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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 0-23160
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ANESTA CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 87-0424798
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
4745 WILEY POST WAY, PLAZA 6 SUITE 650, SALT LAKE CITY, UTAH 84116
(Address of principal executive offices, including zip code)
(801) 595-1405
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to be
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The approximate aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock reported on the National Association of Securities Dealers Automated
Quotation National Market System was $46,057,820 as of March 25, 1996.*
The number of shares of Common Stock outstanding was 7,225,331 as of March
25, 1996.
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* Excludes 4,301,025 shares of Common Stock held by directors and officers and
stockholders whose beneficial ownership exceeds five percent of the shares
outstanding at March 25, 1996. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Registrant, or that such person is controlled by or under common control
with the Registrant.
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PART I
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the section entitled Management's Discussion And Analysis Of Financial Condition
And Results of Operations.
ITEM 1. BUSINESS
INTRODUCTION
Anesta is a leader in the development of new pharmaceutical products for
transmucosal drug administration using its proprietary oral transmucosal (OT)
system. The OT-system consists of either a disolvable or non-disolvable matrix
which is mounted on a handle and contains a drug. The Company's OT-system
provides rapid absorption of certain potent drugs into the bloodstream, which
can produce the onset of the desired therapeutic effect within five to ten
minutes. Anesta's OT-system allows the caregiver or patient to monitor the onset
of action, remove the unit and stop administration of the drug once the desired
therapeutic effect has been achieved. In certain situations, this allows the
caregiver or the patient an element of therapeutic control not possible with
traditional drug delivery products and technologies such as tablets, capsules or
transdermal patches. Prior to the development of Anesta's OT-system, infusions
or injections were generally required to achieve rapid drug absorption, dose
control and titration (dose-to-effect). Anesta's non-invasive OT-system is more
comfortable and convenient for patients, provides flexibility to caregivers, and
has the potential to be more effective and less costly in a variety of clinical
settings.
The Company's first OT-fentanyl product, Fentanyl Oralet, has been approved
by the U.S. Food and Drug Administration (the FDA) and is being marketed by
Abbott Laboratories (Abbott) for use in both children and adults as a surgical
premedicant and for conscious sedation (sedation/analgesia) prior to diagnostic
or therapeutic procedures in hospital settings. Fentanyl, the active ingredient,
has been widely used in other dosage forms for nearly 30 years. Over the last
five years, the fentanyl transdermal patch has gained acceptance among
oncologists, internists and family practice physicians in treating chronic pain,
primarily associated with cancer. U.S. sales of the fentanyl transdermal patch
are estimated to be approximately $100 million in a total cancer pain market of
approximately $400 million annually.
Anesta is nearing completion of its Phase III clinical trial program of a
second OT-fentanyl product, Actiq, to treat breakthrough pain (moderate to
severe transitory pain) associated with cancer in patients already receiving
around-the-clock opioid therapy for their persistant or constant pain. The
Company believes that the ability of Actiq to provide rapid relief from
breakthrough pain (onset of meaningful pain relief five to ten minutes) will
enhance the patient's ability to more precisely control his or her own pain and
enhance the patient's overall quality of life. Current breakthrough pain
treatment most commonly includes orally administered morphine which usually
requires 30 minutes or more to provide pain relief. The Company expects to file
an NDA with the FDA covering the use of OT-fentanyl for breakthrough cancer pain
in early 1997.
Anesta also has several other products in clinical development, targeting
applications where the OT-system advantages of rapid onset of action and patient
or caregiver control may provide therapeutic value. Products in clinical trials
include OT-fentanyl for acute pain (Phase II/III), OT-nicotine for smoking
cessation (Phase II) and OT-etomidate for sedation (Phase I). Several drugs are
being evaluated preclinically with the OT-system, including drugs to treat
migraine headache and nausea and vomiting.
Anesta entered into a strategic alliance with Abbott in 1989 under which
Abbott has provided funding to Anesta for the development of Fentanyl Oralet,
Actiq and other applications for OT-fentanyl. Abbott contract manufactures
Fentanyl Oralet for Anesta and is marketing Fentanyl Oralet to U.S. hospitals.
Abbott has also agreed to manufacture Anesta's OT-fentanyl line of products,
including Fentanyl Oralet and Actiq, for Anesta's potential international
distributors and licensing partners.
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BACKGROUND ON DRUG DELIVERY METHODS
A wide variety of drug delivery systems are available in the market,
although not all drugs can be beneficially delivered by all routes of
administration. For certain clinical applications, there are clinical benefits
in providing rapid onset of therapeutic action and the appropriate drug dosage
necessary to achieve the desired effects. Drug delivery should be convenient,
cost-effective and as non-invasive as possible. Existing drug delivery systems
each have limitations in meeting some of these requirements:
Tablets or capsules. Although orally delivered tablets or capsules may be
convenient and inexpensive, they generally do not provide rapid onset of action.
Also, some drugs do not achieve adequate bioavailability when administered as a
tablet or capsule due to degradation of the drug by the stomach and liver.
Infusions and injections. Intravenous (IV) infusions and intramuscular (IM)
injections provide rapid uptake and onset of action. Infusion techniques can
titrate potent drugs with very rapid changes in effect. However, infusions and
injections are painful, invasive and sometimes threatening to the patient. Both
IV infusions and IM injections require highly trained medical professionals for
safe and effective administration.
Transdermal patches. Transdermal patches, which allow absorption of drugs
through the skin, provide convenience, ease of administration and a more steady
rate of chronic drug delivery. However, the time to achieve therapeutic blood
levels with transdermal patches may be four to ten hours after administration.
In addition, absorption of the drug into the bloodstream may continue for many
hours after removal of the patch. This slower onset of action and inability to
quickly stop absorption are limiting factors of transdermal patches and present
safety concerns in some clinical situations. For example, patients in acute pain
cannot wait several hours to achieve analgesia and such patients may need to be
hospitalized in order that IV infusions or IM injections can be administered by
skilled health care professionals.
Nasal/Transnasal Sprays. Nasal sprays are designed to provide rapid onset
of action of drugs or are designed to deliver drugs that are not orally
bioavailable. Nasal sprays can cause irritation in some patients and can be
difficult to administer in variable intranasal conditions. In addition, the dose
of the product cannot be titrated or controlled by the patient over a period of
time.
ANESTA'S PROPRIETARY OT-SYSTEM FOR DRUG DELIVERY
Anesta's proprietary OT-system is designed to address the medical need for
a convenient, non-invasive, cost-effective drug delivery system that provides
rapid onset of therapeutic action and allows the caregiver or patient to control
drug administration until the desired effect is achieved. The OT-system consists
of either a dissolvable or a non-dissolvable matrix which is mounted on a handle
and which contains a drug. The drug is released from the matrix in the mouth,
allowing rapid absorption through the oral mucosal tissues and slower absorption
through the gastrointestinal tract. Oral transmucosal drug delivery achieves
rapid absorption of many drugs because the oral mucosa has a large surface area,
is highly vascularized and is significantly more permeable than the skin.
For certain drugs or certain applications, Anesta believes that its
OT-system can provide one or more of the following therapeutic advantages over
traditional methods of drug administration:
Rapid Onset of Action. The efficacy of many systemic drugs is related to
their blood concentration. In order to achieve a therapeutic effect, a
particular blood concentration must be achieved. The more rapidly that such
blood concentration is reached, the sooner the drug takes effect. The Anesta
OT-system allows many types of drugs to cross the oral mucosa and to be absorbed
rapidly into the bloodstream, thus achieving a therapeutic blood concentration
more rapidly than tablets and capsules or transdermal patches.
Dose-to-Effect Control. Anesta's OT-system allows the caregiver or patient
to monitor the onset of action, remove the unit and stop administration of the
drug once the desired therapeutic effect has been achieved. This avoids doses
that are higher than necessary to achieve safe and effective therapy, an
important and beneficial element of control. Drugs delivered by tablet and
capsule may be significantly degraded by the stomach and the liver. Thus,
tablets and capsules often contain higher doses of a drug than necessary to
achieve a therapeutic effect, potentially leading to over-medication and
undesirable side effects. Continuous
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infusion therapy or more frequent administration of tablets or capsules can
alleviate these dosing problems, but may lead to increased cost, patient
inconvenience and patient noncompliance with prescribed dosing regimens.
Rapid Termination of Drug Delivery. In certain applications, it is
desirable that drug administration be terminated once the desired effect has
been obtained. For example, if a patient receives a sedative in connection with
a brief outpatient procedure, substantially all of the sedative effect should be
gone before the patient can be discharged. The drug contained in a tablet or
capsule may dissolve and continue to be absorbed into the bloodstream over a
period of hours. Similarly, when a transdermal patch is removed, the drug which
has already made contact with the skin will continue to be absorbed into the
bloodstream for a number of hours or even days. Thus, drug absorption from
tablets, capsules and transdermal patches may continue longer than necessary or
desired. By contrast, once Anesta's OT dosage unit is removed, absorption of the
drug through the oral mucosal tissues into the bloodstream stops almost
immediately.
Improved Safety. The OT dosage unit is easily removed if a patient has an
adverse reaction or has achieved the desired therapeutic effect. Removing the OT
dosage unit limits further absorption of the drug into the body. Because the
dosage unit can be removed immediately, the amount of the drug delivered to the
patient may be lower than if a tablet, capsule, transdermal patch or injection
had been administered.
Cost-Effective. Traditionally, when rapid onset of action is critical,
infusions or injections have been required. Infusions and injections require
administration by a skilled caregiver and, in the case of IV or subcutaneous
administration, a catheter must be inserted and an administration set-up is
required. In contrast, the OT-system requires simple placement of the dosage
unit in the mouth. Thus, Anesta believes that its OT-system may offer a more
cost-effective means of delivering certain drugs that are now given by infusion
or injection.
Greater Patient and Caregiver Convenience. The Company's OT-system is
easily administered, is comfortable, non-threatening and allows a caregiver or
the patient to titrate drug administration.
ANESTA'S BUSINESS STRATEGY
Anesta's long term objective is to apply its proprietary OT-system in a
number of therapeutic areas and to commercialize new pharmaceutical products
using this system. Anesta is pursuing this objective with the following
strategy:
Proprietary Technology. The Company has sought and will continue to expand
its proprietary position for its OT-system, by pursuing patent protection in the
U.S. and key international markets for its OT-system and for dosage forms that
incorporate such technology.
Approved Drugs. The Company develops new pharmaceutical products by
applying its OT-system to approved drugs, including both proprietary and generic
drugs, in order to create new dosage forms for applications where existing
methods of drug delivery have therapeutic or clinical limitations.
Focused Resources. Anesta focuses its resources on research, product
development, clinical studies, regulatory interactions and filings and market
preparation. Anesta has worked closely with Abbott in developing Fentanyl
Oralet, Actiq and other OT-fentanyl applications and plans to develop strategic
relationships with other pharmaceutical companies to develop, manufacture,
market and distribute Anesta's products worldwide.
The Company believes that this strategy offers a number of potentially
significant benefits. First, by focusing on developing new dosage forms for
approved drugs, Anesta does not bear the cost and risk associated with discovery
and development of new pharmaceutical compounds. Second, by entering into
relationships with strategic partners for costly activities such as
manufacturing, selling and distribution, Anesta is able to focus its resources
on research and development and market preparation where the Company can add
significant value to its partnerships.
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ANESTA'S PRODUCTS AND DEVELOPMENT PROGRAMS
The Company's research and development activities involve formulation and
methods development, manufacturing process development, quality control and
quality assurance programs, preclinical and clinical research, regulatory
documentation and interaction with the FDA to gain marketing approval for its
products.
The following table lists the potential therapeutic indications for and
current status of Anesta's first approved product, and the primary products that
are in research and development, and is qualified in its entirety by reference
to the more detailed descriptions elsewhere in this Prospectus. There can be no
assurance that any product other than Fentanyl Oralet as an anesthetic
premedicant will be developed successfully or approved in a timely manner.
<TABLE>
<CAPTION>
PRODUCT NAME INDICATION ACTIVE DRUG STATUS(1)
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<S> <C> <C> <C>
Fentanyl Oralet Surgical premedicant Fentanyl Marketing
Concious sedation
Actiq Breakthrough cancer pain Fentanyl Phase III Clinical Trials
OT-fentanyl Acute pain Fentanyl Phase II/III Clinical Trials
OTNC Smoking cessation Nicotine Phase II Clinical Trials
OTET Short-acting sedative Etomidate Phase I Clinical Trials
OTDHE Migraine headache Dihydroergotamine Preclinical
OT-antiemetic Nausea/vomiting Chlorpromazine Research
Droperidol
Metoclopramide
Prochlorperazine
</TABLE>
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(1) See "Business -- Government Regulation" for a description of the various
phases of clinical testing.
Fentanyl Oralet
Fentanyl Oralet is approved by the FDA for use in both adult and pediatric
patients in a hospital setting (i) as a surgical premedication or (ii) to
provide conscious sedation (sedation/analgesia) prior to diagnostic or
therapeutic procedures. The unique design of Fentanyl Oralet provides physicians
with a new method of administering fentanyl in a controllable yet painless and
easy to use dosage form. Patients experience an onset of analgesia in six to
eight minutes and sedation and reduced anxiety in 20 to 30 minutes.
For an introductory period, the FDA requested Abbott and Anesta to limit
promotion and rigorously control distribution of Fentanyl Oralet to 400 teaching
hospitals and children's hospitals that underwent a special pre-shipment
training program. Fentanyl Oralet was used safely during this controlled
roll-out period, as determined by the FDA's Anesthetic and Life Support Drug
Advisory Committee in December 1995. In March 1996, based on clinical and
commercial experience, the FDA eased the initial constraints on advertising,
promotion and distribution. Fentanyl Oralet is now available to all hospitals
either directly from Abbott's regional distribution centers or indirectly
through the hospital wholesaler network. Abbott, through its sales force, will
provide comprehensive in-service education and training to every hospital that
receives shipments of the product. With the removal of the earlier constraints,
Fentanyl Oralet can now be promoted and sold to all of the approximately 5,000
hospitals and surgical centers in the U.S. and used by clinical personnel who
have received the appropriate training.
Prior to the development of Fentanyl Oralet, clinicians could only
premedicate pediatric patients with unapproved drugs to provide sedation,
anxiolysis and analgesia. Fentanyl Oralet is the only product specifically
tested and approved by the FDA for use as a pediatric premedication.
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Actiq -- OT-fentanyl for Breakthrough Cancer Pain
Anesta's OT-fentanyl product for breakthrough pain, Actiq, is nearing
completion of its Phase III clinical trial program. Anesta believes that Actiq
has the potential to bring about a major advance in pain management for persons
suffering moderate to severe breakthrough pain. Preliminary evidence from the
Company's clinical trials in cancer patients suggest that OT-fentanyl provides
patients rapid breakthrough pain relief that is predictable, controllable,
convenient and safe. The Company expects to file an NDA with the FDA covering
the use of Actiq to treat breakthrough cancer pain in early 1997.
In recent years there has been a growing awareness that millions of cancer
patients do not receive optimal analgesic therapy for their pain. Inadequate
pain management leads to debilitation, lower quality of life and great stress on
interpersonal relationships with family, friends and caregivers. Many clinicians
believe that improving a patient's control over pain also leads to his or her
ability to better fight the underlying disease.
With improved clinician awareness and understanding of the importance of
managing pain as an integral part of overall cancer therapy, there is a desire
to find solutions to one of the most challenging components of cancer pain,
namely breakthrough pain. Breakthrough pain is a transitory flare of moderate to
severe pain occurring on a background of persistent or constant pain in patients
on chronic opioid therapy. Breakthrough pain may be related to a specific
activity or may occur spontaneously and be totally unpredictable. When related
to a specific activity such as walking or eating, it may be termed incident
pain. Various studies have shown that over 50% of all patients with active
cancer experience moderate to severe pain. Over 70% experience moderate to
severe pain in the end stage of the disease. Other studies have shown that 52 to
64% of these patients experience breakthrough pain. These studies would suggest
that over 700,000 patients suffer from breakthrough pain each year in the U.S.
alone.
Clinical practice guidelines suggest the use of a long-acting opioid
analgesic, such as sustained-release morphine or the fentanyl transdermal patch,
in an around-the-clock dosing regimen to treat the persistent or constant pain
component of cancer pain. When the transitory flares of moderate to severe
breakthrough pain occur, patients are instructed to self-medicate with an
analgesic with a relatively faster onset, such as oral morphine tablets or
elixirs.
Breakthrough pain typically develops over a period of approximately ten
minutes, and has variable duration averaging approximately 30 minutes. These
episodes can be excruciatingly painful and may last for one or two hours. Oral
morphine is not optimal to treat breakthrough pain because it typically requires
30 minutes or more to produce pain relief (analgesia). This delayed onset of
pain relief results in a "pain gap" -- the painful and debilitating wait between
onset of breakthrough pain and the beginning of pain relief.
One approach to managing breakthrough pain is to increase the dose of the
around-the-clock opioid analgesic over several days or weeks until the patient
no longer experiences breakthrough pain. This approach frequently leads to over
medication and an increase in undesirable side effects such as drowsiness or
severe constipation. As patients and their physicians learn from their
experience, they will often seek a balance of drug therapy that meets the
patient's desire for fewer or less severe breakthrough pain episodes offset by a
need to minimize the side effects of higher opioid doses. Often this compromise
leads to an acceptance of one to five episodes of breakthrough pain every day.
As a result, breakthrough pain is a frequent occurrence in the lives of many
cancer patients. Most of these patients have a need for a better therapy to more
effectively treat breakthrough pain.
The only currently available treatments which adequately tie rapid onset of
pain relief to the rapid onset of breakthrough pain are IV infusions or IM
injections of potent opioids, such as morphine. In many settings, these options
are unacceptable because they are invasive, uncomfortable, inconvenient for
patients and caregivers, and can lead to significantly increased costs.
The ideal treatment for breakthrough pain would provide very rapid pain
relief in a simple, controllable, safe and patient-friendly manner. Anesta
believes that Actiq meets these criteria as it provides rapid onset of pain
relief (in five to ten minutes) in a dosage form that provides the patient a
means of controlling the dose (dose-to-effect), and that is safe, convenient,
user-friendly and less costly than invasive methods.
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Patients, nurses and physicians have stated that the two most important
factors in treating breakthrough pain are speed of onset and patient control.
Anesta's Actiq meets these criteria in a drug delivery system that provides
rapid onset of pain relief and is convenient and controllable by the patient.
Moreover, U.S. Government and World Health Organization cancer pain guidelines
teach early and aggressive use of oral or other non-invasive opioid analgesic
therapy to treat patients with moderate to severe pain. The guidelines also
teach that injections and infusions should be avoided if possible and used only
as a last resort. The Company believes Actiq closely fits with these guidelines.
Anesta's cancer pain clinical program has involved over 45 U.S. sites. The
program is designed to determine the safety and effectiveness of Actiq as well
as to gather practical information such as the proper dosing recommendations for
the product in patients receiving conventional around-the-clock opioids for
chronic pain. Two blinded titration trials are designed to develop a practical
method for patients to achieve optimal relief from breakthrough pain.
Incrementally higher doses are administered until a dose is found where one unit
of Actiq is effective for an average breakthrough pain episode. Another blinded
trial is designed to demonstrate the efficacy of Actiq compared to placebo for
breakthrough pain. Actiq is also being investigated in a small ancillary study
as the sole source for pain control in opioid tolerant patients. Additionally,
long-term safety is being assessed in a follow-on study where cancer patients
are allowed to continue with Actiq therapy, if they desire, after completing one
of the other trials. The Company's cancer patient clinical trials in total have
enrolled approximately 170 patients to date who have received over 20,000 doses
of Actiq during participation in these trials. Several patients have completed
approximately 12 months of Actiq therapy with continuing effectiveness in
treating their episodes of breakthrough pain.
Only limited information is currently available from the cancer pain trials
because they are blinded and have not been decoded. However, patient completion
data from the titration trials and enrollment data from the long term safety
trial provide preliminary information on the effectiveness of Actiq. Over 90% of
the patients who completed the blinded titration trials have found a dose of
Actiq where one dosage unit generally relieves an episode of breakthrough pain.
Over 90% of those eligible to enter the long-term safety trial have chosen to
continue Actiq instead of their previous breakthrough pain medication. Actiq is
provided at no cost in this trial, the patients are required to complete daily
diaries, and the patients return monthly for follow-up clinical visits. These
completion and enrollment data are consistent with earlier published studies
reporting clinical effectiveness with Actiq.
Additionally, seven pain assessment and pharmacokinetic studies with over
350 postoperative patients and normal volunteers have been completed to support
the cancer pain program. The objectives of these studies included providing
information comparing IV morphine (the standard treatment for postoperative
pain) and Actiq, and to provide blood level data after multiple and different
doses of Actiq. The analgesic equivalence between Actiq and IV morphine in
providing meaningful pain relief (as defined by the patient) has been determined
by these studies. One of these studies also demonstrated that the speed of onset
of analgesia is as fast with Actiq as with IV morphine in patients with
postoperative pain.
The proposed treatment plan for using Actiq for breakthrough pain will be
simple and consistent with current practice and published guidelines. Physicians
will prescribe an around-the-clock opioid analgesic for constant pain, using
conventional products like sustained-release morphine tablets or fentanyl
transdermal patches. The patient will be instructed to use an Actiq instead of
oral morphine when the patient feels the onset of breakthrough pain. As the
patient sucks on the Actiq, it dissolves and releases the drug for rapid
absorption through the mucosal tissues providing a fast onset of pain relief. A
recent OT-fentanyl clinical study of post-operative patients with acute pain
showed that the onset of meaningful pain relief occurred in under five minutes
in over 50% of the patients and within 15 minutes for substantially all
patients. Currently available oral opioid products have a much slower onset of
therapeutic effect.
Other Products in Development
Anesta has several OT-system products under clinical development for the
following clinical applications:
OT-fentanyl for acute pain. OT-fentanyl is also being studied for acute
pain. There are multiple causes of acute pain including surgery, trauma and
conditions such as kidney stones. Acute pain usually requires the
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rapid onset of pain relief. Historically, hospitalized patients have received IV
infusions or IM injections in order to receive rapid pain relief. A more recent
enhancement to the IV route of administration of analgesics has been the
development of patient controlled devices with sophisticated microelectronics,
which allow patients to self-administer the IV pain medication when they feel
the need for pain relief. This method of patient controlled analgesia (PCA) has
been shown to improve pain management, at the same time decreasing the total
daily dose of medication used. There are also psychological benefits to the
patients who gain more control over their analgesic therapy.
PCA therapy is a major improvement for pain management and reduces the need
for skilled caregivers to provide repeat IV infusions or IM injections. Anesta's
OT-system takes the PCA concept one step further. Instead of relying on invasive
and costly IV infusions, OT-fentanyl will provide the rapid onset of pain relief
in a noninvasive and cost-effective delivery system in a hospital setting.
Anesta has completed several Phase II/III clinical studies in over 300
patients experiencing acute pain after surgery. During the past year, data from
some of these studies have been presented at the annual meeting of the American
Society of Anesthesiologists and the International Anesthesia Research Society.
These early data provide evidence that OT-fentanyl can be clinically effective
for acute pain in a hospital setting.
OT-nicotine (OTNC) for smoking cessation. Anesta's OT-nicotine product is
in Phase II clinical development. OTNC is a new therapy targeted to help
individuals overcome dependence on tobacco.
Six clinical studies with OTNC have been completed. These studies have
evaluated the effects of different dosage strengths, the acceptability of
different taste formulations, and the ability of OTNC to decrease the desire to
smoke after limited, short-term use. Clinical data showing blood levels after
different OTNC doses was presented at the Society for Research on Nicotine and
Tobacco annual meeting in March 1996. These data demonstrated that blood
concentrations increase in proportion to dose and the desire to smoke decreases
at higher doses.
Nicotine replacement therapy has become established as a successful aid to
smoking and tobacco cessation programs. Nicotine replacement products that have
been approved include a nicotine gum, several transdermal nicotine patches and
nicotine nasal spray. In February 1996, nicotine gum was approved in the U.S.
for over-the-counter sales and distribution and in April 1996 two nicotine
transdermal patches were recommended for over-the-counter sales and distribution
by an FDA advisory panel. There are also a number of other companies developing
other types of nicotine replacement products, as well as other smoking cessation
products, which, if approved, would compete with OTNC. Smoking cessation experts
believe that increasing the availability and number of nicotine replacement
products will increase their benefits on public health, as no single therapy
will be effective for all smokers desiring to quit. These experts foresee a need
for a broad range of readily available products and therapies to increase the
success rate of smoking cessation programs.
OTNC provides a combination of pharmacokinetic profile and behavioral
characteristics that is different from the other nicotine replacement products
currently on the market. Some smokers who have used OTNC for up to one week have
commented that the ability to control dosing by repeatedly inserting and
removing the OTNC unit from their mouths has given them a greater ability to
manage their urge to smoke. This element of control is different from that
offered by other treatment modalities. Anesta believes that this ability to
titrate the dose of nicotine and rapidly deliver adequate doses of nicotine to
the individual may more closely displace the physiologic dependence and
psychological craving effects of cigarettes. These properties of OTNC may be
especially effective in the early stages of smoking cessation and in smoking
relapse prevention.
OT-etomidate (OTET), an ultra-short acting non-opioid sedative. OTET is in
Phase I clinical studies. This product is designed to broaden Anesta's product
line and complement Fentanyl Oralet in providing sedation and reducing anxiety
in situations where the procedure is not painful or where pain is managed by
other methods such as local or regional anesthesia. The active ingredient in
OTET, etomidate, is an approved anesthetic drug when supplied in an IV dosage
form.
The first two clinical studies confirmed that OTET delivers dose-related
therapeutic blood levels to reduce anxiety and produce sedation in 10 to 20
minutes. Sedation continues for 30 to 40 minutes. Emergence
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from sedation to a level indicative of complete recovery occurs 60 to 90 minutes
after taking the drug. This profile is very close to the sedation specifications
described as ideal by anesthesiologists and by experts in dental sedation.
An additional clinical study is in progress to evaluate and document the
rapid, uneventful recovery of psychomotor and cognitive function after
administration of OTET. Such rapid recovery is critically important in managed
health care environments emphasizing productivity in health care delivery. The
Company is seeking to establish in its clinical trials that OTET can provide
rapid clear-headed patient recovery and discharge after the procedure is
completed. The Company believes this addresses an important goal in managed care
to maximize the utilization of high cost facilities.
OT-system products to treat migraine headaches. Anesta is conducting
preclinical development of products to treat migraine headaches. Anesta's
product concept was critically reviewed and validated by an advisory panel of
clinical experts in 1995. As a result of their review, preclinical research
activities have been expanded to include several well-accepted drugs for acute
treatment of migraine headaches and related symptoms. The Company believes that
the OT-system has the potential to provide therapeutic benefit for persons
suffering migraine headaches because of the ability to produce rapid uptake of
drug into the bloodstream without the need for infusions or injections.
OT-system products to treat nausea and vomiting. Anesta is currently in
preclinical development of its OT-system to deliver anti-emetic drugs. The
Company believes that its OT-system can be used to treat post-surgical nausea
and vomiting, emesis induced by chemotherapy, or nausea and vomiting secondary
to conditions such as migraine headache or AIDS. Currently, anti-emetics are
administered orally, rectally, by injection or by transdermal patches. Unlike
oral delivery, Anesta's OT-system would allow the patient the ability to remove
the dosage form from the mouth should an emetic episode occur during
administration of the drug. In addition, oral transmucosal delivery avoids
painful injections yet would provide rapid onset similar to an injection.
Patches typically require hours to reach effective blood levels, making them
less attractive for treating acute episodes of nausea and vomiting. Anesta
believes there is an unmet clinical need for a non-invasive method which allows
patients the ability to control the delivery of anti-emetic drugs.
Although the results of research and development activities undertaken to
date have been promising, there can be no assurances that the Company will be
able to successfully develop these products. Further, other companies may be
working on products for similar indications which, if approved for market
introduction before the Company's products, could significantly decrease the
size of market available to the Company.
RESEARCH AND DEVELOPMENT STRATEGY
Anesta develops its proprietary OT-system and products both independently
and with the collaboration of the University of Utah and its assignee, the
University of Utah Research Foundation (collectively, the UURF) and Abbott.
Future development projects may involve collaboration with other established
pharmaceutical companies. The Company's primary emphasis is on preclinical
research and development, clinical research, regulatory approval and market
preparation. The Company currently produces its clinical supplies for clinical
studies and intends to expand manufacturing capabilities to develop improved
manufacturing technologies to support larger clinical research projects and to
demonstrate scale-up capabilities. Since its inception, Anesta has managed most
aspects of its clinical trials and has prepared substantially all U.S.
regulatory filings for its products. In 1993, 1994, 1995 and the first three
months of 1996, Anesta's research and development expenditures were $1,793,000,
$3,210,000, $5,228,000, and $1,795,000, respectively.
COLLABORATIVE RELATIONSHIPS
Anesta's commercial strategy is to develop products independently and,
where appropriate, including internationally, in collaboration with established
pharmaceutical companies and institutions. Collaborative partners may provide
financial resources, research and manufacturing capabilities and marketing
infrastructure to aid in the commercialization of Anesta's products in
development and potential future products.
8
<PAGE> 10
Depending on the availability of financial, marketing and scientific resources,
among other factors, the Company may license its technology or products to
others and retain profit sharing, royalty, manufacturing, co-marketing,
co-promotion or similar rights. Any such arrangements could limit the Company's
flexibility in pursuing alternatives for the commercialization of its products.
There can be no assurance that the Company will establish any additional
collaborative arrangements or that, if established, such relationships will be
successful.
Abbott
In December 1989, Anesta entered into a research and development, license,
supply and distribution agreement with Abbott. Under the agreement, as amended,
Anesta granted to Abbott the exclusive right to make, use and market in the U.S.
OT-products resulting from technology owned or licensed by Anesta consisting of
OT-fentanyl or other central nervous system-acting drugs or intermediates
thereof used for pre-medication, sedation, analgesia, diagnostic procedures,
emergency room, post-operative pain, burn treatment or cancer-related pain
management. Abbott's exclusive license terminates upon the expiration of the
last U.S. patent relative to such licensed technology. Under the 1989 Agreement,
Abbott has provided development funding and milestone payments and Abbott is
obligated to pay royalties and other payments on product sales. In 1995, the
Company entered into two new funding agreements with Abbott under which Abbott
agreed to provide to the Company $1,500,000 in each of 1995 and 1996 to further
the development of the OT-fentanyl product, Actiq, for cancer pain. Through
March 31, 1996, Abbott had paid a total of $8,250,000 and committed an
additional $1,500,000 to be paid during the remainder of 1996. Abbott is
Anesta's contract manufacturer for the OT-fentanyl product line and sells such
products to Anesta. Anesta resells OT-fentanyl products to Abbott for marketing
in the U.S. under Abbott's trademark Fentanyl Oralet and Anesta's trademark
Actiq.
The 1989 Agreement with Abbott contains provisions regarding the
development, manufacture and commercialization of future products by the
Company. The Company intends to continue to provide information to Abbott
regarding its development programs for new products, and to discuss with Abbott
its possible participation in the commercialization of such products.
The 1989 Agreement with Abbott can be terminated with respect to a
particular market or indication upon thirty days notice by Abbott if (i) there
exists a material adverse safety concern with respect to a licensed product,
(ii) there exists a material adverse concern regarding the efficacy of a
licensed product, (iii) action by the FDA precludes the continued testing or
commercialization of a licensed product, and such preclusion is more than
temporary in nature, or (iv) a third party patent poses an infringement risk
with respect to the commercialization of a licensed product in the U.S.
The Company granted to Abbott International in February 1991 a license for
OT-fentanyl products for all countries in the world other than the U.S. In
August 1995, the Company and Abbott International amended the February 1991
license agreement to grant the Company an option to either terminate or make
non-exclusive Abbott International's license rights to OT-fentanyl products,
including Fentanyl Oralet and Actiq, in any country other than the U.S. In
conjunction with the amendment, Abbott agreed to manufacture and sell to the
Company, its distributors or licensees any OT-fentanyl products the Company
requests from Abbott for distribution into a country for which the Company has
exercised its option to terminate or made non-exclusive Abbott International's
license. The amendment also reduced by $100,000 the Company's unearned advance
royalty obligation to Abbott International, which amount was recognized as
royalty revenue during the year ended December 31, 1995.
University of Utah Research Foundation
In 1985, the Company obtained an exclusive worldwide license, including the
right to sublicense, from the UURF to all of the UURF's technology developed or
to be developed by Dr. Theodore H. Stanley, Chairman of the Board of the
Company, and others during employment at the University of Utah in (i) the field
of anesthetic and other drug delivery systems incorporating a matrix to deliver
compounds to the central nervous system via the mucosal tissues of the mouth,
pharynx and esophagus, (ii) drug-based immobilization
9
<PAGE> 11
systems for human and veterinary applications and (iii) transdermal drug
delivery systems. The Company is obligated to pay certain royalties to the UURF
subject to certain minimum royalty payments. In addition, Anesta is obligated to
pay to the UURF a higher percentage of the royalties it receives in the event
Anesta sublicenses the licensed technology without any improvement or added
value. The Company also has an exclusive option with UURF to acquire an
exclusive worldwide license to similar technology and intellectual property that
may be conceived, invented or reduced to practice at the University of Utah
after the date of its license grant. Anesta has exercised such option as to all
technology covered by its patents and pending patent applications. The UURF
exclusive worldwide license terminates as to each country upon the expiration of
the last patent in such country relating to the licensed technology.
MANUFACTURING
Anesta has a manufacturing facility capable of producing only limited
quantities of its proprietary OT-products for formulation and methods
development, animal studies and clinical studies. Anesta has licensed
manufacturing rights to certain of its products to Abbott subject to the right
of Anesta to manufacture such products under certain circumstances.
The Company is in the process of developing a manufacturing process and the
capacity to produce sufficient amounts of OT-nicotine to conduct larger scale
clinical studies of this product. This manufacturing process is designed to
produce large volumes and reduce the unit cost of producing OT-nicotine and
other products. There can be no assurance that the Company will be able to
successfully complete the development of the manufacturing process or required
facilities. The Company will also have to adhere to cGMP regulations enforced by
the FDA's facilities inspection program, as well as requirements imposed by the
DEA. If the Company's facilities cannot pass the necessary FDA plant inspections
and comply with the applicable regulations, it would be unable to manufacture
the OT-nicotine or other OT-products required for clinical studies. Any delays
resulting from problems with regulatory compliance or other manufacturing issues
would delay conduct of clinical trials, regulatory approval, market introduction
and subsequent sales of the Company's products which would have a material
adverse effect on the Company's business, results of operations and financial
condition.
COMPETITION
Fentanyl Oralet, Actiq and other Company products will compete with other
drugs and drug delivery systems. There can be no assurance that any of the
Company's products will have advantages which will be significant enough to
cause medical professionals to adopt its use. Anesta believes that its products
will compete on the basis of quality, efficacy, cost, convenience, safety,
patient compliance and patient preference.
The new products being developed by the Company will compete with drugs
marketed in both traditional and advanced forms of drug delivery. New drugs or
further developments in alternative drug delivery methods may provide greater
therapeutic benefits for a specific drug or indication, or may offer comparable
performance at lower cost, than those offered by the Company's proprietary
OT-system.
Competition in the pharmaceutical industry is intense. There are many
pharmaceutical companies, biotechnology companies, public and private
universities and research organizations actively engaged in research and
development of pharmaceutical products and drug delivery systems. Many of the
Company's existing or potential competitors have substantially greater
financial, technical and human resources than the Company and may be better
equipped to develop, manufacture and market products. In addition, many of these
companies may develop and introduce products and processes competitive with or
superior to those of the Company. The Company's product development programs are
subject to significant competition from companies utilizing alternative
development strategies. There can be no assurance that the Company will be able
to compete successfully.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The basic technology underlying the Company's proprietary OT-system was
invented by Dr. Stanley and Brian Hague, employees of the Company, while
employed at the University of Utah. Anesta is the exclusive
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<PAGE> 12
worldwide licensee of such technology under patents held by the UURF through a
license granted in 1985 which remains in effect for the life of the applicable
patents. The U.S. patents expire on various dates ranging from 2004 to 2009 and
the foreign patents expire on various dates ranging from 2003 to 2006. Anesta
maintains, at its expense, all U.S. patent rights with respect to the licensed
technology and files and prosecutes the relevant patent applications in the U.S.
and foreign countries. The OT-system technology underlying Anesta's exclusive
license is covered by eight issued U.S. patents, 53 issued foreign patents, six
pending U.S. patent applications and 24 pending foreign patent applications. The
Company also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain its competitive
position. The Company plans to prosecute and defend its technology and the
patents and patent applications being licensed from the UURF.
Substantially all of the patents issued and pending which underlie the
licensed technology relate to different embodiments of OT technology and other
transmucosal therapeutic technologies. The Company believes that its proprietary
technologies, which are protected by issued and pending U.S. patents, may
provide it a significant competitive advantage. The Company's agreement with
Abbott provides that Anesta owns all rights to inventions made by Anesta
personnel and owns joint rights to inventions made by Anesta and Abbott jointly
which underlie the licensed technology.
The Company's policy is to protect its technology by, among other things,
filing, or requiring the UURF to file, patent applications for technology that
it considers important to the development of its business. Anesta intends to
file additional patent applications, when appropriate, relating to its
technology, improvements to its technology and to specific products it develops.
There can be no assurance that any additional patents will be issued, or if
issued, that they will be of commercial benefit to Anesta. In addition, it is
impossible to anticipate the breadth or degree of protection that any such
patents will afford.
The patent positions of pharmaceutical firms, including the Company, are
uncertain and involve complex factual questions. In addition, the coverage
claimed in a patent application can be significantly reduced before or after the
patent is issued. Consequently, the Company does not know whether any of the
pending patent applications underlying the licensed technology will result in
the issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or will be circumvented or invalidated. Since
patent applications in the U.S. are maintained in secrecy until patents issue
and since publication of discoveries in the scientific or patent literature
often lag behind actual discoveries, the Company cannot be certain that Dr.
Stanley and Mr. Hague were the first creators of inventions covered by pending
and issued patents or that Dr. Stanley and Mr. Hague were the first to file
patent applications for such inventions. Moreover, the Company may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in
substantial cost to the Company, even if the eventual outcome is favorable to
the Company. There can be no assurance that the patents relating to the licensed
technology, if issued, will be held valid by a court of competent jurisdiction
or that a competitor's product will be found to infringe such patent.
Other pharmaceutical and drug delivery companies and research and academic
institutions may have filed patent applications or received patents in this
field. If patents are issued to other companies that contain competitive or
conflicting claims and such claims are ultimately determined to be valid, there
can be no assurance that the Company would be able to obtain licenses to these
patents at a reasonable cost or be able to develop or obtain alternative
technology.
The Company also relies upon trade secret protection for its confidential
and proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology or that the Company can meaningfully protect its trade secrets.
It is the Company's policy to require its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with the Company is to be kept confidential and not
disclosed to third parties except in specific circumstances. In
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<PAGE> 13
the case of employees, the agreements provide that all inventions conceived by
the individual in the course of his or her employment shall be the exclusive
property of the Company. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for the
Company's trade secrets in the event of unauthorized use or disclosure of such
information.
GOVERNMENT REGULATION
The Company's activities and products are subject to significant regulation
by a number of governmental entities, especially the FDA and DEA in the U.S. and
by comparable authorities in other countries. These entities regulate, among
other things, research and development activities and the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising,
promotion, distribution and sale of the Company's products. Product development
and approval within this regulatory framework takes a number of years and
involves the expenditure of substantial resources. Many products that appear
promising initially ultimately do not reach the market because they are found to
be unsafe (perhaps too toxic) or lack effectiveness, as demonstrated by testing
required by government regulation during the development process. In addition,
there can be no assurance that this regulatory framework will not change or that
additional regulation will not arise at any stage of the Company's product
development that may affect approval, delay an application or require additional
expenditures by the Company. Moreover, even if approval is obtained, failure to
comply with present or future regulatory requirements, or new information
adversely reflecting on the safety or effectiveness of an approved drug, can
lead to FDA withdrawal of approval to market the product.
The activities required before a pharmaceutical product may be marketed in
the U.S. primarily begin with preclinical testing. Preclinical tests include
extensive laboratory evaluation of product chemistry and other end points and
animal studies to assess the potential safety and efficacy of the product as
formulated. Almost all preclinical studies pertinent to drug approval are
regulated by the FDA under a series of regulations called the Good Laboratory
Practice (GLP) regulations. Violations of these regulations can, in some cases,
lead to invalidation of the studies, requiring such studies to be replicated.
The entire body of preclinical development work necessary to administer
investigational drugs to volunteers or patients is summarized in an
Investigational New Drug (IND) submission to the FDA. FDA regulations provide
that clinical trials may begin 30 days following the submission and receipt of
an IND, unless the FDA advises otherwise or requests additional information,
clarification or additional time to review the IND submission; it is generally
considered good practice to obtain affirmative FDA acquiescence before
commencing trials. There is no assurance that the submission of an IND will
eventually allow a company to commence clinical trials. Once trials have
commenced, the FDA may stop the trials, or particular types or parts of trials,
by placing a "clinical hold" on such trials because of concerns about, for
example, safety of the product being tested or the adequacy of the trial design.
Such holds can cause substantial delay and in some cases may require abandonment
of a product.
Clinical testing involves the administration of a drug to healthy
volunteers or to patients under the careful supervision of a qualified principal
investigator, usually a physician, pursuant to an FDA-reviewed protocol.
Clinical tests pertinent to an IND are usually conducted in the following
sequential phases, although the phases may overlap. Phase I trials generally
involve administration of a drug product to a small number of persons to
determine aspects of safety, tolerance, pharmacokinetic characteristics, and
possible early data on effectiveness. Phase II trials generally involve
administration of a product to a limited number of patients with a particular
disease to determine dosage, efficacy and safety. Phase III trials generally
examine the clinical efficacy and safety in an expanded patient population at
multiple clinical sites. Pivotal Phase III trials are trials designed to
demonstrate definitive efficacy. At least one such trial is required for FDA
approval to market a drug. Each clinical study is conducted under the auspices
of an independent Institutional Review Board (IRB) at every institution at which
the study will be conducted. An IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.
The regulatory process required to be completed by the FDA before a new
drug delivery system may be marketed in the U.S. depends significantly on
whether the drug (which will be delivered by the drug delivery system in
question) has existing approval for use and in what dosage forms. If the drug is
a new chemical
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<PAGE> 14
entity that has not been approved, then the process includes (i) preclinical
laboratory and animal tests, (ii) an IND application which has become effective,
(iii) adequate and well-controlled human clinical trials to establish the safety
and efficacy of the drug in its intended indication and (iv) FDA approval of a
pertinent NDA. If the drug has been previously approved, then the approval
process is similar, except that certain toxicity tests normally required for the
IND may not be necessary. Even with previously approved drugs, additional
toxicity testing may be required when the delivery form is substantially
changed. Because the Company's OT-system, by design, produces high drug
concentrations at the surface of the oral mucosa, new toxicity tests at this
site may need to be performed. In addition to the foregoing, the FDA requires
proof that the product delivers sufficient quantities of the drug to the
bloodstream to produce the desired therapeutic result.
The results of product development, preclinical studies and clinical
studies and other information are submitted to the FDA in an NDA seeking
approval for the marketing and interstate commercial shipment of the drug. The
FDA may deny an NDA if applicable regulatory criteria are not satisfied or may
require additional clinical or other testing. Even if such data are submitted,
the FDA may ultimately decide that the NDA does not satisfy the criteria for
approval. If the FDA does ultimately approve the product, it may require, among
other things, postmarketing testing, including potentially expensive Phase IV
studies, and surveillance to monitor the safety and effectiveness of the drug.
In addition, the FDA may in some circumstances impose restrictions on the use of
the drug that may be difficult and expensive to administer and almost always
seeks to require prior approval of promotional materials. Product approvals may
be withdrawn if compliance with regulatory requirements is not maintained or if
serious problems occur after the product reaches the market. Finally, the FDA
requires reporting of certain information that becomes known to a manufacturer
of an investigational or approved drug.
Each domestic drug product manufacturing establishment must be registered
with, and essentially approved by, the FDA. In addition, each such establishment
must inform the FDA of every drug product it has in commercial distribution and
keep such list updated. Establishments handling controlled substances must be
licensed and are inspected by the DEA. Anesta has a current DEA license
appropriate for handling the substances it uses in its facilities. Domestic
establishments are also subject to inspection by the FDA for compliance with
cGMP regulations before or after an NDA has been filed and thereafter, at least
biannually. The labeling, advertising and promotion of drug products also must
be in compliance with pertinent FDA regulatory requirements. Failures to comply
with applicable requirements relating to production, distribution or promotion
of a drug product can lead to FDA demands that production and shipment cease,
and, in some cases, that products be recalled, or to enforcement actions that
can include seizures, injunctions and criminal prosecution. Finally,
manufacturers of drug products seeking FDA approval via an NDA are also
required, due to recently introduced user fee requirements, to make payments to
the FDA at various stages of the approval process. In addition, such payments
must also be made in association with annual establishment registration.
To market its products abroad, the Company is also subject to numerous and
varying foreign regulatory requirements, implemented by foreign health
authorities, governing, among other things, the design and conduct of human
clinical trials, pricing regulations and obtaining marketing approval. The
approval procedure may vary among countries and can involve additional testing,
and the time required to obtain approval may differ from that required to obtain
FDA approval. At present, foreign marketing authorizations are applied for at a
national level, although within the EU certain registration procedures are
available to companies wishing to market a product in more than one EU member
country. If a regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, marketing authorization is
almost always granted. The foreign regulatory approval process includes all of
the risks associated with obtaining FDA approval set forth above. Approval by
the FDA does not ensure approval by other countries.
Various aspects of the Company's business and operations are also regulated
by a number of other governmental agencies including the DEA, U.S. Department of
Agriculture, the Environmental Protection Agency, the Occupational Safety and
Health Administration as well as by other federal, state and local authorities.
In addition, international sales are regulated by numerous foreign authorities.
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PRODUCT LIABILITY INSURANCE
The testing, marketing and sale of human pharmaceutical products involves
unavoidable risks. The use of any of the Company's potential products in
clinical trials and the sale of any of its products may expose the Company to
potential liability resulting from the use of such products. Such liability
might result from claims made directly by consumers or by regulatory agencies,
pharmaceutical companies or others selling such products. The Company currently
has clinical trial and product liability insurance coverage. The Company will
seek to maintain and appropriately increase such insurance coverage as clinical
development of its product candidates progresses and if and when its products
are ready to be commercialized. There can be no assurance that the Company will
be able to obtain such insurance or, if obtained, that such insurance can be
acquired at a reasonable cost or in sufficient amounts to protect the Company
against such liability. The obligation to pay any product liability claim in
excess of whatever insurance the Company is able to acquire, or the recall of
any of its products, could have a material adverse effect of the business,
financial condition and future prospects of the Company.
Anesta has agreed to indemnify Abbott against certain liabilities arising
from Anesta's negligence or willful misconduct in its research and development
activities under the agreement, or its manufacture, use or handling of licensed
products or its breach of the agreement or errors or inaccuracies in the
technology Anesta licensed to Abbott, if such errors or omissions resulted from
Anesta's negligence or willful misconduct. Abbott has agreed to indemnify Anesta
against certain liabilities arising from Abbott's, or its affiliate's or
sublicensee's, negligence or willful misconduct in the manufacture, use or
distribution of licensed products or its breach of the agreement, except to the
extent such liabilities arise from errors or inaccuracies in Anesta's technology
resulting from Anesta's negligence or willful misconduct.
HUMAN RESOURCES
As of March 31, 1996, Anesta employed 54 individuals, of whom approximately
19 hold Ph.D., M.D. or other advanced degrees. Of its total workforce, 43
employees are engaged in research and development activities and 11 are devoted
to support and administrative activities. A significant number of the Company's
management and professional employees have had prior experience with major
international pharmaceutical, biotechnology or medical products companies.
Anesta believes that it maintains good relations with its employees. The
Company's success will depend in large part upon its ability to attract and
retain these and future employees. The Company faces competition in this regard
from other companies, research and academic institutions and government
entities.
ITEM 2. PROPERTIES
On December 31, 1995, the Company's administrative offices and research
laboratories comprised approximately 28,000 square feet located in Salt Lake
City, Utah. The lease covering these facilities expires March 31, 2000, with two
five year renewal options. The Company anticipates that its current facilities
will meet the Company's research and development needs through 1996.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1995.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock (Nasdaq symbol NSTA) began trading publicly in the
over-the-counter market through the Nasdaq National Market System on January 28,
1994. Prior to that date, there was no public market for the Common Stock. The
following table presents quarterly information on the price range of the Common
Stock. This information indicates the high and low sale prices reported by the
Nasdaq National Market System. These prices do not include retail markups,
markdowns or commissions.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1994:
First Quarter (from January 28, 1994)............................ $ 13.25 $ 10.50
Second Quarter................................................... 10.50 6.25
Third Quarter.................................................... 10.13 7.38
Fourth Quarter................................................... 8.50 5.25
Fiscal 1995:
First Quarter.................................................... $ 5.75 $ 4.75
Second Quarter................................................... 10.13 4.38
Third Quarter.................................................... 13.00 8.75
Fourth Quarter................................................... 11.75 9.00
</TABLE>
As of March 25, 1996 there were approximately 100 holders of record of the
Common Stock.
In February 1994 the Company paid a one time dividend on the Company's
preferred stock, all of which was converted into Common Stock at the time of the
Company's initial public offering. The Company currently intends to retain any
future earnings to finance the growth and development of its business and
therefore, does not anticipate paying additional cash dividends in the
foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales...................... $ -- $ -- $ -- $ 37 $ 61
Royalties.......................... -- -- -- 1 102
Royalties from contract research... 1,266 1,741 1,584 812 1,514
------- ------- ------- ------- --------
Total revenues................ 1,266 1,741 1,584 850 1,677
Cost and expenses
Cost of goods sold................. -- -- -- 22 19
Royalties.......................... -- -- -- 2 3
Research and development........... 988 1,403 1,793 3,210 5,228
Depreciation and amortization...... 64 75 85 103 158
Selling, general and
administrative................... 316 363 553 1,328 2,219
------- ------- ------- ------- --------
Loss from operations.................. (102) (100) (847) (3,815) (5,950)
Non operating income, net............. 33 17 8 866 1,250
Provision for income taxes............ -- -- -- -- --
------- ------- ------- ------- --------
Loss before cumulative effect of
change in accounting............... (69) (83) (839) (2,949) (4,700)
Cumulative effect of change in
accounting......................... (1,041)
Net loss.............................. $ (69) $ (83) $ (839) $(2,949) $ (5,741)
======= ======= ======= ======= ========
Net loss per common share:
Loss before cumulative effect of
change in accounting............. $ (0.07) $ (0.08) $ (0.62) $ (0.51) $ (0.65)
Cumulative effect of change in
accounting....................... -- -- -- -- (0.15)
------- ------- ------- ------- --------
Net loss per common share*............ $ (0.07) $ (0.08) $ (0.62) $ (0.51) $ (0.80)
======= ======= ======= ======= ========
Shares used in computing net loss per
common share*...................... 1,039 1,076 1,345 6,721 7,177
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, certificates
of deposit and marketable debt
securities......................... $ 886 $ 628 $ 41 $26,392 $ 21,844
Total assets.......................... 1,707 1,929 1,686 28,260 24,242
Long-term obligations, including
current portion.................... 68 103 83 52 1,516
Deficit accumulated during development
stage.............................. (1,619) (1,702) (2,540) (5,981) (11,719)
Stockholders' equity.................. 633 962 508 27,052 21,677
</TABLE>
- ---------------
* Computed on the basis described for net loss per common share described in
Note 1 of the Notes to Financial Statements.
In February 1994, the Company closed an initial public offering of
2,500,000 shares of Common Stock at an offering price of $12.50 per share
resulting in net proceeds to the Company of $29,062,500.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Revenues.
The Company's revenues decreased from $1,584,000 in 1993 to $850,000 in
1994 and increased to $1,676,500 in 1995. The increase in 1995 was primarily a
result of revenue recognized pursuant to a 1995 collaborative agreement with
Abbott relating to the 1995 Actiq cancer pain program (See Note 10 to Financial
Statements). Substantially all revenues in 1993 and 1994 were from development
funding and milestone payments under the 1989 collaborative agreement between
the Company and Abbott and the decrease in 1994 was a result of decreased
revenue recognized pursuant to such agreement. Amounts earned under the
collaborative agreements with Abbott may vary substantially in the future.
Initial orders for the Company's first product, Fentanyl Oralet(R), were
placed beginning in July 1994. The FDA-approved marketing plan for Fentanyl
Oralet contemplated a controlled product introduction, under which the product
would be sold only to institutions that received extensive training in the
proper use of the product by Abbott anesthesia specialists. As a result of the
controlled introduction, only limited sales of Fentanyl Oralet occurred during
1994 and 1995. Because Fentanyl Oralet was used safely during the controlled
roll-out period, as determined by the FDA's Anesthetic and Life Support Drug
Advisory Committee in December 1995, in March 1996 the FDA eased the initial
constraints on advertising, promotion and distribution. Fentanyl Oralet can now
be used by clinical personnel who have been trained by Abbott's sales force.
Under the Company's agreement with Abbott, Abbott manufactures Fentanyl
Oralet and sells it to the Company at a price which reflects Abbott's cost of
manufacturing. The Company then resells the product to Abbott at a price which
results in a gross profit to the Company ranging from approximately 40-70%. In
addition, the Company is entitled to receive a royalty on product sales by
Abbott.
Operating Expenses.
The Company's research and development expenses increased from $1,793,000
in 1993 to $3,210,000 in 1994 and $5,228,000 in 1995. The increase in research
and development expenses in 1995 was due primarily to higher expenditures for
the Actiq cancer pain program and increased research and development and
clinical trials for other products. Such expenditures, which included $153,000
of accrued bonuses in the fourth quarter, were higher in the fourth quarter of
1995 than in previous quarters in 1995. The increase in 1994 was due primarily
to higher expenditures for new product development, including clinical trials.
The Company's selling, general and administrative expenses increased from
$553,000 in 1993 to $1,329,000 in 1994 and $2,219,000 in 1995. The increase in
selling, general and administrative expenses in 1995 was due primarily to higher
expenditures resulting from additional executives and employees including
$94,000 of accrued bonuses in the fourth quarter of 1995, increased support
required for research and development, patent and corporate development
activities and the expensing in the fourth quarter of $310,000 of patent costs
incurred in 1995 as a result of the change in method of accounting for external
legal costs related to patents. The increase from 1993 to 1994 was due primarily
to expansion of the Company's senior management team, higher expenditures for
consulting, travel, legal, insurance and other costs associated with being a
public company. The Company expects that its selling, general and administrative
expenses will increase in 1996 as a result of the increased support required for
research and development, patent and corporate development activities.
Non Operating Income (Expense).
The Company's interest income increased from $9,780 in 1993 to $883,000 in
1994 and $1,366,000 in 1995. The increase in 1994 was primarily due to higher
average invested balances resulting from proceeds from the sale of common stock
in the Company's 1994 public offering. The increase in 1995 was primarily due to
higher interest rates, partially offset by lower average balances invested.
17
<PAGE> 19
The Company's interest expense increased from $4,527 in 1993 to $17,600 in
1994 and $100,000 in 1995 primarily due to interest expense related to
borrowings on the Company's revolving/term loan in 1995 (See Note 5 to Financial
Statements).
Income Taxes.
As of December 31, 1995, the Company had net operating loss carryforwards
of approximately $11 million and research and development tax credit
carryforwards of $480,000 that expire from 2003 to 2010. A portion of the
Company's net operating loss and research and development tax credit
carryforwards are subject to an annual limitation in future periods pursuant to
the "change in ownership" rules under section 382 of the Internal Revenue Code
of 1986, as amended. Based upon the amount of carryforwards subject to
limitation, the date the limitation arose, and the estimated value of the
Company on the change of ownership date, the Company believes that the
limitation will not have a material impact on the future use of net operating
loss and research and development tax credit carryforwards. The Company's
ability to realize the benefit of the deferred tax asset related to the net
operating loss and research and development tax credit carryforwards will depend
on the generation of future taxable income. Because the Company's operations are
not currently generating taxable income, the Company believes a full valuation
allowance should be provided (See Note 9 to Financial Statements).
Cumulative Effect of Change in Accounting
Effective January 1, 1995, the Company changed its method of accounting for
external legal costs related to patents. Prior to the change, the Company
capitalized these costs and amortized them over the term of the related patent.
Under the new method, these costs will be expensed as incurred. The Company
believes that the change will provide better comparison with the Company's
industry peers, the majority of which expense these costs prior to FDA approval.
The cumulative effect of this accounting change for years prior to 1995, which
is shown separately in the statement of operations for 1995, resulted in a
charge to operations of $1,041,047 or $.15 per share (See Note 2 to Financial
Statements).
Net Loss.
As a result of the increase in research and development, selling, general
and administrative activities and other factors discussed above, the net loss
increased from $838,580 or $.62 per share in 1993 to $2,949,225 or $.51 per
share in 1994 and $5,741,839 or $.80 per share in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Prior to January 1994, the Company had funded its operations primarily
through private equity financings and through contract payments pursuant to the
Company's agreements with Abbott. In February 1994, the Company realized net
proceeds of $28,538,350 through the issuance of common stock in an initial
public offering and approximately $1,426,000 from the exercise of warrants held
by Abbott. In conjunction with the conversion of preferred stock, a one time
payment of accrued dividends of $491,884 was made in February 1994.
During 1995, the Company realized cash proceeds of $224,334 relating to the
exercise of stock options and collections on notes receivable from issuance of
common stock. As of December 31, 1995, the Company had cash and cash equivalents
totaling $3,540,147, $1,530,000 in a certificate of deposit as collateral for a
revolving/term loan as described below, and $16,773,547 in marketable debt
securities which are available for sale (See Note 3 to Financial Statements).
Thus cash, cash equivalents, certificate of deposit and marketable debt
securities totaled $21,843,694 as of December 31, 1995. Cash in excess of
immediate requirements is invested according to the Company's investment policy,
which provides guidelines with regard to liquidity and return, and, wherever
possible, seeks to minimize the potential effects of concentration of credit
risk.
The Company's use of cash in operating activities increased from $743,000
in 1993 to $2,529,000 in 1994 and $4,791,000 in 1995. The increase in cash used
was a direct result of the increase in research and development and selling,
general and administrative activities discussed above.
18
<PAGE> 20
During 1995, the Company made capital expenditures of approximately
$1,592,000, as compared to capital expenditures of $361,000 and $16,035 in 1994
and 1993 respectively. The increase in capital expenditures in 1995 was due to
the Company's remodeling of new facilities. In order to finance the capital
expenditures, the Company, in January 1995, secured a revolving/term loan in the
amount of $1,500,000 which is collateralized by a $1,530,000 certificate of
deposit purchased in 1995. Such loan converted to a 10 year term loan on May 15,
1995.
Effective January 1, 1995, the Company changed its method of accounting for
external legal costs related to patents. Prior to the change, the Company
capitalized these costs and amortized them over the term of the related patent.
Under the new method, these costs will be expensed as incurred. During 1995,
1994 and 1993 the Company paid approximately $360,000, $190,000 and $147,000 in
patent costs, respectively.
During 1995 the Company paid $35,548 on capital lease obligations as
compared to $56,503 and $45,604 in 1994 and 1993 respectively.
The Company expects to continue to incur substantial expenses related to
the continuation and expansion of research and development, including clinical
trials, and increased selling and administrative activities over at least the
next several years. The Company anticipates that its existing cash, cash
equivalents and marketable debt securities, interest earned thereon, and funding
under the 1996 agreement with Abbott will enable it to maintain its current and
planned operations at least through 1997. However, the Company's requirements
may change depending on numerous factors, including, but not limited to, the
progress of the Company's research and development programs, the results of
clinical studies, the number and nature of the indications the Company pursues
in clinical studies, the timing of regulatory approvals, technological advances,
determinations as to the commercial potential of the Company's products, the
status of competitive products, the establishment of collaborative relationships
with other companies and other factors.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company has
determined that based on information available as of December 31, 1995, SFAS No.
121 would have no impact on the Company when adopted.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation". This Statement defines a fair
value method of accounting for an employee stock option or similar equity
instrument and encourages adoption of that method. The Statement also requires
that an employer's financial statements include certain disclosures about
stock-based compensation arrangements regardless of the method used to account
for them. The Statement is effective for financial statements for fiscal years
that begin after December 15, 1995. The Company has elected to continue to apply
the current stock based compensation methods pursuant to APB 25 and to furnish
the additional disclosures required by SFAS No. 123.
19
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Anesta Corp.:
We have audited the accompanying balance sheets of Anesta Corp. (a
development stage enterprise) as of December 31, 1995 and 1994, and the related
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995 and for the period
from inception (August 1, 1985) to December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Anesta Corp. (a development
stage enterprise) as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, and for the period from inception (August 1, 1985) to
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective January 1,
1995 the Company changed its method of accounting for external legal costs
related to patents.
Salt Lake City, Utah
March 1, 1996
20
<PAGE> 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of the Company as of March 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ----------------------------------------
<S> <C> <C>
William C. Moeller........................... 57 President, Chief Executive Officer,
Treasurer and Director
Theodore H. Stanley, M.D. ................... 56 Chairman of the Board and Secretary
Thomas B. King............................... 41 Executive Vice President, Chief
Operating Officer and Director
Michael A. Busch, Ph.D. ..................... 43 Vice President of Clinical Research and
Regulatory Affairs
Dennis L. Coleman, Ph.D. .................... 49 Vice President of Research and
Development
Steven A. Shoemaker, M.D. ................... 44 Vice President of Medical Affairs
Edwin M. Kania, Jr.(1)(2).................... 38 Director
Daniel L. Kisner, M.D.(2).................... 48 Director
Richard H. Leazer(1)(2)...................... 54 Director
Emanuel M. Papper, M.D., Ph.D.(1)............ 80 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
William C. Moeller has been President and Chief Executive Officer of the
Company since he co-founded the Company in 1985. Prior to joining Anesta, Mr.
Moeller held senior management positions with several medical companies that
manufactured products for orthopedic and cardiovascular surgery and for
anesthesiology. These positions included general management responsibilities in
the large multinational companies of Howmedica, Inc., a medical devices company,
from 1964 to 1973 and The BOC Group, from 1973 to 1981, in its medical division.
Mr. Moeller was Chief Operating Officer of Symbion, Inc., a company in the field
of artificial organs, from 1982 to 1985. He received an M.B.A. degree from
Harvard Graduate School of Business Administration in 1964.
Theodore H. Stanley, M.D. has been Chairman of the Board of Directors of
the Company since he co-founded the Company in 1985. Dr. Stanley served as
Medical Director of the Company from 1985 to April 1994. He also has been
Professor of Anesthesiology and Professor of Surgical Research at the University
of Utah School of Medicine since 1978. Dr. Stanley has also been an Adjunct
Professor of Anesthesiology at the University of Texas (Houston) since 1985. He
is internationally known for his work in the clinical testing of intravenous
anesthetic drugs and has been a clinical research investigator for numerous
pharmaceutical companies in the investigation of new anesthetic drugs. Dr.
Stanley received an M.D. degree from Columbia University, College of Physicians
and Surgeons in 1965.
Thomas B. King has been Executive Vice President, Chief Operating Officer
and a Director of the Company since December 1994. Prior to joining Anesta, he
was employed by Somatogen, Inc., a biotechnology company, from January 1990 to
December 1994 as Vice President of Marketing and Business Development. Prior to
joining Somatogen, he was director of the Cardiovascular Business Unit at
Abbott, a
21
<PAGE> 23
pharmaceutical company from January 1988 to December 1989 and held various
marketing and business development positions at Anaquest, the pharmaceutical
division of BOC Healthcare, a producer of medical gases and manufacturer of
medical devices and pharmaceuticals from June 1982 to December 1987. Mr. King
received an M.B.A. in finance and marketing from the University of Kansas in
1982.
Michael A. Busch, Ph.D. has been Vice President of Clinical Research and
Regulatory Affairs of the Company since March 1992. Prior to joining Anesta, he
was employed at Glaxo, Inc., a pharmaceutical company, where he served as Senior
Clinical Research Scientist from March 1988 to September 1988 and as Assistant
Director of Clinical Research and Assistant Director of R&D Project Management
from September 1988 to February 1992. He held several positions at Abbott from
1983 to 1988, most recently as Senior Clinical Research Associate. Dr. Busch
received a Ph.D. degree in Physiology and Biophysics from Colorado State
University in 1981.
Dennis L. Coleman, Ph.D. has been Vice President of Research and
Development of the Company since March 1992 and served as Director, Technical
Marketing at the Company from April 1991 to February 1992. Prior to joining
Anesta, he was a founder of Albion Instruments, a company specializing in the
analysis of anesthetic gases, where he served as Clinical Director from 1981 to
August 1990. He also served as a consultant to Anesta from September 1990 to
March 1991. He served as Research Associate Professor at the College of
Pharmacy, Department of Pharmaceutics from 1985 to 1987 and as Research
Assistant Professor, Department of Surgery, College of Medicine, Division of
Artificial Organs from 1981 to 1986 at the University of Utah. Dr. Coleman
received a Ph.D. degree in Pharmaceutics from the University of Utah in 1980.
Steven A. Shoemaker, M.D. has been Vice President of Medical Affairs since
April 1994. Prior to joining Anesta, he was employed by Somatogen, Inc., a
biotechnology company, from February 1993 to March 1994 as Senior Vice President
and from June 1989 to February 1993 as Vice President of Drug Development and
Medical Affairs. He was Assistant Professor of Medicine at the University of
Colorado Health Sciences Center from July 1985 to June 1988. He received an M.D.
degree from the University of California at Los Angeles in 1978.
Edwin M. Kania, Jr. has served as director of the Company since April 1987.
Since 1985, Mr. Kania has been a special limited partner of Morgan, Holland
Partners, L.P., the general partner of Morgan, Holland Fund, L.P., a venture
capital firm, (Morgan, Holland), which is a major stockholder of the Company. He
also serves as Managing General Partner of Morgan, Holland Fund II, L.P., a
venture fund organized in 1998 and as Managing General Partner of One Liberty
Fund III, L.P., a venture fund organized in 1995. Mr. Kania is currently also a
director of PerSeptive Biosystems, Inc., a supplier to the pharmaceutical and
biotechnical industries, and Cytyc Corporation, a diagnostic company. Mr. Kania
received an M.B.A. degree from Harvard Graduate School of Business
Administration in 1982.
Daniel Kisner, M.D. has served as a director of the Company since February
1996. Dr. Kisner has served as Chief Operating Officer of Isis Pharmaceuticals,
Inc., a biotechnology company, since February 1993, as a Director since March
1991 and as President since May 1994. From March 1991 until February 1993, he
was Executive Vice President of Isis. From December 1988 until March 1991, he
was Division Vice President of Pharmaceutical Development for Abbott. From March
1988 until November 1988, Dr. Kisner served as the Vice President, International
Clinical Research and Development for Smith Kline & French Laboratories and from
May 1985 until March 1988 he served as Vice President, Clinical Research R & D,
Continental Europe for the same company. Dr. Kisner was an Associate Professor
of Oncology at the University of Texas and an acting Associate Director at the
National Cancer Institute. Dr. Kisner received an M.D. from Georgetown
University in 1972.
Richard H. Leazer has served as a director of the Company since February
1994. Mr. Leazer has served as Managing Director of the Wisconsin Alumni
Research Foundation, a not-for-profit corporation supporting research at the
University of Wisconsin, since March 1993. Prior to such time, he was President
of Ohmeda, an anesthesia device and equipment manufacturer and a division of BOC
HealthCare, from 1988 to September 1992 and was President of Anaquest, an
anesthesia pharmaceutical company and a division of BOC HealthCare, from 1981 to
1988. Mr. Leazer received an M.B.A. degree from Drexel University in 1966.
22
<PAGE> 24
Emanuel M. Papper, M.D., Ph.D. has been a director of the Company since
July 1990. He has been Professor of Anesthesiology at the University of Miami
since 1969 and was Professor of Pharmacology there from 1974 to 1981. Dr. Papper
also served as the Vice President for Medical Affairs and the Dean of the
University of Miami School of Medicine from 1969 to 1981. Prior to that time,
Dr. Papper was a Professor of Anesthesiology and Chairman of the Department of
Anesthesiology at Columbia University from 1949 to 1969. Dr. Papper served as a
director of Abbott from 1971 to 1984. He received an M.D. degree from New York
University in 1938 and a Ph.D. degree in English Literature from the University
of Miami in 1990. In addition, Dr. Papper holds numerous honorary degrees.
COMMITTEES
The Audit Committee consists of Messrs. Kania and Leazer and Dr. Kisner.
The Audit Committee makes recommendations to the Board regarding the selection
of independent auditors, reviews the results and scope of the audit and other
services provided by the Company's independent auditors and reviews and
evaluates the Company's internal audit and control functions.
The Compensation Committee consists of Messrs. Kania and Leazer and Dr.
Papper. The Compensation Committee administers the Company's stock option plans
and its employee stock purchase plan and makes recommendations to the Board
concerning salaries and incentive compensation for employees and consultants of
the Company.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTORS' COMPENSATION
The Company's directors do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at Board of
Directors and committee meetings.
23
<PAGE> 25
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth, for the fiscal year ended December 31,
1995, certain compensation, including salary, bonuses, stock options and certain
other compensation, awarded or paid to, or earned by, the Company's Chief
Executive Officer and its four most highly compensated executive officers at
December 31, 1995 (the Named Executive Officers).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------- SECURITIES
SALARY BONUS UNDERLYING
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS
- ----------------------------------------------------- ---- -------- ------- ------------
<S> <C> <C> <C> <C>
William C. Moeller................................... 1995 $150,000 $28,000 --
President, Chief Executive 1994 131,667 20,000 25,000
Officer and Treasurer 1993 90,865 -- 17,606
Michael A. Busch..................................... 1995 120,250 24,000 10,000
Vice President, Clinical Research 1994 101,667 16,000 15,000
and Regulatory Affairs 1993 85,000 -- 14,000
Dennis L. Coleman.................................... 1995 126,462 20,400 10,000
Vice President, Research and 1994 100,834 16,000 15,000
Development 1993 87,467 -- 14,600
Thomas B. King....................................... 1995 143,001 27,000 42,500
Executive Vice President and 1994 6,050 -- 85,000
Chief Operating Officer(1) 1993 -- -- --
Steven A. Shoemaker.................................. 1995 140,000 23,800 10,000
Vice President, Medical 1994 123,302 15,000 50,000
Affairs(2) 1993 -- -- --
</TABLE>
- ---------------
(1) Mr. King became an officer and employee of the Company during 1994.
(2) Dr. Shoemaker became an officer and employee of the Company during 1994.
STOCK OPTION PLANS
In October 1989, the Company adopted a Stock Option Plan (the 1989 Plan)
under which 250,000 shares are reserved for issuance upon exercise of options
granted to employees, officers, directors and consultants of the Company. In
September 1993, the Company adopted the 1993 Stock Option Plan (the 1993 Plan)
under which 750,000 shares are reserved for issuance upon exercise of options
granted to employees, officers and consultants of the Company and its
affiliates. The 1989 Plan and 1993 Plan (collectively, the Option Plans) will
terminate in October 1999 and September 2003, respectively, unless sooner
terminated by the Board of Directors.
The 1993 Plan provides for the grant of both incentive stock options
intended to qualify as such under Section 422 of the Internal Revenue Code of
1986, as amended, and nonstatutory stock options. The 1989 Plan provides only
for the grant of nonstatutory stock options. The Board has delegated
administration of the Option Plans to the Compensation Committee, which is
comprised of disinterested directors. Subject to the limitations set forth in
the Option Plans, the Compensation Committee has the authority to select the
persons to whom grants are to be made, to designate the number of shares to be
covered by each option, to determine whether an option is to be an incentive
stock option or a nonstatutory stock option (under the 1993 Plan), to establish
vesting schedules, to specify the type of consideration to be paid to the
Company upon exercise and, subject to certain restrictions, to specify other
terms of the options.
24
<PAGE> 26
The maximum term of options granted under the Option Plans is ten years.
The aggregate fair market value of the stock with respect to which incentive
stock options are first exercisable in any calendar year may not exceed $100,000
per optionee; portions in excess of such amount shall be treated as nonstatutory
stock options. Options granted under the 1993 Plan are non-transferable and
generally expire forty-five days after the termination of an optionee's service
to the Company. In general, under the 1993 Plan, if an optionee is permanently
disabled or dies during his or her service to the Company, such person's option
may be exercised up to twelve months following such death or termination due to
such disability.
The Board has discretion in connection with a merger, consolidation or
liquidation involving the Company to prescribe the terms and conditions for the
exercise of, or modification of the options granted under the 1993 Plan. Under
the 1989 Plan, (i) in the case of a merger or consolidation where the Company is
the surviving corporation, options shall pertain and apply to the same number
securities as the optionee would be entitled if such optionee had owned the
shares on the date of the consolidation or merger and (ii) in the event of a
dissolution or liquidation of the Company, or the sale of all or substantially
all of the assets of the Company, or a consolidation or merger in which the
Company is not the surviving corporation, the option vesting will accelerate and
can be exercised or will be terminated.
The exercise price of incentive stock options must equal at least the fair
market value of the Common Stock on the date of grant. The exercise price of
nonstatutory stock options under the 1993 Plan may be no less than 85% of the
fair market value of the Common Stock on the date of grant. The exercise price
of incentive stock options granted to any person who at the time of grant owns
stock possessing more than 10% of the total combined voting power of all classes
of stock must be at least 110% of the fair market value of such stock on the
date of grant and the term of these options cannot exceed five years.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth for the Named Executive Officers certain
information regarding options granted for the year ended December 31, 1995:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(2)
OPTIONS IN 1995 PRICE EXPIRATION --------------------
NAME GRANTED(#) (%)(1) ($/SHARE) DATE 5%($) 10%($)
- ---------------------------- ---------- ---------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
William C. Moeller.......... -- -- -- -- -- --
Michael A. Busch............ 10,000 5% $ 5.25 3/15/2000 $ 14,504 $ 32,051
Dennis L. Coleman........... 10,000 5 5.25 3/31/2000 14,504 32,051
Thomas B. King.............. 42,500 22 10.25 10/09/2000 120,355 265,953
Steven A. Shoemaker......... 10,000 5 5.25 4/15/2000 14,504 32,051
</TABLE>
- ---------------
(1) Based on 196,750 options granted in 1995.
(2) The potential realizable value is based on the term of the option at its
time of grant (five years in the case of these options). It is calculated
by assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the
option, and that the option is exercised and sold on the last day of its
term for the appreciated stock price. No gain to the optionee is possible
unless the stock price increases over the option term, which will benefit
all stockholders.
25
<PAGE> 27
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
The following table sets forth for the Named Executive Officers the shares
acquired and the value realized on each exercise of stock options during the
fiscal year ended December 31, 1995 and the fiscal year-end number and value of
unexercised options:
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS IN OPTIONS IN
1995 1995($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE(2)
- -------------------------------- --------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
William C. Moeller.............. 30,000 $137,250 58,980/15,626 $368,660/$39,065
10,000 35,750
Michael A. Busch................ -- -- 41,012/23,588 302,699/107,501
Dennis L. Coleman............... 4,000 18,800 27,836/23,276 192,292/103,934
1,000 4,700
Thomas B. King.................. -- -- 24,790/102,710 78,800/176,200
Steven A. Shoemaker............. -- -- 23,227/36,773 44,603/82,897
</TABLE>
- ---------------
(1) Based on the fair market value of the Common Stock as of the exercise date
as reported on the Nasdaq National Market, minus the exercise price,
multiplied by the number of shares underlying the option.
(2) Based on the fair market value of the Common Stock as of December 31, 1995
as reported on the Nasdaq National Market, minus the exercise price,
multiplied by the number of shares underlying the option.
EMPLOYEE STOCK PURCHASE PLAN
In November 1993, the Company adopted an Employee Stock Purchase Plan (the
Purchase Plan), authorizing the issuance of 250,000 shares pursuant to purchase
rights granted to employees of the Company. The Purchase Plan provides a means
by which employees purchase Common Stock of the Company through payroll
deductions. The Purchase Plan is implemented by offerings of rights to eligible
employees. Generally, Common Stock is purchased for accounts of employees
participating in the Purchase Plan at a price per share equal to the lower of
(i) 85% of the fair market value of a share of Common Stock on the date of
commencement of participation in the offering or (ii) 85% of the fair market
value of a share of Common Stock on the date of purchase and generally must be
held after purchase for a period of at least six months. Generally all regular
employees, including executive officers, who work at least 20 hours per week and
are customarily employed by the Company or a subsidiary of the Company for at
least five months per calendar year may participate in the Purchase Plan and may
authorize payroll deductions of up to 15% of their base compensation for the
purchase of stock under the plan. The Purchase Plan will terminate in November
2003.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In December 1993, the Company adopted the 1993 Non-Employee Directors'
Stock Option Plan (the Directors' Plan) to provide for the automatic grant of
options to purchase shares of Common Stock to non-employee directors of the
Company. The maximum number of shares of Common Stock that may be issued
pursuant to options granted under the Directors' Plan is 150,000. Each
non-employee director of the Company receives stock option grants under the
Directors' Plan. Only non-employee directors of the Company or affiliates of
such directors (as defined in the Code) are eligible to receive options under
the Directors' Plan. Options granted under the Directors' Plan do not qualify as
incentive stock options under the Code.
Option grants under the Directors' Plan are non-discretionary. Each person
who is, after the effective date of the initial public offering of shares of the
Company's Common Stock, elected for the first time to be a non-employee director
shall, upon the initial election date to be a non-employee director by the Board
of Directors or stockholders of the Company, be granted an option to purchase
10,000 shares of Common Stock of the Company under the Directors' Plan. On the
first business day of each calendar year each member of the Company's Board of
Directors who is not an employee of the Company and has served as a non-employee
26
<PAGE> 28
director for at least three months or, where specified by the non-employee
director, an affiliate of such director, is automatically granted under the
Directors' Plan, without further action by the Company, the Board of Directors
or the stockholders of the Company, an option to purchase 1,500 shares of Common
Stock of the Company. No other options may be granted at any time under the
Directors' Plan. The exercise price of options granted under the Directors' Plan
is the fair market value of the Common Stock subject to the option on the date
of the option grant. Options granted under the Directors' Plan may be exercised:
(i) in installments over a period of three years from the date of grant in three
equal installments commencing on the date one year after the date of grant,
provided that the optionee has, during the entire period prior to such vesting
date, continuously served as a nonemployee director, or (ii) until the date upon
which such optionee, or the affiliate of such optionee, as the case may be,
terminates his service as a non-employee director for any reason or for no
reason, the option shall terminate on the earlier of the expiration date of the
option or the date three months following the date of termination of service.
The term of options granted under the Directors' Plan is five years. In the
event of a merger of the Company with or into another corporation or a
consolidation, acquisition of assets or other change-in-control transaction
involving the Company, each option either will continue in effect, if the
Company is the surviving entity, or will be assumed or an equivalent option will
be substituted by the successor corporation, if the Company is not the surviving
entity.
During the last fiscal year, the Company granted options covering 4,500
shares to each non-employee director of the Company, at an exercise price per
share of $5.375, which was equal to the fair market value on the date of grant
(based on the closing sales price reported in the Nasdaq National Market). As of
December 31, 1995, 1,250 options had been exercised under the Directors' Plan.
In the event of a merger, consolidation, reverse merger or reorganization,
the surviving corporation shall assume any options outstanding under the
Directors' Plan or will substitute similar options for those outstanding under
the Directors' Plan or, if the Company is the surviving corporation, such
options will continue in full force and effect.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, the Company has
entered into indemnity agreements with each of its directors and officers.
In addition, the Company's Certificate of Incorporation provides that the
Company's directors will not be liable for monetary damages for breach of the
directors' fiduciary duty of care to the Company and its stockholders. This
provision in the Certificate of Incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as an injunction
or other forms of non-monetary relief would remain available under Delaware law.
Each director will continue to be subject to liability for breach of the
director's duty of loyalty to the Company, for acts or omissions not in good
faith or involving intentional misconduct or knowing violations of law, for acts
or omissions that the director believes to be contrary to the best interests of
the Company or its stockholders, for any transaction from which the director
derived improper personal benefit, for acts or omissions involving a reckless
disregard for the director's duty to the Company or its stockholders when the
director was aware or should have been aware of a risk of serious injury to the
Company or its stockholders, for acts or omissions that constitute an unexcused
pattern of inattention that amounts to an abdication of the director's duty to
the Company or its stockholders, for improper transactions between the director
and the Company and for improper distributions to stockholders and loans to
directors and officers. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
27
<PAGE> 29
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is a former or current officer of
the Company.
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
Until 1994, the Board of Directors (the "Board") of the Company was
responsible for establishing the Company's compensation programs for all
executive officers. Beginning in 1994, the Board delegated to the Compensation
Committee (the "Committee") of the Board the authority to establish and
administer the Company's compensation programs. The Committee is currently
composed of three non-employee directors: Mr. Kania, Mr. Leazer and Dr. Papper.
The Committee is responsible for setting and administering the policies which
govern executive salaries, bonuses (if any) and stock ownership programs. The
Committee annually evaluates the performance, and determine the compensation, of
the Chief Executive Officer (the CEO) and the other executive officers of the
Company, based upon a mix of the achievement of corporate goals, individual
performance and comparisons with other pharmaceutical and drug delivery
companies.
The policies of the Company with respect to compensation of executive
officers, including the CEO, are to provide compensation sufficient to attract,
motivate and retain executives of outstanding ability and potential and to
establish an appropriate relationship between executive compensation and the
creation of stockholder value. To meet these goals, the Committee adopted a mix
among the compensation elements of salary, bonus and stock options, with a bias
toward stock options, to emphasize the link between executive incentives and the
creation of stockholder value as measured by the equity markets. In general for
1995, the salaries, bonuses and stock option awards of executive officers were
linked to the Company's achievement of corporate performance criteria with
respect to progress in product development programs (particularly the cancer
pain program), the controlled roll-out of Fentanyl Oralet, expanding the
Company's management team through the integration of a Chief Operating Officer,
strengthening the Company's pharmaceutical product development capabilities,
further development of the Company's corporate partnering strategy, public
company matters and stock price performance. In order to conserve the Company's
financial resources, and in order to reflect the Company's size and stage of
development in relation to the companies included in industry compensation
surveys reviewed by the Committee, the Committee determined to provide for base
salaries at or below the mid-point of the compensation range for such companies.
Bonuses were awarded to certain executive officers based on the same corporate
performance criteria noted above plus the achievement of individual objectives.
In general, the bonus program is designed to allow each executive officer to
realize total dash compensation that is slightly below or meaningfully above
industry averages, based on performance. Base salary and bonus were supplemented
by awards under the Company's stock option plan, designed to provide long-term
incentives to all employees of the Company. Stock option awards were set in the
mid-range compared to the companies included in the industry surveys considered
by the Committee. Each of these components is discussed in turn below.
BASE SALARY
Base salaries for all executive officers of the Company were established at
or below the mid-point of the range for companies included in the compensation
surveys considered by the Committee. In establishing such salaries, the
Committee also considers each officer's level of industry experience, individual
achievement and overall contribution to the achievement of corporate objectives.
BONUSES
The Company paid bonuses to its CEO and four other executive officers in
1995, in amounts ranging from $20,400 to $28,000. Such bonuses were based on the
extent to which the corporate goals described above were achieved, and
represented approximately 20% of each such officer's base salary.
28
<PAGE> 30
OPTION PLANS
The option plans offered by the Company have been established to provide
all executive officers of the Company with an opportunity to share, along with
stockholders of the Company, in the long-term performance of the Company.
Periodic grants of stock options are generally made to all eligible employees.
These grants have been reviewed by the Compensation Committee. As the base
salaries for executive officers of the Company historically have been below the
mid-point of the range for comparable companies, the Company has used stock
options as the primary incentive to attract and retain its executive officers.
In awarding stock options, the Compensation Committee considers individual
performance and overall contribution to the Company and also considers the
number of unvested stock options held by the officer and the total number of
stock options available to be awarded under the stock option plan. The Committee
also considers the stock option practices of a self-selected group of other
pharmaceutical, biotechnology and drug-delivery companies. After considering the
criteria relating to awarding stock options, the Board determined that four
executive officers would receive option grants in the year ended December 31,
1995. Stock options granted under the stock option plans generally have a
four-year vesting schedule and generally expire five years from the date of
grant. The exercise price of options granted under the stock option plans was
100% of fair market value of the underlying stock on the date of grant for all
officers who were granted options during 1995.
CEO COMPENSATION
Mr. Moeller's base salary and grants of stock options were determined in
accordance with the criteria described above. The base salary of Mr. Moeller was
set at an annual rate of $150,000 commencing January 1, 1995, which represented
an increase from his base salary of $131,667 in 1994. In setting such salary
level, the Committee considered salary surveys prepared by Radford Associates,
Ward Howell and Ernst & Young for other companies in the pharmaceutical,
biotechnology and drug delivery sectors. Mr. Moeller's salary was set below the
mid-point of the range for such companies, reflecting the Company's size and
stage of development in relation to such companies and the Committee's desire to
conserve the Company's financial resources. Mr. Moeller also received a bonus of
$28,000 for 1995. Such salary and bonus were based on the extent to which the
performance objectives described above were achieved. The Committee determined
that certain of such objectives were fully satisfied, and others were partially
satisfied, in 1995.
SECTION 162(M) OF THE INTERNAL REVENUE CODE
Section 162(m) of the Code limits the Company to a deduction for federal
income tax purposes of no more than $1 million of compensation paid to certain
Named Executive Officers in a taxable year. Compensation above $1 million may be
deducted if it is "performance-based compensation" within the meaning of the
Code. The statute containing this law and the applicable proposed Treasury
regulations offer a number of transitional exceptions to this deduction limit,
including an exemption for compensation plans, arrangements and binding
contracts in existence prior to the time the Company became a "publicly held
corporation" within the meaning of the Code. As a result, the Board belives that
at the present time it is quite unlikely that the compensation paid to any Named
Executive Officers in a taxable year which is subject to the deduction limit
will exceed $1 million. Therefore, the Board has not yet established a policy
for determining which forms of incentive compensation awarded to its Named
Executive Officers shall be designed to qualify as "performance-based
compensation." The Board intends to continue to evaluate the effects of the
statute and any final Treasury regulations and to comply with Code Section
162(m) in the future to the extent consistent with the best interests of the
Company.
COMPENSATION COMMITTEE
Edwin M. Kania, Jr.
Emanuel M. Papper, M.D., Ph.D.
Richard H. Leazer
29
<PAGE> 31
PERFORMANCE CHART
COMPARISON OF 23 MONTH CUMULATIVE TOTAL RETURN*
AMONG ANESTA CORP., NASDAQ STOCK MARKET-US INDEX
AND THE BIOCENTURY DRUG DELIVERY SECTOR INDEX
<TABLE>
<CAPTION>
1/28/94 3/94 6/94 9/94 12/94 3/95 6/95 9/95 12/95
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANESTA CORP. 100 84 64 71 43 40 77 87 74
NASDAQ STOCK MARKET-US 100 93 89 96 95 104 119 133 135
BIOCENTURY DRUG DELIVERY SECTOR 100 85 72 75 67 70 82 108 118
</TABLE>
** 100 INVESTED ON 01/28/94 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
30
<PAGE> 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 1996, by (i)
each person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, (iv) all directors and
executive officers of the Company as a group. Except as otherwise noted, the
persons or entities in this table have sole voting and investing power with
respect to all the shares of Common Stock owned by them.
<TABLE>
<CAPTION>
NUMBER
OF SHARES PERCENT
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED(1)(2)
- ---------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Morgan, Holland Fund, L.P............................................. 1,412,345 19.5%
c/o One Liberty Ventures
One Liberty Square,
Boston, Massachusetts 02109
Edwin M. Kania, Jr.(3)................................................ 1,418,845 19.6
c/o One Liberty Ventures
Morgan, Holland Fund, L.P.
One Liberty Square,
Boston, Massachusetts 02109
Abbott Laboratories................................................... 1,202,840 16.6
One Abbott Park Road, D-980, AP30
Abbott Park, IL 60064-3500
Theodore H. Stanley and Stanley Research Foundation(4)................ 734,514 10.0
4745 Wiley Post Way
Plaza 6, Suite 650
Salt Lake City, UT 84116
William C. Moeller(5)................................................. 651,549 8.9
4745 Wiley Post Way
Plaza 6, Suite 650
Salt Lake City, UT 84116
The Capital Group Companies, Inc.(6).................................. 460,000 6.4
Daniel L. Kisner...................................................... -- --
Thomas B. King(7)..................................................... 38,854 *
Richard H. Leazer(8).................................................. 5,187 *
Emanuel M. Papper(9).................................................. 21,353 *
Michael A. Busch(10).................................................. 48,764 *
Dennis L. Coleman(11)................................................. 59,632 *
Steven A. Shoemaker(12)............................................... 30,051 *
All executive officers and directors as a group (10 persons) (3)-(5)
and (7)-(12)........................................................ 3,008,749 39.6%
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options or warrants currently exercisable or exercisable within 60 days
of March 31, 1996, are deemed outstanding for computing the percentage of
the person or entity holding such securities, but are not outstanding for
computing the percentage of any other person or entity. Except as indicated
by footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
31
<PAGE> 33
(2) Percentage of beneficial ownership is based on 7,225,331 shares of Common
Stock outstanding as of March 31, 1996.
(3) Includes 1,412,345 shares held by Morgan, Holland Fund, L.P., 1,000 shares
held by One Liberty Ventures Retirement Trust for the benefit of Edwin M.
Kania, Jr., and options to purchase 5,500 shares of Common Stock held by
Mr. Kania but subject to a sharing agreement with other general partners of
One Liberty Ventures. Mr. Kania, a director of the Company, is a special
limited partner of Morgan, Holland Partners, L.P., the general partner of
Morgan, Holland. Mr. Kania disclaims beneficial ownership of the shares
held by Morgan, Holland except to the extent of his pecuniary interest
therein.
(4) Includes options exercisable for 153,749 shares of Common Stock. Of the
734,514 shares, Dr. Stanley owns 390,649 shares, Mary Ann Stanley, Dr.
Stanley's spouse, owns 236,900 shares, the Stanley Research Foundation owns
82,065 shares and Dr. Stanley owns 24,900 shares jointly with Ellen
Stanley.
(5) Includes options exercisable for 54,584 shares of Common Stock.
(6) The Capital Group Companies, Inc., Capital Research and Management Company,
and SMALLCAP World Fund, Inc. have together filed a Schedule 13G pursuant
to which they report sole or shared voting and dispositive power over
460,000 shares owned as of December 31, 1995. Capital Research and
Management Company is an Investment Adviser and is a wholly owned
subsidiary of The Capital Group Companies, Inc. and serves as investment
adviser to SMALLCAP World Fund, Inc., a registered investment company.
(7) Includes options exercisable for 38,071 shares of Common Stock.
(8) Includes options exercisable for 5,187 shares of Common Stock.
(9) Includes options exercisable for 8,853 shares of Common Stock.
(10) Includes options exercisable for 46,180 shares of Common Stock.
(11) Includes options exercisable for 29,484 shares of Common Stock.
(12) Includes options exercisable for 28,956 shares of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship with Abbott. In December 1989, Anesta entered into a research
and development, license, supply and distribution agreement with Abbott, under
the agreement, as amended, Anesta granted to Abbott the exclusive right to make,
use and market in the U.S. OT-products resulting from technology owned or
licensed by Anesta consisting of the OT-fentanyl product line or other central
nervous system acting drugs or intermediates thereof used for pre-medication,
sedation, analgesia, diagnostic procedures, emergency room, post operative pain,
burn treatment or cancer-related pain management. Abbott's exclusive license
terminates upon the expiration of the last U.S. patent relative to such licensed
technology. Under the 1989 Agreement, Abbott has provided development funding
and milestone payments and Abbott is obligated to pay royalties and other
payments on product sales. In 1995, the Company entered into two new funding
agreements with Abbott under which Abbott agreed to provide to the Company
$1,500,000 in each of 1995 and 1996 to further the development of Actiq for
cancer pain. Through March 31, 1996, Abbott had paid a total of $8,250,000 and
committed an additional $1,500,000 to be paid during the remainder of 1996.
Abbott is Anesta's contract manufacturer for the OT-fentanyl product line and
sells such products to Anesta. Anesta resells OT-fentanyl products to Abbott for
marketing in the U.S. under Abbott's trademark Fentanyl Oralet and Anesta's
trademark Actiq.
The Company granted to Abbott International in February 1991 a license for
OT-fentanyl products for all countries in the world other than the U.S. In
August 1995, the Company and Abbott International amended the February 1991
license agreement to grant the Company an option to either terminate or make
non-exclusive Abbott International's license rights to the OT-fentanyl product
line, including Fentanyl Oralet and Actiq, in any country other than the U.S. In
conjunction with the amendment, Abbott agreed to manufacture and sell to the
Company, its distributors or licensees any OT-fentanyl products the Company
requests from Abbott for distribution into a country for which the Company has
exercised its option to terminate or made non-exclusive Abbott International's
license. The amendment also reduced by $100,000 the Company's
32
<PAGE> 34
unearned advance royalty obligation to Abbott International, which amount was
recognized as royalty revenue during the year ended December 31, 1995.
Relationship with University of Utah Research Foundation. The Company has
entered into a license agreement with the UURF with respect to the license by
UURF to the Company of the Company's proprietary OT-system for drug delivery.
Under the license agreement, the Company is obligated to pay to the UURF
royalties based on Anesta's revenues related to sales of products incorporating
the OT-system. Dr. Theodore H. Stanley has been Professor of Anesthesiology and
Professor of Surgical Research at the University of Utah, an affiliate of the
UURF, since 1978. As one of the inventors of the OT-system, Dr. Stanley may be
entitled to a portion of the royalties obtained by the UURF from the Company in
connection with the license of the technology to the Company pursuant to an
unwritten policy of the University of Utah. In addition, the Company issued to
the UURF 6,000 shares of the Company's Common Stock in connection with the
issuance of the license.
Relationship with Stanley Research Foundation. Dr. Stanley is the sole
trustee of the Stanley Research Foundation (SRF), a not-for-profit entity. SRF
makes grants to the University of Utah which are used to support the work of
scientists and other employees of the University of Utah. The Company reimburses
SRF for such grants. The Company obtains from SRF certain materials and services
at the same cost as that paid by SRF. Such grants and purchasing arrangements
totaled approximately $321,539 for the year ended December 31, 1995. Dr. Stanley
receives no remuneration from SRF, and therefore does not benefit directly from
the Company's arrangements with SRF.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)-1 INDEX TO FINANCIAL STATEMENTS
The following documents are incorporated in Part II of this Annual Report
in Item 8.
(a)-2 FINANCIAL STATEMENT SCHEDULES
None.
33
<PAGE> 35
(a)-3 EXHIBITS
The exhibits to this Annual Report on Form 10-K are listed under Item 14(c)
below.
The following management compensatory plans and arrangements are required
to be filed as exhibits to this Annual Report on Form 10-K pursuant to Item
14(c):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ----------------------------------------------------------------------
<C> <S>
10.2** -- Registrant's 1989 Stock Option Plan.
10.3** -- Registrant's 1993 Stock Option Plan.
10.4** -- Form of Incentive Stock Option Agreement under the 1993 Stock
Option Plan, with related Schedule.
10.5** -- Form of Nonstatutory Stock Option Agreement under the 1993 Stock
Option Plan.
10.6** -- Employee Stock Purchase Plan and related offering document.
10.7** -- Stock option grant letters from the Registrant to William C.
Moeller, dated as of the dates set forth therein.
10.8** -- Stock option grant letters from the Registrant to Theodore H.
Stanley, dated as of the dates set forth therein.
10.9** -- Stock option grant letters from the Registrant to Emanuel Papper,
dated as of the dates set forth therein.
10.16** -- 1993 Non-Employee Directors' Stock Option Plan.
</TABLE>
(b) REPORTS ON FORM 8-K
None.
34
<PAGE> 36
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ----------------------------------------------------------------------
<C> <S>
3.1** -- Amended and Restated Certificate of Incorporation of Registrant.
3.2** -- Bylaws of Registrant.
4.1** -- Specimen stock certificate.
4.2** -- Reference is made to Exhibits 3.1 and 3.2.
10.1** -- Form of Indemnity Agreement entered into between the Registrant and
its directors and executive officers.
10.2** -- Registrant's 1989 Stock Option Plan.
10.3** -- Registrant's 1993 Stock Option Plan.
10.4** -- Form of Incentive Stock Option Agreement under the 1993 Stock
Option Plan, with related Schedule.
10.5** -- Form of Nonstatutory Stock Option Agreement under the 1993 Stock
Option Plan.
10.6** -- Employee Stock Purchase Plan and related offering document.
10.7** -- Stock option grant letters from the Registrant to William C.
Moeller, dated as of the dates set forth therein.
10.8** -- Stock option grant letters from the Registrant to Theodore H.
Stanley, dated as of the dates set forth therein.
10.9** -- Stock option grant letters from the Registrant to Emanuel Papper,
dated as of the dates set forth therein.
10.10** -- Registration Rights Agreement between the Registrant and the
parties named therein, dated as of April 14, 1987.
10.11** -- Technology License Agreement between the Registrant and the
University of Utah Research Foundation, dated as of September 16,
1985, as amended through December 3, 1993. (With certain portions
in brackets deleted)
10.12** -- Research and Development, License, Supply and Distribution
Agreement between the Registrant and Abbott Laboratories, dated as
of December 27, 1989, as amended through December 30, 1992. (With
certain portions in brackets deleted)
10.13** -- Agreement between the Registrant and Abbott International Ltd.,
dated as of February 28, 1991, as amended through September 16,
1991. (With certain portions in brackets deleted)
10.14** -- Agreement between the Registrant, Stanley Research Foundation and
TheraTech, Inc., dated as of December 3, 1990. (With certain
portions in brackets deleted)
10.15** -- Northgate Business Center Lease between the Registrant and Medforte
Research Foundation, dated as of October 1, 1990, as amended
through May 1, 1993.
10.16** -- 1993 Non-Employee Directors' Stock Option Plan.
10.17** -- Registration Rights Agreement between Registrant and certain
stockholders named therein.
10.18*** -- Wiley Post Plaza Lease between the Registrant and Asset Management
Services, dated as of December 7, 1994.
10.19**** -- Letter Agreement dated August 31, 1995, between the Company and
Abbott Laboratories.
10.20**** -- Amendment to Agreement dated August 31, 1995, between the Company
and Abbott International, Ltd.
10.21**** -- Funding Agreement dated September 8, 1995, between the Company and
Abbott Laboratories.
11.1**** -- Statement regarding calculation of net income (loss) per share.
13.1*** -- 1994 Annual Report.
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ----------------------------------------------------------------------
<C> <S>
13.2**** -- Report on 10-Q for the period ending September 30, 1995.
13.3* -- 1995 Annual Report.
18.1***** -- Letter from Coopers & Lybrand L.L.P. regarding change in accounting
principles.
23.1*** -- 1994 Consent of Coopers & Lybrand L.L.P.
23.2***** -- 1995 Consent of Coopers & Lybrand L.L.P.
24.1***** -- Power of Attorney.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed with the Commission as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-72608) and incorporated
herein by reference thereto.
*** Previously filed with the Commission as an exhibit to the Company's 1994
Annual Report on Form 10-K (File No. 0-23160) and incorporated herein by
reference thereto.
**** Previously filed with the Commission as an exhibit to the Company's
September 30, 1995 Form 10-Q (File No. 0-23160) and incorporated herein by
reference thereto.
***** Previously filed with the Commission as an exhibit to the Company's 1995
Annual Report on Form 10-K (File No. 0-23160) and incorporated herein by
reference thereto.
36
<PAGE> 38
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 3,540,147 $11,489,097
Current portion of certificate of deposit...................... 153,000
Marketable debt securities, available-for-sale................. 16,773,547 14,903,346
Accounts receivable -- Abbott.................................. 410,432 16,764
Prepaid expenses and other current assets...................... 77,134 64,838
------------ -----------
Total current assets................................... 20,954,260 26,474,045
------------ -----------
Property and equipment, at cost:
Furniture and equipment........................................ 870,042 812,857
Leasehold improvements......................................... 1,509,430 251,507
Accumulated depreciation....................................... (480,372) (335,191)
------------ -----------
1,899,100 729,173
------------ -----------
Other assets:
License agreements, net of accumulated amortization
of $73,887 in 1994.......................................... 1,041,047
Certificate of deposit......................................... 1,377,000
Other assets................................................... 11,568 15,987
------------ -----------
1,388,568 1,057,034
------------ -----------
Total assets........................................... $ 24,241,928 $28,260,252
============ ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements
37
<PAGE> 39
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Current liabilities:
Accounts payable............................................... $ 231,288 $ 535,855
Accrued liabilities:
Accrued compensation........................................ 247,741 100,736
Other....................................................... 219,131 69,957
Current portion of notes payable............................... 150,000
Current portion of obligations under capital leases............ 16,363 33,155
------------ -----------
Total current liabilities.............................. 864,523 739,703
Unearned advance royalty revenues................................ 350,000 450,000
Obligations under capital leases................................. 18,756
Notes payable.................................................... 1,350,000
------------ -----------
Total liabilities...................................... 2,564,523 1,208,459
------------ -----------
Commitments (Notes 10 and 12)
Stockholders' equity:
Common stock, par value, $.001 per share; Authorized:
15,000,000 shares; Issued and outstanding: 7,207,716 in 1995
and 7,102,023
in 1994..................................................... 7,208 7,102
Additional paid-in capital..................................... 33,270,848 33,104,620
Deficit accumulated during the development stage............... (11,723,314) (5,981,475)
Treasury stock (345 shares), at cost........................... (4,226) (4,226)
Notes receivable from issuance of common stock................. (7,000) (65,000)
Unrealized gain (loss) on marketable debt securities,
available-for-sale.......................................... 133,889 (9,228)
------------ -----------
Total stockholders' equity............................. 21,677,405 27,051,793
------------ -----------
Total liabilities and stockholders' equity............. $ 24,241,928 $28,260,252
============ ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements
38
<PAGE> 40
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND FOR
THE PERIOD FROM INCEPTION (AUGUST 1, 1985) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(AUGUST 1, 1985) TO
1995 1994 1993 DECEMBER 31, 1995
----------- ----------- ---------- ---------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales...................... $ 60,725 $ 37,276 $ 98,001
Royalty revenue.................... 101,775 1,116 102,891
Revenues from contract research.... 1,514,000 811,710 $1,583,696 8,475,931
----------- ----------- ---------- ------------
Total revenues............. 1,676,500 850,102 1,583,696 8,676,823
----------- ----------- ---------- ------------
Operating costs and expenses:
Cost of goods sold................. 18,771 21,628 40,399
Royalties.......................... 2,500 2,500 5,000
Research and development........... 5,228,392 3,210,177 1,792,648 14,542,006
Depreciation and amortization...... 157,647 102,514 84,532 589,935
Selling, general and
administrative.................. 2,219,229 1,328,790 553,021 5,820,718
----------- ----------- ---------- ------------
Total costs and expenses... 7,626,539 4,665,609 2,430,201 20,998,058
----------- ----------- ---------- ------------
Loss from operations....... (5,950,039) (3,815,507) (846,505) (12,321,235)
Non operating income (expense):
Interest income.................... 1,365,605 883,408 9,780 2,386,284
Interest expense................... (99,931) (17,628) (4,527) (241,470)
Other.............................. (16,327) 602 2,772 (12,953)
----------- ----------- ---------- ------------
Loss before provision for
income taxes,
extraordinary item and
cumulative effect of
accounting change........ (4,700,692) (2,949,125) (838,480) (10,189,374)
Provision for income taxes........... (100) (100) (100) (23,305)
----------- ----------- ---------- ------------
Loss before extraordinary
item and cumulative
effect of change in
accounting............... (4,700,792) (2,949,225) (838,580) (10,212,679)
Extraordinary item -- reduction of
income taxes arising from
carryforward of prior years'
operating losses................... 22,296
Cumulative effect of change in
accounting (Note 2)................ (1,041,047) (1,041,047)
----------- ----------- ---------- ------------
Net loss................... $(5,741,839) $(2,949,225) $ (838,580) $ (11,231,430)
=========== =========== ========== ============
Loss per common share amounts --
Loss before extraordinary item and
cumulative effect of change in
accounting...................... $ (0.65) $ (0.51) $ (0.62)
Extraordinary item.................
Cumulative effect of change in
accounting...................... (0.15)
----------- ----------- ----------
Net loss per common share.......... $ (0.80) $ (0.51) $ (0.62)
=========== =========== ==========
Shares used in computing net loss per
common share....................... 7,177,220 6,721,434 1,345,418
=========== =========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
39
<PAGE> 41
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 1, 1985) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
DEFICIT
PREFERRED STOCK -- VOTING COMMON STOCK ACCUMULATED
-------------------------------- -------------------------------- DURING THE
PAID-IN PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL STAGE
-------- -------- ---------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial offering of common
stock for cash on August 1,
1985 (at $.02 per share)..... 53,600 $ 535 $ 537
Issuance of common stock for
cash on September 16, 1985
(at $.20 per share).......... 290,500 2,906 55,194
Issuance of common stock for
cash on November 12, 1985 (at
$.70 per share).............. 149,000 1,490 102,810
Issuance of common stock for a
License Agreement with the
University of Utah on January
31, 1986 (at $.70 per
share)....................... 6,000 60 4,140
Issuance of common stock for
cash on January 31, 1986 (at
$.70 per share).............. 37,500 376 25,874
Compensation recognized for
compensatory stock options... 930
Loss from inception to December
31, 1986..................... $ (121,780)
--------- -------- ----------- ------------
Balance at December 31, 1986... 536,600 5,367 189,485 (121,780)
Issuance of common stock for
cash on March 30, 1987, April
14, 1987 and May 30, 1987 (at
$1.40 per share)............. 357,135 3,570 473,420
Compensation recognized for
compensatory stock options... 1,812
1987 net loss.................. (302,842)
--------- -------- ----------- ------------
Balance at December 31, 1987... 893,735 8,937 664,717 (424,622)
Exercise of stock options for
cash......................... 500 5 345
<CAPTION>
UNREALIZED
NOTES GAIN (LOSS) ON
RECEIVABLE MARKETABLE DEBT
TREASURY STOCK FROM ISSUANCE SECURITIES,
--------------------- OF COMMON AVAILABLE-FOR-
SHARES AMOUNT STOCK SALE TOTAL
------ ------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Initial offering of common
stock for cash on August 1,
1985 (at $.02 per share)..... $ 1,072
Issuance of common stock for
cash on September 16, 1985
(at $.20 per share).......... 58,100
Issuance of common stock for
cash on November 12, 1985 (at
$.70 per share).............. 104,300
Issuance of common stock for a
License Agreement with the
University of Utah on January
31, 1986 (at $.70 per
share)....................... 4,200
Issuance of common stock for
cash on January 31, 1986 (at
$.70 per share).............. 26,250
Compensation recognized for
compensatory stock options... 930
Loss from inception to December
31, 1986..................... (121,780)
-----------
Balance at December 31, 1986... 73,072
Issuance of common stock for
cash on March 30, 1987, April
14, 1987 and May 30, 1987 (at
$1.40 per share)............. 476,990
Compensation recognized for
compensatory stock options... 1,812
1987 net loss.................. (302,842)
-----------
Balance at December 31, 1987... 249,032
Exercise of stock options for
cash......................... 350
</TABLE>
40
<PAGE> 42
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
FOR THE PERIOD FROM INCEPTION (AUGUST 1, 1985) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
DEFICIT
PREFERRED STOCK -- VOTING COMMON STOCK ACCUMULATED
-------------------------------- -------------------------------- DURING THE
PAID-IN PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL STAGE
-------- -------- ---------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
consulting services on
December 20, 1988 (at $.20
per share)................... 3,985 $ 40 $ 757
1988 net loss.................. $ (666,450)
--------- -------- ----------- ------------
Balance at December 31, 1988... 898,220 8,982 665,819 (1,091,072)
Conversion of senior promissory
and demand notes and interest
to voting preferred stock.... 298,908 $ 29,891 $1,165,777
Issuance of voting preferred
stock for cash on September
25, 1989 (at $4.00 per
share)....................... 26,545 2,654 103,525
1989 net loss.................. (550,811)
-------- -------- ----------- --------- -------- ----------- ------------
Balance at December 31, 1989... 325,453 32,545 1,269,302 898,220 8,982 665,819 (1,641,883)
Issuance of voting preferred
stock for technology on
October 1, 1990 (at $.10 per
share)....................... 12,000 1,200
Exercise of stock options
for cash..................... 4,594 46 3,280
1990 net income................ 91,445
-------- -------- ----------- --------- -------- ----------- ------------
Balance at December 31, 1990... 337,453 33,745 1,269,302 902,814 9,028 669,099 (1,550,438)
Issuance of voting preferred
stock for cash on January 11,
1991 (at $12.00 per share)... 20,834 2,084 247,924
Exercise of stock options
for cash..................... 27,500 275 20,475
1991 net loss.................. (68,535)
-------- -------- ----------- --------- -------- ----------- ------------
Balance at December 31, 1991... 358,287 35,829 1,517,226 930,314 9,303 689,574 (1,618,973)
Exercise of stock options for
cash and notes............... 24,041 241 18,992
Issuance of voting preferred
stock for cash on December
21, 1992 (at $25.00 per
share)....................... 16,000 1,600 398,400
1992 net loss.................. (82,813)
-------- -------- ----------- --------- -------- ----------- ------------
Balance at December 31, 1992... 374,287 37,429 1,915,626 954,355 9,544 708,566 (1,701,786)
<CAPTION>
UNREALIZED
NOTES GAIN (LOSS) ON
RECEIVABLE MARKETABLE DEBT
TREASURY STOCK FROM ISSUANCE SECURITIES,
------------------------ OF COMMON AVAILABLE-FOR-
SHARES AMOUNT STOCK SALE TOTAL
------ ------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for
consulting services on
December 20, 1988 (at $.20
per share)................... $ 797
1988 net loss.................. (666,450)
-----------
Balance at December 31, 1988... (416,271)
Conversion of senior promissory
and demand notes and interest
to voting preferred stock.... 1,195,668
Issuance of voting preferred
stock for cash on September
25, 1989 (at $4.00 per
share)....................... 106,179
1989 net loss.................. (550,811)
-----------
Balance at December 31, 1989... 334,765
Issuance of voting preferred
stock for technology on
October 1, 1990 (at $.10 per
share)....................... 1,200
Exercise of stock options
for cash..................... 3,326
1990 net income................ 91,445
-----------
Balance at December 31, 1990... 430,736
Issuance of voting preferred
stock for cash on January 11,
1991 (at $12.00 per share)... 250,008
Exercise of stock options
for cash..................... 20,750
1991 net loss.................. (68,535)
-----------
Balance at December 31, 1991... 632,959
Exercise of stock options for
cash and notes............... $ (7,000) 12,233
Issuance of voting preferred
stock for cash on December
21, 1992 (at $25.00 per
share)....................... 400,000
1992 net loss.................. (82,813)
-------- -----------
Balance at December 31, 1992... (7,000) 962,379
</TABLE>
41
<PAGE> 43
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
FOR THE PERIOD FROM INCEPTION (AUGUST 1, 1985) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
DEFICIT
PREFERRED STOCK -- VOTING COMMON STOCK ACCUMULATED
-------------------------------- -------------------------------- DURING THE
PAID-IN PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL STAGE
-------- -------- ---------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Change in par value upon
reincorporation.............. $(37,055) $ 37,055 $(13,561) $ 13,561
Exercise of stock options for
cash and notes............... 552,362 5,524 436,866
1993 net loss.................. $ (838,580)
-------- -------- ----------- --------- -------- ----------- ------------
Balance at December 31, 1993... 374,287 374 1,952,681 1,506,717 1,507 1,158,993 (2,540,366)
Issuance of common stock for
cash on January 25, 1994 (at
$12.50 per share), net of
offering costs of
$2,711,650................... 2,500,000 2,500 28,535,850
Exercise of warrants for cash
on January 25, 1994 (at an
average of $1.19 per
share)....................... 1,202,840 1,203 1,424,797
Exercise of stock options
for cash..................... 16,499 16 13,095
Issuance of stock under stock
purchase plan................ 4,532 5 20,701
Payment of dividends on
preferred stock ($1.31 per
share)....................... (491,884)
Conversion of preferred stock
to common stock.............. (374,287) (374) (1,952,681) 1,871,435 1,871 1,951,184
Purchase of treasure stock (at
$12.25 per share)............
Unrealized loss on marketable
debt securities,
available-for-sale...........
1994 net loss.................. (2,949,225)
-------- -------- ----------- --------- -------- ----------- ------------
Balance at December 31, 1994... 7,102,023 7,102 33,104,620 (5,981,475)
Exercise of stock options
for cash..................... 96,328 97 115,695
Issuance of stock under stock
purchase plan................ 9,365 9 50,533
Collection on notes receivable
from issuance of common
stock........................
Net change in unrealized gain
(loss) on marketable debt
securities,
available-for-sale...........
1995 net loss.................. (5,741,839)
-------- -------- ----------- --------- -------- ----------- ------------
Balance at December 31, 1995... 7,207,716 7,208 33,270,848 (11,723,314)
======== ======== =========== ========= ======== =========== ============
<CAPTION>
UNREALIZED
NOTES GAIN (LOSS) ON
RECEIVABLE MARKETABLE DEBT
TREASURY STOCK FROM ISSUANCE SECURITIES,
------------------------ OF COMMON AVAILABLE-FOR-
SHARES AMOUNT STOCK SALE TOTAL
------ ------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Change in par value upon
reincorporation..............
Exercise of stock options for
cash and notes............... $ (58,000) $ 384,390
1993 net loss.................. (838,580)
-------- -----------
Balance at December 31, 1993... (65,000) 508,189
Issuance of common stock for
cash on January 25, 1994 (at
$12.50 per share), net of
offering costs of
$2,711,650................... 28,538,350
Exercise of warrants for cash
on January 25, 1994 (at an
average of $1.19 per
share)....................... 1,426,000
Exercise of stock options
for cash..................... 13,111
Issuance of stock under stock
purchase plan................ 20,706
Payment of dividends on
preferred stock ($1.31 per
share)....................... (491,884)
Conversion of preferred stock
to common stock..............
Purchase of treasure stock (at
$12.25 per share)............ 345 $(4,226) (4,226)
Unrealized loss on marketable
debt securities,
available-for-sale........... $ (9,228) (9,228)
1994 net loss.................. (2,949,225)
--- ------- -------- -------- -----------
Balance at December 31, 1994... 345 (4,226 ) (65,000) (9,228) 27,051,793
Exercise of stock options
for cash..................... 115,792
Issuance of stock under stock
purchase plan................ 50,542
Collection on notes receivable
from issuance of common
stock........................ 58,000 58,000
Net change in unrealized gain
(loss) on marketable debt
securities,
available-for-sale........... 143,117 143,117
1995 net loss.................. (5,741,839)
--- ------- -------- -------- -----------
Balance at December 31, 1995... 345 (4,226 ) (7,000) 133,889 21,677,405
=== ======= ======== ======== ===========
</TABLE>
42
<PAGE> 44
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 1, 1985) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(AUGUST 1, 1985) TO
1995 1994 1993 DECEMBER 31, 1995
----------- ------------ --------- ---------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... ($5,741,839) ($ 2,949,225) ($838,580) ($ 11,231,430)
Adjustments to reconcile net loss to net cash used
in operating activities
Cumulative effect of accounting change......... 1,041,047 1,041,047
Depreciation and amortization.................. 157,647 102,514 84,532 589,935
Debt conversion expense........................ 101,330
Interest converted to equity................... 94,104
Compensatory stock options and stock........... 3,539
(Gain) loss on retirement of assets............ 10,985 24,417 (884) 36,614
Increase (decrease) due to changes in:
Accounts receivable.......................... (393,668) 233,726 49,510 (410,432)
Prepaid expenses and other current assets.... (12,296) (50,890) (741) (77,134)
Other assets................................. 4,418 (7,777) 1,950 (14,145)
Accounts payable............................. (53,060) (14,004) 67,668 231,288
Accrued liabilities.......................... 296,179 132,400 17,160 466,872
Unearned revenues from contract research..... (149,039)
Unearned advance royalty revenues............ (100,000) 25,000 350,000
----------- ------------ --------- ------------
Net cash used in operating activities.... (4,790,587) (2,528,839) (743,424) (8,818,412)
----------- ------------ --------- ------------
Cash flows from investing activities:
Capital expenditures............................... (1,591,940) (361,045) (16,035) (2,267,250)
Proceeds from sale of assets....................... 1,875 550 7,550 9,975
Costs associated with license agreements........... (189,626) (146,978) (1,109,533)
Advances to employees.............................. (1,650)
Proceeds from maturity of treasury bills........... 1,174,419
Purchase of marketable debt securities,
available-for-sale............................... (14,606,312) (14,912,574) (29,518,886)
Proceeds from sale of marketable debt securities,
available-for-sale............................... 12,879,228 12,879,228
Purchase of treasury bills......................... (1,174,419)
Purchase of certificate of deposit................. (1,530,000) (1,530,000)
----------- ------------ --------- ------------
Net cash used in investing activities.... (4,847,149) (15,462,695) (155,463) (21,538,116)
----------- ------------ --------- ------------
Cash flows from financing activities:
Principal payments on notes payable................ (37,500) (37,500)
Principal payments on obligations under capital
leases........................................... (35,548) (56,503) (45,604) (178,126)
Proceeds from issuance of notes payable............ 1,500,000 2,537,700
Proceeds from issuance of common stock............. 166,334 30,275,271 384,390 31,529,366
Collections on notes receivable from issuance of
common stock..................................... 58,000 58,000
Proceeds from issuance of preferred stock.......... 756,222
Deferred offering costs............................ (249,341) (27,762) (277,103)
Dividends paid on preferred stock.................. (491,884) (491,884)
----------- ------------ --------- ------------
Net cash provided by financing
activities............................. 1,688,786 29,440,043 311,024 33,896,675
----------- ------------ --------- ------------
Net increase (decrease) in cash and cash
equivalents........................................ (7,948,950) 11,448,509 (587,863) 3,540,147
Cash and cash equivalents at beginning of period..... 11,489,097 40,588 628,451
----------- ------------ --------- ------------
Cash and cash equivalents at end of period........... $ 3,540,147 $ 11,489,097 $ 40,588 $ 3,540,147
=========== ============ ========= ============
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
The Company issued stock and stock options for:
Purchase of additional license agreement........... $ 5,400
Notes receivable................................... $ 58,000 71,000
The Company purchased leasehold improvements using
accounts payable................................... $ 251,507 251,507
The Company entered into various capital lease
arrangements ...................................... 14,460 46,487 204,610
The Company received stock as payment of a note
receivable ........................................ 4,226 4,226
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest............. $ 95,370 $ 18,366 $ 12,045 $ 141,152
Cash paid during the year for taxes................ 100 100 100 500
</TABLE>
The accompanying notes are an integral part of the financial statements
43
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Development Stage Activities
Since its inception in August 1985, Anesta Corp. (Anesta or the Company)
has been a development stage company engaged in the research, development and
commercialization of pharmaceutical products incorporating its proprietary oral
transmucosal drug delivery systems. The Company has been unprofitable to date
and expects to incur additional operating losses over the next several years,
primarily due to the expansion of its research and development programs,
including formulation development, pilot manufacturing capabilities, preclinical
studies and clinical trials. As of December 31, 1995, the Company's accumulated
deficit was approximately $11.7 million.
Anesta is the worldwide licensee of technology obtained pursuant to
technology license agreements with the University of Utah Research Foundation
(UURF). The license agreements, which remain in effect for the life of the
applicable patents, may be assigned only with prior written consent of UURF (see
Note 8).
Revenues recognized to date represent revenues under research and
development contracts and the initial sales of the Company's first product
(Fentanyl Oralet(R)). The market introduction of this product contemplates a
controlled product introduction, under which the product will be sold only to
institutions that have received extensive training in the proper use of the
product. This has resulted in limited sales through December 31, 1995. The
Company's ability to achieve profitability depends in part upon its ability
alone, or with others, to commercialize successfully its first product, to
complete development of its proposed products, to obtain required regulatory
approvals and to manufacture and market such proposed products (see Note 10).
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Substantially all of the Company's cash and cash equivalents are held by a
single bank in San Francisco, California.
Furniture and Equipment and Leasehold Improvements
Expenditures that materially increase asset lives are capitalized at cost,
while normal maintenance and repairs are expenses as incurred. Depreciation is
reported on a straight-line basis over the estimated useful lives of the assets,
or the term of the building lease, which range from 5 to 15 years.
The cost and related accumulated depreciation of assets sold or otherwise
disposed of are removed from the accounts and the gain or loss is reflected in
the statement of operations.
Revenue Recognition
The Company recognized revenues from contract research based on qualifying
expenditures. Research and development expense in the accompanying statements of
operations includes funded and unfunded amounts.
Net Loss Per Share
Net loss per common share is computed on the weighted average number of
common and common equivalent shares outstanding during each period. Common stock
equivalents consist of convertible preferred stock, common stock options and
warrants. Common equivalent shares are excluded from the computation when their
effect is antidilutive, except for stock options issued at prices below the
public offering price during the 12-month period preceding the January 1994
public offering which are treated as if such stock options had been issued at
the inception of the Company in computing the net loss per common share for the
year ended December 31, 1993. The net loss per share for the year ended December
31, 1994 has been adjusted to reflect the $491,884 of dividends paid on the
convertible preferred stock which increased the net loss attributable to
44
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
common shareholders to $(3,450,337) or $(.51) per share. Net loss per common
share for the period from inception to December 31, 1995 has not been presented
as such information is not considered to be relevant or meaningful.
If the conversion of the Series A Preferred Shares into common stock had
occurred on January 1, 1994, the net loss per common share would have been
$(.50) for the year ended December 31, 1994.
Estimates
The preparation of financial statements in conformity with generally
accepting accounting principles requires management to make estimates and
assumptions that affect the reported amounts 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.
Reclassifications
Certain balances in the December 31, 1994 financial statements have been
reclassified to conform to the current year presentation. These changes, which
included reclassifying a portion of cash and cash equivalents to marketable debt
securities, available-for-sale, had an immaterial effect on the previously
reported net loss.
2. ACCOUNTING CHANGE:
Effective January 1, 1995, the Company changed its method of accounting for
external legal costs related to patents. Prior to the change, the Company
capitalized these costs and amortized them over the term of the related patent.
Under the new method, these costs will be expensed as incurred. The Company
believes that the change will provide a better comparison with the Company's
industry peers, the majority of which expense these costs.
The cumulative effect of this accounting change for years prior to 1995,
which is shown separately in the statement of operations for 1995, resulted in a
charge to operations of $1,041,047 or $.15 per share of common stock. Excluding
the cumulative effect, the effect of this change on 1995 results of operations
or cash flow from operating activities was to decrease the net loss by
approximately $310,000, which adjustment was recorded in the fourth quarter of
1995.
The pro forma amounts presented below for 1994 and 1993 reflect the effect
of retroactive application on net loss and net loss per common share had the new
method been in effect at the beginning of the respective year.
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
1994
Net loss.................................................. $(2,949,225) $(3,114,936)
Net loss per share........................................ $ (0.51) $ (0.54)
1993
Net loss.................................................. $ (838,580) $ (970,080)
Net loss per share........................................ $ (0.62) $ (0.72)
</TABLE>
3. INVESTMENT IN MARKETABLE DEBT SECURITIES:
The Company's investment in marketable debt securities is classified as
available-for-sale and carried at market value, with the unrealized gain (loss),
net of deferred taxes, reflected as a separate component of stockholders'
equity. Gross realized gains and (losses), cost determined using the specific
identification method, have not been material.
45
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The cost and estimated market values of marketable debt securities
available-for-sale at December 31, 1995, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Federal Home Loan Bank Bonds............. $ 1,999,063 $ 4,297 $ 2,003,360
Federal Home Loan Bank Notes............. 4,859,700 63,900 4,923,600
Federal National Mortgage Notes.......... 3,518,981 14,899 3,533,880
U.S. Treasury Notes...................... 6,015,158 50,793 6,065,951
Accrued Interest......................... 246,756 246,756
----------- -------- -------- -----------
$16,639,658 $ 133,889 $ $16,773,547
=========== ======== ======== ===========
</TABLE>
The cost and estimated market value of marketable debt securities
available-for-sale at December 31, 1995, by contractual maturity, are shown
below:
<TABLE>
<CAPTION>
ESTIMATED
MARKET
COST VALUE
----------- -------------
<S> <C> <C>
Due in one year or less............................... $9,490,628 $ 9,573,054
Due after one year through five years................. 7,149,030 7,200,493
----------- -----------
$16,639,658 $16,773,547
=========== ===========
</TABLE>
The cost and estimated market values of marketable debt securities
available-for-sale at December 31, 1994, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Federal Home Loan Bank Bonds....... $ 1,999,063 $ 29,563 $ 1,969,500
Student Loan Marketing Assoc.
Bonds............................ 3,000,000 23,430 2,976,570
U.S. Treasury Notes................ 4,891,406 36,706 4,854,700
U.S. Treasury Bonds................ 4,772,979 $ 80,471 4,853,450
Accrued Interest................... 249,126 249,126
----------- ---------- ---------- -----------
$14,912,574 $ 80,471 $ 89,699 $14,903,346
========== ======== ======== ==========
</TABLE>
4. RELATED PARTY TRANSACTIONS:
The Company paid expenses of $321,539, $444,622 and $299,970 in 1995, 1994
and 1993, respectively, to the Stanley Research Foundation for research. Stanley
Research Foundation and its principal trustee are shareholders of the Company.
5. LONG-TERM DEBT:
Long-term debt as of December 31, 1995 is comprised of the following:
<TABLE>
<S> <C>
Term note payable to a bank with interest payable monthly at bank's
certificate of deposit rate (6.4% at December 31, 1995) plus 1.6%.
Principal payments of $150,000 due each May through May 2005.
Collateralized by certificate of deposit in the amount of
$1,530,000........................................................... $1,500,000
----------
Total........................................................ 1,500,000
Current portion.............................................. (150,000)
----------
Long-term portion............................................ $1,350,000
==========
</TABLE>
46
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's long-term debt matures for periods ending December 31, as
follows:
<TABLE>
<S> <C>
1996............................................. $ 150,000
1997............................................. 150,000
1998............................................. 150,000
1999............................................. 150,000
Thereafter....................................... 900,000
----------
$1,500,000
==========
</TABLE>
6. STOCK OPTIONS:
In 1989, the Company adopted a Stock Option Plan (the 1989 Plan) under
which options may be granted to employees, officers, directors and consultants
of the Company to purchase shares of the Company's common stock at not less than
the fair market value at the date of grant, as determined by the Board of
Directors. Options granted under the 1989 Plan are exercisable at varying dates
through 1999.
In September 1993, the Company adopted the 1993 Stock Option Plan (the 1993
Plan) under which 750,000 shares of common stock are reserved for issuance upon
exercise of options granted to employees, officers and consultants of the
Company and its affiliates. The 1993 Plan will terminate in September 2003,
unless sooner terminated by the Board of Directors. Options granted under the
1993 Plan are exercisable at varying dates through 2000.
In December 1993, the Company also adopted the 1993 Non-Employee Directors'
Stock Option Plan (the Directors' Plan) under which 150,000 shares of common
stock are reserved for issuance upon exercise of options granted to non-employee
directors of the Company. The Directors' Plan will terminate in 2003, unless
sooner terminated by the Board of Directors. Options granted under the
Directors' Plan are exercisable at varying dates through 2000.
Options under the 1989, 1993 and the Directors' Plans are summarized as
follows:
<TABLE>
<CAPTION>
1989 PLAN 1993 PLAN DIRECTORS' PLAN
--------------------- ----------------------- -------------------------
OPTION OPTION OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, December 31, 1992.............. 192,100 $ .80
Granted................................... 70,900 .80-1.00 44,377 $5.00- 7.00
Exercised................................. (89,862) .80-1.00
Expired................................... (11,083) .80
------- -------
Outstanding, December 31, 1993.............. 162,055 .80-1.00 44,377 5.00- 7.00
Granted................................... 244,900 5.75- 8.00 50,000 $ 7.88 -12.50
Exercised................................. (16,499) .80-1.00
Expired................................... (1,523) .80-1.00
------- ------- -------
Outstanding, December 31, 1994.............. 144,033 .80-1.00 289,277 5.00- 8.00 50,000 7.88 -12.50
Granted................................... 196,750 5.25-11.00 7,500 5.375
Exercised................................. (24,252) .80-1.00 (3,743) 5.25- 6.75 (1,250) 8.00
Expired................................... (364) 1.00 (7,117) 5.50-11.00 (21,750) 5.375-12.50
------- ------- -------
Outstanding, December 31, 1995.............. 119,417 .80-1.00 475,167 5.00-11.00 34,500 5.375-12.50
------- ------- -------
Exercisable, December 31, 1995.............. 91,162 .80-1.00 137,937 5.00-11.00 7,500 7.88 -12.50
------- ------- -------
</TABLE>
As of December 31, 1995, options to purchase 183,667 shares of the
Company's common stock for $.80-$8.00 per share were outstanding. These options
were granted outside of the 1989, 1993 and Directors' Plans. Exercisable options
under such grants at December 31, 1995 were 168,270. During the years ended
December 31, 1995 and 1993, 67,083 and 462,500 options under such grants were
exercised at prices ranging from $.80-$5.00 and $.80 respectively.
47
<PAGE> 49
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. CAPITAL STOCK:
In 1993, the Company changed its state of incorporation from Utah to
Delaware. In conjunction with this change, the par value of the Company's common
stock was changed to $.001, the authorized common shares increased to
15,000,000, the par value of the preferred stock-voting changed to $.001 and the
authorized preferred voting shares decreased to 1,000,000. At December 31, 1995
and 1994, there were no preferred voting shares issued and outstanding. The
Company also has 50,000 shares of non-voting preferred stock with a par value of
$.10, of which no shares were issued and outstanding at December 31, 1995 and
1994.
In January 1994, the Company closed an initial public offering (IPO) of
2,500,000 shares of common stock at an offering price of $12.50 per share
resulting in net proceeds to the Company of $29,062,500. Upon the closing of the
IPO, Abbott Laboratories' warrants discussed in Note 10 were exercised resulting
in net proceeds to the Company of $1,426,000 and the Series A Preferred Shares
were converted into common stock. In conjunction with the conversion of
preferred stock, accrued dividends of $491,884 were paid.
In November 1993, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan"), authorizing the issuance of 250,000 shares pursuant to
purchase rights granted to employees of the Company. The Purchase Plan provides
a means by which employees can purchase common stock of the Company through
payroll deductions. The Purchase Plan will terminate in November 2003. As of
December 31, 1995, 236,103 shares were available for issuance under the Purchase
Plan.
8. TECHNOLOGY LICENSE AGREEMENT:
In September 1985, the Company obtained an exclusive worldwide license from
UURF to use technology and knowledge developed or to be developed under Dr.
Theodore H. Stanley's direction at the University of Utah, for anesthetic and
other drug delivery systems based on oral transmucosal technology. In return,
the UURF received 6,000 shares of Company stock and certain royalty rights based
on product sales incorporating the technology.
The license expires the later of ten years from the date of the agreement
or the date of the last expiring patent.
9. INCOME TAXES:
The provision for income taxes for the years ended December 31, 1995, 1994
and 1993 is related solely to state income taxes.
Net operating losses (NOLs) totaling approximately $11 million are
available to offset future taxable income, and research and development (R&D)
tax credits totaling approximately $480,000 are available to offset future tax
liabilities. Both the NOL and the R&D tax credit carry forwards expire from 2003
to 2010.
The Company's utilization of approximately $1,380,000 of the NOLs against
future taxable income will be subject to an annual limitation of approximately
$140,000 per year because of a cumulative change in ownership within a
three-year period. Approximately $110,000 of the R&D tax credit carryforwards is
subject to the same annual limitation, under the constraint that the total NOLs
must be utilized before the R&D credits may be used. To the extent the $140,000
annual limitation is not fully utilized in any given year, the unused portion of
the NOLs and the R&D tax credits carry forward for potential utilization in
future years.
Effective January 1, 1993, the Company adopted the liability method of
accounting for income taxes under Statement of Financial Accounting Standards
(SFAS) No. 109. Prior to 1993, income taxes were calculated in accordance with
SFAS No. 96. The adoption of SFAS 109 did not have an impact on the Company's
financial position because the deferred tax asset related to the Company's net
operating loss and research and development tax credit carryforwards was fully
offset by a valuation allowance. The valuation allowance increased $2,160,000
during 1995, $1,136,000 during 1994 and $358,000 during 1993, primarily as a
result of the increase in net operating loss carryforwards.
48
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Financial Accounting Standards No 109 requires that a
valuation allowance be provided if it is more likely than not that some portion
or all of a deferred tax asset will not be realized. The Company's ability to
realize the benefit of its deferred tax asset will depend on the generation of
future taxable income. Because the Company's operations are not currently
generating taxable income, the Company believes that a full valuation allowance
should be provided.
The components of the net deferred tax asset as of December 31, 1995 and
1994 under SFAS 109 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards........................ $ 4,103,000 $ 1,984,000
Research and development tax credit carryforwards....... 480,000 391,000
Unrealized gain on marketable debt securities,
available-for-sale................................... (48,000)
Valuation allowance..................................... (4,535,000) (2,375,000)
----------- -----------
Net deferred tax asset.................................. $ -- $ --
=========== ===========
</TABLE>
10. RESEARCH AND DEVELOPMENT:
In December 1989, the Company entered into a research and development,
license, supply and distribution agreement with Abbott Laboratories Hospital
Products Division (Abbott). Under the agreement as amended, the Company granted
to Abbott the exclusive right to make, use and sell in the U.S. oral
transmucosal products resulting from technology owned or licensed by the Company
consisting of OT-fentanyl including Fentanyl Orelet and Actiq (formerly Oral
Transmucosal Fentanyl Citrate or OTFC(R)) or other central nervous system acting
drugs or intermediates thereof used for premedication, sedation, analgesia,
diagnostic procedures, emergency room, post-operative pain, burn treatment or
cancer-related pain management.
Under the Company's agreement with Abbott, Abbott manufactures Fentanyl
Oralet and sells it to the Company at a price which reflects Abbott's cost of
manufacturing. The Company then sells the product to Abbott at a price which
results in a gross profit to the Company ranging from approximately 40-70%. In
addition, the Company is entitled to receive a royalty on product sales by
Abbott.
Effective March 31, 1995, the Company entered into a 1995 funding agreement
with Abbott, under which Abbott agreed to provide up to $1,500,000 of funding to
further the clinical development of Actiq to treat cancer-related pain (the
"Actiq Cancer Pain Program"). The funding was to be provided for qualifying work
performed and expenses incurred by the Company during the year ended December
31, 1995 in connection with the Actiq Cancer Pain Program. Under the agreement,
the Company agreed to provide the additional funding required for this program
during the year ended December 31, 1995 and to complete certain program
milestones. In conjunction with this agreement, the Company agreed not to
exercise, during 1995, its option to receive the remaining $900,000 of funding
available under the previous agreements with Abbott.
Effective September 8, 1995, the Company entered into a 1996 funding
agreement with Abbott, under which Abbott will provide up to $1,500,000 of
funding to further the commercial development of Actiq to treat cancer-related
pain. The funding will be provided in equal quarterly payments of $375,000 for
qualifying work performed and expenses incurred during the year ended December
31, 1996 in connection with the Actiq Cancer Pain Program. Under the agreement,
the Company will provide any additional funding required for this program during
the year ended December 31, 1996 and will complete certain program milestones.
Under these agreements, Abbott has provided development funding and
milestone payments and is obligated to pay royalties and other payments on
product sales. Abbott has committed to pay a total of $10.05 million to the
Company to fund the clinical development of Fentanyl Oralet as a premedicant, to
fund
49
<PAGE> 51
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
clinical studies using Actiq as a systemic analgesic in hospital and cancer pain
management and to obtain regulatory approval of OT-fentanyl products. During
1995, 1994 and 1993, the Company received $1,125,000, $1,050,000 and $1,150,000
under the terms of the agreements, and incurred $2,530,215, $1,700,086 and
$1,549,528 of costs relating to the agreements, respectively. Revenue of
$1,500,000, $799,510 and $1,549,528 related to the agreements was recognized in
1995, 1994 and 1993, respectively. At December 31, 1995 and 1994, accounts
receivable relating to the agreements totaled $375,000 and $0, respectively. In
connection with such development funding, Abbott was granted warrants to
purchase 1,202,840 shares of the Company's common stock at prices ranging from
$1.00 to $2.40 per share. These warrants were exercised in January 1994.
Effective August 31, 1995, the Company entered into a Letter Agreement
between Abbott and the Company. Abbott has agreed to be the Company's contract
manufacturer for clinical and commercial supplies of OT-fentanyl for territories
outside the U.S. The parties have agreed to consult with each other regarding
collaborative agreements with other companies and negotiate in good faith as to
specific terms regarding product supply by Abbott to any Anesta licensees.
As of December 31, 1995, Abbott was obligated, at the Company's option, to
provide an additional $900,000 of development funding under the agreement, as
amended. If the Company elects to exercise this funding option, Abbott will be
granted the remaining warrants provided for in the agreement (175,439 warrants
at $2.50 per share). As of December 31, 1995, Abbott was also obligated to pay
the Company $300,000 upon receipt of FDA approval of Actiq to treat cancer pain.
11. UNEARNED ADVANCE ROYALTY REVENUES:
During 1991, the Company granted Abbott International (A.I.) an exclusive
license to make, use and sell, with certain limitations, licensed products
including OT-fentanyl products outside the U.S. and Canada. A.I. is obligated to
pay certain royalties on product sales. A.I. also agreed to pay advance
royalties. During 1993 the Company received $25,000 of the advance royalties.
This amount is included in unearned advance royalty revenues.
As part of the 1991 agreement, A.I. made advance royalty payments to the
Company to be used for patent costs associated with the technology license
agreement. The cumulative payments of $150,000 at December 31, 1995 and December
31, 1994, are included in unearned advance royalty revenues.
Additionally, A.I. exercised an option in the agreement in order to broaden
the license for OTFC internationally to include home and alternative site
markets. This amount is also included in unearned advance royalty revenue.
Effective October 12, 1995, the Company entered into an amendment to the
1991 agreement between A.I. and the Company. The 1991 agreement has been amended
to provide the Company the right to terminate or cause to become nonexclusive
A.I.'s license rights to OT-fentanyl products in one or more countries in the
world except the U.S. The amendment also eliminated $100,000 of the Company's
unearned advance royalty obligation, which amount has been recognized as royalty
revenue during the year ended December 31, 1995.
12. LEASES:
During 1994 and prior years, the Company entered into capital lease
agreements for furniture and equipment. At December 31, 1995 and 1994, these
capitalized leases were included in furniture and equipment in the aggregate
amount of $151,982 and $164,290 with accumulated amortization of $90,553 and
$68,336, respectively.
50
<PAGE> 52
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under capital leases as of December 31, 1995
are as follows:
<TABLE>
<S> <C>
1996....................................................................... $18,156
-------
18,156
Less: amount representing interest......................................... (1,793)
-------
$16,363
=======
</TABLE>
In October 1990, the Company entered into an operating lease agreement for
laboratory and office space which expired in May 1995. In December 1994, the
Company entered into a five year operating lease agreement for a building which
has two five year renewal options.
During 1995 the Company also entered into operating lease agreements for
furniture and equipment.
Future minimum rental payments under operating leases as of December 31,
1995 are as follows:
<TABLE>
<S> <C>
1996.............................................. $191,725
1997.............................................. 191,725
1998.............................................. 191,725
1999.............................................. 148,779
--------
$723,954
========
</TABLE>
Total expense under operating lease agreements for 1995, 1994 and 1993 was
$239,135, $76,688, and $45,312 respectively.
51
