<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1996
REGISTRATION NO. 333-04653
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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NEXSTAR PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1173453
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
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2860 WILDERNESS PLACE
BOULDER, CO 80301
(303) 444-5893
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
PATRICK J. MAHAFFY
President and Chief Executive Officer
NeXstar Pharmaceuticals, Inc.
2860 Wilderness Place
Boulder, CO 80301
(303) 444-5893
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<S> <C>
PETER H. JAKES, ESQ. ALAN K. AUSTIN, ESQ.
Willkie Farr & Gallagher TAMARA G. MATTISON, ESQ.
One Citicorp Center Wilson Sonsini Goodrich & Rosati, P.C.
153 East 53rd Street 650 Page Mill Road
New York, NY 10022-4669 Palo Alto, CA 94304
(212) 821-8000 (415) 493-9300
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act regis-
tration statement number of the earlier effective registration statement for the
same offering. / /
- ------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities
may not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This Prospectus shall not
constitute an offer to sell or the solicitation of an offer to
buy nor shall there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
JUNE 17, 1996
2,500,000 SHARES
NEXSTAR LOGO
COMMON STOCK
---------------------
All of the shares of Common Stock offered hereby are being sold by NeXstar
Pharmaceuticals, Inc. ("NeXstar Pharmaceuticals" or the "Company"). The
Company's Common Stock is traded on the Nasdaq National Market under the symbol
NXTR. On June 13, 1996, the last reported sale price of the Common Stock was
$19 3/4 per share. See "Price Range of Common Stock."
---------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS
TO PUBLIC COMMISSIONS(1) TO COMPANY(2)
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Per Share............................... $ $ $
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Total(3)................................ $ $ $
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</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses of the offering, estimated at $360,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 375,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, the Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
---------------------
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them and
subject to the right of the Underwriters to reject any order in whole or in
part. It is expected that delivery of the shares of Common Stock will be made at
the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1996.
ALEX. BROWN & SONS
INCORPORATED
SMITH BARNEY INC.
VECTOR SECURITIES INTERNATIONAL, INC.
SBC WARBURG INC.
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE> 3
[On the upper left corner of the page is a picture of a vial of AmBisome. Next
to the vial is the following statement -- "Currently, the Company sells
AmBisome primarily in Europe. Sales reached a record $17.2 million for the
first three months of 1996, and were $57 million in 1995. The Company expects a
New Drug Application to be filed shortly with the U.S. Food and Drug
Administration. The Company estimates that more than 20,000 patients have been
treated with AmBisome."
In the middle of the page is a chart showing all of the Company's current
products. The chart indicates the current status of each product, i.e., whether
it is approved for marketing, whether it is the subject of a New Drug
Application and whether it is the subject of preclinical or Phase I, Phase II
or Phase III clinical trial.
On the lower right corner of the page is a picture of a vial of DaunoXome. Next
to the vial is the following statement -- "DaunoXome has recently been approved
for sale in the United States and a number of Western European countries as a
first line therapy for the treatment of advanced HIV-associated Kaposi's
sarcoma. DaunoXome was launched in the U.S. on May 1, 1996. The Company is also
conducting Phase II clinical trials with DaunoXome in both the U.S. and Europe
for other oncology indications, including breast cancer and lymphoma."]
------------------------------------------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MAY OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET, OR
OTHERWISE, IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF
1934. SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements including the notes thereto
contained or incorporated by reference in this Prospectus. Prospective investors
in the Common Stock should consider carefully the factors discussed in detail
elsewhere in this Prospectus under the caption "Risk Factors." Unless otherwise
indicated, the information in this Prospectus assumes no exercise of the
Underwriters' option to purchase up to 375,000 additional shares. Special Note:
Certain statements set forth below constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). See "Special Note Regarding Forward-Looking Statements" on page
61 for additional factors relating to such statements.
THE COMPANY
NeXstar Pharmaceuticals, Inc., a Delaware corporation ("NeXstar
Pharmaceuticals" or the "Company"), is a leading biopharmaceutical company
engaged in the discovery, development, manufacture and marketing of proprietary
pharmaceutical products to treat life-threatening and other serious diseases.
Currently, the Company markets AmBisome, an antifungal agent, and DaunoXome, an
anticancer agent, which is used as a first line cytotoxic therapy for the
treatment of advanced, HIV-associated Kaposi's sarcoma. AmBisome achieved sales
of $17.2 million in the first three months of 1996, the fifth consecutive
quarter of increased revenues, after sales of $57 million in 1995. In April
1996, the Company received approval from the U.S. Food and Drug Administration
(the "FDA") to sell DaunoXome and formally launched the drug in the U.S. on May
1, 1996. In addition, the Company is in the process of launching DaunoXome
throughout Europe where it has recently been approved for sale by regulatory
authorities in 12 countries. The Company is also conducting Phase II clinical
trials in Europe with a third product, MiKasome, a liposomal formulation of the
aminoglycoside antibiotic amikacin, which has demonstrated preliminary evidence
of efficacy against multiple drug resistant tuberculosis. In addition to its
products and clinical candidates, the Company has proprietary technologies in
drug discovery and drug formulation that provide the basis for a significant
pipeline of drug candidates. These technologies have produced several drug
candidates that are now in preclinical development.
NeXstar Pharmaceuticals' revenues have historically been derived primarily
from European sales of AmBisome, its proprietary liposomal formulation of the
antifungal agent amphotericin B. Liposomes are subcellular-sized spheres
composed primarily of molecules called phospholipids, certain of which are the
primary components of living cell membranes. By encapsulating in liposomes
certain drugs that in their free state are dosed at, or close to, toxic levels,
it is possible to increase the therapeutic index of the active drug (i.e., to
increase the efficacy of the active drug relative to the severity of its side
effects). Regulatory authorities in 20 countries have approved AmBisome for
treating life-threatening fungal infections when conventional amphotericin B
treatment fails. Additionally, AmBisome has been approved in Australia as a
primary therapy for systemic fungal infections caused by Candida, Aspergillus
and Cryptococcus, for antifungal prophylaxis after liver transplantation and for
visceral leishmaniasis and has been approved in Ireland as a primary therapy for
confirmed and suspected systemic fungal infections. The Company estimates that
since commercial sales of AmBisome began in 1989 more than 20,000 patients have
been treated with AmBisome. Consistent with its strategy of broadening the
clinical use of its existing products, NeXstar Pharmaceuticals has recently
completed two Phase III trials in Europe involving over 390 patients comparing
AmBisome to conventional amphotericin B in Fever of Unknown Origin ("FUO") and
confirmed fungal infections. The results showed that AmBisome has significantly
fewer side effects and is at least as efficacious as amphotericin B. The Company
and its U.S. promotion and development partner, Fujisawa USA, Inc., also are
conducting additional Phase III clinical trials. These trials, which will
ultimately include over 1,000 patients, are comparing the effectiveness and side
effect profile of AmBisome to conventional amphotericin B therapy for fungal
infections and presumed fungal infections including FUO, cryptococcal meningitis
and histoplas-
3
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mosis. Based on its extensive AmBisome database, the Company expects that a New
Drug Application will be filed shortly for AmBisome in the United States for
primary and salvage therapy for treating systemic fungal infections, including
FUO. In addition, NeXstar Pharmaceuticals intends to file shortly for approval
of AmBisome as a first line therapy for the treatment of FUO with regulatory
authorities in each of its primary European markets.
The Company's second product, DaunoXome, a liposomal formulation of the
anticancer agent daunorubicin, has been approved for sale in the United States
and 12 Western European countries as a primary therapy for Kaposi's sarcoma, a
cancer that occurs in approximately 15% of AIDS patients and which can be fatal
if left untreated. The Company anticipates additional European approvals in
1996. In addition, the product has been approved in Canada as a salvage therapy
for Kaposi's sarcoma. To expand the clinical indications for DaunoXome, NeXstar
Pharmaceuticals is also conducting Phase II trials with DaunoXome in both the
U.S. and Europe for other oncology indications, including breast cancer,
small-cell lung cancer, leukemia and lymphoma among others. The Company has had
initial favorable results in connection with small studies in breast cancer and
lymphoma and expects results from additional studies to be available beginning
in 1996.
MiKasome is currently in Phase II clinical trials for the treatment of
multiple drug resistant tuberculosis. To date, MiKasome has shown activity in in
vitro and animal studies and early stage clinical trials for the treatment of
multiple drug resistant tuberculosis. NeXstar Pharmaceuticals is now planning
further clinical trials to confirm and define the scope of both the efficacy and
safety advantages provided by this novel liposomal antibiotic. The Company
expects to initiate clinical studies of MiKasome in the U.S. in the second half
of 1996.
In addition to a growing portfolio of existing products and clinical
candidates, the Company possesses both powerful combinatorial chemistry
technologies for drug discovery and proven drug delivery and development
capabilities. The Company has integrated its drug discovery and drug formulation
programs and has focused its research and development on refining its technology
platforms to enable it to create drug candidates targeting a number of
indications in its chosen areas of therapeutic interest. These technology
platforms include: (i) a powerful proprietary combinatorial chemistry
technology, known as the SELEX process, that rapidly identifies novel
oligonucleotide compounds with potential therapeutic and diagnostic benefits;
(ii) an extension of the SELEX process, known as the Parallel SELEX process,
that is designed to rapidly discover small organic molecules intended to serve
as orally available drugs; (iii) a proprietary chemistry for the synthesis of
new pyrimidine and purine nucleosides for potential use as antiviral,
antineoplastic and antibacterial agents; (iv) a technology involving lipid
conjugates that improves the pharmacokinetic qualities of certain drugs and/or
makes such drugs orally available; (v) a novel approach to the specific deletion
or inactivation of pathogenic subsets of T cells involved in human diseases; and
(vi) the liposomal formulation of drugs, which has been shown to improve drug
therapy through reduced toxicity, improved biodistribution profile and
pharmacokinetics and drug targeting.
NeXstar Pharmaceuticals has demonstrated the ability to develop products,
design and implement complex clinical trials, obtain regulatory approval in
numerous countries, manufacture products in commercial quantities in compliance
with stringent regulatory requirements and successfully market its products. The
Company's ongoing strategy is to continue building the capacity and
infrastructure necessary to further its growth as a vertically integrated
biopharmaceutical company. The Company plans to use its existing capabilities
and planned increases in infrastructure to support market expansion of its
current products, to support any complementary products which the Company may
acquire and for the development of new products derived from its drug discovery
and drug formulation technologies.
4
<PAGE> 6
THE OFFERING
Common Stock offered by the Company..... 2,500,000 shares
Common Stock to be outstanding after
this Offering........................... 28,822,385 shares(1)
Use of Proceeds......................... To initiate the marketing and
distribution of DaunoXome, to
continue research, drug discovery
and development programs, to
acquire interests in drug
candidates or technologies and for
other general corporate purposes,
including working capital
Nasdaq National Market symbol........... NXTR
- ------------------------------
(1) Excludes warrants outstanding to purchase 1,168,372 shares of Common Stock
at a weighted average exercise price of $5.31 per share and options
outstanding under the Company's option plans to purchase 2,120,933 shares
of Common Stock at a weighted average exercise price of $11.35 per share.
All share information in this table is based on the number of shares of
Common Stock as of June 10, 1996.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
CONSOLIDATED STATEMENT ------------------------------------------------------- -------------------
OF OPERATIONS DATA: 1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues............... $14,035 $25,999 $ 30,518 $ 43,967 $ 57,770 $11,894 $17,545
Collaborative agreements and
contracts.................... 531 591 2,098 4,054 2,920 751 579
Interest income................ 634 2,518 2,424 2,409 1,736 555 433
------- ------- -------- -------- -------- ------- -------
Total revenues............ 15,200 29,108 35,040 50,430 62,426 13,200 18,557
Expenses:
Cost of goods sold............. 3,642 3,896 5,024 8,091 13,246 2,569 3,819
Research and development....... 7,445 13,067 24,574 31,595 39,662 8,242 11,176
Selling, general and
administrative............... 5,535 11,627 16,279 22,108 32,994 7,280 9,463
Purchased research and
development(2)............... -- -- -- -- 11,824 -- --
Retirement agreement expenses.. -- -- -- 4,097 -- -- --
Interest expense............... 45 48 308 587 1,148 337 285
------- ------- -------- -------- -------- ------- -------
Total expenses............ 16,667 28,638 46,185 66,478 98,874 18,428 24,743
------- ------- -------- -------- -------- ------- -------
Income (loss) before provision
for income taxes............... (1,467) 470 (11,145) (16,048) (36,448) (5,228) (6,186)
Provision for income taxes....... -- 392 167 159 183 52 110
------- ------- -------- -------- -------- ------- -------
Net income (loss)................ $(1,467) $ 78 $(11,312) $(16,207) $(36,631) $(5,280) $(6,296)
======= ======= ======== ======== ======== ======= =======
Net income (loss) per share...... $ (0.15) $ 0.00 $ (0.53) $ (0.71) $ (1.57) $ (0.23) $ (0.25)
======= ======= ======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
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CONSOLIDATED BALANCE SHEET DATA: ACTUAL AS ADJUSTED(3)
<S> <C> <C>
Cash and cash equivalents and marketable securities................... $ 46,163 $ 92,339
Working capital....................................................... 56,786 102,962
Total assets.......................................................... 133,041 179,217
Long-term obligations................................................. 9,689 9,689
Total stockholders' equity............................................ 102,195 148,371
</TABLE>
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(1) NeXstar Pharmaceuticals, Inc. was incorporated under the name NeXagen, Inc.
("NeXagen") on March 4, 1991. On February 21, 1995, NeXagen and Vestar, Inc.
("Vestar") effected a merger which was accounted for as a pooling of
interests. The summary Consolidated Statement of Operations Data for the
period prior to March 4, 1991 represent the operations of Vestar, while all
data on or after March 4, 1991 represent the combined operations of NeXagen
and Vestar.
(2) Relates to the acquisition of Supragen, Inc. on September 8, 1995.
(3) Adjusted to reflect the application of the estimated net proceeds from the
sale by the Company of the 2,500,000 shares of Common Stock offered hereby
at an assumed offering price of $19 3/4 per share.
6
<PAGE> 8
RISK FACTORS
In evaluating the Company and its business, prospective investors should
carefully consider the following risk factors in addition to the other
information contained herein. Special Note: Certain statements set forth below
constitute "forward-looking statements" that involve risks and uncertainties.
The Company's actual results may differ materially from the results discussed in
the "forward-looking statements." See "Special Note Regarding Forward-Looking
Statements" on page 61 for additional factors relating to such statements.
DEPENDENCE ON PRINCIPAL PRODUCT
The Company has relied on sales of AmBisome for substantially all of its
product revenues with most of those sales occurring in European countries. A
reduction in demand for AmBisome could have a material adverse effect on the
Company's results of operations. Additional regulatory approvals will be needed
in order to market AmBisome in the United States and to expand the indications
for which it may be marketed in the countries where it is already approved.
There can be no assurance as to whether or when such approvals will be obtained.
See "Business -- Clinical Trials, Preclinical Trials and Regulatory
Status -- AmBisome."
The Company has only one other product, DaunoXome, that has received
regulatory approval and such approvals have only been recently obtained. Sales
to date for DaunoXome have been limited. The market demand for DaunoXome for the
treatment of Kaposi's sarcoma has not been demonstrated, and there can be no
assurance as to the volume of sales that will be achieved. The Company will seek
to expand the market for DaunoXome by obtaining approvals for additional
indications. However, there can be no assurance that the drug will be effective
for the treatment of other tumors or that such additional approvals will be
obtained. See "Business -- Clinical Trials, Preclinical Trials and Regulatory
Status -- DaunoXome."
The Company has one other product that has reached clinical development,
MiKasome, which is currently the subject of a Phase II clinical trial in Europe.
While the results of animal and early human tests have been encouraging, the
results of animal studies may not be indicative of efficacy in humans, and
further human testing of MiKasome may not achieve the desired result, may reveal
unduly harmful side effects or may be less efficacious than other drug entities
or delivery systems for the desired indication. No assurance can be given that
MiKasome will be more effective than existing drugs or other technologies that
may be developed in the future or that MiKasome will reach commercialization or
be accepted by the medical community. See "Business -- Clinical Trials,
Preclinical Trials and Regulatory Status -- MiKasome."
The Company's other potential products that are based on liposome
technologies are in development, and there can be no assurance that such
potential products will be successfully developed, achieve therapeutic efficacy,
be approved by regulatory authorities or be successfully marketed. Nor can there
be any assurance that the Company will be able to develop any additional
products, that the approval of its current products will not be revoked or that
named-patient purchases will be permitted to continue in countries that have not
granted approval for AmBisome or DaunoXome.
RISK OF CURRENCY FLUCTUATIONS
Substantially all of the sales of AmBisome have occurred in Europe with 50%
of the Company's AmBisome sales for the year ending December 31, 1995 and 47% of
the Company's AmBisome sales for the three months ending March 31, 1996
occurring in the United Kingdom, Germany and Spain. In most significant European
markets, the Company prices AmBisome and DaunoXome in the currency of the
country in which such products are sold. Accordingly, the prices of such
products in dollars will vary as the value of the dollar fluctuates against such
local currencies. Increases in the value of the dollar against such currencies,
therefore, will reduce the dollar return to the Company on the sale of its
products. Furthermore, there can be no assurance that significant fluctuations
in
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foreign currency values will not occur that will create substantial differences
in the relative prices of the Company's products in different countries. In
addition, although the Company implements hedging techniques with respect to its
foreign currency accounts receivable and accounts payable, these techniques have
not completely eliminated the effects of foreign currency fluctuations in the
past, and there can be no assurance that such techniques will be successful in
the future. The Company currently hedges certain of its foreign currency
exposures, with respect to its outstanding trade accounts receivable and
accounts payable, through the use of forward contracts. In the future, the
Company may begin currency hedging in connection with anticipated revenues and
expenses and may use options in addition to forward contracts. Such hedging will
be done solely for the purpose of protecting the Company from foreign currency
fluctuations and not for the purpose of speculating in foreign currency. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
TECHNOLOGICAL UNCERTAINTY
A significant portion of the Company's research is focused upon the
discovery and development of novel pharmaceuticals based upon oligonucleotides
and on novel synthetic compounds. There can be no assurance that any of the
Company's approaches to drug discovery will result in commercially successful
drugs. Although the Company has demonstrated an ability to efficiently identify
oligonucleotides that bind with high affinity to and inhibit selected molecular
targets, the Company has not successfully demonstrated the efficacy of such
oligonucleotides as human therapeutic agents, nor have any human clinical trials
been initiated with products based upon such oligonucleotides. Additionally, the
Company has yet to demonstrate the human efficacy or therapeutic usefulness of
any compounds derived from its SELEX process or Parallel SELEX process. There
remain numerous challenges which the Company must address to successfully
develop commercial products from the lead compounds which it identifies through
its SELEX process or Parallel SELEX process. These challenges include developing
and implementing appropriate clinical protocols and developing manufacturing
methods which are efficient, cost-effective and capable of meeting stringent
regulatory standards. In addition, although many targets with potential
therapeutic significance have already been identified, there can be no assurance
that the targets selected by the Company will ultimately prove to have the
requisite medical significance such that a compound inhibiting such target will
prove to be a useful pharmaceutical product. There can be no assurance that the
Company will successfully address any of these or other challenges that may
arise in the course of its research and development.
In addition to developing products based on its liposome, lipid conjugate,
SELEX process and Parallel SELEX process technologies, the Company has a
longer-term strategy of providing pharmaceuticals to treat patients with cancer,
serious infectious diseases and immunological disorders by employing other
technologies, including technologies acquired in connection with its September
1995 acquisition of Supragen, Inc. However, there can be no assurance that the
Company will be successful in developing marketable products using such
technologies. See "Business."
UNCERTAINTY OF HEALTH CARE REIMBURSEMENT
The Company's ability to commercialize its current and any future products
depends in part on the extent to which reimbursement for the cost of such
products and related treatments are available from government health agencies,
private health insurers and other third-party payors. Third-party payors are
increasingly challenging the price and cost-effectiveness of medical products.
Significant uncertainty exists as to the reimbursement status of newly-approved
health care products, and there can be no assurance that adequate third-party
coverage will be available for the Company to obtain satisfactory price levels
for its products. Government and other third-party payors are increasingly
attempting to contain health care costs by a variety of means, including
limiting both the degree of coverage and the level of reimbursement for new
therapeutic products. If adequate coverage and reimbursement levels are not
provided by government and third-party payors for use of the
8
<PAGE> 10
Company's existing and potential products, the market acceptance of these
products would be adversely affected.
RELIANCE ON PROPRIETARY RIGHTS
The Company's success depends in part on its ability to continue to obtain
patent protection in the United States and other countries for its technologies
and the products, if any, resulting from such technologies. The patent positions
of pharmaceutical and biotechnology firms, including the Company, are uncertain
and involve complex legal and factual questions. The Company intends to continue
to file applications as appropriate for patents covering its technologies and
any products resulting from the application of such technologies. No assurance
can be given that patents will issue from any of the Company's applications or
that patents will be issued in connection with technology licensed by the
Company or, if patents do issue, that the claims allowed will be sufficiently
broad to protect the Company's proprietary rights, that such patents will not be
challenged, invalidated, or circumvented or that the rights granted pursuant to
such patents will provide competitive advantages to the Company.
The Company also relies on trade secrets, proprietary know-how and
continuing technological innovation which it seeks to protect with
confidentiality agreements with its collaborators, employees and consultants.
There can be no assurance that these agreements will not be breached, that the
Company will have adequate remedies for any breach or that the Company's trade
secrets and proprietary know-how will not otherwise become known or be
independently discovered by competitors. Under certain of the Company's research
and development agreements and joint ventures, inventions discovered in certain
cases become jointly owned by the Company and the corporate sponsor or partner
and in other cases become the exclusive property of the Company or the corporate
sponsor or partner. Disputes may arise with respect to ownership of any such
inventions.
The commercial success of the Company will also depend in part on the
Company not infringing patents or proprietary rights of third parties nor
breaching any technology licenses that relate to the Company's technologies and
products. A number of pharmaceutical and biotechnology companies and research
and academic institutions have developed technologies, filed patent applications
or received patents on various technologies that may be related to the Company's
business. In addition, such entities may file applications for or be issued
future patents with respect to technology potentially necessary or useful to the
Company. The Company is aware of third parties that have filed patent
applications with claims allegedly covering technologies similar to the basic
aspects of the Company's SELEX process. Some of these technologies, applications
or patents may conflict with the Company's technologies and existing or future
patents, if any, or patent applications. Such conflict could limit the scope of
the patents that NeXstar Pharmaceuticals has obtained or may be able to obtain
or result in the Company's applications failing to issue as patents. In
addition, if patents that cover the Company's activities are issued to other
companies, there can be no assurance that NeXstar Pharmaceuticals would be able
to obtain licenses to these patents at a reasonable cost, or at all, or be able
to develop or obtain alternative technology. In addition, as more patents are
issued to third parties, the risk increases that the Company's products may give
rise to claims that they infringe the patents of others. See
"Business -- Patents, Trade Secrets and Licenses."
LITIGATION RISKS RELATED TO PROPRIETARY RIGHTS
The Company believes that its patents and applications are soundly based,
but the extent of protection in different countries may vary and no assurance
can be given that any patent will provide commercially significant protection or
will not be challenged, invalidated or circumvented. Litigation could be
necessary to protect the Company's patent position, which would result in
substantial cost to, and diversion of efforts by, the Company.
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Further, a number of other patents have issued to other persons, some to
competitors, relating to technology similar to that used by the Company. Both
the Company and certain of its competitors have filed oppositions against each
other as to patents granted by the European Patent Office and patents granted by
the Japanese Patent Office. The Liposome Company ("TLC") and the University of
California each have patents or patent applications relating to active drug
loading techniques that the owners could claim are used in the manufacture of
products such as DaunoXome. The Company has opposed the grant of a European and
a Japanese patent owned by TLC and is involved in an interference with a U.S.
patent application owned by the University of California, relating to such
loading technology.
Competitors or other patent holders could bring legal actions against the
Company involving the Company's patents, patent applications or rights to use
proprietary technology. If any actions are successful, in addition to any
potential liability for damages, the Company could be enjoined from selling the
affected product, or be required to obtain a license in order to continue to
manufacture or market the product. There can be no assurance that the Company
would prevail in any such action or that any license required under any such
patent would be made available on acceptable terms, if at all. There has been,
and the Company believes that there will continue to be, significant litigation
in the pharmaceutical industry regarding patent and other intellectual property
rights. Any additional litigation could consume a substantial portion of the
Company's resources regardless of the outcome.
On May 17, 1993, the Company filed a complaint in the United States
District Court for the District of Delaware against TLC asking the court to
declare U.S. Patent No. 4,880,635 (the "TLC '635 Patent") owned by TLC invalid,
unenforceable and not infringed following allegations by TLC that the freeze
drying of AmBisome infringes the TLC '635 Patent. In addition, the Company has
opposed the grant to TLC of the European and Japanese patents that are
counterparts of the TLC '635 Patent. On December 20, 1993, the United States
District Court for the District of Delaware stayed the May 17, 1993 lawsuit
pending the outcome of a reexamination of the TLC '635 Patent instituted by TLC
in the U.S. Patent and Trademark Office ("USPTO"). Upon reexamination, the USPTO
refused to confirm any of the claims of the TLC '635 Patent in their original
form. However, on June 6, 1996, TLC publicly stated that it had been informed by
the USPTO that certain amended claims would be allowed and that, when a
reexamination certificate issues in respect of such claims, TLC intends to file
a counterclaim against the Company for damages and an injunction based on
infringement of the reexamined patent.
Upon review of the claims to be included in the reexamination certificate
relating to the TLC '635 Patent, NeXstar Pharmaceuticals has concluded that no
valid claim should be found to be infringed by the Company. In addition, the
Company believes that TLC's efforts in crafting claims to avoid prior liposome
work reported by others has presented NeXstar Pharmaceuticals with additional
avenues of defense in any litigation. For example, because of the amendments
made to the TLC '635 Patent during reexamination, NeXstar Pharmaceuticals would
also have a defense based upon the doctrine of "intervening rights." This
doctrine would provide a clear defense to any damage claim for any NeXstar
Pharmaceuticals activity prior to the actual issuance of the reexamined patent
and would empower the court to permit NeXstar Pharmaceuticals to continue its
activities to the extent and under such terms as the court deems equitable for
the protection of investments made by NeXstar Pharmaceuticals prior to issuance
of the reexamination certificate.
However, were the court to determine that the TLC '635 Patent is both valid
and infringed as a result of the freeze drying of AmBisome, the Company could be
enjoined from using its method of manufacturing and/or could be required to pay
damages. In such event, the Company could experience interruption in its ability
to produce AmBisome and/or incur significant royalty obligations. In addition,
the expense of litigation is expected to be significant regardless of the
outcome.
Although the Company has been successful in its recent litigation with TLC
regarding a different freeze-drying patent, past success is not a predictor of
success in the future and, in general, adverse
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results in litigation could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Certain statements set forth above with respect to the litigation and
potential litigation with TLC constitute "forward-looking statements" within the
meaning of the Reform Act. Such statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results of the
litigation to be materially different from the results expressed or implied by
such forward-looking statements. Such factors include, among other things: (i)
adverse facts adduced in discovery or at trial; (ii) contrary conclusions of law
by the court; (iii) the court refusing to exercise its equitable powers in a
manner favorable to the Company; and (iv) other uncertainties of litigation.
Although patents are enforceable from the date of issuance and presumed to
be valid, future litigation or reexamination proceedings regarding the
enforcement or validity of the Company's existing patents or future patents, if
issued, could result in a ruling adverse to the Company that could invalidate
such patents or substantially reduce the scope of the protection afforded by
such patents. As to any issued patent or patent application, it is also possible
that the U.S. Patent and Trademark Office could declare an interference
proceeding to determine, inter alia, priority of inventorship between
applications claiming the same invention. An adverse ruling in any such
interference proceeding could result in cancellation of claims in issued patents
or patent applications, limitations on the scope of issued patents or claims in
patent applications, or in the awarding of the rights to third parties
participating in such interference. If the Company elects or is required to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office, substantial cost to the Company could result. See
"Business -- Patents, Trade Secrets and Licenses" and "-- Legal Proceedings."
MANUFACTURING RISKS
The Company is manufacturing AmBisome in commercial quantities in its
existing facility and is in the process of completing the validation of a new
facility, in part, to increase its production capacity for AmBisome. However,
the new facility has not yet been approved by regulatory authorities for the
production of the Company's products and the Company has no significant
experience in operating this new facility. While the Company currently has
internal capacity to perform lyophilization (product freeze-drying) in smaller
clinical batches, it relies on third parties to lyophilize larger commercial
batches. There can be no assurance that problems with such lyophilization
vendors will not occur and have an adverse effect on the Company's results of
operations or that the Company's new manufacturing facility will be approved and
provide the Company with its own lyophilization capability.
The Company in the past has manufactured DaunoXome in quantities sufficient
to support clinical trials and has recently increased batch sizes in
anticipation of expanding commercial sales. The Company currently has regulatory
approval from the Medicines Control Agency of the United Kingdom (the "MCA") to
manufacture both AmBisome and DaunoXome for commercial distribution at its
existing manufacturing facility in San Dimas, California. The Company has
obtained approval from the U.S. Food and Drug Administration ("FDA") to
manufacture DaunoXome in its existing facility and in the summer of 1996 expects
to seek MCA, FDA and state approval to manufacture AmBisome and DaunoXome at its
new facility next to its present site. The Company does not have substantial
experience in the larger-scale manufacture of DaunoXome and there can be no
assurance that the Company will be successful in the larger-scale manufacture of
DaunoXome or that the regulatory approvals which the Company is currently
seeking in connection with its manufacturing facilities will be granted.
Additionally, to import its products into the European Union (the "EU"),
the Company must receive quality control release of its products in the EU. The
Company currently obtains quality control release of its products through a toll
manufacturer which it uses in Ireland pursuant to an agreement which terminates
at the end of 1996. In the event that the Company's arrangement with
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its current toll manufacturer is not renewed or terminates early, the Company
will be required to obtain quality control release in the EU through other
means. The Company is evaluating performing its own quality control and toll
manufacturing in the EU. While the Company believes that it will be able to
continue to obtain quality control release for its products in the EU through
other means, including performing its own quality control release, no assurances
can be given.
The manufacture of AmBisome and DaunoXome involves a number of technical
steps and requires meeting stringent quality control specifications imposed by
governmental regulatory bodies and by the Company itself. Additionally, such
products can only be manufactured in facilities approved by the applicable
regulatory authorities. Because of these factors, the Company may not be able to
quickly and efficiently replace its manufacturing capacity in the event that it
is unable to manufacture its products at one or more of its facilities. In the
event of a natural disaster (including an earthquake), equipment failure, strike
or other difficulty, the Company may be unable to manufacture its products in a
manner necessary to fulfill the demand for the products. If the Company does not
receive approval for its new facility, it could become unable to meet its
manufacturing requirements, which could have a material adverse effect on the
Company's business and results of operations.
The Company depends on single approved suppliers for high quality
amphotericin B, daunorubicin HCl and high quality cholesterol, each of which is
used in the Company's manufacture of its liposome products. Additional suppliers
of these components are presently under evaluation. If any of these materials
becomes unavailable from its respective supplier, the Company would be unable to
manufacture at least some of its liposome products until alternative sources of
supply are obtained and the substitution of such replacement supplies has been
granted by the appropriate regulatory authorities. The Company believes that
alternative supplies of such materials are or will become available at
reasonable prices. However, no assurance as to the availability of such supplies
can be given. See "Business -- Manufacturing," "-- Government Regulation" and
"-- Properties."
While the Company has experience in manufacturing drug products based on
liposome technologies, it lacks experience in the manufacture of other
pharmaceuticals, including oligonucleotide-based products. The Company has
leased 5,260 square feet of industrial space for use as a bulk pharmaceutical
manufacturing facility. Such facility has not been validated for the production
of any product and there can be no assurance that the production facility will
ultimately obtain "current Good Manufacturing Practices" status. The Company has
not yet determined which, if any, drug substances it will attempt to produce at
such facility, and there is no assurance that any drug substance selected for
production at such facility will be suitable for production on a larger scale.
To the extent that the Company's current facilities are unsuitable for the
manufacture on an adequate scale of new drug substances developed by the
Company, it will need to develop additional facilities or contract with third
parties for the manufacture of drug substances, if any, that it may develop for
its own account or in connection with collaborative arrangements in which it has
retained manufacturing rights. If the Company is unable to develop needed
manufacturing facilities or to obtain or retain third party manufacturing on
acceptable terms, the Company's ability to conduct preclinical and clinical
testing will be adversely affected and it will be unable to obtain regulatory
approval for or supply commercial quantities of products it successfully
developed. There can be no assurance that the Company will be successful in the
further development of its manufacturing capabilities for its potential
products. See "Business -- Manufacturing" and "-- Properties."
MARKETING RISKS
The Company has formed a network of subsidiaries in Europe and elsewhere to
promote and sell AmBisome and DaunoXome. The Company has also entered into a
number of agreements with distributors for the promotion, sale and/or
distribution of AmBisome and DaunoXome. To date, the Company has not relied on
larger corporate partners in its primary markets to perform these functions. The
Company competes with many other companies that currently have extensive and
well-funded marketing and sales operations. There can be no assurance that
either the Company's
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marketing or sales efforts will compete successfully against other companies.
The Company has recently assembled a marketing group for the sale of DaunoXome
in the United States and in other countries worldwide. The Company has not
previously had any experience in the marketing of pharmaceuticals in the United
States and there can be no assurance that the Company's marketing and sales
efforts in the United States will be successful. See "Business -- Marketing" and
"-- Competition."
The Company's rights to market AmBisome are pursuant to an agreement
between the Company and Fujisawa USA, Inc. ("Fujisawa"). Under the terms of the
agreement, as amended, the Company has the sole marketing rights to AmBisome in
all countries except the United States and Canada. The agreement provides that
the Company and Fujisawa will co-promote AmBisome in the United States if
AmBisome is ultimately approved for commercial sale in the U.S. and that the
Company will manufacture AmBisome for sale in the U.S. In addition, the Company
will be reimbursed for the cost of the product sold to Fujisawa and will receive
20% of the gross profits from the sales of AmBisome in the United States. In the
event that the Company and Fujisawa are unable to cooperate in obtaining
approval for AmBisome in the U.S. or in connection with the promotion of the
product, the Company's potential revenues from the sale of AmBisome in the U.S.
may be substantially reduced. See "Business -- Products and Markets" and
"-- Collaborative Relationships and License Agreements."
COMPETITION
Generally, competition in the pharmaceutical field is based on such factors
as product performance, safety, acceptance by doctors, patient compliance,
patent protection, ease of use, price, distribution, marketing and adaptability
to various modes of administration. The Company's products compete or may
compete with new chemical substances as well as improved delivery of current
drugs. The Company's products and potential products are in various stages of
development, and no assurance can be given that any of these products or
potential products will be sufficiently more effective than existing treatment
alternatives to generate meaningful commercial demand.
NeXstar Pharmaceuticals anticipates that it will face increased competition
in the future as new products enter the market and advanced technologies become
available. Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than NeXstar
Pharmaceuticals and may be better equipped to develop, manufacture and market
products. In addition, many of these companies have extensive experience in
research, preclinical testing and human clinical trials, obtaining FDA and other
regulatory approvals, and manufacturing and marketing their products. As a
result, these companies may develop and introduce products and processes more
rapidly than, and competitive with or superior to those of NeXstar
Pharmaceuticals. There can be no assurance that existing products or new
products developed by the Company's competitors will not be more effective than
any that may be developed by NeXstar Pharmaceuticals. Competitive products may
render the Company's technology and products obsolete or noncompetitive.
The current regulatory approvals for AmBisome principally relate to
situations in which traditional amphotericin B therapy has failed. However, if
the Company succeeds in its effort to expand the approved indications for
AmBisome, such as it has in obtaining approval as a primary therapy in Australia
and Ireland, AmBisome will increasingly compete with traditional amphotericin B
therapy. Amphotericin B is currently produced and marketed by Bristol-Myers
Squibb Company. Moreover, if the Company succeeds in broadening the indications
for AmBisome, it will also face competition from other antifungal products,
including those produced by Pfizer Inc. and Johnson & Johnson. In addition,
there are a number of other companies that are focused on the development of
lipid-based products. In the antifungal area, one company has a lipid-based
amphotericin B product that was approved in the United States in November 1995
and has also been approved in several European countries, and another company
has a lipid-based amphotericin B product that has been approved in several
European countries. Both of these companies have applied for approvals in other
European countries and the latter company has applied for
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U.S. approval. These products are offered at prices that are less than
AmBisome's price on a milligram for milligram basis, although the Company
believes that the total cost of therapy for the competitive products is
substantially equal to or greater than that of AmBisome. In the anticancer area,
another company has a lipid-based anticancer drug which is expected to compete
with DaunoXome and which was approved by the FDA in November 1995 for use as
second line therapy for the Kaposi's sarcoma indication. Applications for
approval of this anticancer product are also pending in various European
countries and approval in a number of countries comprising the EU has been
indicated or obtained. See "Business -- Competition."
EUROPEAN PRICING CONSTRAINTS
As a result of deriving most of its revenues from European countries, the
Company is subject to the risk of parallel imports, governmental regulation of
prices and potential price competition.
Under European Union laws, the Company is limited in its ability to
restrict the distributors of its products and third parties from selling the
Company's products in other countries when customers from such other countries
offer to buy the product from such distributors or third parties. To the extent
that the Company's product prices vary among countries, the Company is
susceptible to parallel importing between the countries. To date, the Company
does not believe that its revenues have been significantly reduced by parallel
import activities among European countries.
Differing product prices among countries occur in part because many foreign
countries require regulatory approval of prices. In particular, certain European
countries will condition their approval of a product on the agreement of the
seller not to sell that product for more than a certain price in the country.
There can be no assurance that any regulatory action reducing the price of
AmBisome or DaunoXome in any one country will not have the practical effect of
requiring the Company to correspondingly reduce its prices in other countries as
a result of government mandated price reductions or price pressures resulting
from the potential of parallel importing. If the Company is successful in
developing additional products or obtaining approval for additional indications
for its current drugs, the Company may also face increased price competition
from potential competitors, including European-based companies. See
"Business -- Competition" and "-- Government Regulation."
HISTORY OF LOSSES; FUTURE CAPITAL NEEDS ANTICIPATED
The Company has incurred substantial losses during its history. At March
31, 1996, the Company's accumulated deficit was $109.3 million. There can be no
assurance that the Company will ever achieve or maintain profitability.
The Company believes that the anticipated revenues from sales of its
existing products, together with its existing cash and the proceeds of this
offering, should permit the Company to implement currently planned research and
development programs and marketing and manufacturing activities and to otherwise
finance its operations for several years. However, there can be no assurance
that increased costs associated with developing and obtaining regulatory
approval of any future drugs or other currently unanticipated expenses will not
require the Company to access the capital markets sooner. Such capital may be
raised through additional public or private financings, as well as collaborative
relationships, borrowings and other available sources. The Company's future
capital requirements will be substantial and will depend on, and could increase
as a result of, many factors, including progress of the Company's research, drug
discovery and development programs, whether the Company acquires interests in
products currently held by third parties, the results and costs of preclinical
and clinical testing of the Company's products, if developed, the time and costs
involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, payments received under collaborative agreements, changes in
collaborative research relationships, the costs associated with potential
commercialization of its products, if any, including the development of
additional manufacturing,
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marketing and sales capabilities, the cost and availability of third-party
financing for capital expenditures and administrative and legal expenses. There
can be no assurance that additional or sufficient financing will be available,
or, if available, that it will be available on acceptable terms. If additional
funds are raised by issuing equity securities of the Company, dilution to then
existing stockholders may result. If adequate funds are not available, NeXstar
Pharmaceuticals may be required to significantly curtail one or more of its
research and development programs or commercialization efforts or obtain funds
through arrangements with collaborative partners or others on less favorable
terms than might otherwise be available. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
IMPACT OF GOVERNMENT REGULATION
The production and marketing of the Company's products, developed through
the Company's technologies, and its ongoing research and development activities,
including its preclinical studies and clinical trials, are subject to regulation
by numerous federal, state and local governmental authorities in the United
States and by similar regulatory agencies in other countries where the Company
tests and markets, or intends to test and/or market, its current or potential
products. There can be no assurance that the Company will obtain further
regulatory approvals to conduct clinical trials or to market its products, or
that the Company will obtain regulatory approvals to conduct clinical trials or
to market products developed in the future, if any, on a timely basis. Prior to
marketing any drug developed by the Company or marketed under license, the
Company must undergo an extensive regulatory approval process by the FDA and
comparable regulatory authorities in foreign countries. The 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.
Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target medication. The results from preclinical animal studies and early
clinical trials may not be predictive of results that will be obtained in large
scale testing, and there can be no assurance that the Company's clinical trials
will demonstrate the safety and efficacy of any products or will result in
marketable products. A number of companies in the biotechnology industry have
suffered significant setbacks in advanced clinical trials, even after
experiencing promising results in early animal and human testing. In addition,
the rate of completion of the Company's clinical trials is dependent upon, among
other factors, the rate of patient enrollment. Patient enrollment is a function
of many factors, including the size of the patient population, the nature of the
protocol, the Company's ability to manage the clinical trial, the proximity of
patients to clinical sites and the eligibility criteria for the study. Several
factors, such as delays in planned patient enrollment, may result in increased
costs and delays or termination of clinical trials prior to completion, which
could have a material adverse effect on the Company. Preclinical studies must
also be conducted in conformity with the FDA's good laboratory practice
regulations. Clinical trials generally must meet requirements for institutional
review board oversight and informed consent, as well as regulatory agency prior
review, oversight and good clinical practice requirements.
Data obtained from preclinical and clinical activities 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 the
policies of regulatory authorities for drug approval during the period of
product development and regulatory review of each submitted new drug application
or product license application. The Company may be required to demonstrate that
the proposed product represents an improved form of treatment over existing
therapies. There can be no assurance that, even after such time and
expenditures, regulatory approvals will be obtained for any drugs developed or
discovered by the Company or its collaborative partners utilizing the Company's
technologies. Moreover, if regulatory approval of a drug is granted, such
approval is likely to entail
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limitations on the indicated uses for which it may be marketed. Further, even if
such regulatory approval is obtained, a marketed drug and its manufacturer are
subject to continual review, and discovery of previously unknown problems with a
product or manufacturer may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market.
The Company has submitted and will continue to submit requests for approval
of AmBisome and DaunoXome with regulatory authorities in other European
countries, and a number of these regulatory authorities are actively reviewing
such applications or have indicated that final marketing authorization will be
granted. Regulatory procedures and review times vary from country to country.
There can be no assurance that any of the Company's pending applications for
approvals will be granted or that regulatory actions will be taken in a timely
fashion. The Company has received an approved shelf life of 24 weeks for
DaunoXome in the United States. While the Company has an ongoing stability
program aimed at demonstrating a significantly longer shelf life than 24 weeks,
there can be no assurance that the extension of the shelf life beyond 24 weeks
will be approved by the FDA. The likelihood that customers would seek to return
material amounts of DaunoXome to the Company because of the expiration of its
shelf life may be increased if a shelf life of longer than 24 weeks is not
approved for DaunoXome in the U.S. See "Business -- Government Regulation."
In addition, the Company's manufacturing facilities are subject to
inspection and regulation by U.S., foreign and state regulatory agencies. The
Company's facilities in San Dimas, California have been inspected by the FDA,
the MCA and the State of California. These agencies may reinspect at any time,
and other countries' regulatory authorities may inspect such facilities as well.
Furthermore, although the Company's current commercial and clinical products do
not require an export license, there can be no assurance that export licenses
will not be required in the future.
Failure to comply with applicable regulatory requirements can, among other
things, result in fines, suspension of regulatory approvals, product recalls,
seizure of products, imposition of operating restrictions and criminal
prosecutions. Further, FDA policy or similar policies of regulatory agencies in
other countries may change and additional government regulations may be
established that could prevent or delay regulatory approval of the Company's or
a collaborative partner's potential products. See "-- Manufacturing Risks."
POTENTIAL PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS
Although the Company is not currently a party to any product liability
litigation, the use of any of the Company's products or potential products in
clinical trials and the sale of such products may expose the Company to
liability claims. These claims may be made directly by consumers, health care
providers, pharmaceutical companies or others selling such products. While the
Company currently has liability insurance in amounts that it believes to be
adequate for its business as currently conducted, such insurance is expensive
and may be difficult (or impossible) to obtain in the future. In the event
liability insurance becomes unobtainable, the Company's ability to clinically
test and to market its products could be significantly impaired. Moreover, the
amount and scope of any coverage may be inadequate to protect the Company in the
event of a successful product liability claim.
Additionally, with the approval of DaunoXome in the United States, the
Company has significantly greater risk in connection with product liability
claims due to the greater frequency of lawsuits and higher claims paid in courts
in the United States as opposed to most other countries. The Company is required
by governmental regulations to test its products even after they have been sold
and used by patients. As a result of such tests, the Company may be required to,
or may determine that, it should recall products when most of such products have
already been sold or used. Such later testing and product recalls may increase
the Company's potential exposure to product liability claims.
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RISKS ASSOCIATED WITH THE USE OF HAZARDOUS MATERIALS
The Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any such liability
could exceed the resources of the Company or otherwise adversely affect the
Company. NeXstar Pharmaceuticals is subject to numerous environmental and safety
laws and regulations, including those governing the use of hazardous materials.
In June 1995, the Company was contacted by the U.S. Environmental Protection
Agency (the "EPA") informing the Company that it is a potentially responsible
party relating to the disposal of the Company's waste products by a third party
at a hazardous waste disposal facility. The Company has complied with all
requests by the EPA relating to this matter; however, there can be no assurance
that this matter or any violation of, or the cost of compliance with,
environmental and safety laws and regulations will not adversely impact the
Company's operations.
VOLATILITY OF STOCK PRICE
The market prices for securities of pharmaceutical and biotechnology
companies, including the Company, have been highly volatile, and it is likely
that the market price of the Common Stock will continue to be highly volatile.
Announcements of technological innovations or new commercial products by the
Company, its collaborative partners or its present or potential competitors,
announcements by the Company or its present or potential competitors of results
in preclinical testing and clinical trials, developments or disputes concerning
patent or proprietary rights, developments in the Company's relationships with
its collaborative partners, adverse litigation, changes in reimbursement
policies, adverse legislation, regulatory decisions, or public concern regarding
the safety, efficacy or other implications of the drugs sought to be developed
or biotechnology in general and economic and other external factors, as well as
period-to-period fluctuations in the Company's operating results, have had, and
may continue to have, a significant impact on the market price of the Company's
Common Stock. See "Price Range of Common Stock."
REGISTRATION RIGHTS, OPTIONS, WARRANTS, DILUTION
As of June 10, 1996, the holders of 5,395,625 outstanding shares of the
Common Stock were entitled to certain piggyback and demand registration rights
with respect to such shares. If such holders, by exercising their demand
registration rights, cause a large number of shares to be registered and sold in
the public market, such sales may have an adverse effect on the market price for
the Common Stock. In addition, if the Company is required to include in a
Company initiated registration shares held by such holders pursuant to the
exercise of their piggyback registration rights, such sales may have an adverse
effect on the Company's ability to raise needed capital. As of June 10, 1996,
there were warrants outstanding to purchase an aggregate of 1,168,372 shares of
Common Stock at a weighted average exercise price of $5.31 per share. There are
piggyback and, in most cases, demand registration rights in connection with such
warrants which can be exercised for an aggregate of 1,147,252 shares. As of June
10, 1996, there were outstanding stock options for an aggregate of 2,120,933
shares of the Common Stock at a weighted average exercise price of $11.35 per
share. Investors purchasing shares of Common Stock in this offering will incur
immediate, substantial dilution equal to approximately $14.80 per share assuming
a public offering price of $19 3/4 per share. Investors purchasing shares of
Common Stock in this offering will incur additional dilution to the extent that
the outstanding options or warrants are exercised. See "Dilution" and
"Description of Capital Stock."
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INFLUENCE BY EXISTING STOCKHOLDER
E.M. Warburg, Pincus & Co., Inc. ("Warburg") and its affiliates own or have
the right to acquire a substantial minority of the common stock of NeXstar
Pharmaceuticals and may influence corporate actions, including influencing
elections and significant corporate events. One of the Company's directors is a
Senior Managing Director of Warburg.
RELIANCE ON RELATIONSHIPS AND EFFECTS OF INVESTMENTS
The Company has entered into a limited number of collaborative arrangements
pursuant to which other companies are entitled to certain product,
manufacturing, marketing and royalty rights, including collaborative
arrangements relating to aspects of the SELEX process. A number of agreements
related to research involving the SELEX process have terminated, or the Company
expects that they will terminate, during 1996. Although the agreements with
these companies provide for the funding by such companies of certain research
and development efforts conducted by the Company, such funding may be terminated
by such companies under certain circumstances. Furthermore, there can be no
assurance that any of the Company's current collaborative arrangements will be
successful.
The Company may seek future collaborative relationships with corporate
partners to fund certain research and development expenses and to develop and
commercialize certain of its potential products. Further, the Company's receipt
of revenues from collaborative agreements will be affected by the timing of
efforts expended by the Company under existing agreements, as well as by the
timing of drug development programs of the Company's collaborators. There can be
no assurance that the Company will be able to negotiate acceptable collaborative
arrangements in the future, or that such collaborative arrangements will be
successful. To the extent that the Company elects not to or is unable to
establish such relationships it could incur increased capital expenditures as it
is required to undertake research, development, marketing and manufacturing of
its proposed products at its own expense. In addition, there can be no assurance
that existing or future collaborative partners will have sufficient economic
motivation to continue their funding or to develop any products to which they
may have rights, or that such partners will not pursue alternative technologies
or attempt to develop alternative compounds either independently or in
collaboration with others. See "Business -- Technology Platforms" and
"-- Collaborative Relationships and License Agreements."
In the past, the Company has invested in privately held entities and at
March 31, 1996 recorded these investments as investments in life science
enterprises with a book value of $4.0 million. Most of the value of these
entities is based on unproven technology. Additionally, the Company does not
have significant control over these entities. In the event that these entities
are unsuccessful, the Company may incur significant future accounting writeoffs.
Currently, the Company has no obligation to make any additional investments in
any of these entities. The Company periodically undertakes a review of the value
of its investments in life science companies to determine if the value of such
investments has been permanently impaired. In connection with the Company's
review of such investments for the year ending December 31, 1995, the Company
incurred a charge of $3.3 million with regard to certain of such investments and
related debt owed to the Company by such entities.
The Company's rights to market AmBisome are pursuant to an agreement
between the Company and Fujisawa. Under the terms of the agreement, as amended,
the Company has the sole marketing rights to AmBisome in all countries except
the United States and Canada. The agreement provides that the Company and
Fujisawa will co-promote AmBisome in the United States if AmBisome is ultimately
approved for commercial sale in the U.S. and that the Company will manufacture
AmBisome for sale in the U.S. In addition, the Company will be reimbursed for
the cost of the product sold to Fujisawa and will receive 20% of the gross
profits from the sales of AmBisome in the United States. In the event that the
Company and Fujisawa are unable to cooperate in obtaining
18
<PAGE> 20
approval for AmBisome in the U.S. or in connection with the promotion of the
product, the Company's potential revenues from the sale of AmBisome in the U.S.
may be substantially reduced. See "Business -- Products and Markets" and
"-- Collaborative Relationships and License Agreements."
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,500,000 shares of Common
Stock being offered by the Company are estimated to be $46.2 million ($53.2
million if the over-allotment option granted to the Underwriters is exercised in
full) assuming a public offering price of $19 3/4 and after deducting estimated
underwriting discounts and commissions and offering expenses.
The Company intends to use the net proceeds of the offering (i) for the
introduction, distribution and market development of DaunoXome in the United
States and in other countries; (ii) for continued research, drug discovery and
development programs; (iii) to acquire interests in drug candidates or
technology held by third parties; and (iv) for other general corporate purposes,
including working capital and facilities expansion. The Company has not
identified precisely the amounts it plans to spend on any of the listed items.
The amounts expended on each item may vary significantly depending on numerous
factors, including the timing of regulatory approvals of DaunoXome, the progress
of the Company's research and development programs, the results of preclinical
and clinical studies, the timing of regulatory approvals, technological
advances, success of current or future collaborative agreements, determinations
as to commercial potential of the Company's potential products and the status of
competitive products.
As discussed above, proceeds of this offering may be used to acquire
companies, products or technologies that complement the business of NeXstar
Pharmaceuticals. In the course of its business, the Company evaluates products
and technologies which, if acquired, could result in the development of product
candidates or which complement technologies currently being developed by the
Company. The Company expects from time to time to be involved in discussions
with other entities concerning the Company's potential acquisition of rights to
additional pharmaceutical products.
The Company believes that its available cash, cash generated from sales of
its existing products and the Company's existing sources of funds, together with
the proceeds of the offering, will be adequate to satisfy the Company's capital
needs for several years. However, there can be no assurance that increased costs
and other currently unanticipated expenses will not require the Company to
access the capital markets sooner than is currently expected. Pending
application of the proceeds as described above, the Company intends to invest
the net proceeds of this offering in interest-bearing investment grade
instruments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
since its inception. The Company does not anticipate paying any cash dividends
on its Common Stock.
19
<PAGE> 21
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "NXTR." The following table sets forth the high and low closing sale
prices per share of the Company's Common Stock, as reported on the Nasdaq
National Market, during the periods presented.
<TABLE>
<CAPTION>
PRICE RANGE
OF COMMON STOCK
------------------
HIGH LOW
<S> <C> <C>
Year Ended December 31, 1994:
First Quarter(1)........................................................ $11 1/8 $ 8 5/8
Second Quarter.......................................................... 8 3/8 5 7/8
Third Quarter........................................................... 7 1/2 5 7/8
Fourth Quarter.......................................................... 8 4 1/4
Year Ended December 31, 1995:
First Quarter........................................................... $ 8 5/8 $ 5 1/2
Second Quarter.......................................................... 9 1/4 6 1/8
Third Quarter........................................................... 17 8 1/2
Fourth Quarter.......................................................... 18 5/8 10 5/8
Year Ended December 31, 1996:
First Quarter........................................................... $26 3/4 $15 1/2
Second Quarter (through June 13, 1996).................................. $25 1/2 $18 1/4
</TABLE>
- ------------------------------
(1) NeXagen, Inc., conducted its initial public offering on January 28, 1994.
The last reported sale price of the Common Stock on June 13, 1996, as
reported on the Nasdaq National Market was $19.75 per share. As of June 10,
1996, there were approximately 579 holders of record of the Company's Common
Stock.
DILUTION
The net tangible book value of the Company at March 31, 1996 was $95.2
million or $3.65 per share of Common Stock. Net tangible book value per share
represents the amount of tangible assets of the Company, less total liabilities,
divided by the number of shares of Common Stock outstanding. Without taking into
account any other changes in net tangible book value after March 31, 1996, other
than to give effect to the sale of 2,500,000 shares of Common Stock offered by
the Company (based on an assumed public offering price of $19.75 per share,
after deduction of the estimated underwriting discounts and commissions and
other offering expenses, and the application of the estimated net proceeds
therefrom), the pro forma net tangible book value of the Company at March 31,
1996 would have been $141.4 million or $4.95 per share. This represents an
immediate increase in net tangible book value of $1.30 per share of Common Stock
to existing stockholders and an immediate dilution of approximately $14.80 per
share to new investors purchasing shares in this offering. The following table
illustrates the per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed public offering per share(1).............................. $ 19.75
Net tangible book value per share as of March 31, 1996(2)....... $ 3.65
Increase per share attributable to new investors................ 1.30
------
Pro forma net tangible book value per share after offering(2)..... 4.95
-------
Dilution per share to new investors(2)............................ $ 14.80
=======
</TABLE>
- ------------------------------
(1) Before deducting estimated underwriting discounts and commissions and other
offering expenses payable by the Company.
(2) Assumes no exercise of any outstanding options or warrants to purchase
Common Stock. At March 31, 1996, there were outstanding warrants to
purchase an aggregate of 1,401,313 shares of Common Stock at a weighted
average exercise price of $5.23 per share and options to purchase an
aggregate of 2,019,608 shares of Common Stock at a weighted average
exercise price of $10.52 per share. To the extent that these warrants
and/or options are exercised, there will be further dilution to new
investors.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
March 31, 1996, and the capitalization of the Company as adjusted to reflect the
sale of 2,500,000 shares of Common Stock offered by the Company and the
application of the net proceeds therefrom estimated to be $46.2 million (based
on a public offering price of $19.75 per share after deduction of the estimated
underwriting discounts and commissions and other expenses of this offering). See
"Use of Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and related notes included
elsewhere or incorporated by reference herein.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents and marketable securities................ $ 46,163 $ 92,339
========= =========
Short-term borrowings and current portion of capital lease
obligations...................................................... $ 9,451 $ 9,451
========= =========
Capital lease obligations.......................................... $ 9,689 $ 9,689
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized, no
shares issued or outstanding, as adjusted..................... -- --
Common Stock, $.01 par value, 50,000,000 shares authorized;
26,065,321 shares issued and outstanding actual, 28,565,321
shares issued and outstanding, as adjusted(1)................. 261 286
Additional paid-in capital....................................... 211,431 257,582
Deferred compensation............................................ (207) (207)
Accumulated deficit.............................................. (109,290) (109,290)
--------- ---------
Total stockholders' equity............................... 102,195 148,371
--------- ---------
Total capitalization............................................... $ 111,884 $ 158,060
========= =========
</TABLE>
- ------------------------------
(1) Does not include 3,557,553 shares of Common Stock reserved for issuance
under the Company's option plans (of which options to purchase 2,019,608
shares were outstanding as of March 31, 1996) or 1,401,313 shares of Common
Stock issuable pursuant to warrants granted by the Company that were
outstanding as of March 31, 1996.
21
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from the
Consolidated Financial Statements of NeXstar Pharmaceuticals, Inc. The
consolidated information for each of the annual periods presented has been
derived from audited consolidated financial statements previously filed with the
Securities and Exchange Commission. The financial data for the three month
periods ended March 31, 1995 and 1996 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which NeXstar Pharmaceuticals considers
necessary for a fair presentation of the financial position and the 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 consolidated financial
data give retroactive effect to the merger of NeXagen, Inc. and Vestar on
February 21, 1995, which has been accounted for as a pooling of interests. The
selected financial data also include the acquisition of Supragen, Inc. on
September 8, 1995 which has been accounted for using the purchase method of
accounting. The data should be read in conjunction with the Consolidated
Financial Statements of the Company, related notes thereto, and other financial
information included or incorporated by reference herein.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Product revenues.................... $ 14,035 $ 25,999 $ 30,518 $ 43,967 $ 57,770 $ 11,894 $ 17,545
Collaborative agreements and
contracts......................... 531 591 2,098 4,054 2,920 751 579
Interest income..................... 634 2,518 2,424 2,409 1,736 555 433
------- ------- -------- -------- -------- ------- -------
Total revenues.................. 15,200 29,108 35,040 50,430 62,426 13,200 18,557
Expenses:
Cost of goods sold.................. 3,642 3,896 5,024 8,091 13,246 2,569 3,819
Research and development............ 7,445 13,067 24,574 31,595 39,662 8,242 11,176
Selling, general and
administrative.................... 5,535 11,627 16,279 22,108 32,994 7,280 9,463
Purchased research and
development(1).................... -- -- -- -- 11,824 -- --
Retirement agreement expenses....... -- -- -- 4,097 -- -- --
Interest expense.................... 45 48 308 587 1,148 337 285
------- ------- -------- -------- -------- ------- -------
Total expenses.................. 16,667 28,638 46,185 66,478 98,874 18,428 24,743
------- ------- -------- -------- -------- ------- -------
Income (loss) before provision for
income taxes........................ (1,467) 470 (11,145) (16,048) (36,448) (5,228) (6,186)
Provision for income taxes............ -- 392 167 159 183 52 110
------- ------- -------- -------- -------- ------- -------
Net income (loss)..................... $ (1,467) $ 78 $ (11,312) $ (16,207) $ (36,631) $ (5,280) $ (6,296)
======= ======= ======== ======== ======== ======= =======
Net income (loss) per share(2)........ $ (0.15) $ 0.00 $ (0.53) $ (0.71) (1.57) $ (0.23) $ (0.25)
======= ======= ======== ======== ======== ======= =======
Shares used in computing net income
(loss) per share(2)................. 12,969 21,891 21,336 22,825 23,374 22,941 25,065
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and
marketable securities............... $ 15,351 $ 72,015 $ 54,495 $ 40,284 $ 26,734 $ 46,163
Working capital....................... 19,964 79,457 62,227 44,203 35,169 56,786
Total assets.......................... 27,012 97,633 103,912 126,927 112,449 133,041
Long-term obligations................. 87 1,899 2,107 10,500 9,848 9,689
Accumulated deficit................... (38,923) (38,845) (50,157) (66,364) (102,995) (109,290)
Total stockholders' equity............ 24,114 89,925 91,268 97,478 81,304 102,195
</TABLE>
- ------------------------------
(1) Relates to the acquisition of Supragen, Inc. on September 8, 1995.
(2) See Note 1 of Notes to Consolidated Financial Statements.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Prospectus contain
"forward-looking statements" that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
"forward-looking statements." See "Special Note Regard Forward-Looking
Statements" on page 61 for additional factors relating to such statements.
NeXstar Pharmaceuticals is a leading biopharmaceutical company engaged in
the discovery, development, manufacture and marketing of proprietary
pharmaceutical products to treat life-threatening and other serious diseases.
The Company currently markets AmBisome, a liposomal formulation of
amphotericin B, for the treatment of life-threatening fungal infections when
conventional treatment fails and DaunoXome, a liposomal formulation of the
anticancer agent daunorubicin, which is used as a first line cytotoxic therapy
for the treatment of advanced, HIV-associated Kaposi's sarcoma. The Company has
relied on sales of AmBisome in Europe for a significant portion of its product
revenues and expects sales of AmBisome in Europe to account for a majority of
its revenues in 1996. AmBisome has been approved for sale by the regulatory
authorities in 22 countries for the treatment of life-threatening fungal
infections, including Australia and Ireland where it has been approved as a
primary therapy. Sales in Germany, the U.K. and Spain together accounted for 47%
of AmBisome revenues for the three months ended March 31, 1996. In April 1996,
the Company received approval for DaunoXome as a first line treatment for
Kaposi's sarcoma from the FDA and formally launched the drug in the U.S. on May
1, 1996. In addition, DaunoXome has recently been approved for sale by the
regulatory authorities in 12 Western European countries as primary therapy for
Kaposi's sarcoma and in Canada as salvage therapy for Kaposi's sarcoma. Revenue
growth, if any, will be substantially dependent upon increased penetration of
existing markets, establishing new markets, development of new indications for
AmBisome and DaunoXome and introduction of new products.
In connection with most of its European sales, the Company prices its
products in the currencies of the country into which they are sold (the "Payment
Currencies"), and revenues in the past have been and in the future could be
adversely affected by currency fluctuations. A significant majority of the
Company's manufacturing costs are in U.S. dollars. Therefore, any fall in the
value of the Payment Currencies relative to the U.S. dollar is likely to
negatively impact gross margins for the Company's products since the Company's
manufacturing costs would stay approximately the same while its revenue in terms
of U.S. dollars would decline.
NeXstar Pharmaceuticals hedges certain of its foreign currency exposures,
with respect to its outstanding trade accounts receivable and accounts payable,
through the use of forward contracts. In the future, the Company may begin
currency hedging in connection with anticipated revenues and expenses and may
use options in addition to forward contracts. Such hedging will be done solely
for the purpose of protecting the Company from foreign currency fluctuations.
NeXstar Pharmaceuticals does not enter into speculative foreign currency
transactions and does not write speculative options. The Company recognizes a
gain or loss for each forward contract for the difference between the contract
rate and the market rate on each balance sheet date which is recorded as a
selling, general and administrative expense. Accordingly, no deferred accounting
is used in connection with the Company's hedging activities. Notwithstanding its
hedging activities (which have not always included fully hedging against
potential gains or losses), the Company has in the past recognized significant
foreign exchange gains and losses. There can be no assurance that significant
gains or losses will not be incurred in the future.
NeXstar Pharmaceuticals was formed in 1991 as NeXagen, Inc. The Company is
the result of a merger (the "Merger") between NeXagen, Inc. and Vestar, Inc.
("Vestar") on February 21, 1995. In
23
<PAGE> 25
connection with the Merger, NeXagen, Inc. changed its name to NeXstar
Pharmaceuticals, Inc. The Merger was accounted for as a pooling of interests.
Except where otherwise indicated, the following Management's Discussion and
Analysis of Financial Condition and Results of Operations gives effect to the
Merger and the pooling of interests accounting treatment, and thus includes the
results of Vestar for all periods discussed. Additionally, the Company acquired
Supragen, Inc. ("Supragen") on September 8, 1995. The Supragen acquisition has
been accounted for using the purchase method of accounting.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Product revenues increased 47% to $17.5 million for the three months ended
March 31, 1996 from $11.9 million for the corresponding period in 1995 primarily
due to increased unit sales of AmBisome in existing markets.
Collaborative agreement and contract revenues decreased to $579,000 for the
three months ended March 31, 1996 from $751,000 for the three months ended March
31, 1995. Collaborative agreement and contract revenue fluctuations are
generally the result of changes in the number of funded research projects as
well as the timing and performance of contract benchmarks. Contract revenues
consisted of payments by corporate or federal sponsors for work performed to
develop products. A number of the Company's collaborative research agreements
with corporate partners have expired, or the Company anticipates that they will
expire, in 1996.
Interest income was $433,000 for the three months ended March 31, 1996
compared to $555,000 for the three months ended March 31, 1995. Interest income
generally fluctuates as a result of cash available for investment and prevailing
interest rates.
Cost of goods sold increased to $3.8 million for the three months ended
March 31, 1996 compared to $2.6 million for the corresponding period in 1995.
Cost of goods sold as a percentage of product revenues for the three months
ended March 31, 1996 and the three months ended March 31, 1995 was 22%. For the
three months ended March 31, 1996, the Company recorded charges of $391,000 for
certain AmBisome lots produced in prior years which subsequently failed to pass
certain of the Company's stringent internal quality control specifications. If
the Company is successful in increasing its product revenues, the Company
expects to gain manufacturing efficiencies from increased production thereby
decreasing its cost of goods sold per unit of product. Cost of goods sold
consists primarily of raw materials, allocations of overhead, labor and
equipment costs, and charges associated with lyophilization services provided by
outside vendors.
Research and development expenses increased 37% to $11.2 million for the
three months ended March 31, 1996 compared to $8.2 million for the three months
ended March 31, 1995. The increase was primarily attributable to increases in
product development and clinical trials and an increase in personnel as a result
of the acquisition of Supragen in September 1995. For the three months ended
March 31, 1996, $360,000 of research expenses was sponsored by third parties.
Research and development expenses consist primarily of salaries and benefits for
scientific, regulatory, quality control and pilot manufacturing personnel,
consultants, supplies, occupancy costs and depreciation of laboratory equipment
and facilities. The Company expects research and development expenses to
continue to increase as a result of ongoing and future preclinical and clinical
trials and as research and development facilities are expanded.
Selling, general and administrative expenses increased $2.2 million, or
30%, to $9.5 million for the three months ended March 31, 1996 from $7.3 million
for the three months ended March 31, 1995. As a percentage of product revenues,
selling, general and administrative expenses decreased to 54% for the three
months ended March 31, 1996 compared to 61% for the corresponding period in
1995. The Company had increased expenses of $3.4 million for the three months
ended March 31, 1996 compared to the corresponding period in 1995, which related
primarily to (i) the expansion of
24
<PAGE> 26
the Company's worldwide sales and marketing distribution network, including the
establishment of a sales force in the U.S. for the sales and marketing of
DaunoXome and (ii) a worldwide increase in administrative personnel to support
the Company's expanding operations. The $3.4 million increase was partially
offset by $2.0 million of non-recurring merger-related costs in the three months
ended March 31, 1995. During the three months ended March 31, 1996, the Company
had foreign exchange losses of $74,000 compared to a gain of $726,000 for the
corresponding period in 1995.
Interest expense decreased to $285,000 for the three months ended March 31,
1996 from $337,000 for the three months ended March 31, 1995. The decrease was
primarily due to a reduction in the average short-term borrowings outstanding.
The Company reported a net loss of $6.3 million, or $0.25 per share, for
the three months ended March 31, 1996 compared to a net loss of $5.3 million, or
$0.23 per share, for the three months ended March 31, 1995.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Product revenues increased 31% to $57.8 million, 44% to $44.0 million and
17% to $30.5 million in 1995, 1994 and 1993, respectively, primarily due to
increased unit sales from AmBisome in existing markets.
Collaborative agreement and contract revenues were $2.9 million, $4.1
million and $2.1 million for 1995, 1994 and 1993, respectively. Collaborative
agreement and contract revenue fluctuations are generally the result of changes
in the number of funded research projects as well as the timing and performance
of contract benchmarks. Contract revenues consisted of payments by corporate or
federal sponsors for work performed to develop products.
Interest income was $1.7 million, $2.4 million and $2.4 million in 1995,
1994 and 1993, respectively. Interest income generally fluctuates as a result of
cash available for investment and prevailing interest rates.
Cost of goods sold was $13.2 million, $8.1 million and $5.0 million in
1995, 1994 and 1993, respectively. Cost of goods sold as a percentage of product
revenues was 23%, 18% and 16% in 1995, 1994 and 1993, respectively. The increase
in cost of goods sold as a percentage of product revenues in 1995 was primarily
the result of (i) an increase in sales of AmBisome at cost to Fujisawa, the
Company's U.S. promotion and development partner, for use in clinical trials and
(ii) validation costs and overhead expenses attributable to the Company's new
manufacturing facility in San Dimas, California. In 1995 and 1994, the Company
recorded charges for certain AmBisome lots produced in prior years which
subsequently failed to pass certain of the Company's stringent internal quality
control specifications of $932,000 and $1.4 million, respectively. Since 1993,
NeXstar Pharmaceuticals has incurred manufacturing scale-up costs for the
production of DaunoXome which have negatively impacted cost of goods sold as a
percentage of product revenues. Additional scale-up costs are expected to be
incurred in 1996. Cost of goods sold consists primarily of raw materials,
allocations of overhead, labor and equipment costs, and charges associated with
lyophilization services provided by outside vendors.
Research and development expenses increased 26% to $39.7 million, 29% to
$31.6 million and 88% to $24.6 million for 1995, 1994 and 1993, respectively.
The increase in 1995 was primarily attributable to $2.5 million for the
production of DaunoXome validation lots as well as increases in product
development and clinical trials. In 1995, $2.1 million of research expenses was
sponsored by third parties as compared to $2.6 million and $1.3 million in 1994
and 1993, respectively. Research and development expenses consist primarily of
salaries and benefits for scientific, regulatory, quality control and pilot
manufacturing personnel, consultants, supplies, occupancy costs and depreciation
of laboratory equipment and facilities.
25
<PAGE> 27
Selling, general and administrative expenses increased 49% to $33.0
million, 36% to $22.1 million and 40% to $16.3 million, or 57%, 50% and 53% of
product revenues in 1995, 1994 and 1993, respectively. The increase in 1995 was
primarily due to merger-related costs of $2.7 million, costs due to expansion of
the Company's sales and marketing distribution network of $4.2 million,
including establishment of a sales force in the U.S. in connection with the
marketing approval for DaunoXome, a $2.4 million note receivable allowance
relating to a loan previously made to Phytogen Life Sciences Inc., a Canadian
company in which the Company owns a minority interest, and $584,000 related to
the cost of a registration statement filed in September 1995 for the sale of the
Company's common stock, which was withdrawn in October 1995. This increase was
also due to other expenses incurred in connection with increased sales of
AmBisome and to an increase in legal expenses, including expenses related to the
Company's European operations and other corporate matters. The 1994 increases
were principally due to the payment of $1.8 million in connection with the
termination of a distribution agreement in Germany, an increase in the allowance
for doubtful accounts of $350,000, a $594,000 write-down of uncollectible
accounts receivable and a non-cash compensation expense of $1.1 million related
to the transfer to Dr. Lawrence M. Gold by Warburg, Pincus Investors, L.P.
("WPI"), an affiliate of the Company, of 97,391 shares of the Company's Common
Stock held by WPI. In addition, the Company recognized foreign exchange gains
(losses) of approximately $371,000, $272,000 and ($640,000) in 1995, 1994 and
1993, respectively, principally due to the revaluation of the Company's accounts
receivable denominated in foreign currency.
Interest expense was $1.1 million, $587,000 and $308,000 in 1995, 1994 and
1993, respectively. The increases were due primarily to additional borrowings in
connection with several equipment lease arrangements.
Results for 1994 were impacted by a charge to earnings of $4.1 million, as
a result of an agreement with Dr. Roger Crossley who retired on May 25, 1994 as
the President and Chief Executive Officer of Vestar. The Company and Dr.
Crossley entered into an agreement effective May 25, 1994 in connection with his
retirement (the "Agreement"). Under the terms of the Agreement, the Company
during 1994 and 1995 paid Dr. Crossley (i) approximately $2.1 million in
connection with his sale of certain shares of the Company's Common Stock, (ii)
approximately $158,000 for health insurance and (iii) a salary through June 1995
at an annual rate of $300,000. The $2.1 million payment in 1995 related to the
Company's guarantee to him that in the event that prior to May 25, 1997 he sold
certain shares of the Company's Common Stock which he owned at a price less than
$15.77 per share, the Company would pay him the difference between the sales
price and $15.77 per share. During June and July, 1995, Dr. Crossley sold all
but 44,000 of the shares covered by the Agreement. In March 1996, he sold the
remaining 44,000 shares covered by the Agreement at no cost to the Company.
The Company reported a net loss for 1995 of $36.6 million, or $1.57 per
share, compared to a net loss of $16.2 million, or $0.71 per share, and a net
loss of $11.3 million, or $0.53 per share, for 1994 and 1993, respectively. The
net loss for 1995 included a one-time, non-cash charge of $11.8 million for
purchased research and development in connection with the Supragen acquisition.
PATENT MATTERS
The Company is currently involved in litigation matters and interference
proceedings involving patent and infringement claims with respect to the
Company's products. To date, the outcomes of these litigation matters and
interference proceedings have generally been favorable to the Company although
they have resulted in significant litigation expenses. The Company believes that
there will continue to be significant litigation in the pharmaceutical industry
regarding patents and other intellectual property rights, but cannot predict the
likelihood of it being involved in any additional disputes. Any additional
litigation could consume a substantial portion of the Company's resources
regardless of the outcome of such litigation.
26
<PAGE> 28
On May 17, 1993, the Company filed a complaint in the United States
District Court for the District of Delaware against TLC asking the court to
declare a patent owned by TLC (U.S. Patent No. 4,880,635) (the "TLC '635
Patent") invalid, unenforceable, and not infringed following allegations by TLC
that the freeze drying of AmBisome infringes the TLC '635 Patent. In addition,
the Company has opposed the grant to TLC of the European and Japanese patents
that are counterparts of the TLC '635 Patent. On December 20, 1993, the United
States District for the District of Delaware stayed the May 17, 1993 lawsuit
pending the outcome of a reexamination of the TLC '635 Patent instituted by TLC
in the U.S. Patent and Trademark Office ("USPTO"). Upon reexamination, the USPTO
refused to confirm any of the claims of the TLC '635 Patent in their original
form. However, on June 6, 1996, TLC publicly stated that it had been informed by
the USPTO that certain amended claims would be allowed and that, when a
reexamination certificate issues in respect of such claims, TLC intends to file
a counterclaim against the Company for damages and an injunction based on
infringement of the reexamined patent. The Company does not believe that the
reexamined TLC '635 Patent presents a material risk to the Company. See "Risk
Factors -- Litigation Risks Related to Proprietary Rights" and
"Business -- Legal Proceedings."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and marketable securities position
at March 31, 1996 was $46.1 million, compared to $26.7 million on December 31,
1995. The $19.4 million increase in cash, cash equivalents and marketable
securities position was primarily the result of the following:
<TABLE>
<S> <C> <C>
Net cash used in operating activities:
Net loss............................................. $ (6,296,000)
Depreciation and amortization........................ 3,103,000
Working capital...................................... (1,328,000)
Other non-cash items................................. (32,000)
-----------
$ (4,553,000)
Investment in equipment and leasehold improvements..... (2,837,000)
Proceeds from sale-leaseback transactions.............. 1,091,000
Payments on capital lease obligations.................. (1,112,000)
Proceeds from sales of Common Stock, net............... 27,162,000
Other.................................................. (322,000)
-----------
Total........................................ $ 19,429,000
===========
</TABLE>
The Company invests its cash and cash equivalents and marketable securities
in interest-bearing investment grade securities.
The Company's accounts receivable balance at March 31, 1996 was $19.8
million as compared to $18.3 million on December 31, 1995. The growth in
receivables was primarily due to increased sales of AmBisome. The Company
considers the credit risk of its customers to be low. However, payment practices
between countries vary significantly and increased sales in countries in which
payments tend to be slower may increase the average length that accounts
receivable are outstanding. The Company continually seeks improvements in its
collection process to maximize its cash flow from product sales in a timely
manner.
As of March 31, 1996, the Company's inventory value was $10.4 million
compared to $9.5 million as of December 31, 1995 which represents a 9% increase
for the period ended March 31, 1996. The increase resulted primarily from an
overall increase in inventory to meet product demand. If the Company is
successful in increasing its product revenues, the Company expects to gain
manufacturing efficiencies from increased production thereby decreasing cost of
goods sold per unit of product.
For the three months ended March 31, 1996, the Company had proceeds from
sale-leaseback transactions of $1.1 million related to the purchase of capital
equipment. As of March 31, 1996,
27
<PAGE> 29
$391,000 was available under equipment lease agreements relating to the lease of
manufacturing equipment, general laboratory and scientific equipment, office
equipment, furniture and fixtures.
At March 31, 1996, the Company had borrowings of $5.0 million under a $5.0
million unsecured line of credit which expires on September 1, 1996.
On February 13, 1996, the Company completed a private sale of 1,425,000
shares of its Common Stock to a group of private investors (the "Private
Investors"). The net proceeds to the Company from the sale were approximately
$24.9 million. In connection with the transaction, the Company filed a "shelf"
registration statement on Form S-3 registering for resale the shares acquired by
the Private Investors. Pursuant to its agreement with the Private Investors, the
Company is required to keep the "resale" registration statement effective for up
to three years. In addition to the Private Investors, a holder of 297,619 shares
of the Company's Common Stock and two holders of warrants to acquire 250,481
shares of the Company's Common Stock exercised registration rights granted to
them by the Company and had their shares of Common Stock, or the shares of
Common Stock which relate to their warrants, included in the registration
statement.
The Company's cash, cash equivalents and marketable securities position at
December 31, 1995 was $26.7 million, compared to $40.3 million on December 31,
1994. The $13.6 million decrease in cash, cash equivalents and marketable
securities position was primarily the result of the following:
<TABLE>
<S> <C> <C>
Net cash used in operating activities:
Net loss......................................... $(36,631,000)
Depreciation and amortization.................... 9,791,000
Non-cash purchased research and development...... 11,824,000
Non-cash allowance for loan loss................. 2,430,000
Working capital.................................. (4,547,000)
Other non-cash items............................. 605,000
------------
$(16,528,000)
Investment in equipment and leasehold
improvements..................................... (8,663,000)
Refund of deposits, net............................ 5,606,000
Proceeds from sale-leaseback transactions.......... 3,382,000
Payments on capital lease obligations.............. (3,592,000)
Proceeds from sales of Common Stock, net........... 6,529,000
Other.............................................. (284,000)
------------
Total.................................... $(13,550,000)
============
</TABLE>
The Company's accounts receivable balance at December 31, 1995 was $18.3
million as compared to $14.0 million on December 31, 1994. The growth in
receivables was primarily due to increased sales of AmBisome.
As of December 31, 1995, the Company's inventory value was $9.5 million
compared to $5.9 million as of December 31, 1994 which represents a 61% increase
for the period ended December 31, 1995. The increase resulted primarily from (i)
an increase in the per unit production cost of AmBisome and DaunoXome because of
increased overhead allocations related to the Company's new manufacturing
facility and (ii) an overall increase in inventory to meet product demand.
For the year ended December 31, 1995, the Company had proceeds from
sale-leaseback transactions of $3.4 million related to the purchase of capital
equipment. As of December 31, 1995, $1.5 million was available under equipment
lease agreements relating to the lease of manufacturing equipment, general
laboratory and scientific equipment, office equipment, and furniture and
fixtures. One of the master lease agreements required a security deposit of $5.5
million to be held by
28
<PAGE> 30
the lessor. This agreement was amended in September 1995 and the security
deposit was returned to the Company.
At December 31, 1995, the Company had borrowings of $3.5 million under a
$5.0 million unsecured line of credit which expires on September 1, 1996.
During September 1995, the Company filed a registration statement with the
Securities and Exchange Commission for the issuance of three million shares of
the Company's Common Stock. In October 1995, the Company withdrew the
registration statement because the Company did not consider the then market
price of the Company's Common Stock to be reflective of its inherent value and
did not believe that market conditions were sufficiently attractive at the time
to warrant proceeding with this discretionary financing for the Company.
NeXstar Pharmaceuticals believes that the anticipated revenues from sales
of its existing products, together with the Company's existing cash and the
proceeds from this offering, should permit the Company to implement currently
planned research and development programs and marketing and manufacturing
activities and to otherwise finance its operations for several years. However,
there can be no assurance that increased costs associated with developing and
obtaining regulatory approval of any future drugs or other currently
unanticipated expenses will not require NeXstar Pharmaceuticals to access the
capital markets sooner. Such capital may be raised through additional public or
private financings, as well as collaborative relationships, borrowings and other
available sources. The Company's future capital requirements will be substantial
and will depend on, and could increase as a result of, many factors, including
progress of the Company's research, drug discovery and development programs,
whether the Company acquires interests in products currently held by third
parties, the results and costs of preclinical and clinical testing of the
Company's products, if developed, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, payments
received under collaborative agreements, changes in collaborative research
relationships, the costs associated with potential commercialization of its
products, if any, including the development of additional manufacturing,
marketing and sales capabilities, the cost and availability of third-party
financing for capital expenditures and administrative and legal expenses. There
can be no assurance that additional or sufficient financing will be available,
or, if available, that it will be available on acceptable terms. If additional
funds are raised by issuing equity securities of the Company, dilution to then
existing stockholders may result. If adequate funds are not available, the
Company may be required to significantly curtail one or more of its research and
development programs or commercialization efforts or obtain funds through
arrangements with collaborative partners or others on less favorable terms than
might otherwise be available.
RECENT EVENTS
In May 1996, the Company's Spanish subsidiary entered into a factoring
agreement with Santander de Factoring, S.A. in connection with which the
subsidiary may borrow up to 500 million Spanish Pesetas (approximately $3.9
million) with such borrowing to be secured by the subsidiary's accounts
receivable.
On June 10, 1996, General Electric Pension Trust exercised a warrant for
232,941 shares of the Company's Common Stock for $1.1 million ($4.83/share).
29
<PAGE> 31
BUSINESS
GENERAL
NeXstar Pharmaceuticals, Inc., a Delaware corporation ("NeXstar
Pharmaceuticals" or the "Company"), is a leading biopharmaceutical company
engaged in the discovery, development, manufacture and marketing of proprietary
pharmaceutical products to treat life-threatening and other serious diseases.
Currently, the Company markets AmBisome, an antifungal agent, and DaunoXome, an
anticancer agent, which is used as a first line cytotoxic therapy for the
treatment of advanced, HIV-associated Kaposi's sarcoma. AmBisome achieved sales
of $17.2 million in the first three months of 1996, the fifth consecutive
quarter of increased revenues, after sales of $57 million in 1995. In April
1996, the Company received approval from the U.S. Food and Drug Administration
(the "FDA") to sell DaunoXome and formally launched the drug in the U.S. on May
1, 1996. In addition, the Company is in the process of launching DaunoXome
throughout Europe where it has recently been approved for sale by regulatory
authorities in 12 countries. The Company is also conducting Phase II clinical
trials in Europe with a third product, MiKasome, a liposomal formulation of the
aminoglycoside antibiotic amikacin, which has demonstrated preliminary evidence
of efficacy against multiple drug resistant tuberculosis. In addition to its
products and clinical candidates, the Company has proprietary technologies in
drug discovery and drug formulation that provide the basis for a significant
pipeline of drug candidates. These technologies have produced several drug
candidates that are now in preclinical development.
NeXstar Pharmaceuticals' revenues have historically been derived primarily
from European sales of AmBisome, its proprietary liposomal formulation of the
antifungal agent amphotericin B. Liposomes are subcellular-sized spheres
composed primarily of molecules called phospholipids, certain of which are the
primary components of living cell membranes. By encapsulating in liposomes
certain drugs that in their free state are dosed at, or close to, toxic levels,
it is possible to increase the therapeutic index of the active drug (i.e., to
increase the efficacy of the active drug relative to the severity of its side
effects). Regulatory authorities in 20 countries have approved AmBisome for
treating life-threatening fungal infections when conventional amphotericin B
treatment fails. Additionally, AmBisome has been approved in Australia as a
primary therapy for systemic fungal infections caused by Candida, Aspergillus
and Cryptococcus, for antifungal prophylaxis after liver transplantation and for
visceral leishmaniasis and has been approved in Ireland as a primary therapy for
confirmed and suspected systemic fungal infections. The Company estimates that
since commercial sales of AmBisome began in 1989 more than 20,000 patients have
been treated with AmBisome. Consistent with its strategy of broadening the
clinical use of its existing products, NeXstar Pharmaceuticals has recently
completed two Phase III trials in Europe involving over 390 patients comparing
AmBisome to conventional amphotericin B in Fever of Unknown Origin ("FUO") and
confirmed fungal infections. The results showed that AmBisome has significantly
fewer side effects and is at least as efficacious as amphotericin B. The Company
and its U.S. promotion and development partner, Fujisawa USA, Inc. ("Fujisawa"),
also are conducting additional Phase III clinical trials. These trials, which
will ultimately include over 1,000 patients, are comparing the effectiveness and
side effect profile of AmBisome to conventional amphotericin B therapy for
fungal infections and presumed fungal infections including FUO, cryptococcal
meningitis and histoplasmosis. Based on its extensive AmBisome database, the
Company expects that a New Drug Application will be filed shortly for AmBisome
in the United States for primary and salvage therapy for treating systemic
fungal infections, including FUO. In addition, NeXstar Pharmaceuticals intends
to file shortly for approval of AmBisome as a first line therapy for the
treatment of FUO with regulatory authorities in each of its primary European
markets.
The Company's second product, DaunoXome, a liposomal formulation of the
anticancer agent daunorubicin, has been approved for sale in the United States
and 12 Western European countries as a primary therapy for Kaposi's sarcoma, a
cancer that occurs in approximately 15% of AIDS patients and which can be fatal
if left untreated. The Company anticipates additional European approvals in
1996. In addition, the product has been approved in Canada as a salvage therapy
for Kaposi's
30
<PAGE> 32
sarcoma. To expand the clinical indications for DaunoXome, NeXstar
Pharmaceuticals is also conducting Phase II trials with DaunoXome in both the
U.S. and Europe for other oncology indications, including breast cancer,
small-cell lung cancer, leukemia and lymphoma among others. The Company has had
initial favorable results in connection with small studies in breast cancer and
lymphoma and expects results from additional studies to be available beginning
in 1996.
MiKasome is currently in Phase II clinical trials for the treatment of
multiple drug resistant tuberculosis. To date, MiKasome has shown activity in in
vitro and animal studies and early stage clinical trials for the treatment of
multiple drug resistant tuberculosis. NeXstar Pharmaceuticals is now planning
further clinical trials to confirm and define the scope of both the efficacy and
safety advantages provided by this novel liposomal antibiotic. The Company
expects to initiate clinical studies of MiKasome in the U.S. in the second half
of 1996.
In addition to a growing portfolio of existing products and clinical
candidates, the Company possesses both powerful combinatorial chemistry
technologies for drug discovery and proven drug delivery and development
capabilities. The Company has integrated its drug discovery and drug formulation
programs and has focused its research and development on refining its technology
platforms to enable it to create drug candidates targeting a number of
indications in its chosen areas of therapeutic interest. These technology
platforms include: (i) a powerful proprietary combinatorial chemistry
technology, known as the SELEX process, that rapidly identifies novel
oligonucleotide compounds with potential therapeutic and diagnostic benefits;
(ii) an extension of the SELEX process, known as the Parallel SELEX process,
that is designed to rapidly discover small organic molecules intended to serve
as orally available drugs; (iii) a proprietary chemistry for the synthesis of
new pyrimidine and purine nucleosides for potential use as antiviral,
antineoplastic and antibacterial agents; (iv) a technology involving lipid
conjugates that improves the pharmacokinetic qualities of certain drugs and/or
makes such drugs orally available; (v) a novel approach to the specific deletion
or inactivation of pathogenic subsets of T cells involved in human diseases; and
(vi) the liposomal formulation of drugs, which has been shown to improve drug
therapy through reduced toxicity, improved biodistribution profile and
pharmacokinetics and drug targeting.
NeXstar Pharmaceuticals was incorporated on March 4, 1991 as NeXagen, Inc.
In connection with its merger with Vestar, Inc. in February 1995, the Company
changed its name to NeXstar Pharmaceuticals, Inc. The principal executive
offices of the Company are located at 2860 Wilderness Place, Boulder, Colorado
80301. Its telephone number is (303) 444-5893.
STRATEGY
NeXstar Pharmaceuticals' strategy is to continue to build the capacity and
infrastructure necessary to maintain and further its growth as a vertically
integrated biopharmaceutical company. The Company has demonstrated the ability
to develop products, design and implement complex clinical trials, obtain
regulatory approval in numerous countries, manufacture products in commercial
quantities in compliance with stringent regulatory requirements and successfully
market its products. NeXstar Pharmaceuticals plans to use its existing
capabilities and planned increases in infrastructure to support market expansion
of its existing products, to support any complementary products which the
Company may acquire and for the development of new products derived from its
drug discovery and drug formulation technologies. The elements of the Company's
strategy include:
- Expand Sales and Marketing Capabilities and Control Products in Major
Markets. The Company believes that it is best positioned and motivated to
sell and market its products and has therefore maintained control over, or
substantial involvement in, the marketing and selling of its products in
its primary markets. To this end, the Company has established marketing
subsidiaries (or in one case a branch) in the U.K., Germany, Italy, Spain,
France, Portugal, the Netherlands, Greece and Australia and, in connection
with its formal launch of DaunoXome on May 1, 1996, has created a sales
force in the United States. In an effort to control the marketing of its
products, the Company regained rights to market AmBisome in
31
<PAGE> 33
Italy and launched the product in Italy on September 1, 1995. The Company
became its own direct distributor of AmBisome in Australia in 1996 and in
Germany and Italy in 1995 after having become its own direct distributor
in Spain in 1994. As of May 24, 1996, the Company had 64 employees engaged
in sales and marketing internationally and 19 employees engaged in sales
and marketing in the U.S.
- Employ Rational Clinical Development Strategy. The Company's clinical
development strategy is to focus initially on a niche indication for each
new product and to expand into broader indications after gaining
experience with such drug in clinical practice. In the case of AmBisome,
the Company has obtained approvals in 20 countries to use the drug as
salvage therapy following the failure of amphotericin B to resolve
systemic fungal infections. Based on AmBisome sales in these countries and
numerous clinical trials, the Company will seek (and, in the case of
Australia and Ireland where AmBisome has been approved as a primary
therapy for systemic fungal infections, has received) approval for
additional indications. The Company expects that a New Drug Application
will be filed shortly for AmBisome in the United States for primary as
well as salvage therapy for treating systemic fungal infections, including
FUO. Additionally, the Company intends to file shortly for approval of
AmBisome as a first line therapy for the treatment of FUO with regulatory
authorities in each of the Company's primary European markets. The Company
has taken the same approach with DaunoXome, seeking initial approval of
the drug to treat Kaposi's sarcoma, a cancer that afflicts approximately
15% of AIDS patients. To date, 14 countries have approved DaunoXome for
the treatment of Kaposi's sarcoma, including 13 countries in which the
drug has been approved as a primary therapy. As a result of its experience
with DaunoXome, the Company is currently conducting Phase II trials
designed to test DaunoXome's efficacy in other cancers, including breast
cancer, lymphoma, leukemia and small-cell lung cancer. In connection with
its clinical development strategy, the Company has centralized its
European clinical and regulatory organization in Antwerp, Belgium to
better service the European medical and regulatory communities and to take
advantage of the harmonization of European pharmaceutical regulations.
Finally, the Company has better integrated its clinical trial activities
to support marketing in each of its primary markets.
- Enhance Product Development Capabilities and Near-Term Product Pipeline.
The Company has strengthened its product development organization to
assure sufficient capacity to conduct simultaneously preclinical studies
on multiple product candidates derived from its drug discovery and
development programs. Currently, the Company has ongoing preclinical
development programs and several additional product candidates in its
research programs that may be the subject of additional preclinical
studies in the next 12 months. The Company believes that its portfolio
approach to research and development activities will help it avoid the
risks of a single product focus and premature commitments to any given
compound.
- Acquire Complementary Technologies or Products. The Company has a goal of
broadening its product line through the selective acquisition of niche
pharmaceuticals that could complement its current products. Such
acquisitions would permit the Company to leverage its existing sales
force, with its expertise in cancer and infectious diseases, by providing
it with additional products in those clinical areas. Such products may
become available as a result of the recent mergers among large
pharmaceuticals companies and the resulting winnowing of smaller products
from such companies' product lines. In late 1995, the Company established
a business development group to focus, in substantial part, on the
acquisition of such products.
- Enhance Manufacturing Capability. The Company has completed construction
and is currently validating a new facility with approximately 45,000
square feet of manufacturing space for the production of AmBisome,
DaunoXome and future parenteral products to complement its 10,000 square
feet of manufacturing space in its existing California facility. In
addition, the Company has successfully implemented a process development
and scale-up program to facilitate a smooth response to any increase in
demand for AmBisome and
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<PAGE> 34
DaunoXome. Finally, the Company has identified alternative suppliers of
raw materials and contract manufacturers for certain of its products as a
back-up to the Company's existing sources. The Company has also completed
construction of a 5,260 square foot facility for the production of
oligonucleotide based drug candidates and diagnostic compounds.
- Leverage Proprietary Combinatorial Chemistry and Other Technologies. The
Company is dedicated to developing a sustainable pipeline of product
candidates. During the past year, the Company has made major strides
towards the discovery of potential oligonucleotide therapeutic agents
using the SELEX process. These include improved in vitro activity and in
vivo performance of oligonucleotides. More significantly, initial
observations of efficacy of oligonucleotides have been demonstrated in
vivo in several independent applications. In addition, the Company has
substantially increased its commitment to its small molecule combinatorial
chemistry program (the Parallel SELEX process) and believes that this
research holds significant potential for the rapid discovery of orally
active compounds. Based upon these research activities and additional
liposomal and lipid-based delivery research programs, the Company during
1995 filed 109 U.S. patent applications, including new applications,
continuations, continuations-in-part and divisionals. The Company
continues to construct an extensive patent portfolio to seek to provide
protection for its core technologies and future products.
PRODUCTS AND PRODUCT DEVELOPMENT
The following table summarizes the principal products and certain product
development activities of the Company. Except as specifically noted below, all
commercial rights to such products are held exclusively by the Company.
<TABLE>
<CAPTION>
PRODUCT INDICATION STATUS
- ---------- ----------------------------------- -----------------------------------
<S> <C> <C>
AmBisome* Systemic fungal infections Approved for marketing in 22
countries
FUO Phase III trials completed with
favorable results in Europe;
confirmatory trial ongoing in U.S.
Confirmed fungal infections Phase III (in Europe)
Prophylaxis in neutropenic patients Phase III (in Europe)
Invasive Aspergillus Phase III (in Europe)
Histoplasmosis Phase III
Cryptococcal meningitis Phase III
DaunoXome Advanced Kaposi's sarcoma Approved for marketing in the U.S.,
Canada and 12 Western European
countries
Breast cancer Phase II ongoing; preliminary
results indicate activity
Small-cell lung cancer Phase II
Leukemia and lymphoma Phase II ongoing; preliminary
results indicate activity in
lymphoma
MiKasome Multiple drug resistant Phase II ongoing; preliminary
tuberculosis results in Europe indicate activity
VincaXome Cancer of various forms Preclinical development
</TABLE>
- ---------------
* Fujisawa and the Company will co-develop and co-promote AmBisome in the United
States pursuant to a collaborative relationship. Fujisawa has sole marketing
rights to AmBisome in Canada. See "-- Products and Markets -- AmBisome."
33
<PAGE> 35
PRODUCTS AND MARKETS
AMBISOME
AmBisome is a liposomal formulation of amphotericin B, a well-established
systemic antifungal agent that is effective against a broad spectrum of fungi.
NeXstar Pharmaceuticals has received marketing approval for AmBisome as a
treatment for life-threatening fungal infections when conventional amphotericin
B treatment fails in Argentina, Austria, Belgium, Egypt, El Salvador, Finland,
Germany, Greece, India, Israel, Italy, Luxembourg, Mexico, The Netherlands,
Portugal, Spain, Sweden, Turkey, the United Kingdom and Uruguay. Australia has
granted marketing approval for AmBisome as primary therapy for systemic fungal
infections caused by Candida, Aspergillus and Cryptococcus and the Republic of
Ireland has granted approval for AmBisome as a first line therapy for confirmed
and suspected systemic fungal infections. In addition, AmBisome has been
approved as a treatment for visceral leishmaniasis in several countries and is
approved for prophylactic treatment to prevent fungal infection after liver
transplantation in Finland and Australia. AmBisome, pursuant to a compassionate
use protocol, is being distributed in the United States as a second line therapy
for fungal infections. The Company is also selling AmBisome through physician
purchase requests in several other countries that permit special license or
named-patient purchases prior to obtaining regulatory approvals. NeXstar
Pharmaceuticals has submitted requests for approval with regulatory authorities
in most other significant European markets. A number of these regulatory
authorities are actively reviewing the applications. Regulatory procedures and
review times vary from country to country.
AmBisome was the subject of a joint venture formed in 1987 with Lyphomed
Corporation, which was subsequently acquired by Fujisawa. In August 1991, the
Company and Fujisawa dissolved their joint venture and distributed its assets.
Under the terms of the dissolution agreement, as later amended, Fujisawa owned
the marketing rights for AmBisome in the United States and Canada, and the
Company retained the marketing rights in all other territories of the world.
Pursuant to an April 1995 amendment to their agreement, the Company and Fujisawa
have agreed to co-promote AmBisome in the United States. If AmBisome is
ultimately approved for commercial sale in the U.S., the Company will
manufacture AmBisome for sale in the United States. In addition, the Company
will be reimbursed for the cost of the product sold to Fujisawa and will receive
20% of the gross profits from all U.S. sales of AmBisome.
Product Profile. Amphotericin B, an antifungal agent with consistent
potency across a broad spectrum of fungal infections, has been a commonly used
drug for the treatment of systemic fungal infections. The clinical usefulness of
amphotericin B is limited, however, because serious toxicity can occur at doses
that are only marginally effective. NeXstar Pharmaceuticals has used its
proprietary technology to develop AmBisome, a liposomal product that
incorporates amphotericin B. The maximum tolerated dose of AmBisome in some
animal models is up to 75 times that of the free drug, permitting higher daily
and cumulative doses of amphotericin B to be delivered to the diseased tissues,
while simultaneously greatly reducing the normal acute and chronic toxicity
typically associated with conventional amphotericin B therapy. NeXstar
Pharmaceuticals believes that the increased safety profile of AmBisome is due to
a proprietary manufacturing process that tightly binds amphotericin B into the
membrane of the liposome, preventing the free drug from escaping into the
bloodstream.
AmBisome is sold as a lyophilized (freeze-dried) cake that is easily
reconstituted by adding sterilized water and has an approved shelf life in most
countries of 30 months. However, some countries which originally approved
AmBisome with only a 12-month shelf life have yet to approve the longer period.
Market. The Company's current marketing efforts for AmBisome are directed
at patients with systemic fungal infections for whom other therapies are
ineffective, toxic or contraindicated. NeXstar Pharmaceuticals believes that
these patients account for approximately half of the patients who develop
systemic fungal infections. Systemic fungal infections are serious infections
with a
34
<PAGE> 36
mortality rate of up to 70% and are commonly caused by species of Candida,
Aspergillus or Cryptococcus, as well as a variety of less common organisms.
These infections can occur in patients whose immune systems have been
compromised by other diseases or by the treatment of other medical conditions.
The largest population of immune-impaired patients consists of organ/bone marrow
transplant patients, heavily treated cancer patients (principally those with
leukemias or lymphomas) and AIDS patients. The product is also currently used
for the treatment of visceral leishmaniasis and has been demonstrated to be
effective against fungi and certain parasites that reside in macrophage.
DAUNOXOME
DaunoXome, a product developed by NeXstar Pharmaceuticals, is a liposomal
formulation of daunorubicin, a well-characterized and long-used chemotherapeutic
agent. The Company has demonstrated in animal studies that its formulation
delivers significantly more drug to malignant tumors than does equal doses of
the conventional drug, with substantially reduced toxicity.
Product Profile. Phase II and Phase III clinical trials have demonstrated
that DaunoXome has significant capability as an effective and well-tolerated
drug for the treatment of Kaposi's sarcoma ("KS"). DaunoXome has been approved
in the United States, the United Kingdom, Sweden, Denmark, Austria, The
Netherlands, Germany, Luxembourg, Belgium, Greece, Ireland, Portugal and Finland
as a primary therapy for KS. In Canada, DaunoXome has been approved as a salvage
therapy for KS. DaunoXome has an approved shelf life in the United States of 24
weeks. While the Company has an ongoing stability program aimed at demonstrating
a significantly longer shelf life than 24 weeks, there can be no assurance that
the extension of the shelf life beyond 24 weeks will be approved by the FDA.
Market. The Company's initial indication for DaunoXome is AIDS patients who
suffer from KS, a malignant disease characterized by widely disseminated lesions
in the skin, mucous membranes, lymph nodes and viscera. KS is reported to occur
in approximately 15% of AIDS patients and alternative therapies are limited.
CLINICAL TRIALS, PRECLINICAL TRIALS AND REGULATORY STATUS
AMBISOME
NeXstar Pharmaceuticals has previously completed clinical trials with
AmBisome for salvage therapy of life-threatening fungal infections, cryptococcal
meningitis, prophylaxis treatment to prevent fungal infections after liver
transplantation and visceral leishmaniasis. These trials have been reported to
regulatory authorities and published in professional journals. More recently
NeXstar Pharmaceuticals has completed two trials involving over 390 patients in
Europe comparing AmBisome to conventional amphotericin B in FUO and confirmed
fungal infections. In addition, the Company has completed a randomized trial
with approximately 160 patents involving prophylaxis treatment to prevent fungal
infections after intensive chemotherapy and two smaller randomized clinical
trials, one involving cryptococcal meningitis and the other neutropenic patients
with confirmed fungal infections. The results of these trials showed that
AmBisome is at least as efficacious as amphotericin B with a nonstatistically
significant trend toward increased efficacy and a statistically significant
trend toward far fewer side effects. Based on these results, the Company intends
to submit filings shortly for the use of AmBisome as a primary therapy in FUO
with the regulatory authorities in each of its primary European markets.
In addition, the Company and Fujisawa are conducting trials which will
ultimately include over 1,000 patients pursuant to a development and
co-promotion agreement. Under its agreement with Fujisawa, the Company is
conducting a Phase III clinical trial of AmBisome for the treatment of
histoplasmosis. Fujisawa is conducting Phase III trials of AmBisome for
cryptococcal meningitis and FUO. Based on the extended AmBisome database, the
Company and Fujisawa expect to file shortly a first NDA for AmBisome in the
United States for primary and salvage therapy for treating systemic
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fungal infections, including FUO. No assurance can be given that broader
indications for AmBisome will result from any of the clinical trials which have
or which are being conducted.
DAUNOXOME
DaunoXome uses a proprietary tumor targeting technology for delivering the
chemotherapeutic agent daunorubicin into tumor cells. This targeted liposomal
delivery system consists of small liposomes that encapsulate the daunorubicin in
their internal aqueous space. The size of the liposomes used in DaunoXome was
selected, in part, so that the liposomes can escape from circulation through the
more porous blood vessels that are generally found in tumors. In animal models,
DaunoXome's formulation permits a concentration of the therapeutic agent in
tumors of 5 to 10 times the concentration achieved with intravenous
administration of the free drug. Animal tests have also demonstrated up to 10
times the efficacy as the equivalent level of daunorubicin in its free drug
form. Further, these animal models have demonstrated a significant reduction in
the toxicity associated with daunorubicin. Because of the reduction of toxicity,
it is possible to safely administer doses of the drug that are significantly
higher than the maximum tolerated doses of the conventionally administered drug.
These higher doses result in further increases in efficacy. There can be no
assurance that preclinical studies in animals will be predictive of results in
clinical studies in humans.
The Company is continuing additional trials to further expand the clinical
indications for DaunoXome in both the U.S. and Europe for other oncology
indications, including breast cancer, small-cell lung cancer, leukemia and
lymphoma among others. A Phase II trial involving 11 women with previously
untreated metastatic breast cancer has indicated that DaunoXome is well
tolerated and has shown evidence of anti-tumor activity in treating advanced
breast cancer. The limited toxicity observed in the trial, particularly the
absence of cardiotoxicity, indicates that DaunoXome may be useful in
ameliorating the side effects that accompany high-dose anthracycline-based
chemotherapy for metastatic breast cancer. The Company expects additional
results from other Phase II studies to be available beginning in 1996. A Phase
II study involving 18 persons (eight of whom were treated with high doses of
DaunoXome and 10 of whom received low-dose DaunoXome therapy) has indicated
evidence of activity in treating relapsed and resistant lymphoma without any
evidence of deterioration in cardiac function. No assurance can be given,
however, that broader indications for DaunoXome will result from any of these
trials. Completed studies in colon cancer, bladder cancer and in non-small-cell
lung cancer have not indicated significant activity for this agent.
MIKASOME
NeXstar Pharmaceuticals has developed and is conducting clinical trials for
MiKasome, its liposomal formulation of amikacin. Amikacin is a potent
aminoglycoside antibiotic that is employed against bacterial infections. Its
use, however, has been limited by a high degree of toxicity, including kidney
damage and hearing loss at effective doses. MiKasome has shown promising results
both in in vitro and in animal studies. The MiKasome formulation has reduced
toxicity by 50 percent as compared to the free drug in animals, and has shown
activity against Klebsiella, Pseudomonas and Mycobacterium avium infections in
vivo. In vitro activity against drug-resistant tuberculosis has also been
demonstrated. There can be no assurance that in vitro or in vivo studies will be
predictive of results in humans or the potential for developing a commercial
product. During 1993, the Company conducted a single dose Phase I trial to
assess the safety of MiKasome. Based on limited Phase II experience, there is
preliminary evidence of possible clinical utility of MiKasome for the treatment
of multiple drug resistant tuberculosis. These results have provided the basis
for a Phase II study which is currently being conducted in Europe in patients
with multiple drug resistant tuberculosis. The Company is now planning further
clinical trials, including a study in the U.S. beginning in the second half of
1996, to confirm and define the scope of both the efficacy and safety advantage
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provided by this novel liposomal antibiotic and anticipates filing an IND
application in the United States during 1996.
VINCAXOME
VincaXome is a tumor targeting liposome formulation containing the
anticancer drug vincristine. VincaXome is based on the successful tumor
targeting properties of DaunoXome, namely small liposomes made of highly
purified phospholipid and cholesterol that selectively target malignant tumors
after intravenous injection. Vincristine is presently used in the therapy of
several common cancers. The drug produces severe toxicity and is limited in its
dosing by peripheral neuropathy, a numbness and tingling in a patient's
extremities. In initial preclinical studies, VincaXome delivered more
vincristine to mouse tumors than the same dose of free drug, resulting in a
substantially better antitumor effect of the liposomal formulation. Also,
VincaXome could be administered at a 50% higher dose than the free drug because
of lower toxicity for the liposome preparation. The Company is presently
conducting initial scale-up work and testing VincaXome in further selected
animal experiments prior to doing the full scale testing needed for an IND
filing, which the Company anticipates filing by late 1996 or early 1997. There
can be no assurance that preclinical studies in animals will be predictive of
results in clinical studies in humans.
TECHNOLOGY PLATFORMS
The Company is dedicated to developing a sustainable pipeline of product
candidates. The Company has made major strides towards the discovery of
potential oligonucleotide therapeutic agents using the SELEX process. These
include improved in vitro activity and in vivo performance of oligonucleotides.
More significantly, initial observations of efficacy of oligonucleotides have
been demonstrated in vivo in several independent applications. In addition, the
Company has substantially increased its commitment to its small molecule
combinatorial chemistry program (the Parallel SELEX process) and believes that
this research holds significant potential for the rapid discovery of orally
active compounds. NeXstar Pharmaceuticals also has developed proprietary
chemistry for the synthesis of new pyrimidine and purine nucleosides for
potential use as antiviral, antineoplastic and antibacterial agents. Together
with these research activities, the Company conducts research involving its
proprietary liposome technology and lipid conjugates. The acquisition of
Supragen has provided the Company with a technology base and research programs
related to the specific inactivation of T cell subsets implicated in autoimmune
diseases, including rheumatoid arthritis. In addition, Supragen's research
should provide immunological targets for the Company's drug discovery
technologies. Moreover, the addition of Supragen's cellular biology and
immunology staff complements the Company's ongoing focus in the areas of
immunology, infectious diseases and oncology.
SELEX: SYSTEMATIC EVOLUTION OF LIGANDS BY EXPONENTIAL ENRICHMENT
General
NeXstar Pharmaceuticals has developed and is utilizing the SELEX process, a
proprietary combinatorial chemistry technology, to rapidly identify families of
compounds (often referred to as "ligands") that bind tightly and selectively to
molecular targets. The SELEX process is designed to create and screen a pool of
up to one million billion (1,000,000,000,000,000) single-stranded and uniquely
shaped oligonucleotides and to select from such pool a family of ligands which
has the highest affinity for a specified molecular target. Drugs based on high
affinity binding properties are more likely to be effective at low doses and
induce fewer side effects than drugs based on low affinity compounds. High
specificity also reduces the likelihood of potential side effects since such
molecules are unlikely to interact with targets not involved in a particular
disease.
The SELEX process begins by creating in a test tube a pool containing a
million billion candidate oligonucleotides, molecules belonging to the same
family as DNA and RNA but typically
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modified to resist degradation by DNA- and RNA-destroying enzymes. When this
pool is mixed with a molecular target whose biological activity is to be altered
or inhibited, a small subset of the larger pool binds to this target. The
oligonucleotides in this smaller pool are then amplified. The new copies of the
surviving candidates form an enriched pool containing more high affinity ligands
than the prior pool. This second generation pool is again exposed to the
molecular target and those oligonucleotides with the best binding properties are
again selected and amplified. These steps of binding, selection and
amplification are repeated several times with each round of the SELEX process
generating a smaller pool of oligonucleotides that bind to the target molecule
with increasing specificity and affinity. Typically, the SELEX process creates
drug candidates in a matter of months, rather than years.
NeXstar Pharmaceuticals has demonstrated that the SELEX process is
applicable to a broad range of molecular targets, including proteins, peptides,
organic compounds, lipids, polysaccharides, carbohydrates, glycoproteins,
hormones, receptors, growth factors, whole cells, tissues and other matter.
The Company believes that its SELEX process technology has certain
advantages over existing drug discovery technologies, including rapid
identification of lead compounds, high affinity and high specificity of target
recognition, breadth of screenable compounds and lack of requirement of
knowledge of the target's structure. As a result, NeXstar Pharmaceuticals
believes that its SELEX process technology will reduce the time and cost
involved in identifying lead compounds and ultimately will reduce the time and
cost involved in discovering and developing effective pharmaceuticals. It is the
Company's goal in 1996 to identify at least one of its SELEX process-derived
drug candidates for the filing of an IND in 1997. However, there can be no
assurance that the Company will not encounter significant delays in filing such
application or that any such candidate will result in a commercially successful
product.
Activity of SELEX Process-Derived Compounds
At present, oligonucleotides derived from the SELEX process have shown
activity in several distinct areas directly relevant to the development of
therapeutic and diagnostic agents. These areas include:
Inflammatory Diseases. The Company has begun animal studies with
oligonucleotide antagonists derived from the SELEX process to the cell adhesion
molecule L-selectin. L-selectin helps mediate an early critical step of the
inflammatory response, the adhesion of leukocytes to inflamed vascular
endothelium which, if uncontrolled, may lead to host tissue damage. If the
Company's L-selectin antagonists are able to block adhesion in vivo, these
molecules could constitute a therapy for several acute inflammatory clinical
conditions, including cardiac reperfusion injury. In various in vitro assays,
oligonucleotide antagonists have inhibited the binding of L-selectin to its
natural carbohydrate ligand. Moreover, they bind to L-selectin on human
leukocytes in whole blood. Experiments to evaluate the efficacy of the
L-selectin antagonist in an animal model of lymphocyte trafficking have been
carried out. In these experiments, labeled human lymphocytes are injected into
SCID mice and can be shown to migrate to peripheral and mesenteric lymph nodes
in an L-selectin dependent manner. However, when the L-selectin antagonist is
injected intravenously into the mice prior to the human cells, their ability to
migrate to the mouse lymph nodes is inhibited in a dose-dependent manner. This
result shows that an oligonucleotide ligand is capable of blocking a normal in
vivo process and supports the likelihood of efficacy of oligonucleotides
directed against a large class of disease-related extracellular protein targets.
Tests of these ligands in animal models of acute inflammation and other
indications are planned.
Diseases Impacted by Growth Factors. Excessive production of growth factors
is implicated in several disease states. NeXstar Pharmaceuticals has isolated
and tested growth factor antagonists in vitro and has begun animal studies with
certain of these antagonists.
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Using the SELEX process, NeXstar Pharmaceuticals has identified antagonists
to basic Fibroblast Growth Factor ("bFGF"), the level of which is elevated in
the urine of patients with certain types of cancer, and Vascular Endothelial
Growth Factor ("VEGF"). NeXstar Pharmaceuticals is currently utilizing the SELEX
process to develop antagonists to a variety of other growth factors implicated
in tumor vascularization. Compounds undergoing initial efficacy testing have
been demonstrated by NeXstar Pharmaceuticals to bind to bFGF and VEGF and
prevent binding of the growth factor to their respective receptors. NeXstar
Pharmaceuticals has begun initial animal studies of certain of its bFGF and VEGF
antagonists. The Company is now testing angiogenesis inhibitors in various
animal tumor models. The goal of these tests is to demonstrate that the
inhibitor can stop the growth of new blood vessels surrounding tumors and, by
doing so, starve tumors into remission or even kill them outright.
Pulmonary fibrosis is an irreversible accumulation of connective tissue in
the interstitium of the lungs. A number of growth factors have been implicated
in the development of pulmonary fibrosis. NeXstar Pharmaceuticals has developed
antagonists to Transforming Growth Factor beta, which is believed to play a role
in the process, and will shortly initiate studies of these antagonists in
animals. Preliminary studies suggest that oligonucleotides derived from the
SELEX process are relatively stable in, and slowly absorbed by, the lungs. While
clinical testing is necessary, animal studies suggest that oligonucleotide-based
therapies could be delivered through inhalation or injection.
Diagnostic Agents. Oligonucleotides derived from the SELEX process have
been used in diagnostic evaluation and have been shown to be capable of
detection with specificities and sensitivities equal to or better than
antibodies, which are commonly used in clinical assays. Moreover,
oligonucleotides derived from the SELEX process may be compatible with and
readily adapted to existing diagnostic instrumentation. Oligonucleotides derived
from the SELEX process also have potential efficacy in diagnostic imaging
processes.
NeXstar Pharmaceuticals is exploring the potential of developing diagnostic
and therapeutic products for the same molecular targets. The Company's goal is
to use these diagnostic reagents as a means of selecting patients in clinical
trials for specific indications to determine if a specific molecular target is
playing a central role in the pathology of the disease before the drug is
administered. In this way, NeXstar Pharmaceuticals may be more likely to select
patients for its clinical trials who would benefit from a drug which inhibits a
specific molecular target. In addition, these diagnostic tests could be used
when marketing a product to ensure that the drugs are only administered to
patients most likely to benefit from such intervention. See "-- Collaborative
Relationships and License Agreements."
Small Molecule Research
The Company believes its small molecule discovery program holds
significance for the rapid discovery of orally active compounds. Current
research programs include:
Parallel SELEX Process. The proprietary Parallel SELEX process is an
adaptation and extension of the SELEX method. The Parallel SELEX process is a
direct combinatorial chemistry approach to identifying small organic molecule
drug candidates from very large libraries. The method allows repeated screening
of the library, as in the SELEX process, until the best compounds from the
library are isolated. No other small molecule combinatorial chemistry paradigm
of which the Company is aware allows reiterative screening of large libraries
based on suitable potency parameters. The Parallel SELEX process can be used
both to identify novel drug leads directly and to optimize leads found by other
means. The Parallel SELEX process is compatible with subtractive steps that
allow high compound specificity to be achieved.
Novel nucleosides. Nucleoside drugs have been proven to be effective as
antiviral, antibacterial, antifungal and antineoplastic agents. NeXstar
Pharmaceuticals has developed proprietary chemistry for the synthesis of new
pyrimidine and purine nucleosides. Diversity in the nucleoside pharmacophore is
generated in a single catalytic step that uses inexpensive starting materials.
More
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than 30 novel nucleoside analogs are currently being tested for biological
activity with another 30 under investigation. In vivo activity screening is
being conducted for antiviral, antineoplastic, antibacterial and antifungal
activity of modified nucleosides made by the Company's proprietary chemistry.
LIPID CONJUGATES
In 1992 and 1993, the Company acquired from Vical, Inc. ("Vical") the
rights to technology that links active molecules to phospholipids to form lipid
conjugates. These lipid conjugates may enhance activity, promote better
distribution and/or make drugs orally available. Several compounds developed
with the lipid conjugate technology are in the early stages of animal tests to
determine their efficacy as antiviral agents. This technology provides a way of
linking a fatty tail to small organic molecules, creating a new molecular entity
that can enter cells more easily.
Lipid conjugate formulations of the antiviral agent foscarnet are currently
being developed by the Company against cytomegalovirus ("CMV"), an infection
common in immunosuppressed patients which can cause blindness if it develops in
the eyes. Foscarnet is an approved therapeutic for CMV retinitis in AIDS
patients. However, it is rapidly cleared from circulation, and dosing is limited
by kidney toxicity. The NeXstar Pharmaceuticals' formulations of a modified form
of foscarnet have been shown to have greatly decreased clearance times in animal
models and do not show accumulation in the kidneys. Foscarnet is also taken up
poorly by cells, thus requiring large doses. The NeXstar Pharmaceuticals
formulations are designed to be efficiently taken up by cells, resulting in
lower drug burdens. In vitro studies have shown that the lipid conjugate of the
antiviral agent foscarnet is more active than foscarnet alone against CMV. In
addition, animal experiments have demonstrated that the lipid conjugate
formulation is potentially orally available while conventional foscarnet must be
administered intravenously. Other lipid conjugate formulations are active
against hepatitis B and herpes simplex viruses. Additional research activities
with respect to this technology are ongoing.
In December 1995, the Company entered into a letter of intent with
Boehringer Mannheim, GmbH ("Boehringer Mannheim"). Under the terms of the letter
of intent, as amended, the Company gave Boehringer Mannheim a twelve-month
exclusive right to enter into a definitive agreement pursuant to which the
parties would use technology which the Company acquired from Vical for the
co-development and co-marketing of the lipid conjugate formulation of foscarnet.
In addition, the Company licensed the patent rights acquired from Vical to
Boehringer Mannheim for the development, manufacture and sale of certain lipid
conjugate formulations for the prevention of HIV in humans.
IMMUNOLOGY
In 1995, the Company acquired Supragen. Supragen brought to the Company
expertise in the development of therapeutic compounds and preventative vaccines
for T cell mediated diseases. The Company is focused on developing novel
approaches to the specific deletion or inactivation of pathogenic subsets of T
cells involved in human diseases. Specific T cell populations have been
implicated in the pathogenesis of a number of autoimmune, inflammatory and
infectious diseases. The Company is currently engaged in the development of new
therapeutic approaches, including the creation of therapeutic compounds and
preventative vaccines, to rheumatoid arthritis, psoriasis and toxic shock
syndrome.
Supragen's founders, who are exclusive consultants to the Company,
discovered T cell receptors in 1982 and superantigens ("SAgs") in 1989. They
demonstrated that SAgs can trigger the destructive overstimulation of the immune
system (as observed in toxic shock syndrome) due to the massive activation and
proliferation of certain T cells. In contrast, conventional antigens activate
relatively few T cells and do not normally trigger a harmful immune response.
SAg exposure also may cause the undesirable activation and proliferation of
autoreactive T cells which attack the host's
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own tissues. These T cells are believed to be responsible for a large number of
autoimmune diseases. The Company believes SAgs can be rendered harmless and used
to treat and prevent T cell mediated diseases either as vaccines engineered to
elicit a SAg-specific antibody or as agents capable of deleting or inactivating
harmful T cells. In addition, the Company has been engaged in research toward
identifying specific antigens which activate pathogenic T cell subsets. The
antigens, when identified, will be used to develop therapies which may be able
to delete or inactivate these T cells.
The Company has been able to mutate two SAgs to eliminate their toxicity.
Preliminary experiments in mice have shown that these mutated SAgs can elicit a
SAg-specific antibody response and immunize the treated animals against exposure
to the naturally occurring SAgs. Thus, these inactivated SAgs have potential use
as vaccines, in particular, against TSST-1, the causative agent in toxic shock
syndrome. Confirmatory experiments are in progress. Additionally, the Company
has made several advances toward using mutated SAgs to inactivate T cells. The
Company is also developing methods of identifying pathogenic T cells and using
the T cell receptors from these cells in order to define the antigens they
recognize.
LIPOSOME TECHNOLOGY
NeXstar Pharmaceuticals believes that it has substantial technological
strengths in the development of liposome products. The Company's proprietary
liposome drug delivery technology enables it to develop products with
significant advantages over intravenous administration of a conventional drug,
including concentrating the drug on the targeted disease, extending the time the
drug remains in the bloodstream to prolong the therapeutic effect and reducing
toxic side effects. The Company's liposome technology may be used as a method of
drug delivery in connection with drugs developed or being developed pursuant to
the Company's other technologies. The use of such liposomes may have the
potential for increasing the efficacy and safety of such drugs.
NeXstar Pharmaceuticals intends to continue to develop products based on
its liposome platforms for cancer and infectious diseases. The Company has
identified certain generic antineoplastic compounds that may benefit
substantially from encapsulation in tumor-targeted liposomes and has begun
formulation studies for these compounds. Other liposomal compounds are being
investigated for use in treating microbial infections, including bacteria,
viruses and parasites. The Company is also testing liposomes for use in
delivering SELEX process-based therapeutic molecules to specific tissues, and
particularly for promoting transport of oligonucleotides across cell membranes
to reach intracellular targets. This work includes the delivery of genes that
code for production of intracellular RNA ligands designed to selectively affect
physiological processes.
COLLABORATIVE RELATIONSHIPS AND LICENSE AGREEMENTS
To apply and develop its technologies as widely as possible, NeXstar
Pharmaceuticals has entered into and expects to enter into strategic
collaborative research agreements, joint ventures and licensing arrangements
with pharmaceutical and other health care companies and research institutions
directed at expanding the scope of its technologies and applying those
technologies toward a wide variety of specific molecular targets or disease
indications.
NeXstar Pharmaceuticals is currently a party to a limited number of
collaborative research agreements with other companies which relate to SELEX
process technology, including the development of nucleic ligands for certain
types of diagnostic products and devices. A number of agreements related to
research involving the SELEX process have terminated, or the Company expects
that they will terminate, during 1996.
NeXstar Pharmaceuticals has a significant ongoing collaborative
relationship with the University of Colorado at Boulder ("CU"), relating to the
SELEX process technology. The relationship is formally with University Research
Corporation ("URC"), a for-profit, wholly owned subsidiary of the University of
Colorado Foundation, Inc. URC is designed to serve as the corporate vehicle for
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commercial exploitation of inventions by the CU faculty. NeXstar Pharmaceuticals
holds an exclusive license from URC to all (i) inventions falling within the
scope of the claims contained in issued patents and pending patent applications
for the SELEX process technology, (ii) improvements to such technology made or
discovered by researchers at CU, (iii) ligands or other molecules that are
derived through the application of such technology by research at CU, (iv)
results of certain sponsored research and (v) computer software related to such
technology. Such license is subject to certain royalties on the Company's net
sales of licensed products and on royalties received from non-affiliate
sublicensees.
The Company's rights to market AmBisome in the United States are pursuant
to an agreement between the Company and Fujisawa. Under the terms of the
agreement, as amended, the Company has the sole marketing rights to AmBisome in
all countries except the United States and Canada and subject to the Company's
obligation to pay royalties in connection with sales in most significant Asian
markets. The agreement provides that the Company and Fujisawa will co-promote
AmBisome in the United States, if AmBisome is ultimately approved for commercial
sale in the U.S., and that the Company will manufacture AmBisome for sale in the
U.S. In addition, the Company will be reimbursed for the cost of the product
sold to Fujisawa and will receive 20% of the gross profits from the sales of
AmBisome in the United States. See "-- Products and Markets -- AmBisome."
MARKETING
NeXstar Pharmaceuticals has established marketing subsidiaries in the
United Kingdom, Germany, Italy, Spain, France, Portugal, The Netherlands and
Australia and a marketing branch operation in Greece to promote and sell its
existing products. In addition, NeXstar Pharmaceuticals has agreements with
third-party distributors, including distributors in certain of the countries in
which the Company has marketing operations, to promote, sell and distribute its
products.
In certain countries, AmBisome and DaunoXome can be prescribed by
individual physicians who request the product even though a regulatory approval
in that country has not yet been obtained. In those cases, the Company's
marketing professionals provide information and assistance requested by
physicians. Additionally, AmBisome currently is being distributed in the United
States in connection with a compassionate use program.
NeXstar Pharmaceuticals has created a sales and marketing organization in
connection with the launch of DaunoXome in the United States. The Company is
selling DaunoXome in Europe primarily through the Company's established
marketing subsidiaries and the Company's current distribution relationships.
Commercial sales of DaunoXome are currently being launched in the European
countries in which approval has been received. Additionally, the Company is
considering a number of other options in connection with marketing its products
throughout the world and may hire additional personnel and/or seek additional
partners to assist with sales and distribution.
In many of its markets, NeXstar Pharmaceuticals prices AmBisome and
DaunoXome in the currency of the country into which such pharmaceuticals are
sold, and revenues in the past have been, and in the future could be, adversely
affected by currency fluctuations. As a result, if the dollar were to
significantly fluctuate in value against such foreign currencies, the Company's
product revenues could be adversely affected. There can be no assurance that
currency fluctuations will not significantly affect the dollar price of the
Company's products. Prices could also be affected by competitive pressures or
regulatory requirements of the countries into which products are sold. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "-- Government Regulation."
MANUFACTURING
The Company's existing products are manufactured at its current facility in
San Dimas, California, which has been inspected by the FDA and by the Medicines
Control Agency of the United Kingdom (the "MCA") and approved for the commercial
production of AmBisome and DaunoXome
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by the MCA and for DaunoXome by the FDA. The facility has also been inspected by
the State of California for compliance with "current Good Manufacturing
Practices" and must be licensed annually by the State of California for
pharmaceutical manufacture.
Although the Company has internal capacity to perform lyophilization
(product freeze-drying) in smaller clinical batches, larger commercial batches
of the Company's products are sent to third parties to perform the filling and
lyophilization processes. NeXstar Pharmaceuticals also utilizes a manufacturer
in Europe to perform certain quality control testing and final labeling and
packaging of both DaunoXome and AmBisome. The Company's manufacturing operations
utilize no more than 50% of the current capacity of its existing facility.
NeXstar Pharmaceuticals is manufacturing DaunoXome in quantities sufficient
to support current clinical trials and commercial launch activities. The Company
is in the process of scaling-up manufacturing capabilities for DaunoXome in
support of increasing commercial usage and believes that it has sufficient
capacity for its initial marketing efforts. There can be no assurance that
further scale-up will be completed in a timely fashion. Additionally, the
Company does not have substantial experience in the larger-scale manufacture of
DaunoXome and there can be no assurance that the Company will be able to scale
up its manufacture of DaunoXome. The Company has received an approved shelf life
of 24 weeks for DaunoXome in the United States. While the Company has an ongoing
stability program aimed at demonstrating a significantly longer shelf life than
24 weeks, there can be no assurance that the extension of the shelf life beyond
24 weeks will be approved by the FDA.
NeXstar Pharmaceuticals has leased and completed construction and equipping
of a new manufacturing facility adjacent to its existing facility in San Dimas,
California. The facility will provide in excess of 70,000 square feet of space,
including approximately 45,000 square feet of manufacturing space. Various
regulatory authorities, including the MCA and the FDA, require NeXstar
Pharmaceuticals to validate the new manufacturing facility prior to use for
commercial production. Validation is designed to establish, through documented
evidence, that a specific manufacturing process will consistently produce a
product meeting its pre-determined specifications and quality characteristics
with a degree of assurance acceptable to such regulatory authorities. The
Company currently is performing the work necessary to apply for site approval
and in the summer of 1996 expects to seek MCA, FDA and state approval to
manufacture AmBisome and DaunoXome at the new facility next to its present site.
The MCA has recently determined that the new facility is in general compliance
with the principles and guidelines of good manufacturing practice and has
indicated that it will support the licensing of AmBisome and DaunoXome in the
facility. In addition, in connection with any approval in the U.S. of AmBisome,
the FDA will have to approve the manufacturing of AmBisome at the existing site.
After the new facility has been validated, it will require approval by these
various regulatory authorities prior to commencement of commercial manufacturing
at that site. The new facility will include lyophilization capability that will
limit the need for third parties to perform the filling and lyophilization of
larger batches of product. There can be no assurance that the regulatory
approvals which the Company is currently seeking in connection with its
manufacturing facilities will be granted.
In September 1994, NeXstar Pharmaceuticals entered into a lease agreement
for 5,260 square feet of industrial space in Boulder, Colorado together with
related agreements pursuant to which Hauser Chemical Research, Inc. ("Hauser")
will supply personnel to assist the Company in operating a facility meeting
"current Good Manufacturing Practices" for the manufacture of bulk drug
candidate materials for use in clinical trials and product development programs
for NeXstar Pharmaceuticals and its corporate partners. NeXstar Pharmaceuticals
is to provide a qualified preproduction process for the initial drug substance
to be produced at the facility, which will provide for production on at least
one-tenth the scale of the production ultimately expected to be provided at the
facility. Construction of the facility, utilities and selected environmental
qualifications were completed in September 1995. There can be no assurance that
the production facility will
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ultimately obtain "current Good Manufacturing Practices" status or that any drug
substance proposed to be manufactured there will be suitable for larger-scale
production. See "-- Properties."
NeXstar Pharmaceuticals concentrates on developing internal manufacturing
capabilities for its products at the same time as it develops those products.
The Company anticipates that its existing capacity for the manufacture of
AmBisome will support commercial needs until its new manufacturing facility is
validated. NeXstar Pharmaceuticals is manufacturing DaunoXome in quantities
sufficient to support current clinical trials and commercial launch activities.
While each liposomal formulation requires unique variations in process methods,
NeXstar Pharmaceuticals believes that it possesses the necessary technical
skills to design and implement scaled-up manufacturing capabilities for the
products it is currently developing. However, there can be no assurance that the
Company will be able to achieve such capabilities.
All the component steps of the manufacturing process use equipment that is
commercially available and that can be obtained in larger sizes if required.
Currently, high quality amphotericin B, daunorubicin HCl and high quality
cholesterol, each of which is used in the Company's manufacture of liposome
products, are obtained only from single approved suppliers. Additional suppliers
of each of these components are presently under evaluation. In the event that
the materials become unavailable from their respective supplier, the Company
believes that alternative supplies of such materials are or will become
available at reasonable prices. Other lipid materials and other raw materials
are available from a number of suppliers and NeXstar Pharmaceuticals believes
that supplies are adequate for the foreseeable future.
COMPETITION
Generally, competition in the pharmaceutical field is based on such factors
as product performance, safety, acceptance by doctors, patient compliance,
patent protection, ease of use, price, distribution, marketing and adaptability
to various modes of administration. The Company's products compete or may
compete with new chemical substances as well as improved delivery of current
drugs. The Company's products and potential products are in various stages of
development, and no assurance can be given that any of these products or
potential products will be sufficiently more effective than existing treatment
alternatives to generate meaningful commercial demand.
NeXstar Pharmaceuticals anticipates that it will face increased competition
in the future as new products enter the market and advanced technologies become
available. Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than NeXstar
Pharmaceuticals and may be better equipped to develop, manufacture and market
products. In addition, many of these companies have extensive experience in
research, preclinical testing and human clinical trials, obtaining FDA and other
regulatory approvals, and manufacturing and marketing their products. As a
result, these companies may develop and introduce products and processes more
rapidly than, and competitive with or superior to, those of NeXstar
Pharmaceuticals. There can be no assurance that existing products or new
products developed by the Company's competitors will not be more effective than
any that may be developed by NeXstar Pharmaceuticals. Competitive products may
render the Company's technology and products obsolete or noncompetitive.
The current regulatory approvals for AmBisome principally relate to
situations in which traditional amphotericin B therapy has failed. However, if
the Company succeeds in its effort to expand the approved indications for
AmBisome, such as it has in obtaining approval as a primary therapy in
Australia, AmBisome will increasingly compete with traditional amphotericin B
therapy. Amphotericin B is currently produced and marketed by Bristol-Myers
Squibb Company. Moreover, if the Company succeeds in broadening the indications
for AmBisome, it will also face competition from other antifungal products,
including those produced by Pfizer Inc. and Johnson & Johnson. In addition,
there are a number of other companies that are focused on the development of
lipid-based products. In the antifungal area, one company has a lipid-based
amphotericin B product that was
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<PAGE> 46
approved in the United States in November 1995 and has also been approved in
several European countries, and another company has a lipid-based amphotericin B
product that has been approved in several European countries. Both of these
companies have applied for approvals in other European countries and the latter
company has applied for U.S. approval. These products are offered at prices that
are less than AmBisome's price on a milligram for milligram basis, although the
Company believes that the total cost of therapy for the competitive products is
substantially equal to or greater than that of AmBisome. In the anticancer area,
another company has a lipid-based anticancer drug which is expected to compete
with DaunoXome and which was approved by the FDA in November 1995 for use as
second line therapy for the Kaposi's sarcoma indication. Applications for
approval of this anticancer product are also pending in various European
countries and approval in a number of countries comprising the European Union
has been indicated or obtained.
The Company believes that earlier entry into a market is an advantage for a
new drug, but it also believes that therapeutic index and cost-effectiveness are
important to a product's success. Ultimately, therefore, the Company believes
that its products and those of its competitors, whether or not lipid-based, will
compete on their merits in the markets where they are approved.
PATENTS, TRADE SECRETS AND LICENSES
NeXstar Pharmaceuticals believes that patents and other proprietary rights
are important to its business. NeXstar Pharmaceuticals also relies upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position. NeXstar
Pharmaceuticals actively seeks patent protection both in the U.S. and abroad. As
of April 30, 1996, NeXstar Pharmaceuticals had 115 pending U.S. patent
applications and had 35 issued patents to protect its technology. Corresponding
applications for certain of the U.S. applications have been or will be filed in
other countries. The Company, as of April 30, 1996, had 458 issued foreign
patents. The patents and patent applications primarily relate to the Company's
liposome products and liposome technology, its immunology technology, its lipid
conjugate technology, various aspects of its SELEX process technology and its
Parallel SELEX combinatorial chemistry process.
U.S. Patent No. 5,270,163 covering the Company's SELEX process technology
(the " '163 Patent") was issued to URC in 1993. U.S. Patent No. 5,475,096
covering certain non-naturally occurring oligonucleotides that are selective
ligands to a variety of target classes (the " '096 Patent") was issued to URC on
December 12, 1995. The '163 and '096 Patents, which are exclusively licensed on
a worldwide basis by URC to NeXstar Pharmaceuticals, grant, inter alia, the
right to exclude others from practicing significant aspects of the basic SELEX
process. In addition to its license to these patents, NeXstar Pharmaceuticals
has licenses or options to technologies covered by nine issued U.S. patents and
34 pending U.S. patent applications. The licensed technology includes (i)
exclusive worldwide rights to existing patent applications filed by URC
describing the SELEX process, as well as to future improvements on the SELEX
process and to compounds developed at the University of Colorado at Boulder
utilizing the SELEX process technology; (ii) exclusive worldwide rights to
existing patent applications filed by the National Jewish Center for Immunology
and Respiratory Medicine describing immunology technology; and (iii) certain
other technologies.
NeXstar Pharmaceuticals believes that its foreign and U.S. patents and
patent applications are soundly based, but the extent of protection provided may
vary in individual countries and no assurance can be given that any patent will
provide commercially significant protection or will not be challenged,
invalidated or circumvented. Litigation could be necessary to protect the
Company's patent position, which would result in substantial cost to, and
diversion of efforts by, the Company. NeXstar Pharmaceuticals has in the past
been involved, and is currently involved, in litigation involving patent and
infringement claims with respect to the Company's products. NeXstar
Pharmaceuticals is aggressively defending its interests and seeking appropriate
relief in such proceedings. See "Legal Proceedings."
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<PAGE> 47
NeXstar Pharmaceuticals has licensed certain technology from and pays
royalties to the Regents of the University of California in connection with the
production and sale of AmBisome. The royalty rate varies depending on the amount
of revenues, among other things. Currently, the royalty rate is approximately 1%
of net sales. NeXstar Pharmaceuticals has also licensed technology from and
agreed to pay royalties to The City of Hope National Medical Center in
connection with the production and sale of DaunoXome. The royalty rate varies
depending on the amount of revenues. NeXstar Pharmaceuticals has entered into
license agreements with various medical and educational institutions and an
individual to obtain certain exclusive and nonexclusive patent rights. Under
these agreements, NeXstar Pharmaceuticals will pay royalties of varying rates
based upon levels of revenues from the licensed products, as defined in the
agreements. The Company intends to continue to seek other such rights as
appropriate.
European and Japanese patents have a defined term following grant during
which opposition to the grant can be filed, and both NeXstar Pharmaceuticals and
certain of its competitors have filed such oppositions against each other with
respect to certain patents in Europe and Japan. Specifically, NeXstar
Pharmaceuticals has opposed the grant to The Liposome Company ("TLC") of the
European and Japanese counterparts of the U.S. Patent No. 4,880,635. See "Legal
Proceedings." NeXstar Pharmaceuticals has also opposed the grant of other TLC
European and Japanese patents, and is involved in an interference proceeding
with a U.S. patent application owned by the University of California, all
relating to certain active drug loading techniques that the owners of this
patent or application could claim are used in the manufacture of products such
as DaunoXome.
Although patents are enforceable from the date of issuance and presumed to
be valid, future litigation or reexamination proceedings regarding the
enforcement or validity of the Company's existing patents or future patents, if
issued, could result in a ruling adverse to the Company that could invalidate
such patents or substantially reduce the scope of the protection afforded by
such patents. As to any issued patent or patent application, it is also possible
that the U.S. Patent and Trademark Office could declare an interference
proceeding to determine, inter alia, priority of inventorship between
applications claiming the same invention. An adverse ruling in any such
interference proceeding could result in cancellation of claims in issued patents
or patent applications, limitations on the scope of issued patents or claims in
patent applications or in the awarding of the rights to third parties
participating in such interference. If the Company elects or is required to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office, substantial cost to the Company could result.
The Company also relies on trade secrets, proprietary know-how and
continuing technological innovation which it seeks to protect with
confidentiality agreements with its collaborators, employees and consultants.
There can be no assurance that these agreements will not be breached, that the
Company will have adequate remedies for any breach or that the Company's trade
secrets and proprietary know-how will not otherwise become known or be
independently discovered by competitors. Under certain of the Company's research
and development agreements and joint ventures, inventions discovered in certain
cases become jointly owned by the Company and the corporate sponsor or partner
and in other cases become the property of the Company or the corporate sponsor
or partner. Disputes may arise with respect to ownership of any such inventions.
LEGAL PROCEEDINGS
The Company believes that its patents and applications are soundly based,
but the extent of protection may vary in different countries and no assurance
can be given that any patent will provide commercially significant protection or
will not be challenged, invalidated, or circumvented. Litigation could be
necessary to protect the Company's patent position, which would result in
substantial cost to, and diversion of efforts by, the Company.
Further, a number of other patents have issued to other persons, some to
competitors, relating to technology similar to that used by the Company. Both
the Company and certain of its competitors
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<PAGE> 48
have filed oppositions against each other as to patents granted by the European
Patent Office and patents granted by the Japanese Patent Office. TLC and the
University of California each have patents or patent applications relating to
active drug loading techniques that the owners could claim are used in the
manufacture of products such as DaunoXome. The Company has opposed the grant of
a European and a Japanese patent owned by TLC, and is involved in an
interference with a U.S. patent application owned by the University of
California, relating to such loading technology.
Competitors or other patent holders could bring legal actions against the
Company involving the Company's patents, patent applications or rights to use
proprietary technology. If any actions are successful, in addition to any
potential liability for damages, the Company could be enjoined from selling the
affected product, or be required to obtain a license in order to continue to
manufacture or market the product. There can be no assurance that the Company
would prevail in any such action or that any license required under any such
patent would be made available on acceptable terms, if at all. There has been,
and the Company believes that there will continue to be, significant litigation
in the pharmaceutical industry regarding patent and other intellectual property
rights. Any additional litigation could consume a substantial portion of the
Company's resources regardless of the outcome.
On May 17, 1993, the Company filed a complaint in the United States
District Court for the District of Delaware against TLC asking the court to
declare U.S. Patent No. 4,880,635 (the "TLC '635 Patent") owned by TLC invalid,
unenforceable and not infringed following allegations by TLC that the freeze
drying of AmBisome infringes the TLC '635 Patent. In addition, the Company has
opposed the grant to TLC of the European and Japanese patents that are
counterparts of the TLC '635 Patent. On December 20, 1993, the United States
District Court for the District of Delaware stayed the May 17, 1993 lawsuit
pending the outcome of a reexamination of the TLC '635 Patent instituted by TLC
in the U.S. Patent and Trademark Office ("USPTO"). Upon reexamination, the USPTO
refused to confirm any of the claims of the TLC '635 Patent in their original
form. However, on June 6, 1996, TLC publicly stated that it had been informed by
the USPTO that certain amended claims would be allowed and that, when a
reexamination certificate issues in respect of such claims, TLC intends to file
a counterclaim against the Company for damages and an injunction based on
infringement of the reexamined patent.
Upon review of the claims to be included in the reexamination certificate
relating to the TLC '635 Patent, NeXstar Pharmaceuticals has concluded that no
valid claim should be found to be infringed by the Company. In addition, the
Company believes that TLC's efforts in crafting claims to avoid prior liposome
work reported by others has presented NeXstar Pharmaceuticals with additional
avenues of defense in any litigation. For example, because of the amendments
made to the TLC '635 Patent during reexamination, NeXstar Pharmaceuticals would
also have a defense based upon the doctrine of "intervening rights." This
doctrine would provide a clear defense to any damage claim for any NeXstar
Pharmaceuticals activity prior to the actual issuance of the reexamined patent
and would empower the court to permit NeXstar Pharmaceuticals to continue its
activities to the extent and under such terms as the court deems equitable for
the protection of investments made by NeXstar Pharmaceuticals prior to issuance
of the reexamination certificate. Accordingly, the Company does not believe that
the reexamined TLC '635 Patent presents a material risk to the Company.
However, were the court to determine that the TLC '635 Patent is both valid
and infringed as a result of the freeze drying of AmBisome, the Company could be
enjoined from using its method of manufacturing and/or could be required to pay
damages. In such event, the Company could experience interruption in its ability
to produce AmBisome and/or incur significant royalty obligations. In addition,
the expense of litigation is expected to be significant regardless of the
outcome.
Although the Company has been successful in its recent litigation with TLC
regarding a different freeze-drying patent, past success is not a predictor of
success in the future and, in general, adverse results in litigation could have
a material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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<PAGE> 49
Certain statements set forth above with respect to the litigation and
potential litigation with TLC constitute "forward-looking statements" within the
meaning of the Reform Act. Such statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results of the
litigation to be materially different from the results expressed or implied by
such forward-looking statements. Such factors include, among other things: (i)
adverse facts adduced in discovery or at trial; (ii) contrary conclusions of law
by the court; (iii) the court refusing to exercise its equitable powers in a
manner favorable to the Company; and (iv) other uncertainties of litigation. See
"Risk Factors."
GOVERNMENT REGULATION
The production and marketing of the Company's products, developed through
the Company's technologies, and its ongoing research and development activities,
including its preclinical studies and clinical trials, are subject to regulation
by numerous federal, state and local governmental authorities in the United
States and by similar regulatory agencies in other countries where the Company
tests and markets, or intends to test and/or market, its current or future
products. There can be no assurance that the Company will obtain further
regulatory approvals to conduct clinical trials or to market its products, or
that the Company will obtain regulatory approvals to conduct clinical trials or
to market products developed in the future, if any, on a timely basis. Prior to
marketing any drug developed by the Company or marketed under license, the
Company must undergo an extensive regulatory approval process by the FDA and
comparable regulatory authorities in foreign countries. The 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.
Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target medication. The results from preclinical animal studies and early
clinical trials may not be predictive of results that will be obtained in large
scale testing, and there can be no assurance that the Company's clinical trials
will demonstrate the safety and efficacy of any products or will result in
marketable products. A number of companies in the biotechnology industry have
suffered significant setbacks in advanced clinical trials, even after
experiencing promising results in early animal and human testing. In addition,
the rate of completion of the Company's clinical trials is dependent upon, among
other factors, the rate of patient enrollment. Patient enrollment is a function
of many factors, including the size of the patient population, the nature of the
protocol, the Company's ability to manage the clinical trial, the proximity of
patients to clinical sites and the eligibility criteria for the study. Several
factors, such as delays in planned patient enrollment, may result in increased
costs and delays or termination of clinical trials prior to completion, which
could have a material adverse effect on the Company. Preclinical studies must
also be conducted in conformity with the FDA's good laboratory practice
regulations. Clinical trials generally must meet requirements for institutional
review board oversight and informed consent, as well as regulatory agency prior
review, oversight and good clinical practice requirements.
The procedure for obtaining regulatory approval for a new human
pharmaceutical product involves many steps. Initially, NeXstar Pharmaceuticals
conducts animal studies to secure data relevant to potential safety and
efficacy. Based on the data from these animal studies, NeXstar Pharmaceuticals
files applications to conduct clinical trials of the products in humans. Such
applications, known as IND applications in the United States, must be made in
each country in which NeXstar Pharmaceuticals proposes to conduct clinical
trials. Once such applications have been approved, NeXstar Pharmaceuticals can
commence clinical trials. The Company currently anticipates filing an IND in
connection with MiKasome during 1996, in connection with VincaXome in late 1996
or early 1997 and in connection with at least one SELEX process-derived drug
candidate
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during 1997. However, there can be no assurance that the Company will be able to
avoid significant delays in filing such applications or that any potential
product will be commercially successful.
Clinical trials are generally conducted in three phases. Phase I trials are
designed to test basic human safety. Phase II trials test dosage and involve a
detailed evaluation of human efficacy and safety. Phase III trials involve
large-scale evaluation of general efficacy and safety and a comparison with
existing alternative therapies. To the extent possible, NeXstar Pharmaceuticals
designs such clinical trials to meet the standards of both foreign and U.S.
regulatory authorities, but there can be no assurance that the authorities in
any country will be satisfied with the conduct of any particular clinical trial.
Data obtained from preclinical and clinical activities 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 the
policies of regulatory authorities for drug approval during the period of
product development and regulatory review of each submitted New Drug Application
or product license application. The Company may be required to demonstrate that
the proposed product represents an improved form of treatment over existing
therapies. There can be no assurance that, even after such time and
expenditures, regulatory approvals will be obtained for any drugs developed or
discovered by the Company or its collaborative partners utilizing the Company's
technologies.
Based on the results of clinical trials, NeXstar Pharmaceuticals may file
for regulatory approvals of the product. Such filings (which in the United
States are known as New Drug Applications and in Europe as Product License
Applications) are made in each country in which NeXstar Pharmaceuticals intends
to sell its products. The Company anticipates that a New Drug Application will
be filed shortly for AmBisome in the United States. This filing will be based on
the Company's extensive database for the product. There can be no assurance that
the Company will be able to avoid significant delays in filing this application
or that AmBisome will be commercially successful in the U.S. Also, there can be
no assurance that the FDA will grant product approval based on the Company's
current database and the FDA may require additional clinical trials in the
United States before approving AmBisome.
When a regulatory authority approves the sale of a drug, regulations also
govern the manufacturing process and marketing activities and may require
post-marketing testing and surveillance programs to monitor the effects of the
Company's products. See "-- Products and Markets." Moreover, if regulatory
approval of a drug is granted, such approval is likely to entail limitations on
the indicated uses for which it may be marketed. Further, even if such
regulatory approval is obtained, a marketed drug and its manufacturer are
subject to continual review, and discovery of previously unknown problems with a
product or manufacturer may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market. Regulatory
approval of prices is generally required in most foreign countries. In
particular, certain European countries will condition their approval of a
product on the agreement of the seller not to sell that product for more than a
certain price in that country. There can be no assurance that European
regulatory authorities will not establish lower prices or that any regulatory
action reducing the price of AmBisome or DaunoXome in any country will not have
the practical effect of requiring the Company correspondingly to reduce its
prices in other countries. There can be no assurance that the resulting prices
would be sufficient to generate an acceptable return on the Company's investment
in its products.
NeXstar Pharmaceuticals is aggressively pursuing commercialization in
Europe, where regulatory procedures allow for product sales under certain
circumstances before final regulatory approvals are obtained. The Company has
submitted and will continue to submit requests for approval of AmBisome and
DaunoXome with regulatory authorities in other European countries, and a number
of these regulatory authorities are actively reviewing the applications.
Regulatory procedures and review times vary from country to country. There can
be no assurance that any of the Company's pending applications for approvals
will be granted or that regulatory actions will be taken in a timely fashion.
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In addition, the Company's manufacturing facilities are subject to
inspection and regulation by U.S., foreign and state regulatory agencies. The
Company's facilities have been inspected by the FDA, the MCA and the State of
California. These agencies may reinspect at any time, and other countries'
regulatory authorities may inspect the Company's facilities as well.
Furthermore, although the Company's current products do not require an export
license, there can be no assurance that export licenses will not be required in
the future. See "Manufacturing."
The Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any such liability
could exceed the resources of the Company or otherwise adversely affect the
Company. NeXstar Pharmaceuticals is subject to numerous environmental and safety
laws and regulations, including those governing the use of hazardous materials.
In June 1995, the Company was contacted by the U.S. Environmental Protection
Agency (the "EPA") informing the Company that it is a potentially responsible
party relating to the disposal of the Company's waste products by a third party
at a hazardous waste disposal facility. The Company has complied with all
requests by the EPA relating to this matter and believes that its environmental
liability with respect to this matter is not material; however, there can be no
assurance that this matter or any violation of, or the cost of compliance with,
environmental and safety laws and regulations will not adversely impact the
Company's operations.
EMPLOYEES
As of May 17, 1996, NeXstar Pharmaceuticals and its subsidiaries employed
445 persons on a full-time basis, of whom 278 were engaged in research,
development, clinical research, regulatory affairs, quality control and
manufacturing and 167 were engaged in marketing, finance and administration.
There can be no assurance that NeXstar Pharmaceuticals will be able to continue
to attract and retain qualified personnel in sufficient numbers to meet its
needs. NeXstar Pharmaceuticals believes that it maintains good relations with
its employees.
PROPERTIES
The Company's executive offices are located in Boulder, Colorado. The
offices, comprising approximately 45,000 square feet, also house research
laboratories. NeXstar Pharmaceuticals leases its facility in Boulder subject to
a lease which expires in February 1999. The lease can be renewed at the option
of NeXstar Pharmaceuticals for two successive five-year periods. NeXstar
Pharmaceuticals presently leases 5,260 square feet of industrial space in
Boulder, Colorado, which is being prepared as a "current Good Manufacturing
Practices" facility for the manufacture of bulk drug substance pharmaceuticals.
This lease expires in January 2002 and may be renewed at the option of NeXstar
Pharmaceuticals for two successive seven-year periods. NeXstar Pharmaceuticals
believes that it will need to expand its facilities to support further growth in
its operations, and is evaluating alternatives. See "Use of Proceeds."
NeXstar Pharmaceuticals also occupies a facility in San Dimas, California
under a noncancelable operating lease which expires in May 2003 and has two
five-year renewal options. This plant provides 51,500 square feet of space and
houses research and development activities, manufacturing and certain
administrative functions. The facility has been inspected by the State of
California for compliance with "current Good Manufacturing Practices" and is
licensed by the State of California for pharmaceutical manufacturing. The
license is renewable annually. The existing San Dimas facility has also been
licensed for the manufacture of AmBisome and DaunoXome by the MCA and for
DaunoXome by the FDA.
On June 1, 1992, the Company entered into a long-term lease agreement for a
new manufacturing facility adjacent to its existing San Dimas facility. The new
manufacturing facility, the lease to which expires in November 2003 and has two
five-year renewal options, will provide in excess of
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70,000 square feet of space, including approximately 45,000 square feet of
manufacturing space, and will become the Company's primary injectable
pharmaceutical production plant. Construction of the new facility has been
completed; however, the facility must go through the validation process required
by various regulatory authorities. Validation is designed to establish through
documented evidence that a specific manufacturing process in a given facility
will consistently produce a product meeting its predetermined specifications and
quality characteristics with a degree of assurance acceptable to such regulatory
authorities. The preproduction validation process is nearing conclusion and
appropriate regulatory amendments listing the new manufacturing site are
expected to be filed in the summer of 1996. The MCA has recently determined that
the facility is in general compliance with the principles and guidelines of good
manufacturing practice and has indicated that it will support the licensing of
AmBisome and DaunoXome in the facility. As of March 31, 1996, NeXstar
Pharmaceuticals had expended approximately $21.0 million for the development and
validation of the new facility and has leased approximately $10.0 million of
equipment for use therein. NeXstar Pharmaceuticals anticipates that after March
31, 1996, it has expended or will expend an additional $425,000 for the
completion and validation of the new manufacturing facility (exclusive of costs
associated with validation batch runs) and the ongoing validation effort in its
existing manufacturing facility. The leases for the Company's two San Dimas
facilities provide for a combined annual rent of $1.6 million. See
"Manufacturing."
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MANAGEMENT
The following table sets forth certain information with respect to the
executive officers, directors and key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- --------------------------------------
<S> <C> <C>
Lawrence M. Gold, Ph.D. ................ 54 Chairman of the Board, Chief
Scientific Officer
Patrick J. Mahaffy...................... 33 President, Chief Executive Officer and
Director
Michael E. Hart......................... 43 Vice President and Chief Financial
Officer
Michael T. Burke........................ 50 Vice President, Business Development
Adam Cochran............................ 55 Vice President, General Counsel and
Secretary
Bruce E. Eaton, Ph.D. .................. 42 Vice President, Chemistry
Crispin G.S. Eley, D. Phil. ............ 39 Vice President, Pharmaceutical
Operations
David W. Flamberg....................... 52 Vice President, Compliance
George B. Herron........................ 48 Vice President, Sales and Marketing
Barbara B. Kazmier...................... 39 Vice President, Human Resources
Barry A. Polisky, Ph.D. ................ 50 Vice President, Drug Discovery
Michael E. Ross, M.D. .................. 50 Vice President, Medical/Regulatory
Affairs
Paul G. Schmidt, Ph.D. ................. 52 Vice President, Drug Delivery Research
John D. Baldeschwieler, Ph.D. .......... 62 Director
James A. Eskridge....................... 53 Director
David I. Hirsh, Ph.D. .................. 57 Director
Rodman W. Moorhead, III................. 52 Director
Carl F. Pollard......................... 57 Director
</TABLE>
Dr. Gold, a founder of the Company, has been director of the Company since
its inception in 1991 and has served as Chairman of the Board of Directors since
February 1993. He was Executive Vice President of Research and Development of
NeXstar Pharmaceuticals from March 1991 to February 1995. In February 1995, Dr.
Gold was named Chief Scientific Officer of the Company. Dr. Gold was Chairman of
the Department of Molecular, Cellular and Developmental Biology at the
University of Colorado at Boulder ("CU") from 1988 to 1992. In addition to his
full-time duties at the Company, Dr. Gold serves as a professor at CU where he
has been a professor since 1970 and has received the CU Distinguished
Lectureship Award. From January 1981 to June 1988, Dr. Gold served as Founder
and Co-Director of Research for Synergen, Inc., a biopharmaceutical company
located in Boulder, Colorado. Dr. Gold is a recipient of the National Institutes
of Health Merit Award and Career Development Award. Dr. Gold received an A.B. in
Biochemistry from Yale University and a Ph.D. degree in Biochemistry from the
University of Connecticut. Dr. Gold is a member of the National Academy of
Sciences.
Mr. Mahaffy has been President and Chief Executive Officer of NeXstar
Pharmaceuticals since June 1992 and has served as a director since the Company's
inception in 1991. Prior to joining NeXstar Pharmaceuticals, Mr. Mahaffy was
employed beginning in 1986 by E.M. Warburg, Pincus & Co., Inc. ("Warburg"), a
privately held venture banking firm, where he last served as a Vice President.
Mr. Mahaffy received a B.A. in International Affairs from Lewis and Clark
College and an M.A. in International Affairs from Columbia University.
Mr. Hart served as Executive Vice President and Chief Financial Officer of
Vestar from November 1990 to February 1995. In February 1995, Mr. Hart was named
Vice President and Chief
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<PAGE> 54
Financial Officer of NeXstar Pharmaceuticals. He was employed by Avantek, Inc.
as Treasurer and Director of Finance from June 1982 through November 1990. From
May 1980 to June 1982, he was employed by Magnuson Computer Systems as Assistant
Treasurer. Prior to 1980, Mr. Hart was employed by Memorex Corporation where he
held various financial positions. Mr. Hart received a B.A. in Business Economics
and a B.A. in Geography from the University of California at Santa Barbara. He
received an M.B.A. from California State University, Fresno.
Mr. Burke was President and Director of Supragen from November 1994 until
he became Vice President, Business Development of the Company in September 1995.
From 1974 until November 1994, he was with Burroughs Wellcome Co., serving in a
number of positions including Licensing Director from May 1993 until November
1994 and Licensing Manager from January 1990 until May 1993. Mr. Burke has a
B.S. in Chemistry from the New Mexico Institute of Mining and Technology and an
M.S. in Chemistry from the University of Colorado.
Mr. Cochran has served as Vice President and General Counsel of NeXstar
Pharmaceuticals since February 1995, after serving as Vice President and General
Counsel of Vestar since 1994. He was elected Secretary of the Company in March
1996. From 1988 until 1994, he was Vestar's Patent Counsel. Prior to August
1988, Mr. Cochran was a partner in the law firm of Nilsson, Robbins in Los
Angeles. He received a B.A. in Chemistry and in Business Administration from
Hanover College in 1962, and has a Master's degree from Purdue University and a
Juris Doctor from Loyola University of Chicago.
Dr. Eaton has been Vice President, Chemistry of NeXstar Pharmaceuticals
since January 1, 1995. During 1994, he was the Company's Director of Medicinal
Chemistry. From 1989 to 1994, he was an Assistant Professor and in 1995 an
Associate Professor of Chemistry at Washington State University. From 1986 to
1989, Dr. Eaton was a Research Chemist at Amoco Corporation studying the
computer aided design and synthesis of macromolecules. From 1981 to 1986, he was
a consultant and Research Associate in bioconjugate chemistry with HANA
Biologics. Dr. Eaton has a B.S. degree in Biology, a B.S. in Chemistry and an
M.S. in Organic Chemistry from the University of Oregon, Eugene. He received a
Ph.D. in Organic Chemistry from the University of California, Berkeley.
Dr. Eley served as the Vice President of Product Development of Vestar from
March 1993 until February 1995 when he was appointed the Vice President,
Pharmaceutical Operations of NeXstar Pharmaceuticals. From August 1985 until
March 1993, Dr. Eley held the following positions with Vestar: Senior Research
Scientist (August 1985 until March 1988), Director, Chemistry Research (March
1988 until March 1989), Director, Chemistry (March 1989 until January 1992) and
Senior Director, Product Development (January 1992 until March 1993). Dr. Eley
has a B.A. in Chemistry and a D.Phil. in Chemistry from Oxford University.
Mr. Flamberg served as Vice President of Compliance of Vestar from January
1994 until February 1995 when he was appointed Vice President, Compliance of
NeXstar Pharmaceuticals. Mr. Flamberg served as Director, QA/QC of Vestar from
1986 to 1990 and as Vestar's Senior Director of Compliance from 1990 to 1994.
Prior to joining Vestar in 1986, Mr. Flamberg spent 20 years serving in a
variety of posts in pharmaceutical quality operations and product development
for Ben Venue Laboratories, Inc. in Bedford, Ohio. Mr. Flamberg holds a B.S. in
Chemistry-Biology from Bucknell University and an M.B.A. from Baldwin-Wallace
College.
Mr. Herron has been Vice President, Sales and Marketing of the Company
since July 1995 after having served as Senior Director, Marketing of the Company
from February 1995 until June 1995. From April 1990 until March 1993, he was the
General Manager of Vestar's United Kingdom office and from April 1993 until
February 1995, he was Senior Director, Marketing of Vestar. Prior to joining
Vestar, Mr. Herron held several senior marketing positions for various
pharmaceutical companies, including Kirby-Warrick Pharmaceuticals Ltd. (August
1986 until November 1989), Schering Corporation (September 1984 until August
1986), Novo Laboratories (November 1982 until July 1984) and Smith Kline &
French Laboratories (January 1975 until November 1982). Mr. Herron received a
B.S. from Queen's University in Belfast, Northern Ireland.
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<PAGE> 55
Ms. Kazmier has been Vice President, Human Resources of the Company since
December 1995 after having served as Director, Human Resources of the Company
from August 1994 until December 1995. From October 1987 until August 1994, Ms.
Kazmier served in various human resources management positions at Syntex
Chemicals, Inc. Ms. Kazmier has a B.A. from Metropolitan State College and an
M.S. in Management and Organization from the University of Colorado.
Dr. Polisky served as Vice President of Research of NeXstar Pharmaceuticals
from August 1993 to February 1995 when he was named Vice President, Drug
Discovery. Prior to that time, he was Associate Director of Research at NeXstar
Pharmaceuticals beginning in July 1992. Prior to coming to NeXstar
Pharmaceuticals, Dr. Polisky was an Assistant, Associate, then full Professor of
Biology at Indiana University during the period 1977 to 1992, where he also
chaired the Molecular, Cell and Developmental Biology Program. Dr. Polisky
received a B.A. in Biochemistry from the University of Chicago and his Ph.D. in
Molecular Biology from the University of Colorado at Boulder.
Dr. Ross served as Vestar's Executive Vice President, Medical/Regulatory
Affairs from December 1991 to February 1995 at which time he was named Vice
President, Medical/Regulatory Affairs of NeXstar Pharmaceuticals. Immediately
prior to joining Vestar, Dr. Ross served as Director, Portfolio Development,
Oncology, for Eastman Pharmaceutical/Sterling Drug ("Eastman"), a position he
had held since 1990. Between 1987 and 1990, Dr. Ross was a Director of Clinical
Research, Oncology, for Eastman, and between 1985 and 1987 he was employed as a
clinical scientist for Lilly. Dr. Ross received an A.B. in Chemistry from Yale
University, an M.D. from Harvard Medical School and an M.B.A. from Villanova
University. He is a member of the American College of Physicians and the
American Society of Clinical Oncology. He is board certified in internal
medicine and medical oncology.
Dr. Schmidt served as Executive Vice President, Research Operations of
Vestar from March 1993 to February 1995. In February 1995, Dr. Schmidt was named
Vice President, Drug Delivery Research of NeXstar Pharmaceuticals. From December
1988 to July 1991, Dr. Schmidt was Vestar's Vice President, Research and
Development and from July 1991 until March 1993, he was Vestar's Executive Vice
President, Research and Development. Prior to joining Vestar in 1983, he served
as Associate Professor of Biochemistry and Molecular Biology at Oklahoma Medical
Research Foundation where he received a Research Career Development Award from
the National Institutes of Health, and as Assistant Professor of Chemistry and
Biochemistry at the University of Illinois, Urbana. Dr. Schmidt received a B.S.
in Chemistry from Pomona College and a Ph.D. in Physical Chemistry from Stanford
University. He is a member of the American Chemical Society and the American
Society of Biochemistry and Molecular Biology. From 1984 until 1992, Dr. Schmidt
was a Visiting Associate at the California Institute of Technology.
Dr. Baldeschwieler is a founder of Vestar and served as Chairman of the
Vestar Board of Directors from Vestar's inception in April 1981 to January 1993
and as a director through February 1995. He has served as a director of NeXstar
Pharmaceuticals since February 1995. He is currently a Professor of Chemistry at
the California Institute of Technology and was Chairman of the Division of
Chemistry and Chemical Engineering from 1973 to 1978. Dr. Baldeschwieler was
Deputy Director of the Office of Science and Technology, Executive Office of the
President from 1971 to 1973, and previously served on the faculties of Stanford
and Harvard Universities. He received a Ph.D. in Physical Chemistry from the
University of California at Berkeley. Dr. Baldeschwieler is a member of the
National Academy of Sciences and the American Philosophical Society.
Mr. Eskridge served as a director of Vestar from July 1992 to February
1995. He was appointed a director of NeXstar Pharmaceuticals in February 1995.
Mr. Eskridge has been Senior Consultant for Mattel, Inc. since March 1996 and
from January 1996 to March 1996, he was Group President, Mattel Worldwide. From
April 1995 to December 1995, Mr. Eskridge was the Group President-U.S., Mattel,
Inc. and Fisher-Price, Inc. and from November 1993 until April 1995 he was the
President and Chief Executive Officer of Fisher-Price, Inc. From 1988 to
November 1993, Mr. Eskridge served as the Executive Vice President and Chief
Financial and Administrative Officer of Mattel, Inc. Mr. Eskridge is a director
of Golden Family Entertainment.
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<PAGE> 56
Dr. Hirsh has been a director of NeXstar Pharmaceuticals since February
1993. He currently is the Robert Wood Johnson, Jr. Professor and Chairman of the
Department of Biochemistry and Molecular Biology at Columbia University's
College of Physicians and Surgeons. Dr. Hirsh has been a professor at Columbia
University since July 1990. Dr. Hirsh received a B.A. in Biology from Reed
College and a Ph.D. in Biochemistry from Rockefeller University.
Mr. Moorhead has served as a director of NeXstar Pharmaceuticals since June
1992 and was a director of Vestar from 1984 to February 1995. He has been
employed since 1973 by Warburg, where he currently serves as a Senior Managing
Director. He is a director of Value Health, Inc., a managed health care company,
and a number of privately held companies. Mr. Moorhead received an A.B. and an
M.B.A. from Harvard University. He is a Trustee of The Taft School and a member
of the Overseers' Committee on University Resources, Harvard College.
Mr. Pollard served as a director of Vestar from October 1989 to February
1995. He was appointed a director of NeXstar Pharmaceuticals in February 1995.
Since January 1995, Mr. Pollard has been the owner and operator of Hermitage
Farm, a thoroughbred breeding operation. From 1991 to 1993, Mr. Pollard served
as President and Chief Operating Officer of Humana, Inc. ("Humana"). In March
1993, Mr. Pollard was elected Chairman and Chief Executive Officer of Galen
Health Care, Inc., a hospital company spun-off from Humana. In connection with a
reorganization of Galen Health Care, Mr. Pollard served as the Chairman of
Columbia/HCA Healthcare Corporation from September 1993 to February 1994. From
1984 to 1991, Mr. Pollard was the Senior Executive Vice President of Humana. He
joined Humana in 1968 as its Chief Financial Officer and assumed responsibility
as Executive Vice President and President of the Hospital Division of Humana in
1977. Prior to his association with Humana, Mr. Pollard was a partner with
Coopers & Lybrand, an international public accounting firm. Mr. Pollard is also
a member of the Board of Directors of Churchill Downs Incorporated, National
City Bank, Kentucky, and the University of Kentucky's Business Partnership
Foundation and is President of the Kentucky Derby Museum Board.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock,
par value $1.00 per share (the "Preferred Stock"). At June 10, 1996, there were
26,322,385 shares of Common Stock issued and outstanding and an additional
3,289,305 shares of Common Stock were subject to outstanding warrants and
options (of which 2,016,893 are currently exercisable), and no shares of
Preferred Stock were outstanding.
COMMON STOCK
Subject to such preferential rights as may be determined by the Board of
Directors in the future in connection with the issuance of shares of Preferred
Stock, holders of the Common Stock are entitled to cast one vote on all matters,
to receive such dividends as may be declared by the Board of Directors out of
legally available funds and to share ratably in any distribution of the
Company's assets, after payment of all debts and other liabilities, upon
liquidation, dissolution or winding up. The holders of the Common Stock have no
preemptive or other subscription or conversion rights. There are no redemption
or sinking fund provisions applicable to the Common Stock. The Common Stock
currently outstanding is, and the Common Stock to be issued and sold by the
Company hereunder will be, duly and validly issued, fully paid and
nonassessable. As of June 10, 1996, there were approximately 579 holders of
record of the Common Stock.
PREFERRED STOCK
The Certificate of Incorporation of the Company provides that the Board of
Directors has the authority, without further action of stockholders, to issue up
to 5,000,000 shares of Preferred Stock in one or more series, of which 4,977,102
shares are available for issuance by the Company. The
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<PAGE> 57
Company previously issued a total of 22,898 shares of Preferred Stock which were
converted into shares of Common Stock in connection with the Company's initial
public offering and are no longer available for issuance by the Company. The
Board of Directors is authorized to determine the rights, preferences,
privileges and restrictions granted to and imposed upon the Preferred Stock or
any series thereof with respect to any wholly unissued class or series of the
Preferred Stock, and to fix the number of shares of any series of the Preferred
Stock and the designation of any such series of Preferred Stock. These rights
and privileges could adversely affect the voting power of holders of the Common
Stock, and the authority of the Board of Directors to issue the Preferred Stock
without further stockholder approval could have the effect of delaying,
deferring or preventing a change in control of the Company.
WARRANTS
As of June 10, 1996, there were warrants outstanding to purchase an
aggregate of 1,168,372 shares of Common Stock at an average weighted exercise
price of $5.31 per share. The exercise price of the warrants ranges from $4.09
to $32.54 per share of Common Stock with expiration dates from March 31, 1997
until November 30, 2003. The warrants include a warrant to acquire 1,035,294
shares of Common Stock held by Warburg, Pincus Capital Partners, L.P. which
terminates on December 31, 1997.
REGISTRATION RIGHTS
As of June 10, 1996, the holders of 5,395,625 shares of NeXstar
Pharmaceuticals Common Stock were entitled to certain demand and piggyback
registration rights. The registration rights relate to stock sold by the Company
prior to its initial public offering in January 1994. Additionally, there are
certain piggyback registration rights in connection with warrants which can be
exercised for an aggregate of 89,974 shares of Common Stock, demand registration
rights in connection with warrants which can be exercised for an aggregate of
19,526 shares of Common Stock and demand and piggyback registration rights in
connection with warrants which can be exercised for 1,037,752 shares of Common
Stock. The exercise price of the warrants with registration rights ranges from
$4.09 to $32.54 per share with expiration dates from March 31, 1997 until
November 19, 2003.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law ("Delaware Law"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined in the Delaware Law) with a Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting or stock of the corporation
outstanding at the time the transaction commenced (excluding shares owned by
persons who are both officers and directors of the corporation and shares held
by certain employee stock ownership plans); or (iii) following the transaction
in which such person became an interested stockholder, the business combination
is approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the corporation not owned by the
interested stockholder.
LIMITATION OF LIABILITY
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware Law, a Director of the Company shall not be liable
to the Company or its stockholders for
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<PAGE> 58
monetary damages for breach of fiduciary duty as a Director. Under current
Delaware Law, liability of a director may not be limited (i) for any breach of
the director's duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases and (iv) for any transaction from which the
director derives an improper personal benefit. The effect of the provision of
the Company's Certificate of Incorporation is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of the
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in the situations described in
clauses (i) through (iv) above. This provision does not limit or eliminate the
rights of the Company or any stockholder to seek nonmonetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
In addition, the Company's Certificate of Incorporation provides that the
Company shall indemnify its directors, officers, employees and agents against
losses incurred by any such person by reason of the fact that such person was
acting in such capacity.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services.
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<PAGE> 59
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Smith Barney Inc., Vector Securities
International, Inc. and SBC Warburg Inc., have severally agreed to purchase from
the Company the following respective numbers of shares of Common Stock at the
public offering price less the underwriting discounts and commissions set forth
on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Alex. Brown & Sons Incorporated..........................................
Smith Barney Inc.........................................................
Vector Securities International, Inc.....................................
SBC Warburg Inc..........................................................
---------
Total.......................................................... 2,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of Common Stock offered hereby if any of
such shares are purchased.
The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise this option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 2,500,000 and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,500,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
All of the officers and directors of the Company, as well as Warburg and
its affiliates, will agree that, except under certain circumstances, for a
period of 90 days after the date of this Prospectus, they will not, without the
prior written consent of Alex. Brown & Sons Incorporated, directly or
indirectly, offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any Common Stock (including without limitation, shares of
Common Stock, which may be deemed to be beneficially owned by such holders) or
any securities convertible into or exercisable or exchangea-
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<PAGE> 60
ble for such Common Stock or in any manner transfer all or a portion of the
economic consequences associated with the ownership of the Common Stock.
The Company has agreed that, for a period of 90 days from the date of this
Prospectus, it will not, without prior written consent of Alex. Brown & Sons
Incorporated, directly or indirectly, offer, sell, sell short, or otherwise
dispose of any shares of Common Stock of the Company or other securities
convertible into or exchangeable or exercisable for shares of Common Stock or
derivative of Common Stock of the Company, or agree to do any of the foregoing
(except pursuant to its stock plans).
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market markers on the Nasdaq National Market may have engaged in passive market
making transactions in the Common Stock of the Company on the Nasdaq National
Market in accordance with Rule 10b-6A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), during the two business day period before
commencement of offers or sales of the Common Stock. The passive market making
transactions must comply with applicable volume and price limits and be
identified as such. In general, a passive market maker may display its bid at a
price not in excess of the highest independent bid for the security; if all
independent bids are lowered below the passive market maker's bid, however, such
bid must then be lowered when certain purchase limits are exceeded.
In connection with the Company's acquisition of Supragen, Inc., one of the
Representatives, Vector Securities International, Inc. ("Vector"), was employed
by the Company to perform certain financial analyses and to deliver an opinion
to the Company's Board of Directors that the amount paid for Supragen, Inc. was
fair to NeXstar Pharmaceuticals from a financial point of view. For the services
it performed, Vector was paid $100,000. In connection with the Company's private
sale of 1,425,000 shares of Common Stock to a group of private investors,
completed on February 13, 1996, Vector received a placement fee of $1.3 million
and was reimbursed for expenses of $75,000.
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by Willkie Farr & Gallagher, New
York, New York. Certain legal matters relating to this offering will be passed
upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. A member of the firm of Willkie Farr &
Gallagher owns 2,440 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements of the Company at December 31, 1995
and 1994, and for each of the three years in the period ended December 31, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995, the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, the Company's Form 8-K, dated April 8, 1996, and the Company's
Form 8-A as declared effective on January 28, 1994 filed with the Securities and
Exchange Commission (the "Commission") are hereby incorporated by reference in
this Prospectus except as superseded or modified herein or therein.
All documents filed with the Commission by NeXstar Pharmaceuticals pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in any document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as modified or superseded, to constitute a part of this
Prospectus. NeXstar Pharmaceuticals will provide without charge to each person,
including any beneficial owner, to whom this Prospectus is delivered, upon
written or oral request of such person, a copy of any and all of the documents
that have been or may be incorporated by reference herein (other than exhibits
to such documents which are not specifically incorporated by reference into such
documents). Such requests should be directed to the Director, Corporate
Communications at the Company's principal executive offices at 2860 Wilderness
Place, Boulder, Colorado 80301, telephone number (303) 444-5893.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and may be available at the following Regional
Offices of the Commission: Chicago Regional Office, CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60621; and New York Regional
Office, 7th World Trade Center, 14th Floor, New York, New York 10048. Copies of
such materials can be obtained at prescribed rates from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Company's Common Stock is traded on the Nasdaq
National Market. The foregoing material also should be available for inspection
at the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
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<PAGE> 62
ADDITIONAL INFORMATION
The Company has filed with the Commission under the Securities Act, a
Registration Statement on Form S-3 with respect to the shares of Common Stock
offered hereby, of which this Prospectus forms a part. This Prospectus omits
certain information contained in the Registration Statement, and reference is
made to the Registration Statement, including the exhibits thereto, for further
information with respect to the Company and the securities offered hereby.
Statements contained in this Prospectus concerning the provisions of such
documents are necessarily summaries of such documents and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission. Copies of the Registration Statement and the exhibits
and schedules thereto may be inspected, without charge, at the offices of the
Commission, or obtained at prescribed rates from the Public Reference Section of
the Commission at 450 Fifth Street N.W., Washington, DC 20549.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" and elsewhere in this Prospectus
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions; competition; technological
advances; ability to obtain rights to technology; ability to obtain and enforce
patents; ability to commercialize and manufacture products; results of clinical
studies; results of research and development activities; business abilities and
judgment of personnel; availability of qualified personnel; changes in, or
failure to comply with, governmental regulations; ability to obtain adequate
financing in the future; and other factors referenced in this Prospectus. See
"Risk Factors."
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NeXstar Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of NeXstar
Pharmaceuticals, Inc. as of December 31, 1995 and 1994, and the related
consolidated 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 consolidated financial position of NeXstar
Pharmaceuticals, Inc. at December 31, 1995 and 1994, and the consolidated
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
Denver, Colorado
February 16, 1996
F-1
<PAGE> 64
NEXSTAR PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------- -------------
1994 1995 1996
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 7,605,000 $ 20,893,000 $ 22,807,000
Marketable securities....................... 32,679,000 5,841,000 23,356,000
Accounts receivable......................... 13,954,000 18,315,000 19,788,000
Inventories................................. 5,898,000 9,469,000 10,372,000
Prepaid expenses and other.................. 3,016,000 1,948,000 1,620,000
------------ ------------- -------------
Total current assets.......................... 63,152,000 56,466,000 77,943,000
Equipment and leasehold improvements --
net of accumulated depreciation and
amortization................................ 42,162,000 43,001,000 42,321,000
Deposits...................................... 5,806,000 200,000 244,000
Investments in life science enterprises....... 4,822,000 3,950,000 3,950,000
Patent and trademark costs, net of accumulated
amortization of $349,000, $461,000 and
$566,000 at December 31, 1994 and 1995 and
March 31, 1996, respectively................ 3,142,000 3,732,000 3,949,000
Purchased technology, net of accumulated
amortization of $480,000, $1,485,000 and
$1,736,000 at December 31, 1994 and 1995 and
March 31, 1996, respectively................ 4,020,000 3,015,000 2,764,000
Other noncurrent assets, net of allowance of
$2,430,000 at December 31, 1995 and March
31, 1996.................................... 3,823,000 2,085,000 1,870,000
------------ ------------- -------------
Total assets.................................. $126,927,000 $ 112,449,000 $ 133,041,000
============ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings....................... $ 2,950,000 $ 3,500,000 $ 5,000,000
Accounts payable............................ 3,945,000 6,789,000 4,907,000
Accrued compensation and employee
benefits................................. 1,954,000 2,704,000 2,470,000
Accrued retirement agreement expense........ 3,939,000 101,000 73,000
Other accrued expenses...................... 2,838,000 3,890,000 4,256,000
Current portion of capital lease
obligations.............................. 3,323,000 4,313,000 4,451,000
------------ ------------- -------------
Total current liabilities..................... 18,949,000 21,297,000 21,157,000
Capital lease obligations..................... 10,500,000 9,848,000 9,689,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; 5,000,000
shares authorized
Common stock, $.01 par value; 50,000,000
shares authorized; issued and outstanding
shares -- 22,927,609 in 1994, 24,377,192
in 1995 and 26,065,321 at March 31,
1996..................................... 229,000 244,000 261,000
Additional paid-in capital.................. 163,966,000 184,290,000 211,431,000
Deferred compensation....................... (353,000) (235,000) (207,000)
Accumulated deficit......................... (66,364,000) (102,995,000) (109,290,000)
------------ ------------- -------------
Total stockholders' equity.................... 97,478,000 81,304,000 102,195,000
------------ ------------- -------------
Total liabilities and stockholders' equity.... $126,927,000 $ 112,449,000 $ 133,041,000
============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 65
NEXSTAR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
-------------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues.......... $ 30,518,000 $ 43,967,000 $ 57,770,000 $11,894,000 $17,545,000
Collaborative agreements
and contracts........... 2,098,000 4,054,000 2,920,000 751,000 579,000
Interest income........... 2,424,000 2,409,000 1,736,000 555,000 433,000
------------ ------------ ------------ ----------- -----------
Total revenues.............. 35,040,000 50,430,000 62,426,000 13,200,000 18,557,000
------------ ------------ ------------ ----------- -----------
Expenses:
Cost of goods sold........ 5,024,000 8,091,000 13,246,000 2,569,000 3,819,000
Research and development.. 24,574,000 31,595,000 39,662,000 8,242,000 11,176,000
Selling, general and
administrative.......... 16,279,000 22,108,000 32,994,000 7,280,000 9,463,000
Purchased research and
development............. -- -- 11,824,000 -- --
Retirement agreement
expense................. -- 4,097,000 -- -- --
Interest expense.......... 308,000 587,000 1,148,000 337,000 285,000
------------ ------------ ------------ ----------- -----------
Total expenses.............. 46,185,000 66,478,000 98,874,000 18,428,000 24,743,000
------------ ------------ ------------ ----------- -----------
Loss before provision for
income taxes.............. (11,145,000) (16,048,000) (36,448,000) (5,228,000) (6,186,000)
Provision for income
taxes..................... 167,000 159,000 183,000 52,000 110,000
------------ ------------ ------------ ----------- -----------
Net loss.................... $(11,312,000) $(16,207,000) $(36,631,000) $(5,280,000) $(6,296,000)
============ ============ ============ =========== ===========
Net loss per share.......... $ (0.53) $ (0.71) $ (1.57) $ (0.23) $ (0.25)
============ ============ ============ =========== ===========
Shares used in computing net
loss per share............ 21,336,000 22,825,000 23,374,000 22,941,000 25,065,000
============ ============ ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 66
NEXSTAR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------ --------------------- PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
------- -------- ---------- -------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992.................. 15,046 $ 15,000 15,188,871 $141,000 $128,615,000 $ -- $ (38,845,000) $89,926,000
Issuance of common
stock for cash...... -- -- 245,771 2,000 231,000 -- -- 233,000
Issuance of Series D
convertible
preferred stock for
cash................ 5,471 5,000 -- -- 10,037,000 -- -- 10,042,000
Issuance of Series E
convertible
preferred stock for
cash................ 2,381 2,000 -- -- 4,635,000 -- -- 4,637,000
Effect of 1.7-for-1
common stock split
effected as a stock
dividend............ -- -- -- 12,000 (12,000) -- -- --
Stock repurchases..... -- -- (279,400) (3,000) (2,574,000) -- -- (2,577,000)
Deferred compensation
related to grants of
stock and options... -- -- -- -- 789,000 (789,000) -- --
Amortization of
deferred
compensation........ -- -- -- -- -- 319,000 -- 319,000
Net loss.............. -- -- -- -- -- -- (11,312,000) (11,312,000)
------- ------- ---------- -------- ------------ --------- ------------- ------------
Balance at December 31,
1993.................. 22,898 22,000 15,155,242 152,000 141,721,000 (470,000) (50,157,000) 91,268,000
Issuance of common
stock for cash...... -- -- 2,147,784 21,000 21,115,000 -- -- 21,136,000
Conversion of
preferred stock upon
initial public
offering............ (22,898) (22,000) 5,655,396 56,000 (34,000) -- -- --
Stock repurchases..... -- -- (50,422) -- -- -- -- --
Employee stock
purchase plan....... -- -- 6,009 -- 29,000 -- -- 29,000
Option exercises...... -- -- 13,600 -- 15,000 -- -- 15,000
Amortization of
deferred
compensation........ -- -- -- -- -- 117,000 -- 117,000
Compensation
expense............. -- -- -- -- 1,120,000 -- -- 1,120,000
Net loss.............. -- -- -- -- -- -- (16,207,000) (16,207,000)
------- ------- ---------- -------- ------------ --------- ------------- ------------
Balance at December 31,
1994.................. -- -- 22,927,609 229,000 163,966,000 (353,000) (66,364,000) 97,478,000
Issuance of common
stock for cash...... -- -- 309,861 3,000 5,093,000 -- -- 5,096,000
Retirement agreement
transfer............ -- -- -- -- 1,688,000 -- -- 1,688,000
Issuance of common
stock for purchase
of Supragen, Inc.... -- -- 751,597 8,000 12,018,000 -- -- 12,026,000
Stock repurchases..... -- -- (1,156) -- -- -- -- --
Employee stock
purchase plan....... -- -- 46,600 1,000 306,000 -- -- 307,000
Option exercises...... -- -- 198,328 2,000 553,000 -- -- 555,000
Warrant exercises..... -- -- 144,353 1,000 666,000 -- -- 667,000
Amortization of
deferred
compensation........ -- -- -- -- -- 118,000 -- 118,000
Net loss.............. -- -- -- -- -- -- (36,631,000) (36,631,000)
------- ------- ---------- -------- ------------ --------- ------------- ------------
Balance at December 31,
1995.................. -- -- 24,377,192 244,000 184,290,000 (235,000) (102,995,000) 81,304,000
Issuance of common
stock for cash...... -- -- 1,429,132 14,000 24,960,000 -- -- 24,974,000
Retirement agreement
transfer............ -- -- -- -- 28,000 -- -- 28,000
Option exercises...... -- -- 234,838 3,000 2,044,000 -- -- 2,047,000
Warrant exercises..... -- -- 24,159 -- 109,000 -- -- 109,000
Amortization of
deferred
compensation........ -- -- -- -- -- 28,000 -- 28,000
Net loss.............. -- -- -- -- -- -- (6,295,000) (6,295,000)
------- ------- ---------- -------- ------------ --------- ------------- ------------
Balance at March 31,
1996 (unaudited)...... -- -- 26,065,321 $261,000 $211,431,000 $ (207,000) $(109,290,000) $102,195,000
======= ======= ========== ======== ============ ========= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 67
NEXSTAR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
-------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................. $(11,312,000) $(16,207,000) $(36,631,000) $(5,280,000) $ (6,296,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 2,358,000 4,160,000 9,791,000 2,181,000 3,103,000
Compensation expense related to grant
of options and sales of stock,
including amortization of deferred
compensation......................... 319,000 1,237,000 118,000 30,000 28,000
Retirement agreement expense........... -- 3,939,000 -- -- --
Purchased research and development..... -- -- 11,824,000 -- --
Allowance for loan loss................ -- -- 2,430,000 -- --
Other.................................. 332,000 140,000 487,000 (330,000) (60,000)
Changes in operating assets and
liabilities:
Accounts receivable.................. (2,472,000) (4,811,000) (4,361,000) (1,812,000) (1,480,000)
Inventories.......................... (1,578,000) 163,000 (3,571,000) (1,390,000) (903,000)
Prepaid expenses and other........... (1,046,000) (430,000) 1,082,000 1,264,000 395,000
Other noncurrent assets.............. (128,000) (88,000) (141,000) (40,000) 142,000
Short-term borrowings................ -- 2,950,000 550,000 (400,000) 1,500,000
Accounts payable..................... 1,307,000 (742,000) 2,527,000 2,686,000 (1,082,000)
Accrued compensation and employee
benefits........................... 903,000 912,000 846,000 (244,000) (266,000)
Accrued retirement agreement......... -- -- (2,150,000) -- --
Other accrued expenses............... 1,859,000 (1,156,000) 671,000 (68,000) 366,000
------------ ------------ ------------ ----------- ------------
Net cash used in operating activities.... (9,458,000) (9,933,000) (16,528,000) (3,403,000) (4,553,000)
INVESTING ACTIVITIES
Maturities (purchases) of marketable
securities, net........................ 23,535,000 (4,577,000) 26,838,000 11,094,000 (17,515,000)
Additions to equipment and leasehold
improvements........................... (15,799,000) (23,695,000) (8,663,000) (3,656,000) (2,837,000)
Cash acquired from purchase of Supragen,
Inc.................................... -- -- 418,000 -- --
Reductions (additions) to deposits....... (62,000) (5,633,000) 5,606,000 -- --
Reductions (additions) to investments in
life sciences enterprises, net......... (1,024,000) (3,286,000) -- 87,000 --
Additions to patent costs................ (707,000) (626,000) (702,000) (161,000) (322,000)
Additions to purchased technology........ (1,500,000) -- -- -- --
Additions to other noncurrent assets..... (1,328,000) (2,309,000) -- (333,000) --
------------ ------------ ------------ ----------- ------------
Net cash provided by (used in) investing
activities............................. 3,115,000 (40,126,000) 23,497,000 7,031,000 (20,674,000)
FINANCING ACTIVITIES
Proceeds from sale-leaseback
transactions........................... 1,257,000 12,197,000 3,382,000 614,000 1,091,000
Payments on capital lease obligations.... (1,234,000) (2,106,000) (3,592,000) (823,000) (1,112,000)
Stock repurchases........................ (2,577,000) -- -- -- --
Proceeds from sale of preferred stock.... 14,679,000 -- -- -- --
Proceeds from sale of common stock, net
of offering costs...................... 233,000 21,180,000 6,529,000 26,000 27,162,000
------------ ------------ ------------ ----------- ------------
Net cash provided by (used in) financing
activities............................. 12,358,000 31,271,000 6,319,000 (183,000) 27,141,000
------------ ------------ ------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents............................ 6,015,000 (18,788,000) 13,288,000 3,445,000 1,914,000
Cash and cash equivalents at beginning of
period................................. 20,378,000 26,393,000 7,605,000 7,605,000 20,893,000
------------ ------------ ------------ ----------- ------------
Cash and cash equivalents at end of
period................................. $ 26,393,000 $ 7,605,000 $ 20,893,000 $11,050,000 $ 22,807,000
============ ============ ============ =========== ============
</TABLE>
(continued on next page)
F-5
<PAGE> 68
NEXSTAR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Income taxes paid........................... $ 122,000 $ 111,000 $ 235,000
Supplemental schedule of non-cash activities:
Capital lease additions..................... 615,000 -- --
Purchase of equipment and leasehold
improvements through accounts payable.... -- 1,300,000 1,500,000
Deferred offering costs accrued............. 403,000 -- --
Deferred compensation....................... 789,000 -- --
Issuance of common stock through director
deferred compensation plan............... -- -- 96,000
Accrued retirement agreement................ -- -- 1,688,000
Details of Supragen, Inc. acquisition:
Fair value of assets acquired............... -- -- $ 1,248,000
Purchased research and development.......... -- -- 11,824,000
Liabilities assumed......................... -- -- (1,046,000)
Stock issued................................ -- -- (12,026,000)
------------ ------------ ------------
Cash paid................................... -- -- --
Add: cash acquired.......................... -- -- 418,000
------------ ------------ ------------
Cash acquired from purchase of Supragen,
Inc...................................... -- -- $ 418,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 69
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND SUBSEQUENT TO MARCH 31, 1996 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
NeXstar Pharmaceuticals, Inc., a Delaware corporation ("NeXstar
Pharmaceuticals" or the "Company"), is a leading biopharmaceutical company
engaged in the discovery, development, manufacture and marketing of proprietary
pharmaceutical products to treat life-threatening and other serious diseases.
NeXstar Pharmaceuticals was formed in 1991 as NeXagen, Inc. On October 30, 1994,
the Company, Neptune Merger-Sub Corp. ("Neptune"), a wholly-owned subsidiary of
the Company, and Vestar, Inc., a Delaware corporation ("Vestar"), entered into
an Agreement and Plan of Merger pursuant to which Neptune agreed to merge with
and into Vestar (the "Merger"). On February 21, 1995, the Merger was effected,
as a result of which, Vestar became a wholly-owned subsidiary of NeXstar
Pharmaceuticals. Each outstanding share of Vestar common stock was converted
into the right to receive 0.88 shares of NeXstar Pharmaceuticals common stock.
Accordingly, the Company issued or will issue 12,285,844 shares of its common
stock for all the outstanding shares of Vestar common stock. Additionally,
outstanding options and warrants to purchase Vestar common stock were converted
to options and warrants to acquire 3,220,724 shares of the Company's common
stock. Rights to receive Vestar common stock under a deferred compensation plan
were also converted to rights to receive 16,511 shares of common stock of the
Company. The Merger has been accounted for as a pooling of interests. On
September 30, 1995, Vestar was merged with and into the Company and Vestar
ceased its existence as a separate corporation.
Prior to the Merger, NeXstar Pharmaceuticals was primarily engaged in the
discovery and development of novel oligonucleotide-based pharmaceuticals. As a
result of the Merger, the Company combined its drug discovery program and
financial resources with Vestar's proprietary drug delivery technology, existing
products and product pipeline, and Vestar's manufacturing, marketing and
regulatory capabilities.
On September 8, 1995, the Company completed its acquisition of all of the
equity interests of Supragen, Inc. ("Supragen") for $12 million in the form of
751,597 shares of the Company's common stock. Following the acquisition,
Supragen became a wholly-owned subsidiary of the Company. The acquisition has
been accounted for as a purchase. As a result of the Supragen acquisition, the
Company has recorded a one-time, non-cash charge of purchased research and
development in its 1995 third quarter results of operations of $11.8 million. On
December 31, 1995, Supragen was merged with and into the Company and Supragen
ceased its existence as a separate corporation. Supragen's primary focus has
been in research and development of novel approaches to the specific deletion or
inactivation of pathogenic subsets of T cells involved in human diseases.
The following unaudited pro forma consolidated results of operations give
effect to the acquisition as though it had occurred at the beginning of the
periods presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995
------------ ------------
<S> <C> <C>
Total revenues....................................... $ 50,449,000 $ 62,484,000
Net loss............................................. (18,968,000) (39,832,000)
Net loss per share................................... (0.80) (1.67)
</TABLE>
F-7
<PAGE> 70
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma information is not necessarily indicative either of
results of operations that would have occurred had the purchase been made on
January 1, 1994, or future results of operations of the Company.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly and majority-owned subsidiaries; significant
intercompany transactions have been eliminated. Certain reclassifications,
including adjustments to conform accounting practices, have been made to prior
year amounts to agree with the current year presentation.
Unaudited Interim Financial Information
The financial information at March 31, 1996 and for the three months ended
March 31, 1995 and 1996 and subsequent to March 31, 1996 is unaudited, but
includes all adjustments (consisting only of normal recurring adjustments) which
the Company considers necessary for a fair presentation of the financial
position at such date and the operating results and cash flows for those
periods. Results for the three-month period ended March 31, 1996 are not
necessarily indicative of results that may be expected for the year ending
December 31, 1996.
Stock-based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting and Disclosure of Stock-Based Compensation" ("Statement No.
123"). Statement No. 123 is applicable for fiscal years beginning after December
15, 1995 and gives the option to either follow fair value accounting or to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25") and related Interpretations.
The Company has not yet determined whether it will elect to use fair value
or to follow APB No. 25 and related Interpretations in accounting for its
employee stock options. The Company has not yet determined the impact on its
financial position or results of operations, should it decide to adopt fair
value accounting.
Long-Lived Assets
Effective January 1, 1996, the Company adopted Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("Statement No. 121"), which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present. Implementation of
Statement No. 121 was immaterial to the financial statements of the Company.
Accounting Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
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.
It is possible that the future economic life of the Company's commercial
revenues, the amount of anticipated future commercial revenues, or both, could
be reduced significantly in the future due to alternate products or technologies
being developed by other biotech or pharmaceutical compa-
F-8
<PAGE> 71
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nies. As a result, the carrying amount of patent and trademark costs and
purchased technology costs could be reduced in the future.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are provided by the
straight-line method over the shorter of the lease term or the estimated useful
life.
Patent Costs
Patent costs are deferred pending the outcome of patent applications.
Successful patent costs are amortized by the straight-line method over the
lesser of the estimated useful life or the patent life. Unsuccessful patent
costs are expensed when so determined. Effective January 1, 1996, the Company
began amortizing its patent costs over a period of ten years. This change is not
expected to have a significant impact on the Company's financial condition or
results of operations.
Product Revenues/Accounts Receivable
Product revenues are recognized upon passage of legal title of the
inventory.
A significant portion of the Company's product revenues have been export
sales of AmBisome primarily through Company subsidiaries and to distributors in
Europe. The Company performs credit evaluations of its customers' financial
condition and historically has not required collateral. The Company's accounts
receivable are predominantly trade receivables, and to date, the Company has
experienced only modest losses with respect to the collection of its accounts
receivable.
In 1995, sales to one distributor accounted for approximately 27% of
product revenues. In 1993 and 1994, sales to two distributors accounted for
approximately 30% and 18% and 22% and 18% of product revenues, respectively.
In connection with most of its European sales, the Company prices its
products in the currencies of the countries into which they are sold (the
"Payment Currencies"), and revenues in the past have been and in the future
could be adversely affected by currency fluctuations. A significant majority of
the Company's manufacturing costs are in U.S. dollars. Therefore, any fall in
the value of the Payment Currencies relative to the U.S. dollar is likely to
negatively impact gross margins for the Company's products since the Company's
manufacturing costs would stay approximately the same while its revenue in terms
of U.S. dollars would decline.
Foreign Currency Transactions and Contracts
Foreign exchange transaction gains (losses) included in the Consolidated
Statements of Operations in 1993, 1994 and 1995 were ($640,000), $272,000, and
$371,000, respectively.
The Company hedges certain of its foreign currency exposures, with respect
to its outstanding trade accounts receivable and accounts payable, through the
use of forward contracts. In the future, the Company may begin currency hedging
in connection with anticipated revenues and expenses and may use options in
addition to forward contracts. Such hedging will be done solely for the purpose
of protecting the Company from foreign currency fluctuations. The Company does
not enter into speculative foreign currency transactions and does not write
speculative options. The Company recognizes a gain or loss for each forward
contract for the difference between the contract rate and the market rate on
each balance sheet date which is recorded as a selling, general and
administrative expense. Accordingly, no deferred accounting is used in
connection with the Company's hedging
F-9
<PAGE> 72
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
activities. Notwithstanding its hedging activities (which have not always
included fully hedging against potential gains or losses), the Company has in
the past recognized foreign exchange gains and losses. There can be no assurance
that significant gains or losses will not be incurred in the future.
At December 31, 1994 and 1995, the Company had forward exchange contracts
outstanding of $1.5 million and $11.4 million, respectively. These contracts
have maturities that do not exceed one year, and gains/losses resulting from
these contracts were not material.
The Company does not hedge any balance sheet exposure of its foreign
subsidiaries.
Common Stock Dividend
On November 19, 1993, the Company's Board of Directors authorized a stock
split effected in the form of a stock dividend of 0.7 shares of common stock for
each share of common stock outstanding, which was distributed on December 1,
1993 to common stockholders of record on November 24, 1993. As a result of the
stock split, an additional 1,242,894 common shares were issued. The par value of
the common stock did not change. Accordingly, an amount equal to the par value
of the common shares issued for the stock split has been transferred from
additional paid-in capital to the common stock account. All references in the
accompanying consolidated financial statements to the number of common shares
and per share amounts, including shares reserved for issuance under the NeXstar
Pharmaceuticals, Inc. 1993 Incentive Stock Plan, stock options, and warrants,
have been retroactively restated to reflect the stock split.
Research and Development
Expenditures for research and development, including costs related to
contract and collaborative agreements, and technology defense costs, are charged
to operations as incurred.
Net Loss per Share
Beginning on April 1, 1994, net loss per share is computed using the
weighted average number of shares of common stock outstanding. Prior to April 1,
1994, pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins and Staff Policy, common and common equivalent shares issued during
the 12-month period prior to the initial public offering at prices below the
public offering price are presumed to have been issued in contemplation of the
public offering, even if antidilutive, and have been included in the calculation
as if they were outstanding for all periods presented (using the treasury stock
method and the initial public offering price for common stock, stock options and
warrants and the as converted method for convertible preferred stock).
Cash and Cash Equivalents
Cash and cash equivalents represent highly liquid debt instruments with a
maturity of three months or less when purchased.
At December 31, 1994 and 1995, approximately $3,518,000 and $2,000,
respectively, of cash and cash equivalents were held and managed by an affiliate
of Warburg, Pincus Investors, L.P. ("WPI"), a holder of more than 5% of the
Company's common stock.
F-10
<PAGE> 73
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
The carrying amounts reported on the balance sheet for cash and
cash equivalents, accounts receivable, other noncurrent assets,
short-term borrowings, accounts payable, and capitalized lease
obligations approximate their fair value.
Marketable securities are classified as available-for-sale and
carried at amortized cost which approximates market.
The fair value of forward exchange contracts is estimated based
on quoted market prices.
The carrying amount and fair value of certain of the Company's assets,
liabilities, and off-balance sheet financial instruments as of December 31, 1995
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------
CARRYING
AMOUNT FAIR VALUE
----------- -----------
<S> <C> <C>
Assets:
Cash and cash equivalents............................ $20,893,000 $20,893,000
Marketable securities................................ 5,841,000 5,841,000
Accounts receivable.................................. 18,315,000 18,315,000
Other noncurrent assets.............................. 2,085,000 2,085,000
Liabilities:
Short-term borrowings................................ 3,500,000 3,500,000
Accounts payable..................................... 6,789,000 6,789,000
Current portion of capital lease obligations......... 4,313,000 4,313,000
Capital lease obligations............................ 9,848,000 9,848,000
Off-balance sheet financial instruments:
Forward exchange contracts........................... 11,248,000 11,248,000
</TABLE>
NOTE 2. MARKETABLE SECURITIES
Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designation as of each balance sheet
date. Available-for-sale securities are carried at fair value, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary are included in income. At
December 31, 1994 and 1995, aggregate amortized cost of marketable securities
approximates their aggregate amortized fair value (based on dealer quotations)
and unrealized gains/losses are not significant.
The following is a summary of the amortized cost of marketable securities,
which approximates estimated fair value:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY TOTAL
------------------ ---------------- -----------
<S> <C> <C> <C>
December 31, 1994
U.S. corporate securities............ $ 21,662,000 $4,867,000 $26,529,000
Other debt securities................ 2,054,000 4,096,000 6,150,000
----------- ---------- -----------
Total marketable
securities................. $ 23,716,000 $8,963,000 $32,679,000
=========== ========== ===========
</TABLE>
F-11
<PAGE> 74
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
------------------
<S> <C>
December 31, 1995
U.S. corporate securities............ $ 4,897,000
Other debt securities................ 944,000
-----------
Total marketable
securities................. $ 5,841,000
===========
</TABLE>
The following is a summary of the amortized cost, which approximates
estimated fair value of marketable securities, by contractual maturity:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
------------------
<S> <C>
December 31, 1995
Due in one year or less.............. $ 4,897,000
Due after one year through three
years............................. 944,000
-----------
Total marketable
securities................. $ 5,841,000
===========
</TABLE>
At December 31, 1994 and 1995, approximately $16,866,000 and $5,841,000,
respectively, of marketable securities were held and managed by an affiliate of
WPI.
NOTE 3. INVENTORIES
Raw materials, work in process and finished goods inventories are recorded
at the lower of cost or market, based on currently adjusted standard costs,
which approximates cost on a first-in, first-out basis.
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Finished goods............................ $ 960,000 $2,804,000 $ 3,110,000
Work in process........................... 3,711,000 4,846,000 5,806,000
Raw materials............................. 1,227,000 1,819,000 1,456,000
---------- ---------- -----------
Total inventories............... $5,898,000 $9,469,000 $10,372,000
========== ========== ===========
</TABLE>
NOTE 4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------ -----------
<S> <C> <C>
Laboratory equipment.................................. $ 4,805,000 $ 6,517,000
Office furniture and equipment........................ 3,259,000 4,859,000
Capitalized leased equipment.......................... 17,664,000 21,910,000
Leasehold improvements................................ 3,883,000 25,586,000
Construction in progress.............................. 20,621,000 1,251,000
------------ -----------
50,232,000 60,123,000
Less accumulated depreciation and amortization........ (8,070,000) (17,122,000)
------------ -----------
Net equipment and leasehold improvements.............. $ 42,162,000 $43,001,000
============ ===========
</TABLE>
F-12
<PAGE> 75
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. PURCHASED TECHNOLOGY
In 1992, the Company and Vical, Incorporated ("Vical") entered into an
agreement under which the Company purchased (for $3,000,000) exclusive rights to
develop applications of Vical's lipid conjugate technology for a limited number
of applications. This agreement was expanded in 1993 (for an additional
$1,500,000) to grant the Company exclusive rights to Vical's entire portfolio of
lipid conjugate technologies for all potential therapeutic applications. The
cost of such base-core technology has been capitalized and is included in
purchased technology on the accompanying Consolidated Balance Sheets. Prior to
January 1, 1995, the Company amortized the technology over the estimated life of
the related patents. Effective January 1, 1995, the Company began amortizing the
remaining value of the technology over a four year period. The Company evaluates
the carrying amount of the technology for impairment at least quarterly by,
among other things, reviewing the status of applicable ongoing development
activities, as well as the progress of patent applications and issuances.
NOTE 6. OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
---------- ----------
<S> <C> <C>
Commissions, distribution fees, and royalties............ $ 929,000 $1,457,000
Other.................................................... 1,909,000 2,433,000
---------- ----------
Total other accrued expenses........................ $2,838,000 $3,890,000
========== ==========
</TABLE>
NOTE 7. COMMITMENTS AND CONTINGENCIES
Leases
The Company has entered into two long-term noncancelable operating leases
for office, research, and manufacturing facilities in Boulder, Colorado. The
lease terms for these leases are five to seven years with two renewal options
each of five and seven years, respectively. The leases are subject to escalation
clauses which provide for annual increases in rent based on the Consumer Price
Index. The Company has entered into two long-term lease agreements for office,
research, and manufacturing facilities in San Dimas, California. The terms of
the leases provide for an eleven-year, six-month term and a ten-year, six-month
term, both with two five-year renewal options. One lease contains an option to
purchase the property at fair market value at the end of the original lease
term.
The Company has entered into certain sale-leaseback transactions and
related master equipment lease agreements for manufacturing equipment, general
laboratory and scientific equipment, office equipment, and furniture and
fixtures. At December 31, 1995 $1,481,000 was available under such agreements.
Title to assets acquired under the lease lines of credit resides with the
lessor. The Company has the option to purchase the assets at the end of the
lease term for the fair market value, however, one master lease agreement
contains a bargain purchase price of $1.00. The leases have terms ranging from
two to five years. One of the master lease agreements required a security
deposit of $5,476,000 to be held by the lessor. The agreement was amended in
September 1995 and the security deposit was returned to the Company. The
interest rates on borrowings under these lease lines of credit range between
7.31% and 12.75% per annum. Cash paid for interest approximates interest
expense.
Rent expense for the years ended December 31, 1993, 1994 and 1995 was
approximately $1,633,000, $1,685,000 and $2,618,000, respectively.
F-13
<PAGE> 76
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental payments under noncancellable operating and capital
leases with initial or remaining terms of more than one year as of December 31,
1995 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEARS ENDING DECEMBER 31, LEASES LEASES
------------------------------------------------------- ------------ ------------
<S> <C> <C>
1996........................................... $ 2,902,000 $ 5,212,000
1997........................................... 2,743,000 4,664,000
1998........................................... 2,299,000 3,744,000
1999........................................... 1,883,000 2,331,000
2000........................................... 1,626,000 --
Thereafter..................................... 3,920,000 --
----------- -----------
$ 15,373,000 15,951,000
===========
Less amount representing interest...................... (1,790,000)
-----------
Total capital lease obligations........................ 14,161,000
Less current portion................................... (4,313,000)
-----------
Long-term capital lease obligations.................... $ 9,848,000
===========
</TABLE>
Loan Receivable
Beginning in 1995, the Company adopted Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan"
("Statement No. 114"). Under the new standard, the 1995 allowance for loan loss
related to a loan that was identified for evaluation in accordance with
Statement No. 114 is based on the fair value of the collateral.
The Company previously loaned 4.5 million Canadian dollars (approximately
$3.35 million at December 31, 1995) (the "Loan") to Phytogen Life Sciences Inc.
("Phytogen"), a Canadian corporation incorporated in British Columbia, to fund
construction of a manufacturing facility, working capital and inventory. At
December 31, 1995, the Company recorded an allowance for loan loss of $2.43
million for the loan and ceased accruing interest income. On June 5, 1996, the
Company agreed to convert 968,784 Canadian dollars (approximately $707,000) of
the Loan into 235,714 preferred shares of Phytogen. Additionally, the Company
agreed to terminate its right to convert the Loan into a 49.9% equity interest
in Phytogen and received a warrant for 300,000 Phytogen shares with an exercise
price of $3 per share and an agreement from Phytogen to repay the Company
$700,000 of the principal of the Loan within 10 business days of receipt of
certain third-party funding. The Company has no future obligation to lend any
amount to Phytogen.
Short-term Borrowings
The Company has an unsecured line of credit available with a domestic bank
(the "Bank") for $5.0 million. The short-term borrowings outstanding at December
31, 1995 and March 31, 1996 represent borrowings under this line of credit. The
Company's working capital needs were fulfilled by borrowing under this line of
credit agreement; the terms and interest rate are similar to those generally
extended to companies of comparable creditworthiness. In November 1995, the Bank
agreed to extend the term of the line of credit to September 1, 1996.
Licenses and Royalties
The Company has entered into license agreements with various medical and
educational institutions to obtain certain exclusive and nonexclusive patent
rights for the purpose of developing, manufacturing and selling potential
products using these patented technologies. Under these
F-14
<PAGE> 77
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreements, the Company will pay royalties at varying rates based upon levels of
revenues from the licensed products, as defined. Generally, the agreements
continue as long as any licensed patents remain in force.
Patent Matters
On May 17, 1993, the Company filed a complaint in the United States
District Court for the District of Delaware against The Liposome Company ("TLC")
asking the court to declare a patent owned by TLC (U.S. Patent No. 4,880,635)
(the "TLC '635 Patent") invalid, unenforceable, and not infringed following
allegations by TLC that the freeze drying of AmBisome infringes the TLC '635
Patent. In addition, the Company has opposed the grant to TLC of the European
and Japanese patents that are counterparts of the TLC '635 Patent. On December
20, 1993, the United States District for the District of Delaware stayed the May
17, 1993 lawsuit pending the outcome of a reexamination of the TLC '635 Patent
instituted by TLC in the U.S. Patent and Trademark Office ("USPTO"). Upon
reexamination, the USPTO refused to confirm any of the claims of the TLC '635
Patent in their original form. However, on June 6, 1996, TLC publicly stated
that it had been informed by the USPTO that certain amended claims would be
allowed and that, when a reexamination certificate issues in respect of such
claims, TLC intends to file a counterclaim against the Company for damages and
an injunction based on infringement of the reexamined patent. The Company does
not believe that the reexamined TLC '635 Patent presents a material risk to the
Company.
Accrued Retirement Agreement Expense
Results for the year ended December 31, 1994 were impacted by a charge to
earnings of $4,097,000 as a result of an agreement with Dr. Roger Crossley who
retired on May 25, 1994 as the President and Chief Executive Officer of Vestar.
Vestar and Dr. Crossley entered into an agreement effective May 25, 1994, in
connection with his retirement (the "Agreement"). Under the terms of the
Agreement, during 1995 Dr. Crossley was paid approximately $2.1 million in
connection with his sale of certain shares of the Company's common stock. Such
payment related to a guarantee that in the event that prior to May 25, 1997 he
sold certain shares of the Company's common stock which he owned at a price less
than $15.772 per share, the Company would pay him the difference between the
sales price and $15.772 per share. During June and July 1995, Dr. Crossley sold
all but 44,000 of the shares covered by the Agreement. In March 1996 he sold the
remaining 44,000 shares covered by the Agreement at no cost to the Company.
The Company accounted for its liability to Dr. Crossley in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"). Because of the price
guarantee of $15.772 per share, the Company recorded compensation expense at
December 31, 1994 based on the amount the Company would have been required to
pay Dr. Crossley based on the market value of the Company's common stock at
December 31, 1994. In accordance with APB 25, following the $2.1 million payment
to Dr. Crossley, the Company transferred $1.7 million from accrued retirement
agreement expenses to additional paid-in capital.
NOTE 8. STOCKHOLDERS' EQUITY
All share and per share amounts discussed below reflect the 1.7-for-1 stock
split described in Note 1, which was effected in the form of a stock dividend
pursuant to which each stockholder received 0.7 shares of common stock for each
share of common stock.
F-15
<PAGE> 78
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock
In February 1994, the Company completed an initial public offering of its
common stock, whereby 2,000,000 shares of the Company's common stock were sold
at $11.50 per share, resulting in net proceeds of approximately $20,617,000.
As a result of the Company's initial public offering, all preferred shares
outstanding, including the Series B preferred shares held by WPI, an affiliate
of the Company, were exchanged for shares of common stock upon consummation of
the offering (but excluding all preferred shares issuable upon exercise of
outstanding warrants), automatically converted into an aggregate of 5,655,396
common shares.
On November 19, 1993, the Company's Board of Directors approved the
conversion of the Company's Series B redeemable preferred stock into common
stock immediately prior to any public offering by the Company. The Series B
redeemable preferred stock was converted by dividing $4,000,000 by $11.50, the
price per share in the Company's public offering, with the holder waiving rights
to any dividends. In connection with the initial public offering, the Series B
stockholder, WPI, transferred to Lawrence M. Gold, the Chairman of the Company,
approximately 28% of the shares of common stock WPI acquired as a result of the
conversion in consideration for the termination of certain of his rights. At the
time of the transfer, the Company recorded non-cash compensation expense and a
corresponding credit to additional paid-in capital equal to the fair value of
the shares transferred (approximately $1,120,000).
During 1993, the Company repurchased 279,400 shares of its common stock for
approximately $2,577,000. The repurchased shares were retired in February 1995.
On December 22, 1995, the Company sold 297,619 shares of its common stock
in a private offering for $5 million ($16.80 per share).
On February 13, 1996, the Company completed a private sale of 1,425,000
shares of its common stock to a group of private investors (the "Private
Investors"). The net proceeds to the Company from the sale were approximately
$24.9 million. In connection with the transaction, the Company filed a "shelf"
registration statement on Form S-3 registering for resale the shares acquired by
the Private Investors. Pursuant to its agreement with the Private Investors, the
Company is required to keep the "resale" registration statement effective for up
to three years. In addition to the Private Investors, a holder of 297,619 shares
of the Company's common stock and two holders of warrants to acquire 250,481
shares of the Company's common stock exercised registration rights granted to
them by the Company and had their shares of common stock, or the shares of
common stock which relate to their warrants, included in the registration
statement.
On May 29, 1996, the stockholders of the Company approved an increase in
the authorized shares of the Company's Common Stock from 35 million to 50
million.
Warrants
Common stock warrant activity was as follows:
<TABLE>
<CAPTION>
SHARES EXPIRATION
WARRANTS EXERCISE PRICE RESERVED DATE
--------- -------------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1994...... 1,825,316 $4.09 - $16.48 1,825,316 1995 - 2003
Granted........................... 8,458 $7.08 - $32.54 8,458 1999 - 2002
Exercised......................... (144,354) $4.09 - $ 4.83 (144,354) 1995 - 2000
Expired........................... (257,647) $4.09 - $ 4.83 (257,647) 1995
--------- ---------
Outstanding, December 31, 1995...... 1,431,773 1,431,773 1996 - 2003
========= =========
</TABLE>
F-16
<PAGE> 79
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the above table are warrants to purchase 220,000 shares of
common stock which were issued in 1990 to Warburg, Pincus Capital Partners, L.P.
("WPCP"), a beneficial owner of more than 5% of the Company's common stock, with
a purchase price of $4.09 per share in connection with the issuance of a letter
of credit on behalf of the Company, which has expired. In April 1995, 40,000
warrants were exercised and the remaining 180,000 warrants expired. In addition,
WPCP has warrants to purchase 1,035,294 of the Company's common stock at an
exercise price of $4.83 per share which were issued in 1990 in connection with
the sale of certain equity securities of the Company. In April 1995, WPCP's
warrants were amended to change the expiration date to December 31, 1997.
Registration Rights
Under certain circumstances, the Company's common stockholders and holders
of warrants to purchase common stock of the Company may require a registration
of the outstanding common shares or the shares underlying warrants, the cost of
which would be borne by the Company.
Stock Options
On February 8, 1993, the Company adopted the 1993 Incentive Stock Plan (the
"1993 Plan") for employees, directors, and consultants of NeXstar
Pharmaceuticals which provides for the sale of shares or the issuance of
incentive and nonstatutory stock options of up to 2,404,711 shares of common
stock. Options issued under the 1993 Plan are exercisable under conditions as
determined by the Board of Directors, with the term of each option being a
maximum of ten years from the date of grant. The Company has reserved 2,404,711
shares of its authorized common stock under its 1993 Plan.
During the year ended December 31, 1995, the Company granted options to
purchase 200,000 shares of common stock under the 1993 Plan to executive
officers of the Company. Options granted prior to November 1993 vest 20%
immediately and 20% on the grant date anniversary each year thereafter for four
years. Options granted after October 1993 vest 25% on each anniversary date of
the four years following the grant date. The option exercise prices range from
$0.69 to $16.50 per share.
The Company has reserved for issuance 955,439 shares of its common stock to
allow for the exercise of options under its 1988 Stock Option Plan (the "1988
Plan"). Options granted under the 1988 Plan are exercisable upon conditions
determined by the Board of Directors of the Company, and expire no later than
ten years from the date of grant. The Company does not intend to issue
additional options under the 1988 Plan.
On July 25, 1995, the Company's Board of Directors approved the 1995
Director Option Plan (the "Director Plan"). On May 29, 1996, the stockholders of
the Company approved the Director Plan. Under the Director Plan, each outside
director of the Company is entitled to receive an option for 10,000 shares of
the Company's common stock on the later of the effective date of the Director
Plan or the date on which such person first becomes an outside director. In
addition, each outside director who has served on the Board of Directors for at
least six months automatically is entitled to receive an option grant for 5,000
shares on the last business day prior to each annual meeting of stockholders of
the Company. The options have a term of ten years, an exercise price equal to
100% of the fair market value of the common stock on the date of grant and vest
50% on each anniversary date of the two years following the grant date. Options
for up to 500,000 shares of common stock may be issued under the Director Plan.
In 1995, options for 30,000 shares were issued to three outside directors.
F-17
<PAGE> 80
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity was as follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
--------- ---------------
<S> <C> <C>
Outstanding, December 31, 1994................................ 1,950,772 $ 0.69 - $18.47
Granted..................................................... 783,340 $ 5.65 - $16.50
Exercised................................................... (198,328) $ 0.69 - $13.92
Cashless exercises.......................................... (51,652) $ 3.13 - $ 3.55
Terminated.................................................. (294,098) $ 0.69 - $15.91
---------
Outstanding, December 31, 1995................................ 2,190,034 $ 0.69 - $18.47
=========
</TABLE>
At December 31, 1995, options for 997,798 shares were exercisable and
options for 1,618,809 shares were available for future grants.
As a result of compensatory stock issuances and option grants in 1993, the
Company recorded deferred compensation, noncash charges to earnings, and a
credit for additional paid-in-capital of $470,000, $319,000 and $789,000,
respectively. The Company is amortizing the deferred compensation over a period
of four years.
NOTE 9. INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Pretax income:
United States.............................. $ (9,876,000) $(14,543,000) $(35,128,000)
Foreign.................................... (1,269,000) (1,824,000) (1,320,000)
------------ ------------ ------------
$(11,145,000) $(16,367,000) $(36,448,000)
============ ============ ============
</TABLE>
The current provision for income taxes includes the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Federal income taxes............................. $ -- $ 16,000 $ --
State income taxes............................... -- -- --
Foreign income taxes............................. 167,000 143,000 183,000
-------- -------- --------
$167,000 $159,000 $183,000
======== ======== ========
</TABLE>
F-18
<PAGE> 81
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the Company's current provision for income taxes and
the federal statutory rate of 34% is reconciled as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1993 1994 1995
------------ ----------- ------------
<S> <C> <C> <C>
Statutory rate applied to income before
income taxes.............................. $ (3,789,000) $(5,565,000) $(12,392,000)
State income taxes, net of federal tax
benefit................................... -- -- --
Tax effect of subsidiary losses without
benefit................................... 80,000 144,000 296,000
Effect of foreign tax rates................. 32,000 41,000 183,000
In-process purchased research and
development............................... -- -- 4,020,000
Merger-related costs not deductible for tax
purposes.................................. -- -- 1,023,000
Net operating loss unused/(net of operating
loss carryforwards utilized).............. 3,479,000 4,525,000 6,470,000
Other....................................... 365,000 1,014,000 583,000
------------ ----------- ------------
$ 167,000 $ 159,000 $ 183,000
============ =========== ============
</TABLE>
At December 31, 1995, the Company had net operating loss and tax credit
carryforwards available to reduce future taxable income. Utilization of these
losses and credits may be subject to substantial annual limitations due to the
separate return limitation years ("SRLY") and ownership change limitations
provided by the Internal Revenue Code of 1986. The annual limitation may result
in the expiration of the net operating losses and credits before utilization.
Tax loss and tax credit carryforwards are as follows:
<TABLE>
<CAPTION>
FEDERAL STATE
----------------------------- -----------------------------
RESEARCH AND RESEARCH AND
NET DEVELOPMENT NET DEVELOPMENT
OPERATING AND OTHER OPERATING AND OTHER
EXPIRES DECEMBER 31, LOSS CREDITS LOSS CREDITS
- -------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
2001................. $ 3,430,000 $ -- $ -- $ --
2002................. 3,732,000 -- -- --
2003................. 6,443,000 -- -- --
2004................. 7,288,000 -- 3,646,000 --
2005................. 6,194,000 2,020,000 3,096,000 393,000
2006................. 621,000 39,000 621,000 --
2007................. 2,943,000 709,000 2,943,000 275,000
2008................. 11,001,000 1,846,000 8,547,000 604,000
2009................. 11,858,000 1,259,000 11,965,000 192,000
2010................. 23,831,000 506,000 23,831,000 49,000
------------ ----------- ------------ -----------
$ 77,341,000 $ 6,379,000 $ 54,649,000 $ 1,513,000
============ =========== ============ ===========
</TABLE>
F-19
<PAGE> 82
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's deferred tax asset and related valuation
allowance as of December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995
------------- -------------
<S> <C> <C>
Net Operating Loss Carryforwards
Federal............................................ $ 17,465,000 $ 26,295,000
State.............................................. 959,000 1,811,000
Tax Credit Carryforwards
Federal............................................ 5,165,000 6,379,000
State.............................................. 1,238,000 1,513,000
Other -- net......................................... 1,573,000 3,846,000
------------ ------------
26,400,000 39,844,000
Valuation Allowance.................................. (26,400,000) (39,844,000)
------------ ------------
Deferred Tax Asset Recognized........................ $ -- $ --
============ ============
</TABLE>
NOTE 10. EMPLOYEE BENEFIT PLANS
Retirement Savings Plan
Effective January 1, 1993, the Company established a noncontributory profit
sharing plan with an Internal Revenue Code Section 401(k) feature for its
salaried employees aged 21 or older. Employee contributions are discretionary,
but are not to exceed 20% of eligible annual compensation.
Vestar's Board of Directors adopted a retirement savings plan (the "Savings
Plan") in 1988 pursuant to which employees may defer compensation for income tax
purposes under Section 401(k) of the Internal Revenue Code. Prior to the Merger
between the Company and Vestar, all qualifying employees could direct
contributions to be invested in the Company's common stock in addition to other
investment options. As of December 31, 1995, $953,000, representing 58,641
shares of the Company's common stock, was held by the Savings Plan in trust for
plan participants. In addition, prior to 1992, the Company contributed shares of
its common stock to plan participants as discretionary contributions under the
Savings Plan. As of December 31, 1995, 50,933 shares of the Company's common
stock were held by the Savings Plan as discretionary contributions for plan
participants, all of which was vested on December 31, 1995.
Effective January 1, 1996, the Company adopted a new retirement savings
plan pursuant to which employees may defer compensation for income tax purposes
under Section 401(k) of the Internal Revenue Code (the "New Plan"). Employee
contributions are discretionary, but are not to exceed 10% of eligible annual
compensation. The New Plan was established to consolidate all of the Company's
current employees, including former employees of Vestar, Inc. and Supragen,
Inc., under a single plan. The New Plan is a successor to the Company's prior
401(k) plans, including the Savings Plan, for the Company's current employees.
F-20
<PAGE> 83
NEXSTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Stock Purchase Plan
On June 9, 1994, the Company adopted an employee stock purchase plan with
an effective date of August 1, 1994, under Internal Revenue Code Section 423
which provides for the sale to employees of up to 500,000 shares of common
stock. The Company has reserved 500,000 shares of its authorized common stock in
connection with this plan. Employees who work at least twenty hours per week and
at least five months per calendar year may participate. The granting of rights
to purchase common stock of the Company shall be determined by the Board of
Directors. As of December 31, 1995, a total of 52,609 shares were purchased at
prices per share from $4.78 to $7.23, which represented 85% of the fair market
value of the common stock on the lower of the offering date or the date of
exercise.
F-21
<PAGE> 84
[This page presents a series of eight pictures illustrating how the SELEX
Process works to produce lead compounds. The pictures are accompanied by the
following narrative:
THE SELEX PROCESS
The SELEX Process starts by generating a million billion different
oligonucleotides. This pool of oligos serves as a source of diverse molecular
shapes. Some of these shapes will form a complementary fit with a specific
target, much as a glove fits to a hand. The goal of the SELEX process is to
find those oligos from within the pool that fit best, and thus bind strongly to
a particular target.
(1) During early rounds of the SELEX protocol, the pool is mixed with a
relatively large amount of target. Many oligos will bind to the target, some
better than others. (2) The non-binding oligos are discarded. (3) The bound
oligos are dislodged from the target. (4) The dislodged oligos are then
amplified to create an enriched pool, using the tools of modern molecular
biology.
(5) Beginning with an enriched pool, step 5 through 8 are identical to steps 1
through 4 except that fewer target molecules are used. Decreasing the amount of
target molecules in subsequent rounds increases the competition amongst the
oligos for the target and permits selection of the strongest binding oligos.
Shown above are two rounds of the SELEX Process. Typically it takes fewer than
15 rounds to yield the lead compounds.]
<PAGE> 85
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- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT 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 ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 19
Dividend Policy....................... 19
Price Range of Common Stock........... 20
Dilution.............................. 20
Capitalization........................ 21
Selected Consolidated Financial
Data................................ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 30
Management............................ 52
Description of Capital Stock.......... 55
Underwriting.......................... 58
Legal Matters......................... 59
Experts............................... 59
Incorporation of Certain Documents by
Reference........................... 60
Available Information................. 60
Additional Information................ 61
Special Note Regarding
Forward-Looking Statements.......... 61
Financial Statements.................. F-1
</TABLE>
2,500,000 SHARES
NEXSTAR LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
ALEX. BROWN & SONS
INCORPORATED
SMITH BARNEY INC.
VECTOR SECURITIES
INTERNATIONAL, INC.
SBC WARBURG INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered (all amounts are estimated except
the registration fee and the NASD filing fee):
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
SEC registration fee..................................................... $ 21,687
NASD filing fee.......................................................... 6,790
Blue Sky fees and expenses............................................... 7,500
Printing, shipping and engraving expenses................................ 150,000
Legal fees and expenses.................................................. 100,000
Accounting fees and expenses............................................. 20,000
Transfer Agent and Registrar fees and expenses........................... 2,500
Nasdaq National Market listing fees...................................... 17,500
Miscellaneous expenses................................................... 34,023
--------
Total.......................................................... $360,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's By-Laws require the Company to indemnify any and all of its
directors or officers or directors or officers who serve at the request of the
corporation as a director or officer of another corporation, to the full extent
permitted by the Delaware General Corporation Law (the "DGCL").
The Company's Amended and Restated Certificate of Incorporation (the
"Company Certificate of Incorporation") also provides that:
The Company shall indemnify to the fullest extent permitted under and in
accordance with the laws of the State of Delaware any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he is or was a director, officer,
employee or agent of the Company, or is or was serving at the request of the
Company as a director, officer, trustee, employee or agent of or in any other
capacity with another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Expenses incurred in defending a civil or criminal action, suit or
proceeding shall (in the case of any action, suit or proceeding against a
director of the Company) or may (in the case of any action, suit or proceeding
against an officer, trustee, employee or agent) be paid by the Company in
advance of the final disposition of such action, suit or proceeding as
authorized by the NeXstar Pharmaceuticals Board of Directors upon receipt of an
undertaking by or on behalf of the indemnified person to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by
NeXstar Pharmaceuticals as authorized in the NeXstar Pharmaceuticals Certificate
of Incorporation.
The indemnification and other rights set forth in the Company Certificate
of Incorporation shall not be exclusive of any provisions with respect thereto
in the By-Laws or any other contract or agreement between the Company and any
officer, director, employee or agent of the Company.
II-1
<PAGE> 87
Neither the amendment nor repeal of the provisions (described above) in the
Company Certificate of Incorporation regarding indemnification, nor the adoption
of any provision of the Company Certificate of Incorporation inconsistent with
such provisions, shall eliminate or reduce the effect of such provisions, in
respect of any matter occurring prior to such amendment, repeal or adoption of
an inconsistent provision or in respect of any cause of action, suit or claim
relating to any such matter which would have given rise to a right of
indemnification or right to receive expenses pursuant to such provisions, if
such provision had not been so amended or repealed or if a provision
inconsistent therewith had not been so adopted.
No director shall be personally liable to the Company or any stockholder
for monetary damages for breach of fiduciary duty as a director, except for any
matter in respect of which such director (A) shall be liable under Section 174
of the DGCL or any amendment thereto or successor provision thereto, or (B)
shall be liable by reason that, in addition to any and all other requirements
for liability, he:
(i) shall have breached his duty of loyalty to the Company or its
stockholders;
(ii) shall not have acted in good faith or, in failing to act, shall
not have acted in good faith;
(iii) shall have acted in a manner involving intentional misconduct or
a knowing violation of law or, in failing to act, shall have acted in a
manner involving intentional misconduct or a knowing violation of law; or
(iv) shall have derived an improper personal benefit.
If the DGCL is amended after the date upon which a document is filed in the
State of Delaware to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director of the
Company shall be eliminated or limited to the fullest extent permitted by the
DGCL, as so amended.
Section 145 of the DGCL empowers a Delaware corporation to indemnify any
persons who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was an officer or
director of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided that
such officer or director acted in good faith and in a manner reasonably believed
to be in or not opposed to the corporation's best interests, and, for criminal
proceedings, had no reasonable cause to believe his conduct was illegal. A
Delaware corporation may indemnify officers and directors in an action by or in
the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation in the performance of his
duty. Where an officer or director is successful on the merits or otherwise in
the defense of any action referred to above, the corporation must indemnify him
against the expenses which such officer or director actually and reasonably
incurred.
II-2
<PAGE> 88
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
*1 -- Form of Underwriting Agreement.
*4.1 -- Form of Second Amended and Restated Certificate of Incorporation of the
Company.
**4.2 -- Form of Common Stock Certificate of the Company.
5 -- Opinion of Willkie Farr & Gallagher.
*10.1 -- Amendment No. 4 to NeXagen, Inc. 1993 Incentive Stock Plan, adopted February 8,
1993.
*10.2 -- Amendment No. 1 to Registrant's 1994 Employee Stock Purchase Plan adopted June
9, 1994.
23.1 -- Consent of Ernst & Young LLP, independent auditors.
23.2 -- Consent of Willkie Farr & Gallagher (contained in its opinion filed as Exhibit
5 to this Registration Statement).
*24 -- Powers of Attorney.
</TABLE>
- ------------------------------
* Previously filed.
** Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K (Commission File Number 0-23012) for the fiscal year ended
December 31, 1994.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 15 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) for purpose of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of the registration statement
in reliance upon Rule 430A and contained in the form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of the registration statement as of the time it was
declared effective; (2) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and (3) for
purposes of determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boulder, State of Colorado, on June 17, 1996.
NEXSTAR PHARMACEUTICALS, INC.
By: /s/ PATRICK J. MAHAFFY
------------------------------------
Patrick J. Mahaffy
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
LAWRENCE M. GOLD* Chairman of the Board and June 17, 1996
- ------------------------------------- Chief Scientific Officer
Lawrence M. Gold
/s/ PATRICK J. MAHAFFY Director, President and Chief Executive June 17, 1996
- ------------------------------------- Officer (Principal Executive Officer)
Patrick J. Mahaffy
MICHAEL E. HART* Vice President and Chief Financial June 17, 1996
- ------------------------------------- Officer (Principal Financial Officer and
Michael E. Hart Principal Accounting Officer)
JOHN D. BALDESCHWIELER* Director June 17, 1996
- -------------------------------------
John D. Baldeschwieler
JAMES A. ESKRIDGE* Director June 17, 1996
- -------------------------------------
James A. Eskridge
DAVID I. HIRSH* Director June 17, 1996
- -------------------------------------
David I. Hirsh
RODMAN W. MOORHEAD, III* Director June 17, 1996
- -------------------------------------
Rodman W. Moorhead, III
CARL F. POLLARD* Director June 17, 1996
- -------------------------------------
Carl F. Pollard
*By: /s/ PATRICK J. MAHAFFY
---------------------------------
Patrick J. Mahaffy
Attorney-in-fact
</TABLE>
II-4
<PAGE> 90
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
*1 -- Form of Underwriting Agreement.
*4.1 -- Form of Second Amended and Restated Certificate of Incorporation of
the Company.
**4.2 -- Form of Common Stock Certificate of the Company.
5 -- Opinion of Willkie Farr & Gallagher.
*10.1 -- Amendment No. 4 to NeXagen, Inc. 1993 Incentive Stock Plan, adopted
February 8, 1993.
*10.2 -- Amendment No. 1 to Registrant's 1994 Employee Stock Purchase Plan
adopted June 9, 1994.
23.1 -- Consent of Ernst & Young LLP, independent auditors.
23.2 -- Consent of Willkie Farr & Gallagher (contained in its opinion filed
as Exhibit 5 to this Registration Statement).
*24 -- Powers of Attorney.
</TABLE>
- ------------------------------
* Previously filed.
** Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K (Commission File Number 0-23012) for the fiscal year ended December
31, 1994.
<PAGE> 1
EXHIBIT 5
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, NY 10022-4677
June 14, 1996
NeXstar Pharmaceuticals, Inc.
2860 Wilderness Place
Boulder, Colorado 80301
Dear Sirs:
We are delivering this opinion in connection with the Registration Statement on
Form S-3 (File No. 333-04653) (the "Registration Statement") filed by NeXstar
Pharmaceuticals, Inc. (the "Company"), on May 29, 1996, with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"),
with respect to 2,875,000 shares, par value $0.01 each, of common stock of the
Company ("Common Stock"). 2,500,000 of such shares of Common Stock are to be
sold by the Company in the public offering contemplated by the Prospectus
contained in the Registration Statement through the underwriters named therein
(the "Underwriters") pursuant to the underwriting agreement described in such
Prospectus (the "Underwriting Agreement"), and up to 375,000 of such shares of
Common Stock may be sold upon the exercise of an over-allotment option granted
to the Underwriters by the Company in the Underwriting Agreement as described
in such Prospectus. In addition, the Company's Board of Directors has
authorized the issuance of such additional number of shares of Common Stock as
the Company may elect to include in a registration statement filed under Rule
462(b) under the Act increasing the size of the offering registered under the
Registration Statement, should the Company make such an election. All shares
of Common Stock registered under the Registration Statement and any
registration statement filed under Rule 462(b) relating to the same offering
registered under the Registration Statement (a "Rule 462(b) Registration
Statement") are herein called the "Shares."
We have examined and are familiar with originals or copies, certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments relating to the incorporation of the Company and to the
authorization and issuance of the Shares, and have made such investigations of
law, as we have deemed necessary and
<PAGE> 2
NeXstar Pharmaceuticals, Inc.
June 14, 1996
Page 2
advisable. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to authentic originals of all documents submitted to us as
copies.
Based upon the foregoing, we are of the opinion that:
1. The Company is duly incorporated and validly existing under the laws
of the State of Delaware; and
2. The Shares have been duly authorized and, when issued, delivered and
sold by the Company and paid for by the Underwriters, as contemplated
by the Underwriting Agreement and as described in the Registration
Statement, will constitute duly authorized, validly issued, fully paid
and nonassessable shares of Common Stock of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement referred to above and to any Rule 462(b) Registration
Statement and to the reference to our firm under the heading "Legal Matters" in
the Prospectus included in the Registration Statement and in any Rule 462(b)
Registration Statement. We do not admit by giving this consent that we are in
the category of persons whose consent is required under Section 7 of the Act.
Very truly yours,
/s/ Willkie Farr & Gallagher
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 16, 1996, in Amendment No. 1 to the
Registration Statement (Form S-3 No. 333-04653) and related Prospectus of
NeXstar Pharmaceuticals, Inc. for the registration of 2,875,000 shares of its
common stock.
/s/ ERNST & YOUNG LLP
-------------------------
ERNST & YOUNG LLP
Denver, Colorado
June 14, 1996
