<PAGE>
FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-0172
[LOGO OF NEUROCRINE BIOSCIENCES]
3,500,000 SHARES
COMMON STOCK
All of the 3,500,000 shares of Common Stock offered hereby are being sold by
Neurocrine Biosciences, Inc. ("Neurocrine" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
See "Underwriting" for information relating to the method of determining the
initial public offering price.
Ciba-Geigy Limited is a party to a strategic alliance with the Company. As
part of the strategic alliance, Ciba-Geigy Limited has agreed to purchase
$5,000,000 of Common Stock upon completion of this offering in a separate
transaction at a price per share equal to the price per share at which Common
Stock is sold in this offering.
Johnson & Johnson Development Corp. ("JJDC"), a subsidiary of Johnson &
Johnson, is an affiliate of Janssen Pharmaceutica, N.V., a party to a
strategic alliance with the Company. As part of the strategic alliance, JJDC
has agreed to purchase $2,500,000 of Common Stock upon completion of this
offering in a separate transaction at a price per share equal to the price per
share at which Common Stock is sold in this offering.
--------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY (1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $10.50 $0.74 $9.76
- ------------------------------------------------------------------------------------------
Total (2)....................... $36,750,000 $2,572,500 $34,177,500
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $500,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 525,000 shares of Common Stock solely to cover over-
allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $42,262,500, $2,958,375 and $39,304,125,
respectively.
--------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens
& Company"), San Francisco, California, on or about May 29, 1996.
ROBERTSON, STEPHENS & COMPANY
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
The date of this Prospectus is May 23, 1996
<PAGE>
INSERT COLOR GRAPHIC
[GRAPHIC APPEARS HERE]
[NARRATIVE DESCRIPTION: REPRESENTATION OF HUMAN BRAIN, CRF RECEPTOR AND
CRF-BINDING PROTEIN INDICATING ADVERSE EFFECTS OF INCREASED AND DECREASED CRF
LEVELS]
Overproduction of corticotropin releasing factor ("CRF") in the brain is
associated with disorders such as anxiety, depression, stroke and substance
abuse. Conversely, low levels of CRF are associated with Alzheimer's disease
and obesity. Neurocrine has discovered antagonists of the CRF receptors and
the CRF-binding protein that may represent novel therapeutic approaches to the
treatment of these diseases and disorders.
THE COMPANY'S PRODUCTS HAVE NOT BEEN APPROVED BY THE UNITED STATES FOOD AND
DRUG ADMINISTRATION ("FDA") FOR MARKETING IN THE UNITED STATES. FDA APPROVAL
IS NOT EXPECTED TO BE FORTHCOMING FOR SEVERAL YEARS, AND MAY NOT BE RECEIVED
AT ALL.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN
OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL JUNE 17, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 23
Management............................................................... 40
Executive Compensation................................................... 43
Certain Transactions..................................................... 48
Principal Stockholders................................................... 51
Description of Capital Stock............................................. 53
Shares Eligible For Future Sale.......................................... 56
Underwriting............................................................. 58
Legal Matters............................................................ 59
Experts.................................................................. 59
Additional Information................................................... 60
Index to Financial Statements............................................ F-1
</TABLE>
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by its independent accountants and quarterly
reports containing unaudited financial statements for each of the first three
quarters of each fiscal year.
Tradenames and trademarks appearing in this Prospectus are the property of
their respective holders.
3
<PAGE>
SUMMARY
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus.
THE COMPANY
Neurocrine Biosciences, Inc. is a leading neuroimmunology company focused on
the discovery and development of novel therapeutics to treat diseases and
disorders of the central nervous and immune systems. The Company's neuroscience
and immunology disciplines provide a unique biological understanding of the
molecular interactions between the central nervous, immune and endocrine
systems leading to therapeutic opportunities for diseases and disorders such as
anxiety, depression, Alzheimer's disease, obesity and multiple sclerosis.
Neurocrine is leveraging its resources through strategic alliances and novel
financing mechanisms to build its internal product development and
commercialization capabilities. To date, Neurocrine has entered into strategic
alliances with Janssen Pharmaceutica, N.V. ("Janssen"), a subsidiary of Johnson
& Johnson, focused on the treatment of anxiety, depression and substance abuse,
and Ciba-Geigy Limited ("Ciba-Geigy") for the treatment of multiple sclerosis.
In conjunction with a number of institutional investors, the Company has also
established a research and development subsidiary in Canada, Neuroscience
Pharma (NPI) Inc. ("NPI"), to develop additional compounds for the treatment of
Alzheimer's disease and other neurodegenerative diseases and disorders.
The Company employs advanced technologies, including high-throughput
screening, combinatorial chemistry, molecular biology, gene sequencing and
bioinformatics, to discover and design novel small molecule therapeutics.
Neurocrine has utilized these technologies to advance its four research and
development programs:
Corticotropin Releasing Factor ("CRF"). CRF is the central regulator of the
body's overall response to stress and functions as both an endocrine factor
and a neurotransmitter. In conjunction with Janssen, the Company is
developing compounds to block the effects of over-production of CRF,
potentially offering new therapies for disorders such as anxiety,
depression and substance abuse. Neurocrine is independently developing
related compounds for the treatment of stroke. The Company is also
developing compounds to block a protein in the brain that binds to CRF and
holds it in an inactive state. These compounds may provide a novel
therapeutic approach for diseases that are associated with decreased levels
of CRF, such as Alzheimer's disease and obesity.
Altered Peptide Ligands. In autoimmune diseases, certain T-cells
inappropriately recognize the body's own tissues as foreign and attack
healthy cells. Peptide ligands are naturally occurring molecules which can
be altered to bind to disease-causing T-cells to inhibit their destructive
capabilities. In conjunction with Ciba-Geigy, the Company is conducting
preclinical testing of its altered peptide ligand drug candidate for the
treatment of multiple sclerosis. Neurocrine is also independently
developing compounds to treat diabetes.
Neurosteroids. Neurosteroids are a class of steroidal compounds produced in
the central nervous system that show a wide range of effects on neurons,
including the potential to enhance memory. A physician-sponsored clinical
trial is being conducted to test a naturally-occurring human steroid that
may have memory enhancing properties in patients suffering from Alzheimer's
disease.
Neurogenomics. The immune system of the brain plays a role in neurological
diseases and disorders. Neurocrine scientists are identifying novel genes
in the brain which are involved in neurodegeneration. To date,
approximately 2,000 novel genes have been identified and are undergoing
evaluation as drug targets or as potential diagnostics and therapeutics for
diseases and disorders such as Alzheimer's disease, stroke, multiple
sclerosis, Parkinson's disease, epilepsy and AIDS dementia.
The Company has retained certain marketing or co-promotion rights in North
America to its products under development and plans to establish a North
American sales and marketing organization focused on neurologists and certain
other disease specialists. The Company intends to concentrate its resources on
research and development activities by outsourcing its requirements for
manufacturing, preclinical studies, and clinical research monitoring
activities.
The Company's offices are located at 3050 Science Park Road, San Diego, CA
92121, and its telephone number is (619) 658-7600. The Company was originally
incorporated in the State of California in January 1992 and was reincorporated
in the State of Delaware in May 1996.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the
Company........................... 3,500,000 shares
Common Stock Outstanding After the
Offering.......................... 16,582,548 shares (1)
Use of Proceeds................... Research and development, capital
expenditures, the acquisition of technology
rights and general corporate purposes,
including working capital. See "Use of
Proceeds."
Nasdaq National Market Symbol..... NBIX
</TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues under collaborative
research agreements:
Sponsored research.............. $ -- $ -- $ 3,750 $ 625 $ 1,625
License fees.................... -- -- 2,000 2,000 --
Other revenues.................... -- 162 356 127 534
------- ------- ------- ------- -------
Total revenues................ -- 162 6,106 2,752 2,159
Operating expenses:
Research and development........ 2,804 6,231 7,740 1,848 1,794
General and administrative...... 1,550 2,223 2,728 737 571
------- ------- ------- ------- -------
Total operating expenses...... 4,354 8,454 10,468 2,585 2,365
------- ------- ------- ------- -------
Income (loss) from operations..... (4,354) (8,292) (4,362) 167 (206)
Interest income, net.............. 118 627 839 220 187
Other income (expense)............ -- (41) 177 27 44
------- ------- ------- ------- -------
Net income (loss)................. $(4,236) $(7,706) $(3,346) $ 414 $ 25
======= ======= ======= ======= =======
Net income (loss) per share....... $ (0.64) $ (0.67) $ (0.27) $ 0.03 $ --
======= ======= ======= ======= =======
Shares used in computing net
income (loss) per share (2)...... 6,635 11,433 12,184 12,409 13,240
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED (3)
-------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments (4).................................... $ 20,562 $ 61,440
Total assets........................................ 28,080 68,958
Accumulated deficit................................. (15,871) (15,871)
Total stockholders' equity.......................... 24,220 65,098
</TABLE>
- --------
(1) Based on the number of shares outstanding at March 31, 1996. Includes the
sale of 714,286 shares of Common Stock to Ciba-Geigy and JJDC at a price
equal to the initial public offering price of $10.50 per share. Excludes
3,618,638 shares of Common Stock issuable upon exercise of options and
warrants outstanding as of March 31, 1996 at a weighted average exercise
price of $5.90 per share. See "Business -- Strategic Alliances,"
"Management -- Stock Plans" and "Description of Capital Stock -- Warrants."
(2) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used to compute net income (loss) per
share.
(3) Adjusted to reflect the sale of 3,500,000 shares of Common Stock offered
hereby at the initial public offering price of $10.50 per share and 714,286
shares of Common Stock to Ciba-Geigy and JJDC at a price equal to the
initial public offering price of $10.50 per share, and the application of
the estimated net proceeds therefrom. See "Use of Proceeds," "Business --
Strategic Alliances" and "Underwriting."
(4) Excludes approximately $9.5 million held by NPI which is available to fund
certain of the Company's research and development activities. See "Business
-- Strategic Alliances."
Except as otherwise indicated, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option, and assumes the
reincorporation of the Company in Delaware, which is anticipated to be
completed prior to consummation of this offering.
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus.
The following risk factors should be considered carefully in evaluating the
Company and its business before purchasing the shares of Common Stock offered
hereby.
UNCERTAINTIES RELATED TO EARLY STAGE OF DEVELOPMENT
Neurocrine was founded in 1992 and all of its product candidates are in
research or early stages of development. The Company has not requested nor
received regulatory approval for any product from the FDA or any other
regulatory body. Any products resulting from the Company's research and
development programs are not expected to be commercially available for the
foreseeable future, if at all.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Such reasons include the possibilities that the potential products
will be found ineffective or cause harmful side effects during preclinical
testing or clinical trials, fail to receive necessary regulatory approvals, be
difficult to manufacture on a large scale, be uneconomical, fail to achieve
market acceptance or be precluded from commercialization by proprietary rights
of third parties.
The Company's product candidates require significant additional research and
development efforts. No assurance can be given that any of the Company's
development programs will be successfully completed, that any investigational
new drug application ("IND") will be accepted by the FDA, that clinical trials
will commence as planned, that required regulatory approvals will be obtained
on a timely basis, if at all, or that any products for which approval is
obtained will be commercially successful. If any of the Company's development
programs are not successfully completed, required regulatory approvals are not
obtained, or products for which approvals are obtained are not commercially
successful, the Company's business, financial condition and results of
operations would be materially adversely affected.
DEPENDENCE ON STRATEGIC ALLIANCES
The Company has established strategic alliances with Janssen and Ciba-Geigy
with respect to certain of the Company's research and development programs.
The Company is dependent upon these corporate partners to provide adequate
funding for such programs. Under these arrangements, the Company's corporate
partners are responsible for (i) selecting compounds for subsequent
development as drug candidates, (ii) conducting preclinical testing and
clinical trials and obtaining required regulatory approvals for such drug
candidates, and (iii) manufacturing and commercializing any resulting drugs.
Failure of these partners to select a compound discovered by the Company for
subsequent development into marketable products, gain the requisite regulatory
approvals or successfully commercialize products would have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's strategy for development and commercialization of
certain of its products is dependent upon entering into additional
arrangements with research collaborators, corporate partners and others, and
upon the subsequent success of these third parties in performing their
obligations. There can be no assurance that the Company will be able to enter
into additional strategic alliances on terms favorable to the Company, or at
all. Failure of the Company to enter into additional strategic alliances would
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company cannot control the amount and timing of resources which its
corporate partners devote to the Company's programs or potential products. If
any of the Company's corporate partners breach or terminate their agreements
with the Company or otherwise fail to conduct their collaborative activities
in a
6
<PAGE>
timely manner, the preclinical testing, clinical development or
commercialization of product candidates will be delayed, and the Company will
be required to devote additional resources to product development and
commercialization, or terminate certain development programs. The Company's
strategic alliances with Janssen and Ciba-Geigy are subject to termination by
Janssen or Ciba-Geigy, respectively. There can be no assurance that Janssen or
Ciba-Geigy will not elect to terminate its strategic alliance with the Company
prior to its scheduled expiration. In addition, if the Company's corporate
partners effect a merger with a third party, there can be no assurance that
the strategic alliances will not be terminated or otherwise materially
adversely affected. The termination of any current or future strategic
alliances could have a material adverse effect on the Company's business,
financial condition and results of operations. Neurocrine's corporate partners
may develop, either alone or with others, products that compete with the
development and marketing of the Company's products. Competing products,
either developed by the corporate partners or to which the corporate partners
have rights, may result in their withdrawal of support with respect to all or
a portion of the Company's technology, which would have a material adverse
effect on the Company's business, financial condition and results of
operations. There can be no assurance that disputes will not arise in the
future with respect to the ownership of rights to any products or technology
developed with corporate partners. These and other possible disagreements
between corporate partners and the Company could lead to delays in the
collaborative research, development or commercialization of certain product
candidates or could require or result in litigation or arbitration, which
would be time-consuming and expensive, and would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business -- Strategic Alliances."
INTENSE COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE
The biotechnology and pharmaceutical industries are subject to rapid and
intense technological change. The Company faces, and will continue to face,
competition in the development and marketing of its product candidates from
academic institutions, government agencies, research institutions and
biotechnology and pharmaceutical companies. Competition may arise from other
drug development technologies, methods of preventing or reducing the incidence
of disease, including vaccines, and new small molecule or other classes of
therapeutic agents. There can be no assurance that developments by others will
not render the Company's product candidates or technologies obsolete or
noncompetitive.
Recently, Betaseron, a form of beta-interferon marketed by Berlex
BioSciences, has been approved for the treatment of relapsing remitting
multiple sclerosis ("MS"). Avonex, a similar form of beta-interferon, produced
by Biogen, Inc., has been recommended for approval by an FDA advisory
committee for the same indication. Tacrine, marketed by Warner Lambert Co.,
has recently been approved for the treatment of Alzheimer's disease. Sales of
these drugs may reduce the available market for any product developed by the
Company for these indications. The Company is developing products for the
treatment of anxiety disorders, which will compete with well-established
products in the benzodiazepene class, including Valium, marketed by Hoffman-La
Roche, Inc., and depression, which will compete with well-established products
in the anti-depressant class, including Prozac, marketed by Eli Lilly & Co.
Certain technologies under development by other pharmaceutical companies could
result in treatments for these and other diseases and disorders being pursued
by the Company. For example, a number of companies are conducting research on
molecules to block CRF to treat anxiety and depression. Other biotechnology
and pharmaceutical companies are developing compounds to treat obesity, and
one such drug, d-fenfluramine, marketed by American Home Products Corporation,
has been recommended for approval by an FDA advisory committee. Several
companies are engaged in the research and development of immune modulating
drugs for the potential treatment of MS. In the event that one or more of
these programs were successful, the market for the Company's products may be
reduced or eliminated.
In addition, if Neurocrine receives regulatory approvals for its products,
manufacturing efficiency and marketing capabilities are likely to be
significant competitive factors. At the present time, Neurocrine has no
commercial manufacturing capability, sales force or marketing experience. In
addition, many of the Company's competitors and potential competitors have
substantially greater capital resources, research and development resources,
manufacturing and marketing experience and production facilities than does
7
<PAGE>
Neurocrine. Many of these competitors also have significantly greater
experience than does Neurocrine in undertaking preclinical testing and
clinical trials of new pharmaceutical products and obtaining FDA and other
regulatory approvals. See "Business -- Products Under Development" and " --
Competition."
UNCERTAINTIES RELATED TO PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend on its ability to obtain patent protection
for its products, preserve its trade secrets, prevent third parties from
infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the United States and
internationally.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval
processes in order to reach the marketplace, the pharmaceutical industry
places considerable importance on obtaining patent and trade secret protection
for new technologies, products and processes. Accordingly, the Company intends
to seek patent protection for its proprietary technology and compounds. There
can be no assurance as to the success or timeliness in obtaining any such
patents, that the breadth of claims obtained, if any, will provide adequate
protection of the Company's proprietary technology or compounds, or that the
Company will be able to adequately enforce any such claims to protect its
proprietary technology and compounds. Because patent applications in the
United States are confidential until the patents issue, and publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months, the Company cannot be certain that Company
inventors were the first to conceive of inventions covered by pending patent
applications or that it was the first to file patent applications for such
inventions.
The degree of patent protection afforded to pharmaceutical inventions is
uncertain and any patents which may issue with regard to the Company's
potential products will be subject to this uncertainty. There can be no
assurance that competitors will not develop competitive products outside the
protection that may be afforded by the claims of the Company's patents. For
example, the Company is aware that other parties have been issued patents and
have filed patent applications in the United States and foreign countries
which claim alternative uses of dehydroepiandrosterone ("DHEA"), a potential
product of the Company, and cover other therapeutics for the treatment of
multiple sclerosis. DHEA is not a novel compound and is not covered by a
composition of matter patent. The issued patents licensed to the Company
covering DHEA are use patents containing claims related to therapeutic methods
and the use of specific compounds and classes of compounds for
neuroregeneration. Other potential products which the Company may develop may
not consist of novel compounds and therefore would not be covered by
composition of matter patent claims. Competitors may be able to commercialize
products not covered by composition of matter patent claims for indications
outside of the protection provided by the claims of any use patents that may
be issued to the Company. In this case, physicians, pharmacies and wholesalers
could then substitute a competitor's product for the Company's product. Use
patents may be unavailable or may afford a lesser degree of protection in
certain foreign countries due to the patent laws of such countries.
The Company may be required to obtain licenses to patents or proprietary
rights of others. As the biotechnology industry expands and more patents are
issued, the risk increases that the Company's potential products may give rise
to claims that such products infringe the patent rights of others. At least
one patent containing claims covering compositions of matter consisting of
certain altered peptide ligand therapeutics for use in modulating the immune
response has issued in Europe, and the Company believes that this patent has
been licensed to a competitor of the Company. There can be no assurance that a
patent containing corresponding claims will not issue in the United States. In
addition, there can be no assurance that the claims of the European patent or
any corresponding claims of any future United States patents or other foreign
patents which may issue will not be infringed by the manufacture, use, or sale
of any potential altered peptide ligand therapeutics developed by the Company
or Ciba-Geigy. Furthermore, there can be no assurance that the Company or
Ciba-Geigy would prevail in any legal action seeking damages or injunctive
relief for infringement of any patent that might issue under such applications
or that any license required under any
8
<PAGE>
such patent would be made available or, if available, would be available on
acceptable terms. Failure to obtain a required license could prevent the
Company and Ciba-Geigy from commercializing any altered peptide ligand
products which they may develop.
No assurance can be given that any licenses required under any patents or
proprietary rights of third parties would be made available on terms
acceptable to the Company, or at all. If the Company does not obtain such
licenses, it could encounter delays in product introductions while it attempts
to design around such patents, or could find that the development, manufacture
or sale of products requiring such licenses is foreclosed. Litigation may be
necessary to defend against or assert such claims of infringement, to enforce
patents issued to the Company, to protect trade secrets or know-how owned by
the Company, or to determine the scope and validity of the proprietary rights
of others. In addition, interference proceedings declared by the United States
Patent and Trademark Office may be necessary to determine the priority of
inventions with respect to patent applications of the Company or its
licensors. Litigation or interference proceedings could result in substantial
costs to and diversion of effort by, and may have a material adverse impact
on, the Company. There can be no assurance that these efforts by the Company
would be successful.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners
and consultants. There can be no assurance that relevant inventions will not
be developed by a person not bound by an invention assignment agreement. There
can be no assurance that binding agreements will not be breached, that the
Company would have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known or be independently discovered
by competitors. See "Business -- Patents and Proprietary Rights."
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company or its corporate partners must
demonstrate through preclinical testing and clinical trials that the product
is safe and effective for use in each target indication. To date the Company
has not commenced clinical trials with regard to any potential product. A
physician-IND Phase II clinical trial was initiated in March 1996 with regard
to the use of DHEA for the treatment of Alzheimer's disease. However, such
clinical trial is not under the full control of the Company. In addition, a
physician-IND clinical trial does not replace the need for Company-sponsored
clinical trials.
The results from preclinical testing and early clinical trials may not be
predictive of results obtained in later clinical trials, and there can be no
assurance that clinical trials conducted by the Company or its corporate
partners will demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals or will result in marketable products. In
addition, clinical trials are often conducted with patients having the most
advanced stages of disease. During the course of treatment, these patients can
die or suffer other adverse medical effects for reasons that may not be
related to the pharmaceutical agent being tested but which can nevertheless
adversely affect clinical trial results. A number of companies in the
biotechnology and pharmaceutical industries have suffered significant setbacks
in advanced clinical trials, even after promising results in earlier trials.
If the Company's drug candidates are not shown to be safe and effective in
clinical trials, the resulting delays in developing other compounds and
conducting related preclinical testing and clinical trials, as well as the
potential need for additional financing, would have a material adverse effect
on the Company's business, financial condition and results of operations.
The rate of completion of clinical trials conducted by the Company or its
corporate partners may be delayed by many factors, including slower than
expected patient recruitment or unforeseen safety issues. Any delays in, or
termination of, the Company's clinical trials would have a material adverse
effect on the Company's business, financial condition and results of
operations. There can be no assurance that Neurocrine
9
<PAGE>
will be permitted by regulatory authorities to undertake clinical trials for
its products or, if such trials are conducted, that any of the Company's
product candidates will prove to be safe and efficacious or will receive
regulatory approvals. See "Business -- Products Under Development."
UNPREDICTABILITY OF FUTURE FINANCIAL RESULTS; UNCERTAINTY OF FUTURE
PROFITABILITY
At March 31, 1996, the Company had an accumulated deficit of approximately
$15.9 million. The Company anticipates that it will incur substantial losses
in the future, potentially greater than losses incurred in prior years.
Neurocrine expects to incur substantial additional operating expenses over the
next several years as its research, development, preclinical testing and
clinical trial activities increase. To the extent that the Company is unable
to obtain third-party funding for such expenses, the Company expects that
increased expenses will result in increased losses from operations. There can
be no assurance that the Company's products under development will be
successfully developed or that its products, if successfully developed, will
generate revenues sufficient to enable the Company to earn a profit.
Neurocrine does not expect to generate revenues from the sale of products, if
any, for the foreseeable future. The Company's ability to achieve
profitability depends in part on its ability to enter into agreements for
product development, obtain regulatory approval for its products and develop
the capacity, or enter into agreements, for the manufacture, marketing and
sale of any products. There can be no assurance that Neurocrine will obtain
required regulatory approvals, or successfully develop, manufacture,
commercialize and market product candidates or that the Company will ever
achieve product revenues or profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
The Company's research, preclinical testing and clinical trials of its
product candidates are, and the manufacturing and marketing of its products
will be, subject to extensive and rigorous regulation by numerous government
authorities in the United States and in other countries where the Company
intends to test and market its product candidates. Prior to marketing, any
product developed by the Company must undergo an extensive regulatory approval
process. This regulatory process, which includes preclinical testing and
clinical trials of each compound to establish its safety and efficacy, can
take many years and require the expenditure of substantial resources, and may
include post-marketing surveillance. Data obtained from preclinical testing
and clinical trials are susceptible to varying interpretations which could
delay, limit or prevent regulatory approval. In addition, delays or rejections
may be encountered based upon changes in FDA policy for drug approval during
the period of product development and FDA regulatory review of each submitted
new drug application ("NDA") or product license application ("PLA"). Similar
delays may also be encountered in foreign countries. There can be no assurance
that regulatory approval will be obtained for any drugs developed by the
Company. Moreover, regulatory approval may entail limitations on the indicated
uses of the drug. Further, even if regulatory approval is obtained, a marketed
drug and its manufacturer are subject to continuing review, and discovery of
previously unknown problems with a product or manufacturer can result in the
withdrawal of the product from the market, which would have an adverse effect
on the Company's business, financial condition and results of operations.
Violations of regulatory requirements at any stage, including preclinical
testing and clinical trials, the approval process or post-approval, may result
in various adverse consequences including the FDA's delay in approving or its
refusal to approve a product, withdrawal of an approved product from the
market, and the imposition of criminal penalties against the manufacturer and
NDA or PLA holder. The Company has not submitted any IND applications for any
product candidate, and none has been approved for commercialization in the
United States or internationally. A physician-IND Phase II clinical trial
commenced in March 1996 with regard to the use of DHEA for the treatment of
Alzheimer's disease. However, such clinical trial is not under the full
control of the Company. In addition, a physician-IND clinical trial does not
replace the need for Company-sponsored clinical trials. No assurance can be
given that the Company will be able to obtain FDA approval for any products.
Failure to obtain requisite regulatory approvals or failure to obtain
approvals of the scope requested will delay or preclude the Company or its
licensees or marketing partners from marketing the Company's products or limit
the commercial use of the products and would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business-- Government Regulation."
10
<PAGE>
NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL
Neurocrine will require substantial additional funding in order to continue
its research and product development programs, including preclinical testing
and clinical trials of its product candidates, for operating expenses, for the
pursuit of regulatory approvals for its product candidates, and may require
additional funding for establishing manufacturing and marketing capabilities
in the future. The Company believes that its existing capital resources,
together with the net proceeds of this offering and the sale of shares to
Ciba-Geigy and JJDC, interest income and future payments due under strategic
alliances, will be sufficient to satisfy its current and projected funding
requirements through 1998. However, no assurance can be given that such net
proceeds will be sufficient to conduct its research and development programs
as planned. The Company's future capital requirements will depend on many
factors, including continued scientific progress in its research and
development programs, the magnitude of these programs, progress with
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, if any, the costs involved in filing and
prosecuting patent applications and enforcing patent claims, competing
technological and market developments, the establishment of additional
strategic alliances, the cost of manufacturing facilities and of
commercialization activities and arrangements, and the cost of product in-
licensing and any possible acquisitions. There can be no assurance that the
Company's cash reserves and other liquid assets, including the net proceeds of
this offering, together with funding that may be received under the Company's
strategic alliances, and interest income earned thereon, will be adequate to
satisfy its capital and operating requirements.
Neurocrine intends to seek additional funding through strategic alliances,
and may seek additional funding through public or private sales of the
Company's securities, including equity securities. In addition, the Company
has obtained equipment leases and may continue to pursue opportunities to
obtain additional debt financing in the future. There can be no assurance,
however, that additional equity or debt financing will be available on
reasonable terms, if at all. Any additional equity financings would be
dilutive to the Company's stockholders. If adequate funds are not available,
Neurocrine may be required to curtail significantly one or more of its
research and development programs and/or obtain funds through arrangements
with corporate partners or others that may require Neurocrine to relinquish
rights to certain of its technologies or product candidates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
UNCERTAINTY OF ABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT, EMPLOYEES AND
CONSULTANTS
The Company is highly dependent on the principal members of its management
and scientific staff. The loss of services of any of these personnel could
impede the achievement of the Company's development objectives. Furthermore,
recruiting and retaining qualified scientific personnel to perform research
and development work in the future will also be critical to the Company's
success. There can be no assurance that the Company will be able to attract
and retain personnel on acceptable terms given the competition among
biotechnology, pharmaceutical and health care companies, universities and non-
profit research institutions for experienced scientists. In addition, the
Company relies on members of its Scientific Advisory Board and a significant
number of consultants to assist the Company in formulating its research and
development strategy. All of Neurocrine's consultants and the members of the
Company's Scientific Advisory Board are employed by employers other than the
Company, and may have commitments to, or advisory or consulting agreements
with, other entities that may limit their availability to the Company. See
"Business -- Scientific Advisory Board" and "Management."
NO MANUFACTURING EXPERIENCE; RELIANCE ON THIRD-PARTY MANUFACTURING
The Company has in the past utilized, and intends to continue to utilize,
third-party manufacturing for the production of material for use in clinical
trials and for the potential commercialization of future products. The Company
has no experience in manufacturing products for commercial purposes and does
not have any manufacturing facilities. Consequently, the Company is dependent
on contract manufacturers for the production of products for development and
commercial purposes. In the event that the Company is unable to obtain or
retain third-party manufacturing, it will not be able to commercialize its
products as planned. The manufacture of the Company's products for clinical
trials and commercial purposes is subject to current Good Manufacturing
Practices ("cGMP") regulations promulgated by the FDA. No assurance can be
given that the Company's third-party manufacturers will comply with cGMP
regulations or other regulatory requirements now or in the future. The
Company's current dependence upon third parties for the
11
<PAGE>
manufacture of its products may adversely affect its profit margins, if any,
on the sale of future products and the Company's ability to develop and
deliver products on a timely and competitive basis. See "Business -- Strategic
Alliances" and "-- Manufacturing."
LACK OF MARKETING AND SALES CAPABILITIES
Neurocrine has retained certain marketing or co-promotion rights in North
America to its products under development, and plans to establish its own
North American marketing and sales organization. The Company currently has no
experience in marketing or selling pharmaceutical products and does not have a
marketing and sales staff. In order to achieve commercial success for any
product candidate approved by the FDA, Neurocrine must either develop a
marketing and sales force or enter into arrangements with third parties to
market and sell its products. There can be no assurance that Neurocrine will
successfully develop such experience or that it will be able to enter into
marketing and sales agreements with others on acceptable terms, if at all. If
the Company develops its own marketing and sales capabilities, it will compete
with other companies that currently have experienced and well funded marketing
and sales operations. To the extent that the Company enters into co-promotion
or other marketing and sales arrangements with other companies, any revenues
to be received by Neurocrine will be dependent on the efforts of others, and
there can be no assurance that such efforts will be successful. See
"Business -- Marketing and Sales."
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
The Company's business may be materially adversely affected by the
continuing efforts of government and third-party payors to contain or reduce
the costs of health care through various means. For example, in certain
foreign markets, pricing or profitability of prescription pharmaceuticals is
subject to government control. In the United States, there have been, and the
Company expects that there will continue to be, a number of federal and state
proposals to implement similar government control in such jurisdictions. In
addition, an increasing emphasis on managed care in the United States has put,
and will continue to put, pressure on pharmaceutical pricing. Such initiatives
and proposals, if adopted, could decrease the price that the Company receives
for any products it may develop and sell in the future, and thereby have a
material adverse effect on the Company's business, financial condition and
results of operations. Further, to the extent that such proposals or
initiatives have a material adverse effect on other pharmaceutical companies
that are corporate partners or prospective corporate partners for certain of
the Company's potential products, the Company's ability to commercialize its
potential products may be materially adversely affected.
The Company's ability to commercialize pharmaceutical products may depend in
part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health insurers and other third-party payors. Significant
uncertainty exists as to the reimbursement status of newly approved health
care products, and third-party payors are increasingly challenging the prices
charged for medical products and services. There can be no assurance that any
third-party insurance coverage will be available to patients for any products
developed by the Company. Government and other third-party payors are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new therapeutic products, and by refusing,
in some cases, to provide coverage for uses of approved products for disease
indications for which the FDA has not granted marketing approval. If adequate
coverage and reimbursement levels are not provided by government and third-
party payors for the Company's products, the market acceptance of these
products would be materially adversely affected.
POTENTIAL PRODUCT LIABILITY EXPOSURE AND LIMITED INSURANCE COVERAGE
The use of any of the Company's potential products in clinical trials, and
the sale of any approved products, may expose the Company to liability claims
resulting from the use of its products. These claims might be made directly by
consumers, health care providers or by pharmaceutical companies or others
selling such products. Neurocrine has obtained limited product liability
insurance coverage for its clinical trials in the
12
<PAGE>
amount of $1.0 million per occurrence and $1.0 million in the aggregate. The
Company intends to expand its insurance coverage to include the sale of
commercial products if marketing approval is obtained for products in
development. However, insurance coverage is becoming increasingly expensive,
and no assurance can be given that the Company will be able to maintain
insurance coverage at a reasonable cost or in sufficient amounts to protect
the Company against losses due to liability. There can also be no assurance
that the Company will be able to obtain commercially reasonable product
liability insurance for any products approved for marketing. A successful
product liability claim or series of claims brought against the Company could
have a material adverse effect on its business, financial condition and
results of operations.
NO PRIOR PUBLIC MARKET FOR COMMON STOCK
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that a regular trading market will
develop and continue after this offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price will be determined through negotiations between
the Company and the representatives of the Underwriters and may not be
indicative of the market price of the Common Stock following this offering.
Among the factors considered in such negotiations are prevailing market
conditions, certain financial information of the Company, market valuations of
other companies that the Company and the representatives of the Underwriters
believe to be comparable to the Company, estimates of the business potential
of the Company, the present state of the Company's development and other
factors deemed relevant. See "Underwriting."
VOLATILITY OF COMMON STOCK PRICE
The market prices for securities of biotechnology and pharmaceutical
companies have historically been highly volatile, and the market has from time
to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Factors such
as fluctuations in the Company's operating results, announcements of
technological innovations or new therapeutic products by the Company or
others, clinical trial results, developments concerning strategic alliance
agreements, government regulation, developments in patent or other proprietary
rights, public concern as to the safety of drugs developed by the Company or
others, future sales of substantial amounts of Common Stock by existing
stockholders, comments by securities analysts and general market conditions
can have an adverse effect on the market price of the Common Stock. The
realization of any of the risks described in these "Risk Factors" could have a
dramatic and material adverse impact on market price of the Company's Common
Stock.
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 1996, 3,618,638 shares of Common Stock are issuable upon the
exercise of outstanding stock options, warrants and conversion rights. The
issuance of Common Stock, which will occur upon the exercise of such stock
options, warrants and conversion rights, and as a result of future sales of
Common Stock by the Company or by existing stockholders, or the perception
that such sales could occur, could adversely affect the market price of the
Common Stock. In private placement transactions between October 1993 and
February 1994, the Company sold a total of 6,025,892 shares of Common Stock to
various institutional and individual investors. The sale of a significant
number of shares by these investors could have a substantial negative impact
on the market price of the Common Stock. In addition, two of the Company's
corporate partners, Ciba-Geigy and JJDC, an affiliate of Janssen, are
significant stockholders. As of March 31, 1996, Ciba-Geigy owned approximately
4.5%, and JJDC owned approximately 3.5% of the outstanding Common Stock. After
completion of this offering, and after Ciba-Geigy's concurrent purchase of
$5.0 million of Common Stock and JJDC's concurrent purchase of $2.5 million of
Common Stock, all at a price of $10.50 per share, Ciba-Geigy will own
approximately 6.8%, and JJDC will own approximately 4.1% of the outstanding
Common Stock. The sale of shares by either of these partners could be viewed
in the marketplace as illustrative of a lack of confidence in the Company and
could have a substantial negative impact on the
13
<PAGE>
market price of the Common Stock. Each officer, director and certain other
stockholders of the Company that beneficially own or have dispositive power
over approximately 11,960,185 shares of the Company's Common Stock have agreed
with the Representatives for a period of (i) 180 days after the date of this
Prospectus with respect to one-third of the shares held by them, (ii) 270 days
after the date of this Prospectus with regard to an additional one-third of
the shares held by them, and (iii) 360 days after the date of this Prospectus
with regard to the remaining one-third of the shares held by them, subject to
certain exceptions, not to offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock,
or any securities convertible into or exchangeable for shares of Common Stock
owned as of the date of this Prospectus or thereafter acquired directly by
such holders or with respect to which they have or hereafter acquire the power
of disposition, without the prior written consent of Robertson, Stephens &
Company. However, Robertson, Stephens & Company may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. The holders of approximately 10,538,367 shares
are also entitled to certain registration rights. See "Description of Capital
Stock -- Registration Rights Agreements" and "Shares Eligible for Future
Sale."
POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation provides for staggered terms for
the members of the Board of Directors and does not provide for cumulative
voting in the election of directors. In addition, the Board of Directors has
the authority, without further action by the stockholders, to fix the rights
and preferences of, and issue shares of, Preferred Stock. Further, the Company
is subject to Section 203 of the Delaware General Corporation Law which,
subject to certain exceptions, restricts certain transactions and business
combinations between a corporation and a stockholder owning 15% of more of the
corporation's outstanding voting stock (an "interested stockholder") for a
period of three years from the date the stockholder becomes an interested
stockholder. The staggered board terms, lack of cumulative voting, Preferred
Stock provision and other provisions of the Company's charter and Delaware
corporate law may discourage certain types of transactions involving an actual
or potential change in control of the Company. See "Description of Capital
Stock -- Certain Change of Control Provisions."
DILUTION
Upon purchase of Common Stock, investors will experience an immediate and
substantial dilution of $6.63 per share in the net tangible book value of the
Common Stock they acquire in this offering. Additional dilution is likely to
occur upon the exercise of options, warrants and conversion rights granted by
the Company. See "Dilution."
ABSENCE OF CASH DIVIDENDS
The Company has never paid any cash dividends and does not anticipate paying
cash dividends in the foreseeable future. See "Dividend Policy."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered by the Company hereby and the sale of 714,286 shares of
Common Stock to Ciba-Geigy and JJDC are estimated to be $40,877,500
($46,004,125 assuming the Underwriters' over-allotment option is exercised in
full), at the initial public offering price of $10.50 per share after
deducting underwriting discounts and commissions, estimated offering expenses
and a financial advisory fee payable by the Company.
The Company anticipates using the net proceeds from this offering and the
sales of shares to Ciba-Geigy and JJDC to fund its research and development
activities, capital expenditures, the acquisition of technology rights and for
general corporate purposes. The amount and timing of these expenditures will
depend on numerous factors, including the progress of the Company's research
and development programs. Pending application of the net proceeds of this
offering and the sales of shares to Ciba-Geigy and JJDC as described above,
the Company intends to invest such proceeds in United States government
securities and short-term, investment-grade, interest-bearing instruments.
The Company believes that its existing capital resources, together with the
net proceeds from this offering and the sales of shares to Ciba-Geigy and
JJDC, interest income and future payments due under the strategic alliances,
will be sufficient to satisfy its current and projected funding requirements
at least through 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its inception.
The Company currently intends to retain its earnings for future growth and
therefore, does not anticipate paying any cash dividends in the foreseeable
future. Future cash dividends, if any, will be determined by the Company's
Board of Directors.
15
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
March 31, 1996 and (ii) as adjusted to give effect to the sale of 3,500,000
shares of Common Stock offered hereby at the initial public offering price of
$10.50 per share and the sale of 714,286 shares of Common Stock to Ciba-Geigy
and JJDC at a price equal to the initial public offering price per share and
the application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(in thousands)
<S> <C> <C>
Obligations under capital leases, less current por-
tion................................................ $ 1,406 $ 1,406
-------- --------
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding....... -- --
Common Stock, $0.001 par value, 50,000,000 shares
authorized; 12,368,262 shares issued and
outstanding actual; 16,582,548 shares issued and
outstanding as adjusted............................ 12 17
Additional paid-in capital.......................... 40,639 81,512
Deferred compensation............................... (371) (371)
Notes receivable from stockholders.................. (135) (135)
Unrealized losses on short-term investments......... (54) (54)
Accumulated deficit................................. (15,871) (15,871)
-------- --------
Total stockholders' equity (1)..................... 24,220 65,098
-------- --------
Total capitalization.............................. $ 25,626 $ 66,504
======== ========
</TABLE>
- --------
(1) Excludes 3,618,638 shares of Common Stock issuable upon exercise of
options and warrants outstanding as of March 31, 1996 at a weighted
average exercise price of $5.90 per share. See "Business -- Strategic
Alliances," "Management -- Stock Plans" and "Description of Capital
Stock -- Warrants."
16
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1996 was
$23,220,551 or $1.88 per share of Common Stock. Net tangible book value per
share represents the amount of the Company's total tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding. Net
tangible book value dilution per share represents the difference between the
amount per share paid by purchasers of shares of Common Stock in this offering
and the net tangible book value per share of the Common Stock immediately
after completion of this offering. After giving effect to the sale by the
Company of 3,500,000 shares of Common Stock offered hereby at the initial
public offering price of $10.50 per share after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the
Company, and the sale of 714,286 shares of Common Stock to Ciba-Geigy and JJDC
at a price equal to the initial public offering price per share and after
deducting the financial advisory fee payable by the Company, and assuming no
other changes in the net tangible book value after March 31, 1996, the
Company's net tangible book value as of March 31, 1996 would have been
$64,098,051 or $3.87 per share. This represents an immediate increase in net
tangible book value of $1.99 per share to existing stockholders and an
immediate dilution in net tangible book value of $6.63 per share to new
investors in this offering and in the sale of shares of Common Stock to Ciba-
Geigy and JJDC, as illustrated by the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $10.50
Net tangible book value per share at March 31, 1996.......... $1.88
Increase attributable to new investors....................... 1.99
-----
Net tangible book value per share after offering............... 3.87
------
Dilution to new investors...................................... $ 6.63
======
</TABLE>
The following table sets forth, as of March 31, 1996, the difference between
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
holders of Common Stock and by the new investors, before deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 12,368,262 74.6% $42,525,349 49.0% $ 3.44
New investors............... 4,214,286 25.4 44,250,000 51.0 10.50
---------- ----- ----------- -----
Total..................... 16,582,548 100.0% $86,775,349 100.0%
========== ===== =========== =====
</TABLE>
The calculation of net tangible book value and the other computations above
assume no exercise of outstanding options and warrants. As of March 31, 1996,
3,618,638 shares of Common Stock were subject to outstanding options and
warrants at a weighted average exercise price of $5.90 per share. To the
extent additional shares are purchased pursuant to the exercise of outstanding
options and warrants, there will be further dilution to new investors. See
"Management -- Stock Plans," "Description of Capital Stock -- Warrants" and
Note 4 of Notes to Financial Statements.
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statement of operations for each of the three years in the period ended
December 31, 1995, and with respect to the Company's balance sheet at December
31, 1994 and 1995, are derived from the financial statements of the Company
that have been audited by Ernst & Young LLP, independent auditors, which are
included elsewhere herein and are qualified by reference to such Financial
Statement and Notes related thereto. The statement of operations data for the
year ended December 31, 1992, and the balance sheet data at December 31, 1992
and 1993, have been derived from financial statements that have been audited
by Ernst & Young LLP which are not included herein. The statement of
operations data for the three months ended March 31, 1995 and 1996 and the
balance sheet data at March 31, 1996 have been derived from unaudited
financial statements; however, management believes such financial statements
include all adjustments, consisting only of normal recurring adjustments, that
the Company considers necessary for a fair presentation of the financial
position and results of operations for these periods. Operating results for
the three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1996. The
selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- ---------------
1992 1993 1994 1995 1995 1996
------ ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues under collabora-
tive research agreements:
Sponsored research...... $ -- $ -- $ -- $ 3,750 $ 625 $ 1,625
License fees............ -- -- -- 2,000 2,000 --
Other revenues............ -- -- 162 356 127 534
------ ------- ------- ------- ------- -------
Total revenues........ -- -- 162 6,106 2,752 2,159
Operating expenses:
Research and
development............ 406 2,804 6,231 7,740 1,848 1,794
General and
administrative......... 216 1,550 2,223 2,728 737 571
------ ------- ------- ------- ------- -------
Total operating ex-
penses............... 622 4,354 8,454 10,468 2,585 2,365
------ ------- ------- ------- ------- -------
Income (loss) from opera-
tions.................... (622) (4,354) (8,292) (4,362) 167 (206)
Interest income, net...... 15 118 627 839 220 187
Other income (expense).... -- -- (41) 177 27 44
------ ------- ------- ------- ------- -------
Net income (loss)......... $ (607) $(4,236) $(7,706) $(3,346) $ 414 $ 25
====== ======= ======= ======= ======= =======
Net income (loss) per
share.................... $(0.49) $ (0.64) $ (0.67) $ (0.27) $ 0.03 $ --
====== ======= ======= ======= ======= =======
Shares used in computing
net income (loss) per
share (1)................ 1,247 6,635 11,433 12,184 12,409 13,240
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------- MARCH 31,
1992 1993 1994 1995 1996
------ ------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments...... $2,010 $21,639 $ 18,228 $ 18,696 $ 20,562(2)
Working capital.............. 1,979 20,177 16,661 16,989 21,699
Total assets................. 2,475 24,436 22,344 24,012 28,080
Obligations under capital
leases, less current por-
tion........................ -- 758 1,733 1,631 1,406
Accumulated deficit.......... (607) (4,843) (12,549) (15,895) (15,871)
Total stockholders' equity... 2,445 22,137 18,743 19,225 24,220
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing net income (loss)
per share.
(2) Excludes approximately $9.5 million held by NPI which is available to fund
certain of the Company's research and development activities. See
"Business -- Strategic Alliances."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
Since the founding of the Company in January 1992, Neurocrine has been
engaged in the discovery and development of novel pharmaceutical products for
diseases and disorders of the central nervous and immune systems. To date,
Neurocrine has not generated any revenues from the sale of products, and does
not expect to generate any product revenues for the foreseeable future. The
Company's revenues, if any, are expected to come from its strategic alliances.
Neurocrine has incurred a cumulative deficit of $15.9 million as of March 31,
1996 and expects to incur substantial additional operating losses, potentially
greater than losses in prior years, in the future.
Neurocrine has primarily financed its operations through the sale of Common
Stock. In February 1994, the Company completed the sale of Common Stock in a
private placement offering resulting in gross proceeds of $30.0 million. In
connection with the Janssen strategic alliance, JJDC purchased $2.5 million of
Common Stock in January 1995 and has agreed to purchase an additional $2.5
million of Common Stock concurrent with this offering. In January 1996, the
Company sold $5.0 million of Common Stock to Ciba-Geigy in connection with the
Ciba-Geigy strategic alliance. Ciba-Geigy has agreed to purchase an additional
$5.0 million of Common Stock concurrent with this offering.
In February 1995, the Company entered into a three to five year strategic
alliance with Janssen for the development of CRF receptor antagonists for the
treatment of anxiety, depression and substance abuse. Pursuant to the
agreement, Janssen has paid the Company $3.0 million and is obligated to pay
the Company an additional $6.5 million in sponsored research payments through
1997, as well as $6.0 million for two additional years should Janssen exercise
its option to extend the collaboration. The Company could also receive
milestone payments of up to $10.0 million for the indications of anxiety,
depression and substance abuse, and up to $9.0 million for other indications,
if certain development and regulatory milestones are achieved. In addition,
Janssen paid a $1.0 million license fee in 1995 and is obligated to pay an
additional $1.0 million license fee in 1996. In return Janssen received
worldwide manufacturing and marketing rights to the compounds developed during
this collaboration, and is required to pay the Company royalties on net sales
and the costs associated with establishing a North American sales force should
Neurocrine exercise its option to co-promote.
In January 1996, the Company entered into an agreement with Ciba-Geigy to
develop altered peptide ligands for the treatment of multiple sclerosis.
Pursuant to the agreement, Ciba-Geigy is obligated to provide Neurocrine with
$12.0 million in license fees and research and development funding during the
first two years of the agreement, and up to $15.5 million in further research
and development funding thereafter, unless the agreement is sooner terminated.
Ciba-Geigy has the right to terminate the agreement after December 30, 1997.
In addition, the Company could also receive milestone payments if certain
development and regulatory milestones are achieved. In return, Ciba-Geigy
received manufacturing and marketing rights outside of North America and will
receive a percentage of profits on sales in North America. The Company will
receive royalties for all sales outside North America and a percentage of
profits on sales in North America, which the Company may at its option convert
to a right to receive royalties on product sales. Neurocrine is obligated to
repay a portion of the development costs for potential products developed in
such collaboration unless the Company elects to convert to the right to
receive royalty payments.
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In March 1996, the Company completed the formation of a research and
development subsidiary, NPI, with a group of Canadian investors. The investors
purchased a 51% equity interest of NPI for approximately $9.5 million. The
Company licensed certain technology and transferred to NPI the Canadian
marketing rights related to its Neurosteroid program and Canadian marketing
rights to products developed in the Company's Neurogenomics program. Along
with certain Canadian government incentives, such funds are expected to fund
the early clinical trials of DHEA and research activities in the Neurogenomics
program. At the option of the investors, the investors may convert and
relinquish the marketing rights upon conversion of NPI Preferred Stock into
the Company's Common Stock at a conversion price of $7.45 per share. In
connection with their investment in NPI, such investors also received warrants
exercisable for shares of Common Stock at an exercise price equal to the per
share price of this offering and are eligible to receive additional future
warrants exercisable at the then prevailing market price in the event that NPI
receives certain Canadian government incentives for research activities, if
any. The Company may at its option, repurchase the marketing rights at a
predetermined price. See "Certain Transactions -- Transaction with Canadian
Subsidiary."
There can be no assurance that the Company and its corporate partners will
be successful in commercializing any potential products. As a result, there
can be no assurance that any product development milestone, royalties, or
profit sharing payments will be made. The Company is dependent upon its
corporate partners to provide adequate funding for its research and
development programs. Under these arrangements, the Company's corporate
partners are responsible for (i) selecting compounds for subsequent
development as drug candidates, (ii) conducting preclinical testing and
clinical trials and obtaining required regulatory approvals for such drug
candidates, and (iii) manufacturing and commercializing any resulting drugs.
Failure of these partners to select a compound discovered by the Company for
subsequent development into marketable products, gain the requisite regulatory
approvals or successfully commercialize products, would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's strategy for development and commercialization of
certain of its products is dependent upon entering into additional
arrangements with research collaborators, corporate partners and others and
upon the subsequent success of these third parties in performing their
obligations. There can be no assurance that the Company will be able to enter
into additional strategic alliances on terms favorable to the Company, or at
all. Failure of the Company to enter into additional strategic alliances would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's strategic alliances with Janssen and
Ciba-Geigy are subject to termination by Janssen or Ciba-Geigy, respectively.
There can be no assurance that Janssen or Ciba-Geigy will not elect to
terminate its strategic alliance with the Company prior to its scheduled
expiration.
The Company expects its research and development expenditures to increase
substantially over the next several years as the Company expands its research
and development efforts and undertakes preclinical testing and clinical trials
with respect to certain of its programs. In addition, general and
administrative expenses are expected to continue to increase as the Company
expands its operations, and incurs the additional expenses associated with
operating as a public company.
The Company's business is subject to significant risks, including but not
limited to, the risks inherent in its research and development activities,
including clinical trials, uncertainties associated both with obtaining and
enforcing its patents and with patent rights of others, the lengthy, expensive
and uncertain process of seeking regulatory approvals, uncertainties regarding
government reforms and of product pricing and reimbursement levels,
technological change and competition, manufacturing uncertainties and
dependence on third parties. Even if the Company's product candidates appear
promising at an early stage of development, they may not reach the market for
numerous reasons. Such reasons include the possibilities that the products
will be ineffective or unsafe during clinical trials, will fail to receive
necessary regulatory approvals, will be difficult to manufacture on large
scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties.
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RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
Revenues
For the three months ended March 31, 1996, the Company's revenues decreased
21.5% to $2.2 million from $2.8 million in the comparable period in 1995. This
decrease was attributable to a one-time license fee of $2.0 million in 1995
under the Janssen collaboration, partly offset in 1996 by higher sponsored
research revenues of $1.6 million, under the Ciba-Geigy strategic alliance, as
compared to $625,000 in 1995.
Research and Development Expenses
For the three months ended March 31, 1996, research and development expenses
were $1.8 million. These expenses were relatively unchanged from the
comparable period in 1995.
General and Administrative Expenses
For the three months ended March 31, 1996, general and administrative
expenses decreased 22.5% to $571,000 from $737,000 for the comparable period
in 1995. The lower expenses were largely attributable to non-recurring timing
differences of certain expenses.
Net Interest Income
For the three months ended March 31, 1996, net interest income decreased
14.9% to $187,000 from $220,000 for the comparable period in 1995, as a result
of lower interest rates.
Years Ended December 31, 1995, 1994 and 1993
Revenues
For the year ended December 31, 1995, the Company generated revenues under
the Janssen strategic alliance of $5.8 million and other revenues from grants
and miscellaneous income of $356,000. There were no collaborative revenues
recognized in 1994 and revenues from grants and miscellaneous income for this
period were $162,000. There were no revenues recognized in 1993.
Research and Development Expenses
For the year ended December 31, 1995, research and development expenses
increased 24.2% to $7.7 million from $6.2 million in 1994. This increase
reflects continued additions to scientific personnel and related support
expenditures as the Company increased its research activities primarily in the
CRF and Altered Peptide Ligand programs. For the year ended December 31, 1994,
research and development expenses increased to $6.2 million from $2.8 million
in 1993. This increase reflects the Company's first full year of research
activities and its relocation to its current research and administrative
facility.
General and Administrative Expenses
For the year ended December 31, 1995, general and administrative expenses
increased 22.7% to $2.7 million from $2.2 million in 1994. For the year ended
December 31, 1994, general and administrative expenses increased 43.4% to $2.2
million from $1.6 million in 1993. These increases reflect the additional
administrative staff required to support increased research and development
activities, increased facility expenses and expanded business development
activities.
Net Interest Income
For the year ended December 31, 1995, net interest income increased 33.7% to
$839,000 from $627,000 in 1994. This increase resulted from improved yields on
the Company's investments and higher cash balances arising from the Janssen
collaboration. For the year ended December 31, 1994, net interest income
increased to $627,000 from $118,000 in 1993. This increase was largely due to
increased cash and short-term investments arising from the completion of the
Company's $30.0 million private placement of Common Stock in February 1994.
Interest income was offset by interest expense over the three-year period due
to steadily increasing borrowings under the Company's equipment leasing
facilities.
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Net Operating Losses
At December 31, 1995, the Company had available a net operating tax loss
carryforward of approximately $14.8 million for federal income tax purposes,
which will begin to expire in 2007. In addition, the Company had federal and
California research and development credit carryforwards of approximately
$680,000 and $314,000, respectively, which will begin to expire in 2007. The
Company had net operating losses of $3.3 million in 1995, $7.7 million in 1994
and $4.2 million in 1993.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 1996, the Company's cash, cash equivalents and short-term
investments totalled $20.6 million. This excludes approximately $9.5 million
held by NPI which is available to fund certain of the Company's research and
development activities. See "Business -- Strategic Alliances."
Cash provided (used) by operating activities in the years ended December 31,
1993, 1994 and 1995 and the three months ended March 31, 1996 was primarily
the result of the net income (loss) reported during these periods offset by
working capital account fluctuations arising from timing differences in
revenue recognition and cash receipts under the Janssen and Ciba-Geigy
collaborations.
Cash provided (used) by investing activities in the years ended December 31
1993, 1994 and 1995 and the three months ended March 31, 1996 was primarily
the result of short-term investment purchases and sales/maturities during
these periods. The fluctuations from period to period were due to the timing
of various investment purchases and sales/maturities and fluctuations in the
Company's portfolio mix between cash equivalent and short-term investment
holdings.
Cash provided by financing activities in the years ended December 31, 1993
and 1994 was primarily the result of the sale of approximately 6,026,000
shares of Common Stock in private placement transactions. Cash provided by
financing activities in the year ended December 31, 1995 was primarily due to
the sale of 434,783 shares of Common Stock to JJDC and the sale of 213,913
shares of Common Stock to a single investor. Cash provided by financing
activities for the three month period ended March 31, 1996 was primarily due
to the sale of 645,161 shares to Ciba-Geigy.
The Company believes that its existing capital resources, together with the
net proceeds from this offering and the sales of shares to Ciba-Geigy and
JJDC, interest income and future payments due under the strategic alliances,
will be sufficient to satisfy its current and projected funding requirements
at least through 1998. However, no assurance can be given that such net
proceeds will be sufficient to conduct its research and development programs
as planned. The amount and timing of expenditures will vary depending upon a
number of factors, including progress of the Company's research and
development programs, conducting preclinical testing and clinical trials,
developing regulatory submissions, the costs associated with protecting its
patents and other proprietary rights, developing marketing and sales
capabilities, the availability of third-party funding, technological advances,
changing competitive conditions and the commercial potential of the Company's
proposed products, if any.
The Company may seek to access the public or private equity markets whenever
conditions are favorable. The Company may also seek additional funding through
strategic alliances and other financing mechanisms, potentially including off-
balance sheet financing. There can be no assurance that such funding will be
available on terms acceptable to the Company, if at all. If adequate funds are
not available, the Company may be required to curtail significantly one or
more of its research or development programs or obtain funds through
arrangements with collaborative partners or others. This may require the
Company to relinquish rights to certain of its technologies or product
candidates.
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BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
Neurocrine Biosciences, Inc. is a leading neuroimmunology company focused on
the discovery and development of novel therapeutics to treat diseases and
disorders of the central nervous and immune systems. The Company's
neuroscience and immunology disciplines provide a unique biological
understanding of the molecular interactions between the central nervous,
immune and endocrine systems leading to therapeutic opportunities for diseases
and disorders such as anxiety, depression, Alzheimer's disease, obesity and
multiple sclerosis. Neurocrine is leveraging its resources through strategic
alliances and novel financing mechanisms to build its internal product
development and commercialization capabilities. To date, Neurocrine has
entered into strategic alliances with Janssen Pharmaceutica, N.V., a
subsidiary of Johnson & Johnson, focused on the treatment of anxiety,
depression and substance abuse, and Ciba-Geigy Limited for the treatment of
multiple sclerosis. In conjunction with a number of institutional investors,
the Company has also established a research and development subsidiary in
Canada, Neuroscience Pharma (NPI) Inc., to develop additional compounds for
the treatment of Alzheimer's disease and other neurodegenerative diseases and
disorders.
BACKGROUND
Corticotropin Releasing Factor (CRF)
Corticotropin releasing factor, the central regulator of the body's overall
response to stress, affects multiple systems by functioning both as an
endocrine factor and a neurotransmitter. CRF acts as a hormone at the
pituitary gland causing the secretion of the steroid cortisol from the adrenal
glands resulting in a number of metabolic effects, including suppression of
the immune system. CRF also functions as a neurotransmitter in the brain and
plays a critical role in coordinating psychological and behavioral responses
to stress such as increased heart rate, anxiety, arousal and reduced appetite.
In addition to neuroendocrine and neurotransmitter roles, accumulating
evidence suggests that CRF may also integrate actions between the immune and
central nervous systems in response to physiological and psychological
stressors.
The body has several mechanisms to regulate the effects of CRF. The
Company's recent cloning of human CRF receptors suggests that the diverse
functions of CRF are mediated through distinct receptor subtypes which are
differentially distributed in specific brain areas and in tissues outside of
the central nervous system. These receptors may offer a mechanism to modulate
specific actions of CRF without affecting the broad range of its activities.
There are several diseases and disorders such as anxiety, depression and
substance abuse in which CRF levels are increased. The deleterious effects of
high levels of CRF may be countered by the administration of selective CRF
receptor antagonists. A protein in the brain that binds to CRF and holds it in
an inactive state, CRF-binding protein ("CRF-BP"), tightly regulates levels of
CRF in certain brain regions. CRF-BP may provide a novel target to selectively
increase levels of CRF in diseases that are associated with decreased levels
of CRF, such as Alzheimer's disease and obesity.
Altered Peptide Ligands
The immune system employs highly specific T-cells that recognize and attack
foreign antigens that invade the body. Occasionally, certain T-cells arise
that inappropriately recognize the body's own tissues as foreign and attack
healthy cells, resulting in autoimmune diseases such as multiple sclerosis and
Type I diabetes. Recently, it has been found that the peptide recognition site
on healthy tissue can be altered, creating molecular decoys that can be
developed as potential drug candidates. The Company believes that these
molecules, known as altered peptide ligands, are capable of binding to and
deactivating T-cells implicated in certain autoimmune diseases.
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Multiple sclerosis is a chronic disease caused by the immune system's attack
on myelin, the insulating material that surrounds and protects nerve fibers in
the central nervous system ("CNS"). This autoimmune reaction is led by T-cells
which come in contact with myelin by utilizing T-cell receptors specific for
myelin proteins. This interaction leads to a destructive inflammatory response
mediated by molecules of the immune system known as cytokines. Cytokines such
as gamma interferon, tumor necrosis factor-alpha and interleukin-6 are found
at the site of inflammation and demyelination and play a role in further
advancing nerve cell destruction. The use of altered peptide ligands of
dominant antigens in autoimmune diseases may inactivate certain T-cells and
decrease the production of destructive cytokines.
[GRAPHIC APPEARS HERE]
[NARRATIVE DESCRIPTION: Representation of how pathogenic T-cells become
activated in the presence of native peptide ligands resulting in inflammatory
cytokine production and how the alteration of the peptide ligand results in de-
activation of the pathogenic T-cells and reduced production and release of
inflammatory cytokines.]
Neurosteroids
Neurosteroids are a class of steroidal compounds produced in the central
nervous system that show a wide range of effects on neurons. DHEA is the most
abundant adrenal steroid in humans. Blood levels of this hormone peak by age
20 and then decrease throughout life, reaching their lowest levels by age 65.
DHEA levels have been found to be decreased in Alzheimer's patients while DHEA
has been shown to have memory-enhancing effects in animal studies. For
example, studies have been performed in aged mice which perform more poorly
than young mice in certain memory tasks. Administration of DHEA in the older
animals has been shown to improve memory to the high levels seen in the
younger animals. DHEA has also been shown to significantly reverse
pharmacologically-induced amnesia and memory impairment in these animals.
In addition to the memory-enhancing effects of DHEA, preliminary data
suggest that this steroid also increases neuronal survival. DHEA may also
induce neuroprotection through inhibition of inflammatory cytokines in the
brain which have recently been implicated in neurodegeneration. In view of its
cognitive enhancing and neuroprotective potential, DHEA replacement therapy
may be beneficial for the treatment of neurodegenerative disorders such as
Alzheimer's disease.
Neurogenomics
The brain and spinal cord are comprised of two major cell types--glial cells
and neurons. Glial cells are the most prevalent cell type in the central
nervous system, comprising over 75% of all brain cells. The gene
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products from these cells are crucial for the survival and development of
neurons. Neurons are CNS cells which transmit and receive complex electrical
and chemical messages from other neurons to control all cognitive processes.
In certain pathological states, excessive glial activity results in the
activation of cytokine and related genes. The proteins encoded by these genes
may be implicated in the degenerative cascade leading to neurological
disorders such as Alzheimer's disease, stroke, multiple sclerosis, Parkinson's
disease, epilepsy and AIDS dementia. For example, in AIDS, the HIV virus does
not attack neurons but does infect glial cells which in turn release
inflammatory cytokines and other factors which are toxic to neurons.
Similarly, in Alzheimer's disease, accumulating evidence suggests complex
interactions between neurons, glia and a protein fragment known as beta
amyloid leading to formation of senile plaques and neurodegeneration.
Currently, it is estimated that only a small fraction of genes involved in
neurodegeneration or regeneration have been identified. The identification of
novel CNS genes involved in the neurodegenerative process may yield new
therapeutic and diagnostic opportunities.
BUSINESS STRATEGY
The Company's strategy is to utilize its understanding of the biology of the
central nervous, immune and endocrine systems to identify and develop novel
therapeutics. There are five key elements to the Company's business strategy:
Target Multiple Product Platforms. Neurocrine is focusing on research and
development programs which utilize its distinct biological and technological
competencies. The Company believes certain central nervous system drug
targets, such as CRF, CRF-BP and neurosteroids, represent significant market
opportunities in psychiatric, neurologic and metabolic disorders.
Immunological targets, such as altered peptide ligands, offer product
opportunities related to autoimmune diseases. Neurogenomics allows the Company
to combine its neuroscience and immunology expertise with new drug discovery
technologies to identify novel gene-related product or gene therapy
opportunities.
Identify Novel Neuroscience and Immunology Drug Targets for the Development
of Therapeutics Which Address Large Unmet Market Opportunities. Neurocrine
employs molecular biology as an enabling discipline to identify novel drug
targets such as receptors, genes and gene-related products. The Company uses
advanced technologies, including combinatorial chemistry, high-throughput
screening, gene sequencing and bioinformatics, to discover and develop novel
small molecule therapeutics for diseases and disorders of the central nervous
and immune systems including anxiety, depression, Alzheimer's disease, obesity
and multiple sclerosis.
Leverage Strategic Alliances to Enhance Development and Commercialization
Capabilities. Neurocrine intends to leverage the development, regulatory and
commercialization expertise of its corporate partners to accelerate the
development of its products, while retaining full or co-promotion rights in
North America. The Company intends to further leverage its resources by
continuing to enter into strategic alliances and novel financing mechanisms to
enhance its internal development and commercialization capabilities. To date,
Neurocrine has entered into a strategic alliance with Janssen focusing on CRF
receptor antagonists to treat anxiety, depression, and substance abuse, and a
strategic alliance with Ciba-Geigy to develop altered peptide ligands for the
treatment of MS. The Company has also formed NPI, a research and development
subsidiary, to finance its Neurosteroid and Neurogenomics programs.
Outsource Capital Intensive and Non-Strategic Activities. Neurocrine intends
to focus its resources on research and development activities by outsourcing
its requirements for manufacturing, preclinical testing, and clinical
monitoring activities. The Company utilizes contract cGMP manufacturing for
both its Neurosteroid and Altered Peptide Ligand programs. Neurocrine believes
that the ease of manufacturing of small molecule therapeutics will allow the
Company to focus on its core discovery and development programs to generate
additional product opportunities.
Acquire Complementary Products in Clinical Development. Neurocrine plans to
acquire rights to products in various stages of clinical development in the
fields of neurology and immunology to take advantage
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of the development and future commercialization capabilities it is developing
in cooperation with its strategic partners. For example, Neurocrine has
licensed rights to DHEA for the treatment of Alzheimer's disease which is
currently being evaluated in a physician-IND Phase II clinical trial.
TECHNOLOGY
Neurocrine utilizes advanced technologies to enhance its drug discovery
capabilities and to accelerate the drug development process. These
technologies include:
High-Throughput Screening. Neurocrine has assembled a chemical library of
diverse, low molecular weight organic molecules for lead compound
identification. The Company has implemented robotic screening capabilities
linked to its library of compounds that facilitate the rapid identification of
new drug candidates for multiple drug targets. The Company believes that the
utilization of high-throughput screening and medicinal and peptide chemistry
will enable the rapid identification and optimization of lead molecules.
Combinatorial Chemistry. Neurocrine has developed an automated combinatorial
chemistry technology (Rapid Microscale Synthesis or "RMS") which is capable of
rapidly producing large quantities of highly purified small organic molecules
for evaluation as drug candidates. Unlike other combinatorial chemistry
technologies, RMS enables individual chemists to optimize candidate compounds
quickly and efficiently by producing hundreds of variations of existing lead
molecules. In collaboration with Hewlett-Packard Company ("HP"), Neurocrine
has automated this technology by adapting HP instrumentation with robotics
leading to a flexible, bench top instrument.
Molecular Biology. Neurocrine scientists have utilized novel techniques for
examination of gene expression in a variety of cellular systems. The Company
has developed a sophisticated technique to evaluate the type and quantity of
genes in various cellular systems prior to the isolation of genes. Neurocrine
has also developed unique expression vectors and cell lines that allow for the
highly efficient protein expression of specific genes.
Gene Sequencing. Neurocrine applies integrated automated DNA sequencing and
gene identification technology in its Neurogenomics program. The systems
utilized by Neurocrine allow for extended gene analysis in a rapid, high-
throughput format with independent linkage into a sequence identification
database. Neurocrine has optimized gene sequencing instrumentation for
"differential display," a technique that may facilitate the rapid
identification of novel genes.
Bioinformatics. Neurocrine's Neurogenomics program creates a significant
amount of genetic sequence information. Applied genomics relies on information
management systems to collect, store and rapidly analyze thousands of gene
sequences. Neurocrine has developed a bioinformatics system which the Company
believes will allow it to identify novel genes which are involved in
neurodegeneration. Data are collected by automated instruments and stored and
analyzed by Neurocrine using customized computational tools. To date,
Neurocrine's molecular biologists have identified over 2,000 novel genes.
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PRODUCTS UNDER DEVELOPMENT
The following table summarizes Neurocrine's most advanced products in
development. This table is qualified in its entirety by reference to the more
detailed descriptions appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PROGRAM INDICATION STATUS (1) COMMERCIAL RIGHTS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corticotropin Releasing Factor
Receptor Antagonists Anxiety Development Janssen/Neurocrine
Depression Development Janssen/Neurocrine
Stroke Development Neurocrine
Substance Abuse Research Janssen/Neurocrine
Binding Protein Antagonists Alzheimer's Disease Development Neurocrine
Obesity Research Neurocrine
Altered Peptide Ligands Multiple Sclerosis IND Preparation Ciba-Geigy/Neurocrine
Type I Diabetes Research Neurocrine
Neurosteroids Alzheimer's Disease Physician-IND Phase II Neurocrine/NPI
Neurogenomics Neurodegenerative
Diseases Research Neurocrine/NPI
- --------------------------------------------------------------------------------------------------------
(1) "Research" indicates identification and evaluation of compounds in in
vitro and animal models.
"Development" indicates that lead compounds have been discovered that meet
certain in vitro and in vivo criteria. These compounds may undergo
structural modification and more extensive evaluation prior to selection
for preclinical development.
"IND Preparation" indicates that Neurocrine has completed pharmacology
testing, toxicology testing, formulation, process development and/or
manufacturing, and is in the process of preparing an IND for regulatory
submission.
"Physician-IND Phase II" indicates that an independent physician has
received FDA approval to evaluate one of the Company's products in humans
to determine safety and efficacy in an expanded patient population. This
clinical trial is not under full control of the Company.
- --------------------------------------------------------------------------------------------------------
</TABLE>
Corticotropin Releasing Factor -- Receptor Antagonist Program
Anxiety
Anxiety is among the most commonly observed group of CNS disorders, which
includes phobias or irrational fears, panic attacks, obsessive-compulsive
disorders and other fear and tension syndromes. Estimates by the National
Institute of Mental Health suggest that the most commonly diagnosed forms of
anxiety disorders may affect 10% of the United States population. Of the
pharmaceutical agents that are currently marketed for the treatment of anxiety
disorders, a class of compounds known as the benzodiazepines, such as Valium,
is the most frequently prescribed. In spite of their therapeutic efficacy,
several side effects limit the utility of these anti-anxiety drugs. Most
problematic among these are drowsiness, ataxia (the inability to stand up),
amnesia, drug dependency and withdrawal reactions following the cessation of
therapy.
Neurocrine is developing a new class of therapeutics that target stress-
induced anxiety. In view of the evidence implicating CRF in anxiety-related
disorders, Neurocrine is developing small molecule CRF receptor antagonists as
anti-anxiety agents which block the effects of overproduction of CRF. The
Company believes that these compounds represent a class of molecules based on
a novel mechanism of action which may offer the advantage of being more
selective, thereby providing increased efficacy with reduced side effects. In
animal studies used to evaluate anti-anxiety drugs, Neurocrine scientists have
demonstrated the efficacy of its lead candidates following oral administration
without evidence of apparent side effects. Neurocrine expects its corporate
partner, Janssen, will select a drug candidate in 1996 for preclinical
testing. Results obtained in animals are not necessarily predictive of results
obtained in man, and no assurance can be given that the Company's partner will
select a preclinical drug candidate, successfully complete preclinical testing
or progress to clinical trials in a timely manner, or at all.
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Depression
Depression is one of a group of neuropsychiatric disorders that is
characterized by extremes of elation and despair, loss of body weight,
decrease in aggressiveness and sexual behavior, and loss of sleep. This
condition is believed to result from a combination of environmental factors,
including stress, as well as an individual's biochemical vulnerability, which
is genetically predetermined. The biochemical basis of depression is thought
to involve elevated secretion of CRF and abnormally low levels of other
neurotransmitters in the brain such as serotonin. Clinical depression was
reported to affect 6% of the population, or approximately 25 million
individuals in the United States in 1994. Current antidepressant therapies,
including Prozac, increase the levels of several chemicals in the brain, such
as serotonin. Because these drugs affect a wide range of neurotransmitters,
they have been associated with a number of side effects. While newer, more
selective drugs offer some safety improvement, their side effect profiles are
still inadequate due to their unwanted effects on gastrointestinal and sexual
function, and on appetite. Furthermore, most existing antidepressant therapies
are limited by their slow onset of action.
Neurocrine is developing small molecule therapeutics to block the effects of
overproduction of CRF for the treatment of depression. The Company has
developed several CRF receptor antagonists and expects its corporate partner,
Janssen, will select a drug candidate in 1996 for preclinical testing.
However, no assurance can be given that the Company's partner will select a
preclinical drug candidate, successfully complete preclinical testing or
progress to clinical trials in a timely manner, or at all.
Stroke
Stroke is an acute neurologic event caused by blockage or rupture of vessels
which supply blood to the brain. Neuronal damage progresses over a period of
four to six hours. According to the National Institutes of Health ("NIH")
estimates, approximately 500,000 patients experience a stroke in the United
States each year, with an approximately equal incidence in the rest of the
world. Stroke results in an estimated 150,000 fatalities each year, making it
the leading cause of death behind heart disease and cancer, and an estimated
additional 150,000 stroke victims suffer permanent neurological damage.
Survivors of stroke are at significantly increased risk of suffering another
episode. Current treatments for stroke consist of surgery, steroid therapy and
anti-platelet therapy. These treatments may help increase blood flow but do
not affect the secondary mechanisms which cause nerve cell death.
Neurocrine believes its CRF receptor antagonist program may have utility in
the treatment of stroke. Preliminary experiments in animal models of stroke
show substantial enhancement of neuronal survival following treatment with a
CRF receptor antagonist. The survival benefit is independent of increased
blood flow and may be acting on secondary mechanisms. The Company is currently
optimizing several series of small molecules and expects to select a
preclinical candidate in late 1996. However, no assurance can be given that
the Company will begin preclinical testing in a timely manner, or at all.
Substance Abuse
Substance abuse, including the use of cocaine and overuse of alcohol, was
estimated to affect nearly 15 million individuals in the United States in
1994. Stress has been reported to enhance the reinforcement and withdrawal
properties of abused substances such as cocaine, amphetamines and alcohol.
Currently there are no pharmaceuticals marketed for most forms of drug abuse.
In view of the primary role of CRF in modulating stress responses,
Neurocrine is developing orally active, small molecule drugs which block the
CRF receptor. A small molecule CRF receptor antagonist may be effective not
only for acute cocaine detoxification, but also for long-term prophylaxis in
the context of a drug prevention or treatment program. The same compounds
developed for anxiety and depression may be used for the treatment of
substance abuse. In collaboration with Janssen, Neurocrine intends to develop
CRF receptor antagonists for this indication. However, no assurance can be
given that the Company will successfully identify suitable candidate compounds
for development in a timely manner, or at all.
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Corticotropin Releasing Factor -- Binding Protein Antagonist Program
Alzheimer's Disease
Alzheimer's disease is a neurodegenerative brain disorder which leads to
progressive memory loss and dementia. Alzheimer's disease generally follows a
predictable course of deterioration over eight years or more, with the
earliest symptom being impairment of short-term memory. Gradually, memory loss
increases, reasoning abilities deteriorate, and individuals become depressed,
agitated, irritable and restless. In the final stages of the disease, patients
become unable to care for themselves. According to the National Alzheimer's
Association, in 1994 over four million individuals in the United States
suffered from Alzheimer's disease. Alzheimer's disease is the fourth leading
cause of death for adults, responsible for over 100,000 deaths in 1994.
Marketed therapies currently available for the treatment of Alzheimer's
disease are severely limited. Tacrine, a therapy which has been recently
approved, shows limited memory improvement in Alzheimer's patients; however,
concerns regarding drug-induced elevations in liver enzymes have limited the
widespread use of this product.
Neurocrine scientists have found that there are significant decreases in CRF
levels in the brain areas that are affected in Alzheimer's disease. In spite
of reduced CRF concentrations, CRF-BP levels are not decreased in areas of the
brain affected by Alzheimer's disease, thereby providing the Company with a
novel target for drug intervention. Consequently, Neurocrine is developing
CRF-BP antagonists to displace CRF from the binding protein and effectively
increase the amount of "free CRF" available to interact with the CRF
receptors. This strategy is expected to selectively raise the concentration of
CRF in brain areas involved in learning and memory processes. Because the
therapeutic is designed to restore normal levels of CRF only in these areas,
the Company believes that the drug will not induce the side effects associated
with administering CRF directly, such as anxiety. The Company has identified a
number of lead compounds which show efficacy following oral administration in
animal models of learning and memory. Efforts are underway to further optimize
these molecules, and the Company expects to select drug candidates for
development in 1996. However, no assurance can be given that the Company will
successfully identify suitable candidate compounds for development in a timely
manner, or at all.
Obesity
Obesity is the most common nutritional disorder in Western societies. As
many as three in 10 adult Americans weigh at least 20% in excess of their
ideal body weight, with 35 million people in the United States characterized
as clinically obese. Increased body weight is a significant public health
problem because it is associated with a number of serious diseases, including
type II diabetes, hypertension, hyperlipidemia and several cancers. Although
obesity has been commonly considered to be a behavioral problem, there is now
evidence that body weight is physiologically regulated. The regulation of body
weight is complex and appears to consist of both centrally and peripherally
acting mechanisms. Recently, d-fenfluramine has received FDA advisory panel
recommendation for approval for the treatment of morbid obesity (in excess of
30% of ideal body weight). This drug displayed statistically significant
weight reducing effects in a large multicenter clinical trial. The Company
believes that d-fenfluramine's actions on weight reduction may in part be due
to modulation of CRF. The use of a CRF-BP antagonist may directly increase CRF
levels without the inadvertent activation of other neurotransmitter systems.
Preliminary data indicate that CRF may act as a central regulator of both
appetite and metabolism. Neurocrine has evaluated CRF-BP antagonists in a
genetically mutant strain of obese animals as well as in animal models which
were pharmacologically induced to overeat. Treatment with CRF-BP antagonists
consistently normalized feeding behavior and weight in both types of models
and did so without inducing excess CRF-related side effects such as anxiety.
Neurocrine has developed several active series of lead molecules. Medicinal
chemistry efforts have resulted in the generation of high-affinity molecules
that show efficacy in elevating brain CRF levels. Neurocrine anticipates
selecting a development candidate in 1996. However, no assurance can be given
that the Company will successfully identify suitable candidate compounds for
development in a timely manner, or at all.
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Altered Peptide Ligand Program
Multiple Sclerosis
Multiple sclerosis is a chronic immune mediated disease characterized by
recurrent attacks of neurologic dysfunction due to damage in the CNS. The
classic clinical features of multiple sclerosis include impaired vision and
weakness or paralysis of one or more limbs. Patients develop a slow, steady
deterioration of neurologic function over an average duration of approximately
30 years. The cause of MS is unknown but immunologic or infectious factors
have been implicated. According to the National Multiple Sclerosis Society,
there are an estimated 350,000 cases of multiple sclerosis in the United
States and an equal number of patients in Europe with approximately 20,000 new
cases diagnosed in the world each year. Currently available treatments for MS
offer only limited efficacy. Steroids have been used to reduce the severity of
acute flare-ups and speed recovery. Experimental therapy with other
immunosuppressive agents has been tried, but with limited success. Betaseron
(a form of beta-interferon) has been shown to delay the onset of flare-ups of
the symptoms in approximately 30% of patients and has been approved for
marketing by the FDA. In addition, Avonex, a similar form of beta-interferon,
has received FDA advisory panel recommendation for approval. Clinical trial
results show these therapies slowed, but did not prevent, the growth of
lesions in the CNS which cause the disease. Patients treated with beta-
interferon experience a variety of side effects, including "flu-like"
symptoms.
One of the Company's co-founders, Dr. Lawrence Steinman, identified the
dominant invading T-cell in the brains of patients who had died of MS. Dr.
Steinman further identified the dominant target or recognition site on the
myelin sheath to which invading T-cells bind. Neurocrine has exclusively
licensed this technology and has designed altered peptide ligands which
resemble native disease-causing molecules of the myelin sheath. These
molecules have been altered to attract and bind to disease-causing T-cells and
inhibit their destructive capabilities. Neurocrine's altered peptide ligand
for the treatment of MS has been shown to reverse disease in animal models of
MS and decrease the production of cytokines such as gamma interferon and tumor
necrosis factor-alpha which contribute to the disease. These same molecules
demonstrate the ability to turn off pathogenic T-cells from MS patients in
vitro. The Company has selected a drug candidate which is now in preclinical
development. Quantities of this drug candidate have been produced under cGMP
conditions in preparation for a Phase I clinical trial. Together with Ciba-
Geigy, the Company's collaborative partner for this program, Neurocrine
expects to file an IND in 1996 to commence clinical trials. However, results
obtained in animals are not necessarily predictive of results obtained in
humans, and no assurance can be given that the Company will successfully
complete preclinical testing or progress to clinical trials.
Type I Diabetes
Type I diabetes, or juvenile-onset diabetes, is an autoimmune disease
resulting from the destruction of insulin producing cells, causing impaired
glucose metabolism resulting from a deficiency in the action of the hormone
insulin. It is one of the most prevalent chronic conditions in the United
States, afflicting approximately 500,000 patients in all age groups in 1994.
Diabetics suffer from a number of complications of the disease including heart
disease, circulatory problems, kidney failure, neurologic disorders and
blindness. Current therapy for type I diabetes consists of daily insulin
injections to regulate blood glucose levels.
Neurocrine is developing altered peptide ligands which target dominant
antigens on insulin producing cells to treat type I diabetes. Pre-diabetic
patients can now be identified using immune markers of the disease several
years before they become insulin dependent. The Company believes that an
altered peptide ligand specific for autoimmune T-cells involved in diabetes
may stop the destruction of the insulin secreting cells in these pre-diabetic
patients, thus allowing them to delay or avoid chronic insulin therapy. The
Company believes that this program can leverage the technological expertise
the Company has developed in its MS program to discover and design altered
peptide ligand therapy useful in treating diabetics and pre-diabetics.
Neurocrine has begun collaborations with two leading diabetes centers, the
Kennedy Institute in London and the Barbara Davis Center for Childhood
Diabetes at the University of Colorado, to study the effects of altered
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peptide ligands on human T-cells from diabetic patients. However, no assurance
can be given that the Company will successfully identify suitable candidate
compounds for development in a timely manner, or at all.
Neurosteroid Program
Alzheimer's Disease
Alzheimer's disease is a neurodegenerative brain disorder which leads to
progressive memory loss and dementia. The Company believes that DHEA, a
naturally occurring hormone, may be useful in treatment of this disease based
on a variety of mechanisms. DHEA may protect neurons from death by increasing
growth factor levels in the brain, such as insulin-like growth factor-1. DHEA
also appears to modulate several cytokines involved in inflammation, which are
believed to be involved in the pathology of Alzheimer's disease. In addition,
DHEA improves memory and learning processes in both animal models and humans
and may prove beneficial in slowing the memory loss seen in Alzheimer's
disease. Because DHEA is naturally occurring, it is expected to have few
toxicity problems, which differentiates this drug from other compounds that
are currently being tested as therapeutics for Alzheimer's disease.
A double-blind, placebo-controlled, physician-IND Phase II clinical trial of
DHEA, is being conducted with investigators from the Alzheimer's Clinic at the
University of California, San Francisco. This trial has been designed to
determine efficacy as measured by improving memory in mild to moderate
Alzheimer's patients. It is anticipated that 60 patients will be treated for
six months with either active drug or a placebo. These patients will be
evaluated throughout the study to assess the progress of disease and retention
of memory. The Company anticipates that this trial will be completed by the
end of 1997. If results of this study are positive, the Company intends to
initiate company-sponsored clinical trials. However, no assurance can be given
that the Company will begin its own clinical trials in a timely manner, or at
all.
Neurogenomics Program
Neurodegenerative Diseases and Disorders
Neurodegenerative diseases and disorders involve damage to the cellular
structure of the brain either acutely, as in stroke or trauma, or chronically,
as in epilepsy and Alzheimer's disease. To date, only a limited number of
effective therapeutics exist to treat neurological disorders, resulting in
significant economic and social costs. In 1994, over 26 million people in the
United States were affected by neurological disorders.
Activation of glial cells is a common feature of many neurodegenerative
diseases. The primary goal of Neurocrine's Neurogenomics program is to
identify and characterize novel genes that are induced in glial cells under
conditions that lead to neurodegeneration or regeneration. The Company is
focusing on stroke, multiple sclerosis, AIDS dementia, epilepsy, Parkinson's
disease and Alzheimer's disease. The unique conditions leading to
neurodegeneration in each of the disorders have been established in both
animal and cellular models of the disease. Neurocrine is actively isolating
and analyzing genes associated with neuronal cell death utilizing state of the
art molecular biology, gene sequencing and bioinformatics. In addition,
activated genes which are neuroprotective or allow for the regeneration of
neurons may also be identified.
Novel neurodegenerative genes that are discovered may include proteins,
enzymes or receptors. Protein signaling molecules or the genes encoding such
molecules may be utilized as therapeutics, while enzymes and receptors may
serve as new targets for drug discovery. Neurocrine intends to place the
receptors and enzymes encoded by these genes in high-throughput screens in an
attempt to discover small molecule therapeutics to treat neurodegenerative
disorders.
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To date, the Company has identified more than 2,000 novel genes of which a
number are undergoing biological evaluation in in vitro and animal models. The
Company intends to identify candidate genes as drugs or drug targets for one
or more neurological diseases. However, there can be no assurance that the
Company will successfully identify suitable gene candidates for development in
a timely manner, or at all.
STRATEGIC ALLIANCES
The Company's business strategy is to utilize strategic alliances and novel
financing mechanisms to enhance its development and commercialization
capabilities. To date, Neurocrine has completed the following alliances:
Janssen Pharmaceutica, N.V.
On January 1, 1995, Neurocrine entered into a research and development
agreement (the "Janssen Agreement") with Janssen to collaborate in the
discovery, development and commercialization of CRF receptor antagonists
focusing on the treatment of anxiety, depression and substance abuse. The
collaboration utilizes Neurocrine's expertise in cloning and characterizing
CRF receptor subtypes, CRF pharmacology and medicinal chemistry. Pursuant to
the Janssen Agreement, the Company has received $1.0 million in license
payments and will receive an additional $1.0 million in 1996. Janssen is
obligated to provide Neurocrine with $3.0 million in sponsored research
payments per year during the term of the research program. The term of the
research program is three years, subject to extension by mutual agreement of
the parties. Janssen has the right to terminate the Janssen Agreement without
cause at any time. However, in the event of such termination, Janssen remains
obligated to continue all sponsored research payments for the term of the
research program and all product and technology rights become the exclusive
property of Neurocrine.
Neurocrine is entitled to receive up to $10.0 million in milestone payments
for the indications of anxiety, depression, and substance abuse, and up to
$9.0 million in milestone payments for other indications, if certain
development milestones are achieved, of which $750,000 was received in 1995.
The Company has granted Janssen an exclusive worldwide license to manufacture
and market products developed under the Janssen Agreement. The Company is
entitled to receive royalties on product sales throughout the world. The
Company has certain rights to co-promote such products in North America.
Janssen is responsible for funding all clinical development and marketing
activities, including reimbursement to Neurocrine for its promotional efforts,
if any. There can be no assurance that the Company's research under the
Janssen Agreement will be successful in discovering any potential products or
that Janssen will be successful in developing, receiving regulatory approvals
or commercializing any potential products that may be discovered. As a result,
there can be no assurance that any product development milestone or royalty
payments will be made.
In connection with the Janssen Agreement, JJDC purchased $2.5 million of the
Company's Common Stock and is obligated to purchase an additional $2.5 million
of the Company's Common Stock upon the completion of this offering at a price
equal to the initial public offering price per share.
Ciba-Geigy Limited
On January 19, 1996, the Company entered into a binding letter agreement
(the "Ciba-Geigy Agreement") with Ciba-Geigy to develop altered peptide ligand
therapeutics for the treatment of MS based upon the Company's drug development
candidates and expertise in immunology and protein chemistry. The Company and
Ciba-Geigy are negotiating a definitive agreement incorporating the terms and
conditions set forth in the Ciba-Geigy Agreement and such other terms and
conditions as agreed to by the Company and Ciba-Geigy. Pursuant to the Ciba-
Geigy Agreement, Ciba-Geigy is obligated to provide the Company with $12.0
million in license fee payments and research funding over the first two years
of the Ciba-Geigy Agreement and thereafter up to $15.5 million in additional
research and development funding unless the Ciba-Geigy Agreement is sooner
terminated. Ciba-Geigy has the right to terminate the Ciba-Geigy Agreement
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on six months' notice which may be given at any time after the earlier of (i)
18 months after the date of execution of the definitive agreement, or (ii)
December 30, 1997.
Neurocrine is entitled to receive milestone payments if certain research,
development and regulatory milestones are achieved. The Company has granted
Ciba-Geigy an exclusive license outside of the United States and Canada to
market altered peptide ligand products developed under the Ciba-Geigy
Agreement for multiple sclerosis. The Company is entitled to receive royalties
on product sales. At its option, Neurocrine is entitled to receive a share of
the profits resulting from sales of altered peptide ligand products in North
America subject to the Company's repayment of a portion of Ciba-Geigy's
development costs. Neurocrine retains the right to convert its profit share to
the right to receive royalty payments at its sole discretion in which case no
repayment of development costs are due to Ciba-Geigy. Neurocrine is obligated
to repay a portion of the development costs of any potential product developed
pursuant to the collaboration unless the Company elects to convert to the
right to receive royalty payments. There can be no assurance that the Company
and Ciba-Geigy will be successful in developing or commercializing any
potential products. As a result, there can be no assurance that any product
development milestone, royalty, or profit sharing payments will be made.
In connection with the Ciba-Geigy Agreement, Ciba-Geigy purchased $5.0
million of the Company's Common Stock and is obligated to purchase an
additional $5.0 million of the Company's Common Stock upon the completion of
this offering at a price equal to the initial public offering price per share.
Neuroscience Pharma (NPI) Inc.
In March 1996, Neurocrine formed NPI, a research and development company.
Neurocrine licensed to NPI certain technology and Canadian marketing rights to
the Company's Neurosteroid and Neurogenomics programs in exchange for 49% of
the outstanding Common Stock of NPI. A group of Canadian institutional
investors have invested approximately $9.5 million in NPI in exchange for
Preferred Stock of NPI which may be converted into shares of the Company's
Common Stock at the option of the investors and 51% of the outstanding Common
Stock of NPI. Pursuant to a Research and Development Agreement NPI has
committed to expend an aggregate amount of $9.5 million for clinical
development of the Neurosteroid program for Alzheimer's disease and for
research activities related to the Neurogenomics program. Pursuant to such
Research and Development Agreement, NPI is entitled to receive royalties on
sales of products developed in these programs as well as exclusive Canadian
marketing rights for such products in the event that the Company has not
terminated the technology license and the marketing rights or that the
investors have not converted their NPI Preferred Stock into shares of the
Company's Common Stock. In connection with their investment in NPI, such
investors received warrants exercisable for shares of the Company's Common
Stock and are eligible to receive additional warrants in the future in the
event that NPI receives certain Canadian government incentives for research
activities. See "Certain Transactions -- Transaction with Canadian
Subsidiary."
Hewlett-Packard Company
The Company and HP have entered into a collaboration to adapt the Company's
RMS combinatorial chemistry technology to certain HP instruments. The parties
will collaborate to modifying existing instrumentation to provide customers
with a flexible automated method for generation of large numbers of chemical
compounds. Neurocrine receives research funding and equipment from HP in
exchange for technical support and consultation.
MANUFACTURING
The Company has in the past utilized, and intends to continue to utilize,
third-party manufacturing for the production of material for use in clinical
trials and for the potential commercialization of future products. The Company
has no experience in manufacturing products for commercial purposes and does
not have any manufacturing facilities. Consequently, the Company is dependent
on contract manufacturers for the production of products for development and
commercial purposes. In the event that the Company is unable
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to obtain or retain third-party manufacturing, it will not be able to
commercialize its products as planned. The manufacture of the Company's
products for clinical trials and commercial purposes is subject to cGMP
regulations promulgated by the FDA. No assurance can be given that the
Company's third-party manufacturers will comply with cGMP regulations or other
regulatory requirements now or in the future. The Company's current dependence
upon third parties for the manufacture of its products may adversely affect
its profit margin, if any, on the sale of future products and the Company's
ability to develop and deliver products on a timely and competitive basis.
MARKETING AND SALES
Neurocrine has retained certain marketing or co-promotion rights in North
America to its products under development, and plans to establish its own
North American marketing and sales organization. The Company currently has no
experience in marketing or selling pharmaceutical products and does not have a
marketing and sales staff. In order to achieve commercial success for any
product candidate approved by the FDA, Neurocrine must either develop a
marketing and sales force or enter into arrangements with third parties to
market and sell its products. There can be no assurance that Neurocrine will
successfully develop such experience or that it will be able to enter into
marketing and sales agreements with others on acceptable terms, if at all. If
the Company develops its own marketing and sales capabilities, it will compete
with other companies that currently have experienced and well funded marketing
and sales operations. To the extent that the Company enters into co-promotion
or other marketing and sales arrangements with other companies, any revenues
to be received by Neurocrine will be dependent on the efforts of others, and
there can be no assurance that such efforts will be successful.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid and
intense technological change. The Company faces, and will continue to face,
competition in the development and marketing of its product candidates from
academic institutions, government agencies, research institutions and
biotechnology and pharmaceutical companies. Competition may arise from other
drug development technologies, methods of preventing or reducing the incidence
of disease, including vaccines, and new small molecule or other classes of
therapeutic agents. There can be no assurance that developments by others will
not render the Company's product candidates or technologies obsolete or
noncompetitive.
Recently, Betaseron, a form of beta-interferon marketed by Berlex
BioSciences, has been approved for the treatment of relapsing remitting
multiple sclerosis. Avonex, a similar form of beta-interferon, produced by
Biogen, Inc., has been recommended for approval by an FDA advisory committee..
Tacrine, marketed by Warner-Lambert Co., has recently been approved for the
treatment of Alzheimer's dementia. Sales of these drugs may reduce the
available market for any product developed by the Company for these
indications. The Company is developing products for the treatment of anxiety
disorders, which will compete with well-established products in the
benzodiazepene class, including Valium, marketed by Hoffman-La Roche, Inc.,
and depression, which will compete with well-established products in the anti-
depressant class, including Prozac, marketed by Eli Lilly & Co. Certain
technologies under development by other pharmaceutical companies could result
in treatments for these and other diseases and disorders being pursued by the
Company. For example, a number of companies are conducting research on
molecules to block CRF to treat anxiety and depression. Other biotechnology
and pharmaceutical companies are developing compounds to treat obesity, and
one such drug, d-fenfluramine, to be marketed by American Home Products
Corporation, has been recommended for approval by an FDA advisory committee.
Several companies are engaged in research and development of immune modulating
drugs for the potential treatment of MS. In the event that one or more of
these programs were successful, the market for the Company's products may be
reduced or eliminated.
In addition, if Neurocrine receives regulatory approvals for its products,
manufacturing efficiency and marketing capabilities are likely to be
significant competitive factors. At the present time, Neurocrine has no
commercial manufacturing capability, sales force or marketing experience. In
addition, many of the Company's
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competitors and potential competitors have substantially greater capital
resources, research and development resources, manufacturing and marketing
experience and production facilities than does Neurocrine. Many of these
competitors also have significantly greater experience than does Neurocrine in
undertaking preclinical testing and clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals.
PATENTS AND PROPRIETARY RIGHTS
The Company files patent applications both in the United States and in
foreign countries, as it deems appropriate, for protection of its proprietary
technology and products. To date, only one patent has been issued to the
Company; however the Company otherwise owns or has received exclusive licenses
to five issued patents as well as 67 patent applications pursuant to license
agreements with academic and research institutions including the Beckman
Research Institute of the City of Hope, the Salk Institute for Biological
Studies, and Leland Stanford Junior University. The Company intends to file
additional United States and foreign applications in the future as
appropriate.
The Company's success will depend on its ability to obtain patent protection
for its products, preserve its trade secrets, prevent third parties from
infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the United States and
internationally.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval
processes in order to reach the marketplace, the pharmaceutical industry
places considerable importance on obtaining patent and trade secret protection
for new technologies, products and processes. Accordingly, the Company intends
to seek patent protection for its proprietary technology and compounds. There
can be no assurance as to the success or timeliness in obtaining any such
patents, that the breadth of claims obtained, if any, will provide adequate
protection of the Company's proprietary technology or compounds, or that the
Company will be able to adequately enforce any such claims to protect its
proprietary technology and compounds. Since patent applications in the United
States are confidential until the patents issue, and publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months, the Company cannot be certain that it was the
first creator of inventions covered by pending patent applications or that it
was the first to file patent applications for such inventions.
The degree of patent protection afforded to pharmaceutical inventions is
uncertain and any patents which may issue with regard to the Company's
potential products will be subject to this uncertainty. There can be no
assurance that competitors will not develop competitive products outside the
protection that may be afforded by the claims of the Company's patents. For
example, the Company is aware that other parties have been issued patents and
have filed patent applications in the United States and foreign countries
which claim alternative uses of DHEA, a potential product of the Company, and
cover other therapeutics for the treatment of multiple sclerosis. DHEA is not
a novel compound and is not covered by a composition of matter patent. The
issued patents licensed to the Company covering DHEA are use patents
containing claims covering therapeutic methods and the use of specific
compounds and classes of compounds for neuroregeneration. Other potential
products which the Company may develop may not consist of novel compounds and
therefore would not be covered by composition of matter patent claims.
Competitors may be able to commercialize DHEA products for indications outside
of the protection provided by the claims of any use patents that may be issued
to the Company. In this case, physicians, pharmacies and wholesalers could
then substitute a competitor's product for the Company's product. Use patents
may be unavailable or may afford a lesser degree of protection in certain
foreign countries due to the patent laws of such countries.
The Company may be required to obtain licenses to patents or proprietary
rights of others. As the biotechnology industry expands and more patents are
issued, the risk increases that the Company's potential products may give rise
to claims that such products infringe the patent rights of others. At lease
one patent containing claims covering compositions of matter consisting of
certain altered peptide ligand therapeutics for use in modulating the immune
response has issued in Europe, and the Company believes that this patent has
been licensed to a competitor of the Company. There can be no assurance that a
patent containing corresponding claims will not issue in the United States. In
addition, there can be no assurance that the claims of the European patent or
any corresponding claims of any future United States patents or other foreign
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patents which may issue will not be infringed by the manufacture, use or sale
of any potential altered peptide ligand therapeutics developed by the Company
or Ciba-Geigy. Furthermore, there can be no assurance that the Company or
Ciba-Geigy would prevail in any legal action seeking damages or injunctive
relief for infringement of any patent that might issue under such applications
or that any license required under any such patent would be made available or,
if available, would be available on acceptable terms. Failure to obtain a
required license could prevent the Company and Ciba-Geigy from commercializing
any altered peptide ligand products which they may develop.
No assurance can be given that any licenses required under any patents or
proprietary rights of third parties would be made available on terms
acceptable to the Company, or at all. If the Company does not obtain such
licenses, it could encounter delays in product introductions while it attempts
to design around such patents, or could find that the development, manufacture
or sale of products requiring such licenses could be foreclosed. Litigation
may be necessary to defend against or assert such claims of infringement, to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company, or to determine the scope and validity of the
proprietary rights of others. In addition, interference proceedings declared
by the United States Patent and Trademark Office may be necessary to determine
the priority of inventions with respect to patent applications of the Company
or its licensors. Litigation or interference proceedings could result in
substantial costs to and diversion of effort by, and may have a material
adverse impact on, the Company. In addition, there can be no assurance that
these efforts by the Company would be successful.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners
and consultants. There can be no assurance that relevant inventions will not
be developed by a person not bound by an invention assignment agreement. There
can be no assurance that binding agreements will not be breached, that the
Company would have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known or be independently discovered
by competitors.
GOVERNMENT REGULATION
Regulation by government authorities in the United States and foreign
countries is a significant factor in the development, manufacture and
marketing of the Company's proposed products and in its ongoing research and
product development activities. The nature and extent to which such regulation
will apply to the Company will vary depending on the nature of any products
which may be developed by the Company. It is anticipated that all of the
Company's products will require regulatory approval by government agencies
prior to commercialization. In particular, human therapeutic products are
subject to rigorous preclinical testing and clinical trials and other approval
procedures of the FDA and similar regulatory authorities in foreign countries.
Various federal and state statutes and regulations also govern or influence
testing, manufacturing, safety, labeling, storage and record-keeping related
to such products and their marketing. The process of obtaining these approvals
and the subsequent compliance with appropriate federal and state statutes and
regulations require the expenditure of substantial time and financial
resources. Any failure by the Company or its collaborators or licensees to
obtain, or any delay in obtaining, regulatory approval could adversely affect
the marketing of any products developed by the Company, its ability to receive
product or royalty revenues and its liquidity and capital resources.
Preclinical testing is generally conducted in laboratory animals to evaluate
the potential safety and the efficacy of a product. The results of these
studies are submitted to the FDA as a part of an IND, which must be approved
before clinical trials in humans can begin. Typically, clinical evaluation
involves a time consuming and costly three-phase process. In Phase I, clinical
trials are conducted with a small number of subjects to determine the early
safety profile, the pattern of drug distribution and metabolism. In Phase II,
clinical trials
36
<PAGE>
are conducted with groups of patients afflicted with a specific disease in
order to determine preliminary efficacy, optimal dosages and expanded evidence
of safety. In Phase III, large-scale, multi-center, comparative trials are
conducted with patients afflicted with a target disease in order to provide
enough data to demonstrate the efficacy and safety required by the FDA. The
FDA closely monitors the progress of each of the three phases of clinical
trials and may, at its discretion, re-evaluate, alter, suspend or terminate
the testing based upon the data which have been accumulated to that point and
its assessment of the risk/benefit ratio to the patient.
A physician-IND is an IND that allows a physician to conduct a clinical
trial under less rigorous regulatory review standards. A physician-IND
clinical trial does not replace the need for Company-sponsored clinical
trials, but can provide a preliminary indication as to whether further
clinical trials are warranted and may sometimes facilitate the more formal
regulatory review process.
The results of preclinical testing and clinical trials are submitted to the
FDA in the form of an NDA or PLA for approval to commence commercial sales. In
responding to an NDA or PLA, the FDA may grant marketing approval, request
additional information or deny the application if the FDA determines that the
application does not satisfy its regulatory approval criteria. There can be no
assurance that approvals will be granted on a timely basis, or at all. Similar
regulatory procedures must also be complied with in countries outside the
United States.
The Company is required to conduct its research activities in compliance
with NIH Guidelines for Research Involving Recombinant DNA Molecules and
Animals. The Company is also subject to various Federal, state and local laws,
regulations and recommendations relating to safe working conditions,
laboratory manufacturing practices, and the use and disposal of hazardous or
potentially hazardous substances, including radioactive compounds and
infectious disease agents, used in connection with the Company's research. The
extent of government regulation which might result from future legislation or
administrative action cannot be predicted accurately.
SCIENTIFIC ADVISORY BOARD
Neurocrine has assembled a Scientific Advisory Board that currently consists
of 16 individuals. Members of the Scientific Advisory Board are leaders in the
fields of neurobiology, immunology, endocrinology, psychiatry and medicinal
chemistry. Scientific Advisory Board members meet as a group at least yearly
to advise the Company in the selection, implementation and prioritization of
its research programs. Certain members meet more frequently to advise the
Company with regard to its specific programs.
The Scientific Advisory Board presently consists of the following
individuals:
Floyd E. Bloom, M.D., is Chairman of the Department of Neuropharmacology at
The Scripps Research Institute. Dr. Bloom is an internationally recognized
expert in the fields of neuropharmacology and neurobiology. He is the current
editor of the journal, Science.
Michael Brownstein, M.D., Ph.D., is Chief of the Laboratory of Cell Biology
at the National Institute of Mental Health. He is a recognized expert in
molecular pharmacology as it applies to the field of neuroendocrinology, where
he has defined many of the pharmaceutically important neurotransmitter
receptors and transporter systems.
Iain Campbell, Ph.D., is an Associate Member of the Department of
Neuropharmacology at The Scripps Research Institute. Dr. Campbell is an expert
in cytokine activation in autoimmune diseases and neuronal degeneration.
Burton G. Christensen, Ph.D., is currently retired from his position as
Senior Vice President of Chemistry at Merck Research Laboratories. In his
capacity as Senior Vice President, Dr. Christensen directed over 400
37
<PAGE>
scientists and groups, who, under his direction, were responsible for the
synthesis of finasteride (Proscar), a 5-alpha-reductase inhibitor for the
treatment of benign prostatic hypertrophy.
George P. Chrousos, M.D., Sc.D., is Chief of the Pediatric Endocrinology
Section at the National Institute of Child Health and Human Development. He
has investigated the role of stress hormones in pathological conditions such
as Cushing's disease, anxiety-related disorders and rheumatoid arthritis.
Caleb E. Finch, Ph.D., is the Arco and William F. Kieschnick Professor of
Neurobiology of Aging at the University of Southern California. He is an
internationally recognized expert in the field of molecular gerontology and
the genomic control of mammalian development and aging. His recent work has
focused on the role of cytokines in neuronal protection and aging.
Stephen M. Hedrick, Ph.D., is Professor and Chairman of Cell Biology at the
University of California, San Diego. Dr. Hedrick is an expert in T-cell
immunology and codiscovered the first T-cell receptor genes and identified the
regions responsible for antigen binding. He is an editor for the Journal of
Immunology.
Florian Holsboer, M.D., Ph.D., is Director at the Max Planck Institute fur
Psychiatrie. Dr. Holsboer is an international expert on the role of
glucocorticoids and neuropeptides, particularly CRF, in neuropsychiatric
disorders. He coordinates the efforts of several hundred scientists and
clinicians at the Max Planck Institute, a major European neuropsychiatric
institute.
George F. Koob, Ph.D., is a Member of the Department of Neuropharmacology at
The Scripps Research Institute and an Adjunct Professor in the Departments of
Psychology and Psychiatry at the University of California, San Diego. Dr. Koob
is an internationally recognized behavioral pharmacology expert on the role of
peptides in the central nervous system, the neurochemical basis of addiction
and in the development of preclinical behavioral procedures for the screening
of anxiolytic and antidepressant drugs and memory enhancers.
Phillip J. Lowry, Ph.D., is Professor and Head of the Department of
Biochemistry and Physiology at the University of Reading in Great Britain. Dr.
Lowry is an internationally recognized biochemical endocrinologist whose work
has focused on the purification and characterization of some of the key
hormonal mediators of the endocrine response to stress. Dr. Lowry is a member
of the European Neuroscience Steering Committee, the European Neuroendocrine
Association and the Committee of British Endocrinology.
Joseph B. Martin, M.D., Ph.D., is Chancellor and Professor of Neurology at
the University of California, San Francisco. Dr. Martin is an internationally
recognized expert in clinical and basic research in neurology and
neuroendocrinology and the etiology of hypothalamic diseases, and was one of
the first neurologists to embrace the role of the central nervous system on
immune function.
Bruce S. McEwen, Ph.D., is Professor and Head of the Harold and Margaret
Milliken Hatch Laboratory of Neuroendocrinology at The Rockefeller University.
Dr. McEwen has identified and studied the function of intracellular receptors
for neuroactive steroid hormones in the brain and immune system, in relation
to stress and sex differences. Dr. McEwen is also President of the Society for
Neuroscience.
Charles B. Nemeroff, M.D., Ph.D., is Chairman and Professor of the
Department of Psychiatry and Behavioral Sciences at Emory University School of
Medicine. Dr. Nemeroff is an internationally recognized expert on the effects
of neuropeptides on behavior and their relevance in clinically important
conditions such as depression, anxiety and schizophrenia, and has published
over 400 articles on this subject.
Lawrence J. Steinman, M.D., is Chief Scientist, Neuroimmunology of the
Company and a member of Neurocrine's Founding Board of Scientific and Medical
Advisors and its Executive Committee. See "Management."
Wylie W. Vale, Ph.D., is Chief Scientist, Neuroendocrinology of the Company
and a member of Neurocrine's Founding Board of Scientific and Medical Advisors
and its Executive Committee. See "Management."
38
<PAGE>
Stanley J. Watson, Jr., M.D., Ph.D., is Professor and Associate Chair for
Research in the Department of Psychiatry and Co-Director of the Mental Health
Research Institute at the University of Michigan. Dr. Watson is a recognized
expert in neuropeptides and their receptors and their role in psychiatric
diseases and behavior. Dr. Watson is also a member of the Institute of
Medicine of the National Academy of Sciences.
Each of the members of the Scientific Advisory Board have signed consulting
agreements that contain confidentiality provisions and restrict the members of
the Scientific Advisory Board from competing with the Company for the term of
the agreement. Each member of the Scientific Advisory Board receives either a
per diem consulting fee or a retainer fee and is anticipated to provide at
least five days of consulting per year. Each member also has received stock or
stock options in the Company, which vest over time. All but one member of the
Scientific Advisory Board is a full-time employee of a university or research
institute that has regulations and policies which limit the ability of such
personnel to act as part-time consultants or in other capacities for a
commercial enterprise. A change in these regulations or policies could
adversely affect the relationship of the Scientific Advisory Board member with
the Company.
INSURANCE
The Company maintains product liability insurance for clinical trials in the
amount of $1.0 million per occurrence and $1.0 million in the aggregate. The
Company intends to expand its insurance coverage to include the sale of
commercial products if marketing approval is obtained for products in
development. However, insurance coverage is becoming increasingly expensive,
and no assurance can be given that the Company will be able to maintain
insurance coverage at a reasonable cost or in sufficient amounts to protect
the Company against losses due to liability. There can also be no assurance
that the Company will be able to obtain commercially reasonable product
liability insurance for any products approved for marketing. A successful
product liability claim or series of claims brought against the Company could
have a material adverse effect on its business, financial condition and
results of operations.
EMPLOYEES
As of March 31, 1996, the Company had 84 employees consisting of 64 full-
time and 20 part-time employees. Of the full-time employees, 28 hold Ph.D. or
M.D. degrees. None of the Company's employees are represented by a collective
bargaining arrangement, and the Company believes its relationship with its
employees is good.
FACILITIES
The Company leases approximately 48,000 square feet of laboratory facilities
at 3050 Science Park Road, San Diego, California. The lease extends through
2006. The Company has sublet 19,000 square feet of this facility to a third
party for up to four years. The Company has also leased an additional 2,000
square-foot animal facility for a term of two years. The Company believes that
its facilities will be adequate to meet its research and development needs
through 1998.
LEGAL PROCEEDINGS
The Company is not a party to any litigation or legal proceedings.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harry F. Hixson, Jr.,
Ph.D. (1).............. 57 Chairman of the Board
Gary A. Lyons........... 45 President, Chief Executive Officer and Director
Wylie W. Vale, Ph.D.
(1)(2)................. 54 Chief Scientist, Neuroendocrinology and Director
Lawrence J. Steinman,
M.D. (2)............... 48 Chief Scientist, Neuroimmunology
Errol B. De Souza,
Ph.D................... 42 Executive Vice President, Research and Development
Paul W. Hawran.......... 44 Senior Vice President and Chief Financial Officer
Kenneth D. Krantz, M.D.,
Ph.D................... 49 Vice President, Medical and Regulatory Affairs
Howard C. Birndorf (3).. 46 Director
David E. Robinson (3)... 47 Director
David Schnell, M.D.
(3).................... 35 Director
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Part-time commitment pursuant to a consulting agreement.
(3) Member of Compensation Committee.
Harry F. Hixson, Jr., Ph.D., has served as a Director and Chairman of the
Board of the Company since September 1992. Dr. Hixson worked with Amgen, Inc.
("Amgen") from July 1985 through February 1991, most recently as President,
Chief Operating Officer and director. While at Amgen, he was responsible for
pharmaceutical development, manufacturing and United States and international
marketing and sales. Dr. Hixson is a director of Biocircuits, Inc. and Somatix
Therapy Corporation. Dr. Hixson holds a Ph.D. in Physical Biochemistry from
Purdue University and an M.B.A. from the University of Chicago.
Gary A. Lyons has served as President, Chief Executive Officer and a
Director of the Company since February 1993. Prior to joining the Company in
February 1993, Mr. Lyons was Vice President of Business Development at
Genentech, Inc. ("Genentech") since 1989. At Genentech, he was responsible for
international licensing, acquisitions and partnering which resulted in over 20
corporate relationships. He was also responsible for Genentech's Corporate
Venture Program which participated in early financing and/or formation of a
number of biotechnology start-up companies such as Xenova Ltd., Tularik, Inc.,
Nexagen, Inc., CytoTherapeutics, Inc., Khepri, Incyte Pharmaceuticals, Inc.,
Genomyx, Inc. and GenVec. Mr. Lyons serves as Chairman of the Board of
Genomyx, Inc. a privately held bio-instrumentation company. In addition, Mr.
Lyons had operating responsibility for Genentech's two subsidiaries, Genentech
Canada, Inc. and Genentech Limited (Japan). Previously, he served as Vice
President of Sales and was responsible for building the marketing and sales
organization for the commercial introduction of Genentech's first two
pharmaceutical products, Protropin (human growth hormone) and Activase (TPA).
Mr. Lyons holds a B.S. in Marine Biology from the University of New Hampshire
and an M.B.A. from Northwestern University's J.L. Kellogg Graduate School of
Management.
Wylie W. Vale, Ph.D., is a Founder and Chief Scientist, Neuroendocrinology
and Chairman of the Company's Founding Board of Scientific and Medical
Advisors and its Executive Committee. Dr. Vale was elected a Director of the
Company in September 1992. He is a Professor at The Salk Institute for
Biological Studies ("The Salk Institute") and is the Senior Investigator and
Head of The Clayton Foundation Laboratories for Peptide Biology at The Salk
Institute, where he has been employed for 25 years. Dr. Vale is the current
Chairman of the Faculty and a current Member of the Board of Trustees of The
Salk Institute. Dr. Vale is recognized for his work on the identification of
neuroendocrine factors such as somatostatin, growth hormone releasing factor,
corticotropin releasing factor, CRF-BP, gonadotropin releasing hormone,
activin and the activin receptor, the CRF/1/ receptor and urocortin, the
native ligand for the CRF/2/ receptor.
40
<PAGE>
These scientific advances have distinguished him as one of the 10 most cited
scientific authors in the world in the past decade. Dr. Vale received a B.A.
in Biology from Rice University, and a Ph.D. in Physiology and Biochemistry
from the Baylor College of Medicine.
Lawrence J. Steinman, M.D., became Chief Scientist, Neuroimmunology and a
member of Neurocrine's Founding Board of Scientific and Medical Advisors and
its Executive Committee in September 1992. Dr. Steinman is a Professor in the
Department of Neurology and Neurological Sciences, Pediatrics and Genetics at
Stanford University School of Medicine where he has been employed for more
than the last five years, and is Professor of Immunology at the Weizmann
Institute. Dr. Steinman has substantial expertise in the basic and clinical
biology of immunological diseases of the central nervous system. Dr. Steinman
has been honored with the Weir Mitchell Award of the American Academy of
Neurology and the Senator Jacob Javits Neuroscience Investigators Award from
the United States Congress. Dr. Steinman is a member of the Board of Directors
of Centocor, Inc.
Errol B. De Souza, Ph.D., is a Founder and Executive Vice President,
Research and Development for the Company. Prior to joining the Company in
October 1992, Dr. De Souza was Director of Central Nervous System Diseases
Research for The Du Pont Merck Pharmaceutical Company ("Du Pont Merck"), where
he directed the discovery efforts of over 100 scientists in the fields of
neurobiology, molecular biology, pharmacology and chemistry commencing in May
1990. Prior to joining Du Pont Merck, Dr. De Souza was Chief of the Laboratory
of Neurobiology at the National Institute on Drug Abuse, and he was an
Associate Professor in the Department of Pathology at The Johns Hopkins
University School of Medicine. Dr. De Souza received a B.A. in Physiology and
a Ph.D. in Endocrinology from the University of Toronto and pursued post-
doctoral training at The Johns Hopkins University School of Medicine and the
University of Kentucky.
Paul W. Hawran became Senior Vice President and Chief Financial Officer of
the Company in February 1996. Prior to joining the Company in May 1993 as Vice
President, Mr. Hawran was employed by SmithKline Beecham Corporation
("SmithKline") from July 1984 to May 1993, most recently as Vice President and
Treasurer. Prior to joining SmithKline in 1984, Mr. Hawran held various
financial positions at Warner Communications (now Time Warner) where he was
involved in corporate finance, financial planning and domestic and
international budgeting and forecasting. Mr. Hawran received a B.S. in Finance
from St. John's University and an M.S. in Taxation from Seton Hall University.
He is a Certified Public Accountant and a member of the American Institute of
Certified Public Accountants, California and Pennsylvania Institute of
Certified Public Accountants and the Financial Executives Institute.
Kenneth D. Krantz, M.D., Ph.D., became Vice President, Medical and
Regulatory Affairs of the Company in January 1996. Prior to joining the
Company as a consultant in December 1994, Dr. Krantz was Vice President of
Clinical and Regulatory Affairs at ImClone Systems from December 1992 to
December 1994, where he successfully initiated three company-sponsored INDs
and clinical research programs. From 1988 through December 1992 he was
Executive Director for Clinical Research and Biostatistics for the Ortho
Biotech/R.W. Johnson Pharmaceutical Research Institute unit of Johnson &
Johnson, where his groups successfully implemented clinical trials in
immunology and hematology, leading to three INDs and five PLA approvals. Dr.
Krantz received a B.S. in Biopsychology, a Ph.D. in Pharmacology and an M.D.
from the University of Chicago.
Howard C. Birndorf became a Director of the Company in September 1992. Mr.
Birndorf is Chairman and Chief Executive Officer and Co-Founder of Nanogen,
Inc., a biotechnology company. From November 1991 to January 1994, Mr.
Birndorf was president of Birndorf Biotechnology Development, an investment
and consulting company. Mr. Birndorf was Co-Founder and Chairman Emeritus of
Ligand Pharmaceuticals Incorporated ("Ligand"). He held the position of
President and Chief Executive Officer of Ligand from January 1988 to November
1991. In addition, Mr. Birndorf was Co-Founder of IDEC Pharmaceuticals, Inc, a
biotechnology company, in 1985 and was involved in the formation of Gensia
Pharmaceuticals, Inc., a biotechnology company, in 1986 and served on the
boards of directors of these companies from their respective inceptions until
1991. He is a director of the Cancer Center of the University of California at
San Diego and a Presidential Appointee to the United States Department of
Commerce Biotechnology Technical Advisory Committee. Mr. Birndorf received an
M.S. in Biochemistry from Wayne State University.
41
<PAGE>
David E. Robinson became a Director of the Company in May 1994. Since 1991,
he has served as President and Chief Executive Officer of Ligand, a
biotechnology company. Prior to joining Ligand in 1991, he was Chief Operating
Officer at Erbamont N.V. ("Erbamont"), a pharmaceutical company. Prior to
that, Mr. Robinson was President of Adria Laboratories, Erbamont's North
American subsidiary. He also was employed in various executive positions for
more than 10 years by Abbott Laboratories, most recently as Regional Director
of Abbott Europe. Mr. Robinson received his M.B.A. from the University of New
South Wales, Australia.
David Schnell, M.D., became a Director of the Company in January 1993. Since
January 1994, he has been a Partner at Kleiner Perkins Caufield & Byers
specializing in life science and health care investing. From August 1987 to
December 1993, he was a marketing and business development executive at Sandoz
Pharmaceuticals Corporation ("Sandoz"). From January 1992 to December 1993, he
managed Sandoz' venture capital activities with Avalon Medical Partners. Dr.
Schnell is the founding President of HealthScape and a founder and Director of
Microcide Pharmaceuticals, Inc. Dr. Schnell received a B.S. in Biological
Sciences, an A.M. in Health Services Research from Stanford University and an
M.D. from Harvard University.
The Company's Certificate of Incorporation provides for a Board of Directors
that is divided into three classes. The Directors in Class I hold office until
the first annual meeting of stockholders following this offering, the
Directors in Class II hold office until the second annual meeting of
stockholders following this offering, and the Directors in Class III hold
office until the third annual meeting of stockholders following this offering
(or, in each case, until their successors are duly elected and qualified or
their earlier resignation, removal from office or death), and, after each such
election, the Directors in each such case will then serve in succeeding terms
of three years and until their successors are duly elected and qualified.
Officers of the Company serve at the discretion of the Board of Directors.
There are no family relationships among the Company's Directors and executive
officers.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee, currently comprised of Drs. Hixson and Vale, oversees the
actions taken by the Company's independent auditors and reviews the Company's
internal financial and accounting controls and policies. The Compensation
Committee, currently comprised of Messrs. Birndorf and Robinson and Dr.
Schnell, is responsible for determining salaries, incentives and other forms
of compensation for officers and other key employees of the Company and
administers various incentive compensation and employee benefits.
DIRECTOR COMPENSATION
Except as described below, members of the Company's Board of Directors do
not receive any cash compensation for their services as Directors.
The Company's 1996 Director Option Plan provides that options may be granted
to non-employee directors of the Company pursuant to an automatic non-
discretionary grant mechanism. At each annual meeting of the stockholders
following the effective date of this offering, each of the non-employee
directors, Messrs. Birndorf and Robinson and Drs. Hixson, Vale and Schnell,
will each automatically be granted an option to purchase 10,000 shares of the
Company's Common Stock at an exercise price equal to the fair market value on
the date of grant.
The Company has entered into a consulting agreement with Dr. Vale, a founder
and Director of the Company. See "Employment and Certain Scientific Consulting
Contracts."
42
<PAGE>
EXECUTIVE COMPENSATION
The following table shows for the fiscal year ended December 31,1995,
certain compensation paid by the Company, including salary, bonuses, stock
options, and certain other compensation, to the Chief Executive Officer and
other executive officers of the Company at December 31, 1995 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
---------------- ---------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS AWARDS OPTIONS COMPENSATION
--------------------------- -------- ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Gary A. Lyons........... $275,000 $25,000 -- 148,000 $17,757(1)
President and Chief Ex-
ecutive Officer
Errol B. De Souza,
Ph.D................... 215,700 15,000 -- 92,000 12,745(2)
Executive Vice
President, Research and
Development
Paul W. Hawran.......... 180,000 15,000 -- 65,000 29,379(3)
Senior Vice President
and Chief Financial
Officer
</TABLE>
- --------
(1) Represents reimbursement for taxes incurred by Mr. Lyons as a result of
the payments by the Company in 1995 of moving, housing and other expenses
incurred in connection with relocating to the Company's geographic region
($14,636) and the premium paid for the term life insurance policies for
the benefit of Mr. Lyons ($3,121).
(2) Represents reimbursement for taxes incurred by Dr. De Souza as a result of
the payments by the Company in 1995 of moving, housing and other expenses
incurred in connection with relocating to the Company's geographic region
($10,297) and the premium paid for the term life insurance policies for
the benefit of Dr. De Souza ($2,448).
(3) Represents reimbursement for taxes incurred by Mr. Hawran as a result of
the payments by the Company in 1995 of moving, housing and other expenses
incurred in connection with relocating to the Company's geographic region
($21,645), payments relating to relocation costs ($6,289) and the premium
paid for the term life insurance policies for the benefit of Mr. Hawran
($1,445).
The following table sets forth certain information concerning grants of
options made during the year ended December 31, 1995 by the Company to the
Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
POTENTIAL REALIZABLE VALUE
MINUS EXERCISE PRICE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OF FOR OPTION TERM (1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------------
NAME GRANTED (2) 1995 PER SHARE DATE 5% 10%
---- ----------- ------------- ----------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Gary A. Lyons........... 148,000 30.0% $4.25 4/18/05 $ 575,894 $ 1,289,776
Errol B. De Souza,
Ph.D................... 92,000 18.6 4.25 4/18/05 357,988 801,753
Paul W. Hawran.......... 65,000 13.2 4.25 4/18/05 252,926 566,456
</TABLE>
- --------
(1) Potential realizable value is based on the assumption that the Common
Stock of the Company appreciates at the annual rate shown (compounded
annually) from the date of the grant until the expiration of the ten-year
option term. These numbers are calculated based on the requirements
promulgated by the Securities and Exchange Commission and do not reflect
the Company's estimate of future stock price growth.
43
<PAGE>
(2) All options shown granted in 1995 become exercisable as to 1/60th of the
option shares each month, with full vesting occurring on the fifth
anniversary of the date of hire. Under the 1992 Incentive Stock Plan, the
Board of Directors retains the discretion to modify the terms, including
price, of outstanding options. Options were granted at an exercise price
equal to 85% of the fair market value of the Company's Common Stock, as
determined by the Board of Directors on the date of grant. Exercise price
may be paid in cash, promissory note, by delivery of already owned shares
subject to certain conditions, or pursuant to a cashless exercise
procedure under which the optionee provides irrevocable instructions to a
brokerage firm to sell the purchased shares and remit to the Company, out
of sale proceeds, an amount equal to the exercise price plus all
applicable withholding taxes.
The following table sets forth certain information regarding the stock
options held at December 31, 1995 by each of the Named Executive Officers.
During 1995, no such stock options were exercised by any of the Named
Executive Officers. The Company has not granted any stock appreciation rights.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1995 AT DECEMBER 31, 1995(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary A. Lyons........... 135,136 164,364 $1,037,921 $1,099,079
Errol B. De Souza,
Ph.D................... 83,025 109,975 658,832 724,168
Paul W. Hawran.......... 27,152 68,148 203,946 444,704
</TABLE>
- --------
(1) Based upon the initial public offering price of $10.50 per share, minus
the per share exercise price, multiplied by the number of shares
underlying the option.
EMPLOYMENT AND CERTAIN SCIENTIFIC CONSULTING AGREEMENTS
Gary A. Lyons has an employment contract that provides (i) Mr. Lyons serves
as the Company's President and Chief Executive Officer for a term of four
years commencing in February 1993 at a current annual salary of $290,000,
subject to annual adjustment by the Board of Directors; (ii) the agreement
will automatically renew for two-year periods thereafter unless the Company or
Mr. Lyons gives 30 days notice of termination; (iii) Mr. Lyons is eligible for
a discretionary annual bonus as determined by the Board of Directors, based
upon achieving certain performance criteria; (iv) the Company has agreed to
forgive the loan of $67,500 made to reimburse Mr. Lyons for 50% of the loss on
sale of his former residence over a four-year period (based on continued
employment); and (v) Mr. Lyons is entitled to continue to receive his salary
for 12 months in the event that the Company terminates his employment without
cause, or materially reduces the power and duties of his employment without
cause, which will be deemed to be a termination.
Errol B. De Souza, Ph.D., has an employment contract that provides that (i)
Dr. De Souza serves as the Company's Executive Vice President of Research and
Development for a term of four years commencing in October 1992 at a current
annual salary of $227,700, subject to annual increase of at least eight
percent over the prior year's salary; (ii) the agreement will automatically
renew for two-year periods thereafter unless the Company or Dr. De Souza gives
30 days notice of termination; (iii) Dr. De Souza is eligible for a
discretionary annual bonus of up to 40% of his annual salary based upon
achieving certain performance criteria; (iv) the Company has agreed to forgive
over a four-year period (based on continued employment) 50% of the $70,500
loan made to reimburse Mr. De Souza for the loss on the sale of his former
residence; and (v) Dr. De Souza is entitled to continue to receive his salary
for up to six months or the remainder of the term of employment, whichever is
less, in the event that the Company terminates his employment without cause.
44
<PAGE>
Paul W. Hawran has an employment contract that provides that (i) Mr. Hawran
serves as the Company's Senior Vice President and Chief Financial Officer for
a term of four years commencing in May 1993 at a current annual salary of
$190,500, subject to annual adjustment by the Board of Directors; (ii) the
agreement will automatically renew for two-year periods thereafter unless the
Company or Mr. Hawran gives 90 days notice of termination; (iii) Mr. Hawran is
eligible for a discretionary annual bonus as determined by the Board of
Directors based upon achieving certain performance criteria; (iv) the Company
has agreed to forgive over a four-year period (based on continued employment)
the loan of $87,500 made to reimburse Mr. Hawran for 50% of the loss on sale
of his former residence; and (v) Mr. Hawran is entitled to continue to receive
his salary for 12 months in the event that the Company terminates his
employment without cause, or materially reduces the power and duties of his
employment without cause, which will be deemed to be a termination.
The Company also has consulting agreements with Drs. Vale and Steinman
pursuant to which Dr. Vale serves as Chief Scientist, Neuroendocrinology and
Dr. Steinman serves as Chief Scientist, Neuroimmunology. Dr. Vale's consulting
agreement requires him to spend a significant amount of time performing
services for the Company and prohibits Dr. Vale from providing consulting
services to or participating in the formation of any company in Neurocrine's
field of interest or that may be competitive with Neurocrine. Dr. Vale's
agreement is for a five-year term that commenced in February 1996 and provides
for an annual consulting fee of $42,500 in exchange for his consulting
services to the Company.
Dr. Steinman's consulting agreement is for a five-year term that commenced
in February 1996 and provides for an annual consulting fee of $85,000, and is
obligated to consult for a minimum of 40 days per year. The agreement
prohibits Dr. Steinman from providing consulting services to or participating
in the formation of any other company, except for his position as a member of
the Board of Directors of Centocor, Inc.
STOCK PLANS
1992 Incentive Stock Plan. The Company's 1992 Incentive Stock Plan (the
"Plan") was approved by the Company's Board of Directors in July 1992 and was
approved by its stockholders in September 1992. A total of 3,300,000 shares of
Common Stock have been reserved for issuance under the Plan, as amended, to
officers, directors, employees and consultants. As of March 31, 1996,
1,343,300 shares have been issued under the Plan, options for 1,434,590 shares
of Common Stock were outstanding under the Plan, and 522,110 shares of Common
Stock remained available for future issuance under the Plan. The Plan allows
for the grant to employees of incentive stock options, and for the grant to
employees, officers, directors, and consultants of nonstatutory stock options,
stock bonuses and stock purchase rights. The Plan is not qualified under
Section 401(a) of the Internal Revenue Code, as amended (the "Code") and is
not subject to the Employee Retirement Income Security Act of 1974. Unless
sooner terminated the Plan will terminate automatically in July 2002.
The purpose of the Plan is to advance the interests of the Company and its
stockholders and to promote the success of the Company's business by
attracting the best available personnel for positions of substantial
responsibility, and to provide an incentive to officers, directors, employees
and consultants of the Company. The Plan is administered by the Board of
Directors of the Company or a committee designated by the Board.
The Board of Directors or a committee of the Board selects the participants
and determines the number of shares and type of grant, as well as when such
shares shall become exercisable (vest), the form of consideration payable upon
exercise, and the other terms and conditions of such grant. The Plan does not
provide for a maximum number of shares of Common Stock which may be granted to
any one participant, although there is a limit on the aggregate market value
of all incentive options granted to a participant during any calendar year.
The exercise price for stock options granted under the Plan is determined by
the Board of Directors of the Company or its committee and may not be less
than 85% (100% in the case of an incentive stock option) of the fair market
value of the Common Stock on the date the option is granted, except in the
case of incentive stock options granted to 10% shareholders, the exercise
price of which may not be less than
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<PAGE>
110% of such fair market value. Options are not generally transferable by the
participant other than by will or the laws of descent and distribution, and
are exercisable during the participant's lifetime only by him, or, in the
event of death of the participant, by a person who acquires the right to
exercise the options by bequest or inheritance or by reason of the death of
the participant. No option may be exercised by any person after such
expiration. Options granted under the Plan generally vest monthly over a four-
year period and have a maximum term of 10 years from the date of grant.
The Plan also allows for the sale of stock or the grant of stock bonuses.
The price to be paid for the shares to be purchased under the Plan, the form
of consideration to be paid for the shares, and the terms of payment are
determined by the Board or a Committee of the Board. Payment for the shares
may be made in installments or at one time, as determined by the Board, and
provision may be made by the Board for aiding any eligible person in paying
for the shares by promissory notes or otherwise.
The Plan provides that in the event of a merger of the Company with or into
another corporation, a sale of substantially all of the Company's assets or a
like transaction involving the Company, each outstanding option or stock
purchase right may be assumed or an equivalent option substituted by the
successor corporation. If the outstanding options and stock purchase rights
are not assumed or substituted as described in the preceding sentence, they
shall terminate.
1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
March 1996 and will be submitted to the stockholders for approval at the
Company's 1996 annual stockholders' meeting. A total of 125,000 shares of
Common Stock is reserved for issuance under the Purchase Plan. The Purchase
Plan, which is intended to qualify under Section 423 of the Code is
administered by the Board of Directors or by a committee appointed by the
Board. Employees (including officers and employee directors) are eligible to
participate if they are customarily employed by the Company for at least 20
hours per week and more than five months in any calendar year. The Purchase
Plan permits eligible employees to purchase Common Stock through payroll
deductions, which may not exceed 15% of an employee's compensation. The
Purchase Plan will be implemented in a series of overlapping offering periods,
each to be of approximately 24 months duration. The initial offering period
under the Purchase Plan will begin on the effective date of this offering and
subsequent offering periods will begin on the first trading day on or January
1 and July 1 each year. Each participant will be granted an option on the
first day of this offering period and such option will be automatically
exercised on the last day of each semi-annual period throughout this offering
period. The purchase price of the Common Stock under the Purchase Plan will be
equal to 85% of the lesser of the fair market value per share of Common Stock
on the start date of an offering period or on the date on which the option is
exercised. Employees may end their participation in an offering period at any
time during an offering period, and participation ends automatically on
termination of employment with the Company. The Purchase Plan will terminate
in March 2006, unless terminated sooner by the Board of Directors.
1996 Director Option Plan. The Company's 1996 Director Option Plan (the
"Director Plan") was adopted by the Board of Directors in March 1996 and will
be submitted to the stockholders for approval at the Company's 1996 annual
stockholders' meeting. A total of 100,000 shares of Common Stock is reserved
for issuance under the Director Plan. The option grants under the Director
Plan shall be automatic and non-discretionary, and the exercise price of the
options shall be 100% of the fair market value of the Common Stock on the
grant date. The Director Plan provides for the grant of options to purchase
10,000 shares of Common Stock to each non-employee director of the Company at
each annual meeting of the stockholders commencing in 1997, providing such
non-employee director has been a non-employee director of the Company for at
least six months prior to the date of such annual meeting of the stockholders.
Each new non-employee director shall automatically be granted an option to
purchase 10,000 shares of Common Stock upon the date such person joins the
Board of Directors. The term of such options is ten years. Any option granted
to a non-employee director shall become exercisable over a three-year period
following the date of grant. No option may be transferred by the optionee
other than by will or the laws of descent or distribution. Any optionee whose
relationship with the Company or any related corporation ceases for any reason
(other than
46
<PAGE>
by death or permanent and total disability) may exercise options only during a
90-day period following such cessation (unless such options terminate or
expire sooner by their terms). Upon a merger or asset sale, all outstanding
options under the Director Plan will be assumed or replaced with an equivalent
option by the successor corporation. In the event that the successor
corporation does not agree to assume the outstanding options or substitute an
equivalent option, each outstanding option shall become fully vested and
exercisable, including as to shares not otherwise exercisable. Each optionee
will be given 30 days notice of the merger or asset sale and be given the
opportunity to fully exercise all outstanding options. All options not
exercised within the 30 day notice period will expire. The Director Plan will
terminate in March 2006, unless sooner terminated by the Board of Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for: (i)
any breach of their duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) unlawful payments of dividends
or unlawful stock repurchases or redemptions, or (iv) any transaction from
which the director derived an improper personal benefit. Such limitation of
liability does not apply to liabilities arising under the federal securities
laws and does not affect the availability of equitable remedies such as
injunctive relief or rescission.
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers and employees and
other agents to the fullest extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. The Company's Bylaws also
permit it to secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the Bylaws permit such indemnification.
The Company has entered into indemnification agreements with its officers
and directors containing provisions which may require the Company, among other
things, to indemnify such officers and directors against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them
as to which they could be indemnified. The Company believes that these
provisions and agreements are necessary to attract and retain qualified
persons as directors and officers.
At the present time, there is no pending litigation or proceeding involving
any director, officer, employee or agent of the Company in which
indemnification will be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
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<PAGE>
CERTAIN TRANSACTIONS
PRIVATE PLACEMENT OF SECURITIES
Between September 1993 and February 1994, the Company sold approximately
6,026,000 shares of its Common Stock at a price of $5.00 per share in private
placement transactions resulting in net proceeds to the Company of
approximately $27.6 million. The purchasers of Common Stock included, among
others, the following Named Executive Officers and directors and holders of
more than five percent of the Company's voting securities:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
PURCHASER COMMON STOCK
--------- ------------
<S> <C>
Howard C. Birndorf............................................ 10,000
Paul W. Hawran................................................ 10,000
The Hixson Family Trust (1)................................... 100,000
Entities affiliated with Kleiner Perkins Caufield & Byers,
L.P. (2)..................................................... 300,000
Gary A. Lyons................................................. 20,000
Wylie W. Vale, Ph.D........................................... 10,000
</TABLE>
- --------
(1) Affiliated with Dr. Hixson, the Chairman of the Board of Directors.
(2) Includes shares held by Kleiner Perkins Caufield & Byers VI, L.P. and KPCB
Founders Fund VI, L.P., a holder of more than five percent of the
Company's Common Stock.
TRANSACTIONS AND RELATIONSHIPS WITH DIRECTORS AND EXECUTIVE OFFICERS
In September 1995, the Company granted Harry Hixson, Chairman of the
Company's Board of Directors, an option to purchase 8,000 shares of Common
Stock, at an exercise price of $5.00 per share.
In July 1993, the Company granted Wylie Vale, Chief Scientist,
Neuroendocrinology and a Director of the Company, an option to purchase
101,000 shares of Common Stock at an exercise price of $2.50 per share.
Dr. Vale is a Professor and the Senior Investigator and Head of the Clayton
Foundation Laboratories for Peptide Biology at The Salk Institute. In 1995,
1994 and 1993, the Company paid $30,162, $91,644 and $5,070 respectively, to
The Salk Institute in connection with various license agreements.
In July 1993, the Company granted Errol De Souza, Executive Vice President
of Research and Development an option to purchase 101,000 additional shares of
Common Stock at an exercise price of $2.50 per share. Such shares are subject
to vesting. In April 1994, the Company loaned Dr. De Souza $70,500 toward the
loss on sale of his former residence. One half of this amount is being
forgiven by the Company over a four-year period, subject to repayment by Dr.
De Souza in the event of termination of employment, and the other one half is
to be repaid by Dr. Souza upon the earlier of (i) 90 days after voluntary
termination of employment, (ii) the completion of this offering, or (iii)
receipt of proceeds from the sale of shares of Common Stock held by him. In
April 1995, the Company granted an additional option to Dr. De Souza to
purchase 92,000 shares of Common Stock at an exercise price of $4.25 per
share. Such shares are also subject to vesting.
In September 1995, the Company granted Howard Birndorf, a Director of the
Company, an option to purchase 8,000 shares of Common Stock, at an exercise
price of $5.00 per share.
In March 1993, the Company sold 323,200 shares of Common Stock at a purchase
price of $0.15 per share to Gary Lyons, President, Chief Executive Officer and
Director of the Company. The purchase price was paid by an interest-bearing
promissory note having a term of three years. In July 1993, the Company
granted Mr. Lyons an option to purchase 151,500 shares of Common Stock at a
purchase price of $2.50 per share. Such shares and option are subject to
vesting. In December 1993, the Company loaned Mr. Lyons $67,500 toward the
loss on sale of his former residence. This loan is being forgiven by the
Company over a
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<PAGE>
four-year period subject to repayment by Mr. Lyons in the event of termination
of employment. In April 1995 the Company granted Mr. Lyons an option to
purchase an additional 148,000 shares of Common Stock at a purchase price of
$4.25 per share. Such shares are subject to vesting.
In June 1993, the Company sold 101,000 shares of Common Stock at a purchase
price of $0.15 per share to Paul Hawran, Senior Vice President and Chief
Financial Officer of the Company. The purchase price was paid by an interest-
bearing promissory note having a term of three years. In July 1993, the
Company granted Mr. Hawran an option to purchase an additional 30,300 shares
of Common Stock at a purchase price of $2.50 per share. Such shares and option
are subject to vesting. In June 1994 the Company loaned Mr. Hawran $175,000
toward the loss on sale of his former residence. One half of this amount is
being forgiven over a four-year period, subject to repayment by Mr. Hawran in
the event of termination of employment; the other one half is to be repaid by
Mr. Hawran upon the earlier of (i) 90 days after voluntary termination of
employment, (ii) sale of his San Diego residence, or (iii) receipt of proceeds
from the sale of Common Stock held by him. In September 1994, the Company
advanced Mr. Hawran $15,000 toward relocation related expenses; such loans
have since been repaid. In April 1995, the Company granted Mr. Hawran an
option to purchase an additional 65,000 shares of Common Stock at a purchase
price of $4.25 per share. Such shares are subject to vesting.
In March 1994, the Company granted David E. Robinson, a Director of the
Company, an option to purchase 20,000 shares of Common Stock at a purchase
price of $5.00 per share. In September 1995, the Company granted Mr. Robinson
an option to purchase 8,000 shares of Common Stock at a purchase price of
$5.00 per share.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal shareholders and their
affiliates will be approved by the majority of the Board of Directors,
including a majority of the independent and disinterested directors, and will
continue to be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties. See "Principal Stockholders."
The Company has agreed to indemnify each of its directors and officers to
the fullest extent permitted by the Delaware General Corporations Law. See
"Executive Compensation -- Limitation of Liability and Indemnification."
TRANSACTION WITH CANADIAN SUBSIDIARY
In March 1996, Neurocrine formed NPI, a subsidiary of the Company in Canada.
Neurocrine licensed to NPI certain technology and Canadian marketing rights to
the Company's Neurosteroid and Neurogenomics programs. A group of Canadian
institutional investors (the "Canadian Investors") invested approximately U.S.
$9.5 million in NPI in exchange for Preferred Stock of NPI which may be
converted into 1,279,584 shares of the Company's Common Stock at an effective
conversion price of U.S. $7.45 at the option of the investors. NPI has
committed to use these funds for clinical development of the Neurosteroid
program for Alzheimer's disease and for research activities related to the
Neurogenomics program. In exchange for providing funding, NPI is entitled to
receive royalties on sales of products developed in these programs as well as
exclusive Canadian marketing rights for such products in the event that the
Company has not terminated the technology license and marketing rights or that
the Canadian Investors have not converted their NPI Preferred Stock into
shares of the Company's Common Stock. The Company has the right to terminate
the technology license and marketing rights, provided that the Company is then
obligated to purchase the shares of NPI Preferred Stock held by the Canadian
Investors in exchange for cash and Common Stock (valued at the market closing
price) whose aggregate value equals U.S. $9.5 million plus a 35% annual
compound rate of return from the date of the original investment (March 1996),
provided that the investors have not previously converted their shares of NPI
Preferred Stock. In connection with their investment in NPI, the Canadian
Investors received warrants exercisable for 383,875 shares of the Company's
Common
49
<PAGE>
Stock at an exercise price equal to the price per share at which Common Stock
is sold in this offering and are eligible to receive additional warrants in
the future exercisable at an exercise price of U.S. $7.75 per share for such
warrants issued prior to June 30, 1998 and thereafter at an exercise price
equal to 110% of the then current market value of the Common Stock in the
event that NPI is successful in receiving certain government incentives for
research activities, with the aggregate exercise price of such additional
warrants equal to 25% of the dollar amount of such incentives received by NPI.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1996 and as adjusted
to reflect the sale of Common Stock offered hereby (i) by each person (or
group of affiliated persons) who is known by the Company to own beneficially
more than five percent of the outstanding shares of Common Stock, (ii) by each
director and Named Executive Officer of the Company, and (iii) by all of
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (2)
----------------------
SHARES
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) OFFERING OFFERING
- ------------------------------------ ------------ ----------- -----------
<S> <C> <C> <C>
Kleiner Perkins Caufield & Byers
Entities (3)....................... 1,613,030 13.0% 9.7%
2750 Sand Hill Road
Menlo Park, CA 94025
Abingworth Bioventures.............. 878,970 7.1% 5.3%
Boite Postale 566
L-2015 Luxembourg
Ciba-Geigy Limited (4).............. 645,162 5.2% 6.8%
4002 Basel
Switzerland
David Schnell, M.D. (5)............. 1,618,080 13.1% 9.7%
Gary A. Lyons (6)................... 566,609 4.5% 3.4%
Errol B. De Souza (7)............... 502,784 4.0% 3.0%
Wylie W. Vale, Ph.D. (8)............ 427,130 3.4% 2.6%
Harry F. Hixson, Jr., Ph.D. (9)..... 210,364 1.7% 1.3%
Paul W. Hawran (10)................. 148,356 1.2% *
Howard C. Birndorf (11)............. 83,650 * *
David E. Robinson (12).............. 28,000 * *
All executive officers and directors
as a group (8 persons) (13)........ 3,584,973 29.0% 21.6%
</TABLE>
- --------
* Represents beneficial ownership of less than one percent (1%) of the
outstanding shares of the Company's Common Stock.
(1) Beneficial ownership is determined with the rules of the Securities and
Exchange Commission and generally includes voting or investment power
with respect to securities. Shares of Common Stock subject to stock
options and warrants currently exercisable or exercisable within 60 days
are deemed to be outstanding for computing the percentage ownership of
the person holding such options and the percentage ownership of any group
of which the holder is a member, but are not deemed outstanding for
computing the percentage of any other person. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown beneficially owned by them.
(2) Applicable percentage of ownership is based on 12,368,262 shares of
Common Stock outstanding prior to this offering.
(3) Includes 1,428,697 shares held by Kleiner Perkins Caufield & Byers VI,
L.P. and 184,333 shares held by Kleiner Perkins Caufield & Byers Founders
Fund VI, L.P.
(4) Post-offering percentage includes 476,191 shares which will be purchased
by Ciba-Geigy concurrent with this offering.
51
<PAGE>
(5) Includes (i) 1,428,697 shares held by Kleiner Perkins Caulfield & Byers
VI, L.P., (ii) 184,333 shares held by Kleiner Perkins Caulfield & Byers
Founders Fund VI, L.P. and (iii) 5,050 shares held by David Schnell,
M.D. Dr. Schnell, a Director of the Company, is a Venture Limited
Partner of Kleiner Perkins Caufield & Byers VI Associates, which is the
General Partner of Kleiner Perkins Caufield & Byers VI, L.P. and KPCB
Founders Fund VI, L.P. Dr. Schnell disclaims beneficial ownership of the
shares held by KPCB VI, L.P., and by KPCB Founders Fund VI, L.P., except
to the extent of his partnership interest in such shares.
(6) Includes 166,406 shares issuable pursuant to options exercisable within
60 days of March 31, 1996.
(7) Includes 121,717 shares issuable pursuant to options exercisable within
60 days of March 31, 1996.
(8) Includes 101,000 shares issuable pursuant to options exercisable within
60 days of March 31, 1996.
(9) Includes 201,000 shares of Common Stock held in the name of The Hixson
Family Trust of which Dr. Hixson is Trustee, and 8,000 shares issuable
pursuant to options exercisable within 60 days of March 31, 1996.
(10) Includes 36,356 shares issuable pursuant to options exercisable within 60
days of March 31, 1996.
(11) Includes 8,000 shares issuable pursuant to options exercisable within 60
days of March 31, 1996.
(12) Includes 28,000 shares issuable pursuant to options exercisable within 60
days of March 31, 1996.
(13) Includes 469,479 shares issuable pursuant to options exercisable within
60 days of March 31, 1996.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Upon completion of this offering, the Company will be authorized to issue
50,000,000 shares of Common Stock, $0.001 par value per share. As of March 31,
1996, there were 12,368,262 shares of Common Stock outstanding held of record
by approximately 408 shareholders.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, and do not have
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding Preferred Stock, the holders of Common Stock are entitled to
receive ratably the dividends, if any, that may be declared from time to time
by the Board of Directors out of funds legally available for such dividends.
See "Dividend Policy." In the event of a liquidation, dissolution or winding
up of the Company, the holders of Common Stock would be entitled to share
ratably in all assets remaining after payment of liabilities and the
satisfaction of any liquidation preferences granted the holders of any
outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive rights and no conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the Common Stock.
All the outstanding shares of Common Stock are, and the Common Stock offered
by the Company in this offering, when issued and paid for, will be validly
issued, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of undesignated
Preferred Stock, $0.001 par value per share. The Board of Directors shall have
the authority to issue the Preferred Stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control
of the Company without further action by the stockholders and may adversely
affect the voting and other rights of the holders of Common Stock. At present,
the Company has no plans to issue any of the Preferred Stock.
WARRANTS
As of March 31, 1996, there were outstanding (i) warrants to purchase
520,589 shares of Common Stock at an exercise price of $5.00 per share (the
"Private Placement Warrants") and (ii) warrants to purchase 383,875 shares of
Common Stock at an exercise price equal to the price per share at which Common
Stock is sold in this offering (the "NPI Warrants"). The Private Placement
Warrants were issued pursuant to the terms of a sales agency agreement
relating to the Company's private placement of Common Stock completed in
February 1994. The Private Placement Warrants are exercisable during the
period beginning 180 days after the date of closing of this offering and
ending in February 1999. As a condition of exercise and upon the request of a
majority of the Company's stockholders, each Private Placement Warrant holder
has agreed not to sell, assign, transfer, convey or otherwise dispose of any
shares of Common Stock issued upon exercise of a Private Placement Warrant,
including any sale pursuant to Rule 144 under the Act, under the lock-up
agreements. See "Shares Eligible for Future Sale." The NPI Warrants were
issued in connection with the financing of the Company's subsidiary NPI in
March 1996. The NPI Warrants are exercisable at any time prior to March 31,
2006. In addition, the Company has committed to issue additional warrants upon
the occurrence of certain events. See "Certain Transactions -- Transaction
with Canadian Subsidiary."
REGISTRATION RIGHTS AGREEMENTS
The holders (or their transferees) of 2,385,224 shares of Common Stock
issued upon conversion of the Series A Preferred Stock originally issued in
September 1992 as well as (i) JJDC, as holder of 434,783 shares of Common
Stock issued in January 1995 and an additional 238,095 shares of Common Stock
purchased upon completion of this initial public offering, (ii) Neuroscience
Partners Limited Partnership as holder of 213,913 shares of Common Stock
issued in February 1995, and (iii) Ciba-Geigy as holder of 645,161 shares of
Common
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<PAGE>
Stock issued in January 1996 and an additional 476,191 shares of Common Stock
purchased upon completion of this initial public offering are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of the Information
and Registration Rights Agreement dated September 15, 1992, as amended to
date, between the Company and the holders of such shares. Subject to certain
limitations in such agreement, the holders of at least 40% of such shares may,
at any time after the earlier of December 31, 1996 or three months after the
Company's initial public offering, require the Company to use its best efforts
to cause such shares to be registered under the Securities Act for resale on
two offerings at the Company's expense. If the Company registers any of its
Common Stock for its own account or for the account of others, the holders of
such shares are entitled to include their shares in the registration, subject
to the ability of the underwriters to limit the number of shares so included,
but not to less than 20% of the total number of shares in all such offerings
other than the Company's initial public offering. The holders of such shares
may also require the Company to register all or a portion of such shares on
Form S-3 when use of such Form becomes available to the Company, provided,
among other limitations, that the proposed aggregate selling price is at least
$500,000. The Company will bear the expenses of the registration of the such
shares, except any underwriting discounts and commissions.
The holders of 6,025,892 shares of Common Stock issued by the Company in a
private placement offering during the period from September 1993 through
February 1994 and the 520,589 shares of Common Stock issuable upon exercise of
outstanding warrants are entitled to certain rights with respect to the
registration of such shares under the Securities Act. In the event that the
Company completes an initial public offering of any of its securities before
August 1996, the Company is obligated to prepare and file a registration
statement under the Securities Act with respect to such shares 360 days after
the date of the offering. The Company is obligated to use its best efforts to
cause such registration to become effective not later than five days after the
end of such period and to keep such registration statement effective until
February 1998.
The holders of 1,279,584 shares of Common Stock issuable upon the exchange
of the shares of Preferred Stock of NPI and the exercise of certain warrants
exercisable for 383,875 shares of Common Stock issuable to the holders of such
NPI Preferred Stock, as well as any additional shares of Common Stock issuable
to such holders upon the exercise of any additional warrants issuable to such
holders, are entitled to certain rights with respect to the registration of
such shares under the Securities Act. These rights are provided under the
terms of a Registration Rights Agreement dated March 29, 1996 between the
Company and the holders of such shares. Subject to certain limitation in such
agreement, the holders of at least 40% of such shares may, at any time after
one year from the date of this offering, require the Company to register at
its expense all or a portion of such shares, provided, among other
limitations, that Form S-3 is then available to the Company and that the
proposed aggregate selling price of such shares is at least $500,000.
The exercise of any of the foregoing registration rights may hinder efforts
by the Company to arrange future financing of the Company and may have an
adverse effect on the market price of the Common Stock.
CERTAIN CHANGE OF CONTROL PROVISIONS
The Company anticipates it will reincorporate in Delaware prior to this
offering and will be subject to Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the
date the person became an interested stockholder, unless (with certain
exceptions) the "business combination" or the transaction in which the person
became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected
to have an anti-takeover effect with respect to transactions not approved in
advance by the Board of Directors, including discouraging attempts that might
result in a premium over the market price for the shares of Common Stock held
by stockholders.
54
<PAGE>
The Certificate of Incorporation provides for a Board of Directors that is
divided into three classes. The Directors in Class I hold office until the
first annual meeting of stockholders following this offering, the Directors in
Class II hold office until the second annual meeting of stockholders following
this offering, and the Directors in Class III hold office until the third
annual meeting of stockholders following this offering, (or, in each case,
until their successors are duly elected and qualified or until their earlier
resignation, removal from office or death), and, after each such election, the
Directors in each such class will then serve in succeeding terms of three
years and until their successors are duly elected and qualified. The
classification system of electing Directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
the Company and may maintain the incumbency of the Board of Directors, as the
classification of the Board of Directors generally increases the difficulty of
replacing a majority of the directors.
The Certificate of Incorporation and Bylaws do not provide for cumulative
voting in the election of directors. The authorization of undesignated
Preferred Stock makes it possible for the Board of Directors to issue
Preferred Stock with voting or other rights or preferences that could impede
the success of any attempt to change control of the Company. These and other
provisions may have the effect of delaying or preventing hostile takeovers or
delaying changes in control or management of the Company. The amendment of any
of these provisions would require approval by holders of at least 66 2/3% of
the outstanding Common Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
approximately 16,582,548 shares of Common Stock (excluding (i) 1,955,179
shares of Common Stock issuable upon exercise of options and warrants
outstanding as of March 31, 1996, (ii) 522,110 shares of Common Stock reserved
for future issuance under the Plan, (iii) 125,000 shares of Common Stock
reserved for future issuance under the Purchase Plan, (iv) 100,000 shares of
Common Stock reserved for future issuance under the Director Plan, and
(v) 1,279,584 shares of Common Stock reserved for future issuance upon
conversion of the shares of Preferred Stock of NPI and 383,875 shares of
Common Stock issuable upon the exercise of certain warrants issued to the
holders of such Preferred Stock, and the shares of Common Stock which may be
issued upon exercise of certain additional warrants which may be issued to
such holders). The 3,500,000 shares offered hereby will be freely tradeable
without restriction or further registration under the Act. The 12,368,262
shares of Common Stock held by existing stockholders are "restricted
securities" as the term is defined in Rule 144 under the Act. Of this number,
approximately 11,960,185 shares will be subject to lock-up agreements (as
described below under "Underwriting"). In addition, the 714,286 shares to be
sold to Ciba-Geigy and JJDC concurrent with this offering will also be
"restricted securities" and subject to such lock-up agreements.
Beginning (i) 180 days, (ii) 270 days, and (iii) 360 days after the date of
this Prospectus, approximately (i) 3,555,443, (ii) 3,555,443, and (iii)
3,555,443 shares that are subject to lock-up agreements (as described below
under "Underwriting") will become eligible for sale in the public market upon
expiration of such agreements, in accordance with the provisions of Rule 144
and Rule 701 of the Act. The remaining approximately 2,008,142 shares which
are also subject to such lock-up agreements will have been held for less than
two years upon the expiration of such lock-up agreements and will become
eligible for sale under Rule 144 at various dates thereafter as the holding
period provisions of Rule 144 are satisfied.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned shares for at least two years (including the continuous holding period
of any prior owner except an affiliate) is entitled to sell in "broker's
transactions" or to market makers, within any three-month period commencing 90
days after the date of this Prospectus, a number of shares that does not
exceed the greater of (i) one percent of the then outstanding shares of Common
Stock (approximately 165,825 shares immediately after this offering), or (ii)
the average weekly trading volume in the Common Stock during the four calendar
weeks preceding the filing of a Form 144 with respect to such sale. Sales
under Rule 144 are also subject to certain requirements as to manner of sale,
the filing of a notice, and the availability of public information concerning
the Company. In addition, a person who is not deemed to have been an affiliate
of the Company at any time during the three months preceding a sale and who
has beneficially owned the shares proposed to be sold for at least three years
(including the contiguous holding period of any prior owner except an
affiliate), would be entitled to sell such shares under Rule 144(k) without
regard to the requirements described above.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701 under the
Act, which permits nonaffiliates to sell their Rule 701 shares without having
to comply with the public information, holding period, volume limitation or
notice provisions of Rule 144 and permits affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions set forth
in Rule 144, in each case commencing 90 days after the date of this
Prospectus.
Approximately 373,780 shares of Common Stock which are not subject to lock-
up agreements will be eligible for immediate resale pursuant to Rule 144(k) as
of the date of this Prospectus, and approximately 29,257 shares of Common
Stock which are not subject to lock-up agreements will be eligible for resale
pursuant to Rule 144 and Rule 701 commencing 90 days after the date of this
Prospectus.
56
<PAGE>
Prior to this offering, there has been no market for the Common Stock of the
Company, and no predictions can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of the Common Stock of the Company in the public market could adversely affect
prevailing market prices for the Common Stock and the ability of the Company
to raise equity capital in the future.
The Company expects to file a registration statement under the Act after
this offering to register an additional 3,300,000 shares of Common Stock
reserved for issuance under the 1992 Stock Incentive Plan, under which options
to purchase 1,434,590 shares of Common Stock had been granted as of March 31,
1996, 125,000 shares reserved for issuance under the Purchase Plan, none of
which have been issued, and 100,000 shares reserved for issuance under the
Director Plan, under which no options have been granted.
Shares issued under such plans after the effective date of such registration
statement will be freely tradeable in the open market, upon expiration of the
agreements not to sell described above. See "Management."
57
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through their
representatives, Robertson, Stephens & Company LLC, Alex. Brown & Sons
Incorporated and Montgomery Securities (the "Representatives"), have severally
agreed with the Company, subject to the terms and conditions of the
Underwriting Agreement, to purchase the number of shares of Common Stock set
forth opposite their respective names below. The Underwriters are committed to
purchase and pay for all of such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Robertson, Stephens & Company LLC.................................. 1,190,000
Alex. Brown & Sons Incorporated.................................... 892,500
Montgomery Securities.............................................. 892,500
Dillon, Read & Co. Inc............................................. 125,000
Auerbach Pollak & Richardson Inc. ................................. 100,000
Gruntal & Co., Incorporated........................................ 100,000
Kaufman Bros., L.P. ............................................... 100,000
Punk, Ziegel & Knoell.............................................. 100,000
---------
Total............................................................ 3,500,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not in excess of $0.42 per share,
of which $0.10 may be reallowed to other dealers. After the initial public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representatives. No such reduction shall change the amount
of proceeds to be received by the Company as set forth on the cover page of
this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 525,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 3,500,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage of such additional shares that the number of shares of Common
Stock to be purchased by it shown in the above table represents as a
percentage of the 3,500,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those
on which the 3,500,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Each officer, director and certain other stockholders of the Company that
beneficially own or have dispositive power over approximately 11,960,185
shares of the Company's Common Stock have agreed with the Representatives for
a period of (i) 180 days after the date of this Prospectus with respect to
one-third of the shares held by them, (ii) 270 days after the date of this
Prospectus with regard to one-third of the shares held by them, and (iii) 360
days after the date of this Prospectus with regard to one-third of the shares
held by them (the "Lock-Up Period"), subject to certain exceptions, not to
offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge
or grant any rights with respect to any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock, or any securities convertible
into or exchangeable for shares of Common Stock owned as of the date of this
Prospectus or thereafter acquired directly by such holders or with respect to
which they have or hereafter acquire the power of disposition, without the
prior written consent of Robertson, Stephens & Company LLC. However,
Robertson, Stephens &
58
<PAGE>
Company LLC may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
Approximately 10,631,700 of such shares will be eligible for immediate public
sale following expiration of the Lock-Up Period, subject to the provisions of
Rule 144. In addition, the Company has agreed that during the 360-day period
after the date of this Prospectus, the Company will not, without the prior
written consent of Robertson, Stephens & Company LLC, subject to certain
exceptions, issue, sell, contract to sell, or otherwise dispose of, any shares
of Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into, exercisable for or exchangeable for
shares of Common Stock other than the Company's sale of shares in this
offering, the issuance of Common Stock upon the exercise of outstanding
options and the Company's issuance of options and shares under existing
employee stock option and stock purchase plans. See "Shares Eligible For
Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority in excess of 5% of the number of shares
of Common Stock offered hereby.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby was determined through negotiations among the Company and
the Representatives. Among the factors considered in such negotiations were
prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the Representatives
believe to be comparable to the Company, estimates of the business potential
of the Company, the present state of the Company's development and other
factors deemed relevant.
In addition to the 3,500,000 shares of Common Stock to be sold by the
Company in this offering, concurrent with this offering the Company will sell
$5,000,000 of Common Stock (476,191 shares at the initial public offering
price of $10.50 per share) to Ciba-Geigy and will sell $2,500,000 of Common
Stock (238,095 shares at the initial public offering price of $10.50 per
share) to JJDC. Such sales will be effected in private placement transactions
pursuant to separate agreements with each of Ciba-Geigy and JJDC and not
pursuant to the Underwriting Agreement. The Representatives will receive from
the Company a financial advisory fee for their services in connection with
such transactions equal to 4% of the aggregate purchase price paid by Ciba-
Geigy and JJDC. The Underwriters will not receive any other compensation in
connection with such transactions.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. As of the date of this Prospectus, 8,080 shares of the
Company's Common Stock were held by a member of such firm. Cooley Godward
Castro Huddleson & Tatum, Palo Alto and San Diego, California is acting as
counsel for the Underwriters in connection with certain legal matters relating
to this offering. As of the date of this Prospectus, 4,040 shares of the
Company's Common Stock were held by a member of such firm.
EXPERTS
The financial statements of Neurocrine Biosciences, Inc. as of December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995 and the balance sheet of Neuroscience Pharma (NPI) Inc. as of March 31,
1996 included in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon included elsewhere
herein and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
59
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC"), Washington, D.C. 20549, a Registration Statement on Form S-1,
including amendments thereto, under the Act, with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules filed
therewith. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to such Registration Statement and to
the exhibits and schedules filed therewith. Statements contained in this
Prospectus regarding the contents of any contract or other document referred
to are not necessarily complete, and in each instance, reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected without charge at the principal office of
the SEC, 450 Fifth Street, NW, Washington, D.C. 20549, and copies of all or
any part thereof may be obtained from such office upon the payment of
prescribed fees.
60
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NEUROCRINE BIOSCIENCES, INC.
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
NEUROSCIENCE PHARMA (NPI) INC.
Report of Ernst & Young LLP, Independent Auditors.......................... F-16
Balance Sheet.............................................................. F-17
Note to Balance Sheet...................................................... F-18
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Neurocrine Biosciences, Inc.
We have audited the accompanying balance sheet of Neurocrine Biosciences,
Inc. as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1995. 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 Neurocrine Biosciences,
Inc. at December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995,
in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Diego, California
February 9, 1996, except for
Note 8, as to which the
date is March 29, 1996
F-2
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 4,716,052 $ 6,392,749 $ 37,504
Short-term investments, available-
for-sale (Note 2)................. 13,511,703 12,303,460 20,524,894
Receivables under collaborative
agreements (Note 6)............... -- 1,000,000 2,854,344
Other current assets............... 302,131 234,334 509,490
------------ ------------ ------------
Total current assets............. 18,529,886 19,930,543 23,926,232
Furniture, equipment and leasehold
improvements, net
(Note 3)............................ 2,685,079 2,772,844 2,741,823
Licensed technology and patent
application costs, net
(Notes 3 and 5)..................... 730,386 919,049 998,950
Other assets......................... 399,045 389,296 412,697
------------ ------------ ------------
Total assets..................... $ 22,344,396 $ 24,011,732 $ 28,079,702
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 715,695 $ 820,883 $ 158,772
Accrued liabilities (Note 3)....... 628,046 879,287 405,117
Deferred revenue................... -- 500,000 872,991
Current portion of obligations
under capital leases
(Note 5).......................... 525,068 741,294 789,966
------------ ------------ ------------
Total current liabilities........ 1,868,809 2,941,464 2,226,846
Obligations under capital leases,
less current portion
(Note 5)............................ 1,732,794 1,631,404 1,405,611
Deferred rent........................ -- 213,925 227,744
Commitments (Note 5).................
Stockholders' equity (Notes 2 and 4):
Preferred Stock, $0.001 par value,
5,000,000 shares authorized, no
shares issued and outstanding..... -- -- --
Common Stock, no par value:
Authorized shares--100,000,000
Issued and outstanding shares--
11,059,426 in 1994, 11,723,101 in
1995 and 12,368,262 in 1996 ..... 31,463,666 35,597,941 40,650,841
Deferred compensation................ -- (342,679) (370,627)
Notes receivable from stockholders... (148,263) (138,177) (135,559)
Unrealized gains (losses) on short-
term investments.................... (23,535) 3,319 (54,355)
Accumulated deficit.................. (12,549,075) (15,895,465) (15,870,799)
------------ ------------ ------------
Total stockholders' equity....... 18,742,793 19,224,939 24,219,501
------------ ------------ ------------
Total liabilities and
stockholders' equity............ $ 22,344,396 $ 24,011,732 $ 28,079,702
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues under collabo-
rative research agree-
ments (Note 6):
Sponsored research.... $ -- $ -- $ 3,750,000 $ 625,000 $1,625,000
License fees.......... -- -- 2,000,000 2,000,000 --
Other revenues.......... -- 161,533 355,750 126,781 533,978
----------- ----------- ----------- ---------- ----------
Total revenues...... -- 161,533 6,105,750 2,751,781 2,158,978
Operating expenses:
Research and
development.......... 2,803,819 6,230,483 7,740,128 1,848,391 1,794,484
General and
administrative....... 1,550,676 2,222,967 2,728,342 736,822 570,797
----------- ----------- ----------- ---------- ----------
Total operating ex-
penses............. 4,354,495 8,453,450 10,468,470 2,585,213 2,365,281
----------- ----------- ----------- ---------- ----------
Income (loss) from oper-
ations................. (4,354,495) (8,291,917) (4,362,720) 166,568 (206,303)
Interest income......... 135,944 785,640 1,137,004 294,440 259,164
Interest expense........ (17,742) (157,960) (297,675) (74,416) (71,822)
Other income (expense).. -- (41,398) 177,001 27,000 43,627
----------- ----------- ----------- ---------- ----------
Net income (loss)....... $(4,236,293) $(7,705,635) $(3,346,390) $ 413,592 $ 24,666
=========== =========== =========== ========== ==========
Net income (loss) per
share.................. $ (0.64) $ (0.67) $ (0.27) $ 0.03 $ --
=========== =========== =========== ========== ==========
Shares used in computing
net income (loss) per
share.................. 6,635,387 11,433,482 12,183,582 12,409,419 13,240,248
</TABLE>
See accompanying notes.
F-4
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
NOTES GAINS
PREFERRED STOCK COMMON STOCK RECEIVABLE (LOSSES) ON
------------------------ ----------------------- DEFERRED FROM SHORT-TERM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION STOCKHOLDERS INVESTMENTS DEFICIT
----------- ----------- ---------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1992........... 10,408,334 $ 3,091,473 2,063,000 $ 10,315 $ -- $ (50,000) $ -- $ (607,147)
Issuance of
Common Stock
for notes
receivable..... -- -- 574,000 83,200 -- (83,200) -- --
Issuance of
Series A
Preferred Stock
for cash....... 1,225,000 354,559 -- -- -- -- -- --
Issuance of
Series A
Preferred Stock
for notes
receivable..... 175,000 52,500 -- -- -- (52,500) -- --
Conversion of
all outstanding
shares of
Series A
Preferred Stock
into Common
Stock and a
1.01 for
1 split of all
outstanding
Common Stock... (11,808,334) (3,498,532) 2,411,654 3,498,532 -- -- -- --
Issuance of
Common Stock
for cash and
cancellation of
debt in
connection with
the Company's
private
placement
offering, net.. -- -- 5,146,300 23,494,726 -- -- -- --
Issuance of
Common Stock
for
technology..... -- -- 11,000 55,000 -- -- -- --
Payments on
notes
receivable..... -- -- -- -- -- 24,776 -- --
Net loss........ -- -- -- -- -- -- -- (4,236,293)
----------- ----------- ---------- ----------- --------- --------- --------- ------------
Balance at
December 31,
1993........... -- -- 10,205,954 27,141,773 -- (160,924) -- (4,843,440)
Issuance of
Common Stock
for cash, net.. -- -- 879,592 4,087,884 -- -- -- --
Repurchase of
shares......... -- -- (26,120) (1,359) -- -- -- --
Payment on notes
receivable..... -- -- -- -- -- 12,661 -- --
Compensation
related to
grant of stock
options........ -- -- -- 235,368 -- -- -- --
Unrealized
losses on
short-term
investments.... -- -- -- -- -- -- (23,535) --
Net loss........ -- -- -- -- -- -- -- (7,705,635)
----------- ----------- ---------- ----------- --------- --------- --------- ------------
Balance at
December 31,
1994........... -- -- 11,059,426 31,463,666 -- (148,263) (23,535) (12,549,075)
Issuance of
Common Stock
for cash....... -- -- 659,635 3,730,000 -- -- -- --
Issuance of
Common Stock
for services... -- -- 4,040 20,200 -- -- -- --
Payment on notes
receivable..... -- -- -- -- -- 10,086 -- --
Deferred
compensation
related to
grant of stock
options........ -- -- -- 384,075 (384,075) -- -- --
Amortization of
deferred
compensation... -- -- -- -- 41,396 -- -- --
Unrealized gains
on short-term
investments.... -- -- -- -- -- -- 26,854 --
Net loss........ -- -- -- -- -- -- -- (3,346,390)
----------- ----------- ---------- ----------- --------- --------- --------- ------------
Balance at
December 31,
1995........... -- -- 11,723,101 35,597,941 (342,679) (138,177) 3,319 (15,895,465)
Issuance of
Common Stock
for cash
(unaudited).... -- -- 645,161 5,000,000 -- -- -- --
Payments on
notes
receivable
(unaudited).... -- -- -- -- -- 2,618 -- --
Deferred
compensation
related to
grant of stock
options
(unaudited).... -- -- -- 52,900 (52,900) -- -- --
Amortization of
deferred
compensation
(unaudited).... -- -- -- -- 24,952 -- -- --
Unrealized
losses on
short-term
investments
(unaudited).... -- -- -- -- -- -- (57,674) --
Net income
(unaudited).... -- -- -- -- -- -- -- 24,666
----------- ----------- ---------- ----------- --------- --------- --------- ------------
Balance at March
31, 1996
(unaudited).... -- $ -- 12,368,262 $40,650,841 $(370,627) $(135,559) $(54,355) $(15,870,799)
=========== =========== ========== =========== ========= ========= ========= ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at
December 31,
1992........... $ 2,444,641
Issuance of
Common Stock
for notes
receivable..... --
Issuance of
Series A
Preferred Stock
for cash....... 354,559
Issuance of
Series A
Preferred Stock
for notes
receivable..... --
Conversion of
all outstanding
shares of
Series A
Preferred Stock
into Common
Stock and a
1.01 for
1 split of all
outstanding
Common Stock... --
Issuance of
Common Stock
for cash and
cancellation of
debt in
connection with
the Company's
private
placement
offering, net.. 23,494,726
Issuance of
Common Stock
for
technology..... 55,000
Payments on
notes
receivable..... 24,776
Net loss........ (4,236,293)
-------------
Balance at
December 31,
1993........... 22,137,409
Issuance of
Common Stock
for cash, net.. 4,087,884
Repurchase of
shares......... (1,359)
Payment on notes
receivable..... 12,661
Compensation
related to
grant of stock
options........ 235,368
Unrealized
losses on
short-term
investments.... (23,535)
Net loss........ (7,705,635)
-------------
Balance at
December 31,
1994........... 18,742,793
Issuance of
Common Stock
for cash....... 3,730,000
Issuance of
Common Stock
for services... 20,200
Payment on notes
receivable..... 10,086
Deferred
compensation
related to
grant of stock
options........ --
Amortization of
deferred
compensation... 41,396
Unrealized gains
on short-term
investments.... 26,854
Net loss........ (3,346,390)
-------------
Balance at
December 31,
1995........... 19,224,939
Issuance of
Common Stock
for cash
(unaudited).... 5,000,000
Payments on
notes
receivable
(unaudited).... 2,618
Deferred
compensation
related to
grant of stock
options
(unaudited).... --
Amortization of
deferred
compensation
(unaudited).... 24,952
Unrealized
losses on
short-term
investments
(unaudited).... (57,674)
Net income
(unaudited).... 24,666
-------------
Balance at March
31, 1996
(unaudited).... $24,219,501
=============
</TABLE>
See accompanying notes.
F-5
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating
activities:
Net income (loss)....... $ (4,236,293) $ (7,705,635) $ (3,346,390) $ 413,592 $ 24,666
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Compensation expense
recognized for stock
options............... -- 235,368 41,396 2,250 24,952
Common Stock issued
for technology........ -- -- 20,200 -- --
Write-off of licensed
technology and patent
application costs..... -- 190,720 -- -- --
Depreciation and amor-
tization.............. 97,208 515,294 715,398 158,889 205,305
Deferred revenue....... -- -- 500,000 1,875,000 372,991
Deferred rent.......... -- -- 213,925 146,208 13,819
Change in operating
assets and liabili-
ties:
Accounts payable and
accrued liabili-
ties................ 1,314,238 (786) 356,429 (513,313) (1,136,281)
Receivables under
collaborative
research
agreements.......... -- -- (1,000,000) (1,000,000) (1,854,344)
Other current as-
sets................ (78,178) (223,953) 67,797 (500,927) (275,156)
Other assets......... (302,337) (88,448) 9,516 (63,891) (23,401)
------------ ------------ ------------ ----------- -----------
Net cash flows provided
by (used in) operating
activities............. (3,205,362) (7,077,440) (2,421,729) 517,808 (2,647,449)
Cash flow from investing
activities:
Purchases of short-term
investments............ -- (43,394,769) (17,854,139) (5,234,125) (29,866,339)
Sales/maturities of
short-term invest-
ments.................. -- 29,859,531 19,098,351 1,504,713 21,587,231
Purchase of licensed
technology and expendi-
tures for patent appli-
cation costs........... (275,034) (235,541) (263,261) (39,621) (105,899)
Purchases of furniture,
equipment and leasehold
improvements........... (710,015) -- (47,657) (162,514) (148,286)
------------ ------------ ------------ ----------- -----------
Net cash flows provided
by (used in) investing
activities............. (985,049) (13,770,779) 933,294 (3,931,547) (8,533,293)
Cash flow from financing
activities:
Repurchase of Common
Stock.................. -- (1,359) -- -- --
Issuance of Common
Stock, net............. 23,494,726 4,087,884 3,730,000 3,730,000 5,000,000
Issuance of Preferred
Stock, net............. 354,559 -- -- -- --
Principal payments on
obligations under capi-
tal leases............. (54,655) (222,875) (574,954) (126,552) (177,121)
Advance received on cap-
ital lease............. -- 49,399 -- -- --
Payments received on
notes receivable from
stockholders........... 24,776 12,661 10,086 2,471 2,618
------------ ------------ ------------ ----------- -----------
Net cash flows provided
by financing activi-
ties................... 23,819,406 3,925,710 3,165,132 3,605,919 4,825,497
------------ ------------ ------------ ----------- -----------
Net increase (decrease)
in cash and cash equiv-
alents................. 19,628,995 (16,922,509) 1,676,697 192,180 (6,355,245)
Cash and cash equiva-
lents at beginning of
period................. 2,009,566 21,638,561 4,716,052 4,716,052 6,392,749
------------ ------------ ------------ ----------- -----------
Cash and cash equiva-
lents at end of peri-
od..................... $ 21,638,561 $ 4,716,052 $ 6,392,749 $ 4,908,232 $ 37,504
============ ============ ============ =========== ===========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION
Interest paid........... $ 17,742 $ 157,960 $ 298,332 $ 75,416 $ 71,836
============ ============ ============ =========== ===========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Furniture and equipment
financed with obliga-
tions under capital
leases................. $ 1,008,536 $ 1,477,457 $ 689,791 $ 54,890 $ --
============ ============ ============ =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(Information as of March 31, 1996, and for the three months
ended March 31, 1995 and 1996, is unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
Neurocrine Biosciences, Inc. (the "Company") was incorporated in California
on January 17, 1992. The Company is engaged in the discovery and development
of therapeutics for the treatment of diseases and disorders of the central
nervous and immune systems including anxiety, depression, Alzheimer's disease,
obesity and multiple sclerosis.
Cash Equivalents
The Company considers as cash equivalents all highly liquid investments with
a maturity of three months or less when purchased.
Short-Term Investments Available-for-Sale
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Debt and Equity Securities," short-term investments
are classified as available-for-sale. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses reported in a
separate component of stockholders' equity. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in
investment income. Realized gains and losses and declines in value judged to
be other-than-temporary, if any, on available-for-sale securities are included
in investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
The Company invests its excess cash in high-grade commercial paper and
marketable debt securities of U.S. government agencies. Management has
established guidelines relative to diversification and maturities that
maintain safety and liquidity.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are carried at cost.
Depreciation and amortization are provided over the estimated useful lives of
the assets, ranging from five to seven years, using the straight-line method.
Licensed Technology and Patent Application Costs
Licensed technology consists of exclusive, worldwide, perpetual licenses to
patents related to the Company's platform technology. Costs incurred related
to licensed technology and patent applications are capitalized at cost and
amortized over the shorter of the license term or estimated useful life of the
license rights or patents, generally 10 to 17 years.
Asset Impairment
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," effective January 1, 1996. SFAS No. 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
SFAS No. 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. There was no effect on the financial statements
from the adoption of SFAS No. 121.
F-7
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information as of March 31, 1996, and for the three months ended
March 31, 1995 and 1996, is unaudited)
Options and Deferred Compensation
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. As a result,
deferred compensation is recorded for the excess of the fair market value of
the stock on the date of the option grant, over the exercise price of the
options. Such deferred compensation is amortized over the vesting period of
the options.
Interim Financial Information
The financial statements as of March 31, 1996 and for the three months ended
March 31, 1995 and 1996 are unaudited, but include all adjustments (consisting
of normal recurring adjustments) which the Company considers necessary for a
fair statement of the financial position as of such date and the operating
results and cash flows for such periods. Results for interim periods are not
necessarily indicative of results to be expected for the entire year.
Research and Development Revenue and Expenses
Revenue under strategic alliances is recognized over the term of the
agreement. Advance payments received in excess of amounts earned are
classified as deferred revenue. Revenues for cost reimbursement are recognized
as costs on a project are incurred. Research and development costs are
expensed as incurred.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number of
shares outstanding during each period. In addition, pursuant to certain
requirements of the Securities and Exchange Commission, Common Stock issued by
the Company during the 12 months immediately preceding the offering described
in this prospectus, plus the number of common equivalent shares which became
issuable during the same period pursuant to the grant of stock options and
warrants at prices below the expected initial public offering price, is
included in the calculation of the shares used in computing net income (loss)
per share as if these shares were outstanding for all periods presented, using
the treasury stock method. For the three months ended March 31, 1995 and 1996,
shares used in computing net income per share also includes common equivalent
shares arising from dilutive stock options and warrants which were issued more
than 12 months immediately preceding the offering described in this
Prospectus, using the treasury stock method. Income per share on a fully
diluted basis was unchanged.
Reliance on Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the financial statements as of and for the year ended
December 31, 1994 have been reclassified to conform with current
classifications.
F-8
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information as of March 31, 1996, and for the three months ended
March 31, 1995 and 1996, is unaudited)
2. SHORT-TERM INVESTMENTS
The following is a summary of short-term investments:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
---------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
MARCH 31, 1996
U.S. Government agency
securities............... $ 2,066,754 $ -- $(17,257) $ 2,049,497
Certificates of deposit... 222,310 -- -- 222,310
Other debt securities..... 18,290,185 -- (37,098) 18,253,087
----------- ------ -------- -----------
Total debt securities... $20,579,249 $ -- $(54,355) $20,524,894
=========== ====== ======== ===========
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
---------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
U.S. Government agency
securities............... $ 6,982,363 $ -- $ (6,213) $ 6,976,150
Certificates of deposit... 222,310 -- -- 222,310
Other debt securities..... 5,095,468 9,532 -- 5,105,000
----------- ------ -------- -----------
Total debt securities... $12,300,141 $9,532 $ (6,213) $12,303,460
=========== ====== ======== ===========
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
---------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
U.S. Government agency
securities............... $11,010,429 $ 860 $ (9,726) $11,001,563
Other debt securities..... 2,524,809 -- (14,669) 2,510,140
----------- ------ -------- -----------
Total debt securities... $13,535,238 $ 860 $(24,395) $13,511,703
=========== ====== ======== ===========
</TABLE>
Gross realized gains and losses were not material for any of the reported
periods.
The amortized cost and estimated fair value of debt securities by contractual
maturity, are shown below.
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
MARCH 31, 1996
Due in one year or less.......................... $ 948,027 $ 946,992
Due after one year through three years........... 19,631,222 19,577,902
----------- -----------
$20,579,249 $20,524,894
=========== ===========
<CAPTION>
ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
DECEMBER 31, 1995
Due in one year or less.......................... $10,283,929 $10,293,460
Due after one year through three years........... 2,016,212 2,010,000
----------- -----------
$12,300,141 $12,303,460
=========== ===========
</TABLE>
F-9
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information as of March 31, 1996, and for the three months ended
March 31, 1995 and 1996, is unaudited)
Excluded from the above table is $4,984,995 of commercial paper which is
classified as cash equivalents in the accompanying balance sheet at December
31, 1995.
3. BALANCE SHEET DETAILS
Furniture, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- -----------
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Machinery and equipment.................. $2,072,443 $ 2,705,757 $ 2,848,481
Furniture and fixtures................... 720,397 788,958 791,520
Leasehold improvements................... 391,698 418,155 421,155
---------- ----------- -----------
3,184,538 3,912,870 4,061,156
Less accumulated depreciation and amorti-
zation.................................. (499,459) (1,140,026) (1,319,333)
---------- ----------- -----------
Net furniture, equipment and leasehold
improvements.......................... $2,685,079 $ 2,772,844 $ 2,741,823
========== =========== ===========
Licensed technology and patent application costs consist of the following:
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- -----------
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Licensed technology and patent applica-
tion costs.............................. $ 818,329 $ 1,081,590 $ 1,187,489
Less accumulated amortization............ (87,943) (162,541) (188,539)
---------- ----------- -----------
Total.................................. $ 730,386 $ 919,049 $ 998,950
========== =========== ===========
Accrued liabilities consist of the following:
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- -----------
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Accrued employee benefits................ $ 276,418 $ 259,394 $ 156,527
Accrued professional fees................ 114,000 335,000 177,096
Other accrued liabilities................ 237,628 284,893 71,494
---------- ----------- -----------
$ 628,046 $ 879,287 $ 405,117
========== =========== ===========
</TABLE>
4. STOCKHOLDERS' EQUITY
Certain shares of Common Stock have been issued to founders, directors, and
employees of, and consultants and advisors to, the Company. Shares issued
under these agreements vest over periods up to four years. In connection with
the related stock purchase agreements, the Company has the option to
repurchase, at the original issue price, the unvested shares in the event of
termination of employment or engagement. At March 31, 1996, 139,190 shares
were subject to repurchase by the Company.
Common Stock issued for services rendered and technology acquired have been
valued at the fair value of the stock issued or the technology acquired and
services rendered, pursuant to APB 29.
Private Placement Offering
In September 1993, the Company commenced a private placement offering under
which it sold approximately five million shares of Common Stock at $5.00 per
share in various closings through December 31, 1993, resulting in net proceeds
to the Company of approximately $23.5 million. In February 1994, the Company
completed the final closing of such private placement offering. Approximately
880,000 shares of Common Stock were issued at $5.00 per share in the final
closing, resulting in net proceeds to the Company of approximately $4.1
million.
F-10
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information as of March 31, 1996, and for the three months ended
March 31, 1995 and 1996, is unaudited)
Common Stock Issuances
Concurrent with a collaborative research and development agreement entered
into in 1995 with Janssen Pharmaceutica, N.V. ("Janssen" -- Note 6), Johnson &
Johnson Development Corporation (an affiliate of Janssen) purchased 434,783
shares of the Company's Common Stock for $2.5 million and is obligated to
purchase an additional $2.5 million in Common Stock for $7.20 per share on the
earlier of July 1, 1996 or the closing of an initial public offering. The
price per share in the second purchase is subject to certain anti-dilution
adjustments if the Company completes an initial public offering within 10
months of the second purchase. If an initial public offering is consummated
prior to the second purchase, the Company has the right to require the second
purchase to be priced at the initial public offering price per share.
In February 1995, the Company sold 213,913 shares of Common Stock at $5.75
per share to one investor for $1,230,000.
Options
In September 1992, the Board of Directors adopted the 1992 Incentive Stock
Plan ("the Plan"), under which 3,098,800 shares of Common Stock are reserved
for issuance upon exercise of options or stock purchase rights granted by the
Company. The Plan provides for the grant of stock options and stock purchase
rights to officers, directors, and employees of, and consultants and advisors
to, the Company. Options may be designated as incentive stock options or
nonstatutory stock options; however, incentive stock options may be granted
only to employees of the Company. Options under the Plan have a term of up to
10 years from the date of grant. The exercise prices of incentive stock
options must equal at least the fair market value on the date of grant, and
the exercise price of nonstatutory stock options may be no less than 85% of
the fair market value on the date of grant.
As of March 31, 1996, options to purchase 696,718 shares were exercisable
and 320,910 shares were available for future grant.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1992................. -- --
Granted........................................ 539,926 $2.50
---------
Outstanding at December 31, 1993................. 539,926 $2.50
Granted........................................ 380,334 $2.50-$5.00
Cancelled...................................... (14,750) $2.50-$5.00
---------
Outstanding at December 31, 1994................. 905,510 $2.50-$5.00
Granted........................................ 638,100 $4.25-$5.00
Cancelled...................................... (128,420) $2.50-$5.00
---------
Outstanding at December 31, 1995................. 1,415,190 $2.50-$5.00
Granted........................................ 19,400 $4.25-$5.00
---------
Outstanding at March 31, 1996.................... 1,434,590 $2.50-$5.00
=========
</TABLE>
F-11
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information as of March 31, 1996, and for the three months ended
March 31, 1995 and 1996, is unaudited)
Warrants
In connection with the private placement offering, the Company issued
warrants in 1993 and 1994 to purchase 520,589 shares of Common Stock at an
exercise price of $5.00 per share to the placement agents. In general, the
warrants have a five-year term and are exercisable on the earlier of 180 days
after the closing date of an initial public offering of the Company's
securities, the date of a change in control of the Company (as such is defined
in the warrant agreement) or four years and 270 days after the date of
issuance. Through March 31, 1996, none of the warrants had been exercised or
were exercisable. The Company has reserved 520,589 shares of Common Stock for
issuance upon exercise of the warrants.
5. COMMITMENTS
Leases
The Company leases its corporate and laboratory facilities under an
operating lease which expires in January 2004. The lease requires the Company
to pay all maintenance, insurance and property taxes and is subject to certain
minimum escalation provisions. Rent expense was approximately $85,000,
$667,000, $798,000, $348,000 and $227,000 for the years ended December 31,
1993, 1994 and 1995, and the three months ended March 31, 1995 and 1996,
respectively, and sublease rental revenue totaled approximately $133,000,
$177,000, $27,000 and $44,000 for the years ended December 31, 1994 and 1995
and the three months ended March 31, 1995 and 1996, respectively.
The Company leases a significant portion of its furniture and equipment
under capital leases. Furniture and equipment under capital leases were
approximately $2,737,000 and $3,368,000 at December 31, 1994 and 1995,
respectively. Accumulated amortization of furniture and equipment under
capital leases totaled $456,000 and $1,043,000 at December 31, 1994 and 1995,
respectively.
Future minimum payments at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
OBLIGATIONS
UNDER
CAPITAL OPERATING
LEASES LEASES
----------- ----------
<S> <C> <C>
1996.............................................. $ 993,768 $ 735,290
1997.............................................. 920,133 757,349
1998.............................................. 758,411 780,070
1999.............................................. 129,190 803,472
2000.............................................. -- 827,576
Thereafter........................................ -- 2,634,692
---------- ----------
Total minimum payments.......................... 2,801,502 $6,538,449
==========
Amount representing interest...................... 428,804
----------
Present value of net minimum payments............. 2,372,698
Less current portion.............................. 741,294
----------
Long-term obligations under capital leases........ $1,631,404
==========
</TABLE>
F-12
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information as of March 31, 1996, and for the three months ended
March 31, 1995 and 1996, is unaudited)
Future minimum rental income to be received under noncancellable subleases
at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.............................................................. $145,800
1997.............................................................. 72,900
--------
Total........................................................... $218,700
========
</TABLE>
Licensing and Research Agreements
The Company has entered into licensing agreements with various universities
and research organizations. Under the terms of these agreements, the Company
has received licenses to technology, or technology claimed, in certain patents
or patent applications. The Company is required to make payments of
nonrefundable license fees and royalties on future sales of products employing
the technology or falling under claims of a patent, and, under certain
agreements, minimum royalty payments. Certain agreements also require the
Company to make payments of up to an aggregate of approximately $4.9 million
upon the achievement of specified milestones. The Company has capitalized
certain expenditures for licensed technology and patent application costs
related to these agreements, totaling $1.2 million through December 31, 1995.
Management regularly monitors the status of all such licensed technology and
patents. Impairment of the licensed technology and patents is determined using
undiscounted cash flow projections. As of each balance sheet date there was no
impairment in such assets. In 1994, the Company expensed approximately
$191,000 related to projects which are no longer being pursued.
6. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT
On January 1, 1995, the Company entered into a research and development
agreement (the "Janssen Agreement") with Janssen to collaborate in the
discovery, development and commercialization of CRF receptor antagonists
focusing on the treatment of anxiety, depression and substance abuse. Janssen
agreed to pay the Company a $2.0 million license fee of which $1.0 million was
received in 1995 and $1.0 million will be received in 1996. Janssen is
obligated to provide the Company with $3.0 million in sponsored research
payments per year during the term of the research program. The term of the
research program is three years, with Janssen having the right to extend such
term for two additional one-year periods.
The Company is entitled to receive up to $10.0 million in milestone payments
for the indications of anxiety, depression and substance abuse, and up to $9.0
million in milestone payments for any other indication, if certain development
milestones are achieved, of which $750,000 was received in 1995. The Company
has granted Janssen an exclusive worldwide license to manufacture and market
products developed under the Janssen Agreement. The Company is entitled to
receive royalties on product sales throughout the world. The Company has
certain rights to co-promote such products in North America. Janssen is
responsible for funding all clinical development and marketing activities,
including reimbursement to Neurocrine for its promotional efforts, if any.
Janssen has the right to terminate the Janssen Agreement upon six months
notice. However, in the event of termination, other than termination by
Janssen for cause or as a result of the acquisition of Neurocrine, Janssen
remains obligated to continue all sponsored research payments for the term of
the research program and all product and technology rights become the
exclusive property of Neurocrine.
F-13
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996, IS UNAUDITED)
7. INCOME TAXES
At December 31, 1995, the Company had federal and California income tax net
operating loss carryforwards of approximately $14.8 million and $1.9 million,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California income tax purposes and the 50% limitation
on California loss carryforwards.
The federal and California tax loss carryforwards will begin to expire in
2007 and 1997, respectively, unless previously utilized. The Company also has
federal and California research tax credit carryforwards of approximately
$680,000 and $314,000, respectively, which will begin to expire in 2007 unless
previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss and credit carryforwards may be limited because
of cumulative changes in ownership of more than 50% which occurred during 1992
and 1993. However, the Company does not believe such changes will have a
material impact upon the utilization of these carryforwards.
Significant components of the Company's deferred tax assets as of December
31, 1994 and 1995 are shown below. A valuation allowance, which was increased
by $1,496,000 in 1995, has been recognized to fully offset the deferred tax
assets as of December 31, 1994 and 1995 as realization of such assets is
uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 4,214,000 $ 5,279,000
Research and development credits............... 680,000 884,000
Capitalized research and development........... 524,000 656,000
Other, net..................................... 62,000 157,000
----------- -----------
Total deferred tax assets.................... 5,480,000 6,976,000
Valuation allowance for deferred tax assets...... (5,480,000) (6,976,000)
----------- -----------
Net deferred tax assets.......................... $ -- $ --
=========== ===========
</TABLE>
8. SUBSEQUENT EVENTS
Ciba-Geigy Limited
In January 1996, the Company entered into a binding letter agreement (the
"Ciba-Geigy Agreement") with Ciba-Geigy to develop altered peptide ligand
therapeutics for the treatment of multiple sclerosis. The Company and Ciba-
Geigy are negotiating a definitive agreement incorporating the terms and
conditions set forth in the Ciba-Geigy Agreement and such other terms and
conditions as agreed to by the Company and Ciba-Geigy. Pursuant to the Ciba-
Geigy Agreement, Ciba-Geigy is obligated to provide the Company with $12.0
million in license fee payments and research funding over the first two years
of the Ciba-Geigy Agreement and thereafter up to $15.5 million in additional
research and development funding (unless the Ciba-Geigy Agreement is sooner
terminated).
F-14
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996, IS UNAUDITED)
The Company is entitled to receive milestone payments if certain research,
development and regulatory milestones are achieved. The Company has granted
Ciba-Geigy an exclusive license outside of the United States and Canada to
market altered peptide ligand products developed under the Ciba-Geigy
Agreement for multiple sclerosis. The Company is entitled to receive royalties
on product sales. At its option, the Company is entitled to receive a share of
the profits resulting from sales of altered peptide ligand products in North
America subject to the Company's repayment of a portion of Ciba-Geigy's
development costs. The Company retains the right to convert its profit share
to the right to receive royalty payments at its sole discretion in which case
no repayment of development costs are due to Ciba-Geigy. If the product's
clinical trials are not successfully completed, the Company will be obligated
to repay a portion of the development costs.
Ciba-Geigy has the right to terminate the Ciba-Geigy Agreement at any time
after December 30, 1997 on six months notice. Upon such termination by Ciba-
Geigy all product and technology rights become the exclusive property of the
Company.
In connection with the Ciba-Geigy Agreement, Ciba-Geigy purchased $5.0
million of the Company's Common Stock in January 1996.
NEUROSCIENCE PHARMA (NPI) INC.
In March 1996, the Company established Neuroscience Pharma (NPI) Inc.
("NPI"), a subsidiary of the Company in Canada. The Company licensed to NPI
certain technology and Canadian marketing rights to the Company's Neurosteroid
and Neurogenomics programs. A group of Canadian institutional investors (the
"Canadian Investors") invested approximately $9.5 million in NPI in exchange
for Preferred Stock of NPI which may be converted into 1,279,584 shares of the
Company's Common Stock at an effective conversion price of $7.45 at the option
of the investors. NPI has committed to use these funds for clinical
development of the Neurosteroid program for Alzheimer's disease and for
research activities related to the Neurogenomics program. In exchange for
providing funding, NPI is entitled to receive royalties on sales of products
developed in these programs as well as exclusive Canadian marketing rights for
such products in the event that the Company has not terminated the technology
license and marketing rights or that the Canadian Investors have not converted
their NPI Preferred Stock into shares of the Company's Common Stock. The
Company has the right to terminate the technology license and marketing
rights, provided that the Company is then obligated to purchase the shares of
NPI Preferred Stock held by the Canadian Investors in exchange for cash and
Common Stock (valued at the market closing price) whose aggregate value equals
$9.5 million plus a 35% annual compound rate of return from the date of the
original investment (March 1996) provided the investors have not previously
converted their shares. In connection with their investment in NPI, the
Canadian Investors received warrants exercisable for 383,875 shares of the
Company's Common Stock at an exercise price equal to the price per share at
which Common Stock is sold in this offering. These warrants will be valued
upon the completion of this offering, and the related cost will be amortized
over a five-year period. The amortization of such expense will not be material
to future operating results. The Canadian Investors are also eligible to
receive additional warrants in the future exercisable at an exercise price of
$7.75 per share for such warrants issued prior to June 30, 1998 and thereafter
at an exercise price equal to 110% of the then current market value of the
Common Stock in the event that NPI is successful in receiving certain
government incentives for research activities, with the aggregate exercise
price of such additional warrants equal to 25% of the dollar amount of such
incentives received by NPI. Since the Company does not have a majority
interest in NPI, NPI is not consolidated. The Company will recognize its pro
rata share of the cumulative profits of NPI as they are earned. All cumulative
losses of NPI will be allocated to the majority owners as the Company has not
contributed any assets with an accounting basis to NPI.
F-15
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Neuroscience Pharma (NPI) Inc.
We have audited the accompanying balance sheet of Neuroscience Pharma (NPI)
Inc. as of March 31, 1996. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Neuroscience Pharma (NPI) Inc. at
March 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
April 3, 1996
F-16
<PAGE>
NEUROSCIENCE PHARMA (NPI) INC.
BALANCE SHEET
MARCH 31, 1996
ASSETS
<TABLE>
<S> <C>
Cash and total assets............................................... $9,245,204
==========
REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Redeemable Series A Preferred Stock, no par value; unlimited shares
authorized, 1,300,000 shares issued and outstanding (stated at liq-
uidation and redemption value) (Note 2) ........................... $9,545,900
</TABLE>
Stockholders' equity:
<TABLE>
<S> <C>
Common Stock, no par value; unlimited shares authorized, 13,000
shares issued and
outstanding...................................................... --
Accumulated deficit (Note 2) ..................................... (300,696)
----------
Total redeemable preferred stock and stockholders' equity.......... $9,245,204
==========
</TABLE>
See note to balance sheet.
F-17
<PAGE>
NOTE TO BALANCE SHEET
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Neuroscience Pharma (NPI) Inc. ("NPI") was established on March 29, 1996 as
a Canadian subsidiary of Neurocrine Biosciences, Inc. ("Neurocrine").
Neurocrine licensed to NPI certain technology and Canadian marketing rights to
its Neurosteroid and Neurogenomics programs. NPI's focus will be clinical
development of the Neurosteroid program for Alzheimer's disease and research
activities related to the Neurogenomics program.
NPI has not yet commenced operations, and its only activity to date has been
the initial funding provided by a group of Canadian institutional investors,
net of related offering expenses.
The accompanying balance sheet is stated in U.S. dollars.
CASH AND CONCENTRATION OF CREDIT RISK
NPI has invested its cash in a highly liquid money market account with a
Canadian bank.
2. REDEEMABLE SERIES A PREFERRED STOCK
The Series A Preferred Stock is nonvoting. The holders of the Series A
Preferred Stock are entitled to receive, when and as declared by the Board of
Directors, cumulative preferential dividends equal to the royalties received
by NPI from sales of its products. The holders of the Series A Preferred Stock
are also entitled to a liquidation preference equal to the original purchase
price of such shares plus any unpaid cumulative dividends. NPI may repurchase
the outstanding shares of Series A Preferred Stock at any time at the
liquidation value, and the holders may demand redemption of such shares at the
liquidation value at their option.
NPI paid a fee of $300, 6% related to the sale of the Series A Preferred
Stock. Since the Preferred Stock is carried on the balance sheet at its
redemption value (currently the original purchase price), such costs were
charged to the accumulated deficit.
F-18
<PAGE>
[LOGO OF NEUROCRINE NEUROCRINE
BIOSCIENCES, INC. APPEARS HERE] -----------------
BIOSCIENCES, INC.
