<PAGE> 1
Filed Pursuant to Rule 424(a)
Registration No. 333-04176
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED APRIL 29, 1996
3,000,000 SHARES
LOGO
COMMON STOCK
Of the 3,000,000 shares of Common Stock, par value $0.001 per share (the
"Common Stock"), offered hereby, 2,000,000 are being sold by Anesta Corp.
("Anesta" or the "Company") and 1,000,000 are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.
The Common Stock of the Company is traded on the Nasdaq National Market under
the symbol "NSTA." On April 26, 1996, the last reported sale price of the Common
Stock on the Nasdaq National Market was $14.25 per share. See "Price Range of
Common Stock."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS IN PURCHASING THE SHARES OF COMMON STOCK
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================
Proceeds
Price to Underwriting Proceeds to to Selling
Public Discount(1) Company(2) Stockholders
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total(3).......................... $ $ $ $
================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting certain expenses payable by the Company estimated at
$375,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public, Underwriting Discount, and Proceeds to Company will be $ ,
$ , and $ respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to their right to reject any order in whole or in
part. It is expected that delivery of the certificates representing such shares
will be made against payment therefor at the office of Montgomery Securities on
or about , 1996.
------------------------
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
VOLPE, WELTY & COMPANY
The date of this Prospectus is , 1996
<PAGE> 2
[ARTWORK]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET-MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
Anesta(TM), OT(TM), OTFC(R) and Actiq(TM) are trademarks of the Company;
Fentanyl Oralet(R) is a trademark of Abbott Laboratories.
<PAGE> 3
PROSPECTUS SUMMARY
Except for the historical information contained herein, the discussion in
this Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section entitled "Risk
Factors" and elsewhere in this Prospectus. The following summary is qualified in
its entirety by the more detailed information and Financial Statements,
including notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise specified, all information in this Prospectus (i) assumes no exercise
of the Underwriters' over-allotment option, and (ii) excludes options to
purchase 801,754 shares of Common Stock outstanding as of March 31, 1996.
THE COMPANY
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 dissolvable or non-dissolvable 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 (FDA) and is being marketed by Abbott
Laboratories (Abbott) for use in both children and adults as a surgical
premedication 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.
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 persistent or constant pain. The
Company believes that the ability of Actiq to provide rapid relief from
breakthrough pain (onset of meaningful pain relief in 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.
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 headaches 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.
RECENT DEVELOPMENTS
The following is a summary of certain developments involving the Company's
business:
- - In March 1996, the FDA eased the conditions of the controlled roll-out that
had been imposed on the marketing of Fentanyl Oralet, based on safe clinical
and commercial use since its introduction to the marketplace. Abbott is now
permitted to advertise and promote Fentanyl Oralet and distribute it to all
hospitals and surgical centers. Clinical use of Fentanyl Oralet can begin
after clinical personnel have been trained by Abbott's sales force.
3
<PAGE> 4
- - The Company is nearing completion of its Phase III clinical trial program of
Actiq to treat cancer pain. The clinical trial program has been conducted at
over 45 sites. Approximately 170 cancer patients have received Actiq, with
over 20,000 doses administered. In two blinded titration trials, over 90% of
the patients who completed the study successfully found an effective dose
level for breakthrough pain, and of those meeting eligibility requirements,
over 90% have elected to continue using Actiq by participating in a subsequent
ongoing long-term safety study. The Company expects to file a New Drug
Application (NDA) with the FDA covering the use of Actiq for breakthrough
cancer pain in early 1997.
- - Six studies have been completed with OT-nicotine (OTNC), the Company's smoking
cessation product, which is now in Phase II clinical trials. These studies
show that OTNC rapidly delivers dose-related therapeutic blood concentrations
of nicotine. Anesta's OT-system delivers nicotine in a manner that is
convenient, intuitive and helps smokers seeking to quit address both their
psychological and physiological needs.
- - Two Phase I clinical studies using OT-etomidate (OTET) for short-acting
sedation have been completed. These studies show dose related blood
concentrations and sedative effects with rapid onset of short duration and
rapid recovery from sedative effects.
THE OFFERING
Common Stock Offered by the Company....... 2,000,000 shares
Common Stock Offered by the Selling
Stockholders.............................. 1,000,000 shares
Common Stock Outstanding after the
Offering.................................. 9,225,331 shares(1)
Use of Proceeds........................... For research and development
activities, including preclinical
and clinical testing,
manufacturing process development,
working capital and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol............. NSTA
- ---------------
(1) Excludes 801,754 shares of Common Stock issuable upon exercise of stock
options at a weighted average exercise price of $5.31 per share outstanding
as of March 31, 1996.
4
<PAGE> 5
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- -------------------
1993 1994 1995 1995 1996
------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues........................................... $1,584 $ 850 $ 1,677 $ 401 $ 395
Operating costs and expenses:
Cost of goods sold and royalties....................... -- 24 22 5 7
Research and development............................... 1,793 3,210 5,228 1,008 1,795
Depreciation and amortization.......................... 85 103 158 23 60
Selling, general and administrative.................... 553 1,328 2,219 446 611
------- ------- ------ -------- -------
Loss from operations..................................... (847) (3,815) (5,950) (1,081) (2,078)
Non operating income, net................................ 8 866 1,250 430 282
Provision for income taxes............................... -- -- -- -- --
------- ------- ------ -------- -------
Loss before cumulative effect of change in accounting.... (839) (2,949) (4,700) (651) (1,796)
Cumulative effect of change in accounting................ -- -- (1,041) (1,041) --
------- ------- ------ -------- -------
Net loss................................................. $ (839) $(2,949) $(5,741) $(1,692) $ (1,796)
======= ======= ====== ======== =======
Loss per common share amounts:
Loss before cumulative effect of change in
accounting........................................... $(0.62) $ (0.51) $ (0.65) $ (0.09) $ (0.25)
Cumulative effect of change in accounting.............. -- -- (0.15) (0.15) --
------- ------- ------ -------- -------
Net loss per share....................................... $(0.62) $ (0.51) $ (0.80) $ (0.24) $ (0.25)
======= ======= ====== ======== =======
Shares used in computing net loss per share.............. 1,345 6,721 7,177 7,146 7,221
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and other marketable securities.................... $ 19,828 $ 46,243
Total assets.............................................................. 22,338 48,753
Long-term obligations, including current portion.......................... 1,510 1,510
Deficit accumulated during development stage.............................. (13,519) (13,519)
Stockholders' equity...................................................... 19,911 46,326
</TABLE>
- ---------------
(1) Adjusted to reflect the sale of 2,000,000 shares of Common Stock by the
Company at an assumed public offering price of $14.25 per share and after
deducting the underwriting discount and estimated offering expenses, and the
application of the proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
5
<PAGE> 6
RISK FACTORS
An investment in the Common Stock being offered hereby involves a high
degree of risk. In addition to other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
before purchasing the Common Stock offered hereby. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the following risk factors and elsewhere in this Prospectus.
DEPENDENCE ON ABBOTT AND OTHER POTENTIAL COLLABORATIVE PARTNERS
The Company's strategy includes entering into various collaborations with
corporate partners, licensors, licensees and others for the development,
clinical testing, manufacturing, marketing and commercialization of certain of
its products. To date, the Company has entered into collaborations only with
Abbott. The Company is dependent upon Abbott for the manufacturing, marketing,
selling and distribution of Fentanyl Oralet, Actiq and the OT-fentanyl product
line in the U.S. The amount and timing of resources to be devoted by Abbott to
performing its obligations are not within the control of the Company. There can
be no assurance that Abbott will perform its obligations as expected or that the
Company will derive any additional revenue from such arrangements. Moreover, the
collaboration agreements with Abbott may be terminated under certain
circumstances. Abbott currently derives substantial revenues from products that
may compete with products under development by Anesta pursuant to its
collaborations with Abbott. Accordingly, there can be no assurance that Abbott
will not pursue its existing or alternative technologies in preference to
products being developed in collaboration with the Company. Abbott also markets
products which, although not directly competitive with Fentanyl Oralet, Actiq
and the OT-fentanyl product line, may receive more sales and marketing
resources. If in the future Abbott chooses to allocate sales and marketing
resources toward other products, sales of the Company's products and the
Company's financial results could be materially adversely affected. In addition,
there can be no assurance that Abbott will pay any additional fees to the
Company or that Abbott will manufacture and/or market any additional products
under the agreements.
There can be no assurance that the Company will be able to negotiate
additional collaborative arrangements in the future with Abbott or other
companies on acceptable terms, if at all, or that such collaborative
arrangements will be successful. To the extent that the Company chooses not to
or is not able to establish such arrangements, the Company would experience
significantly increased capital requirements to undertake such activities at its
own expense. In addition, the Company may encounter significant delays in
introducing products into markets or find that the development, manufacture or
sale of its proposed products in such markets is adversely affected by the
absence of such collaborative agreements. Moreover, if the Company is forced to
develop its products without collaborative arrangements, it would likely take a
much longer period of time to test, manufacture and market such products which
could adversely affect the Company's financial results. See
"Business -- Anesta's Products and Development Programs" and
"Business -- Collaborative Relationships; Abbott."
EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
Anesta is at an early stage of its development. Although the Company's
first product has been approved by the FDA and is being marketed by Abbott, the
Company's other potential products are in research and development and product
revenues may not be realized from the sale of any such products for at least the
next several years, if at all. Many of the Company's other proposed products
will require significant additional research and development efforts prior to
any commercial use, including extensive preclinical and clinical testing as well
as lengthy regulatory approval processes. There can be no assurance that the
Company's research and development efforts will be successful, that the
Company's potential products will prove to be safe and effective in clinical
trials or that any commercially successful products will ultimately be developed
by the Company. See "Business -- Anesta's Proprietary OT-system for Drug
Delivery" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
6
<PAGE> 7
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before seeking regulatory approvals for the commercial sale of products
under development, the Company must demonstrate through preclinical studies and
clinical trials that such products are safe and effective for use in the target
indications. The results from preclinical studies and early clinical trials may
not be indicative of results that will be obtained in large-scale testing, and
there can be no assurance that the Company's clinical trials will demonstrate
sufficient safety and efficacy to obtain the requisite regulatory approvals or
will result in additional marketable products. Clinical trials are also often
conducted with patients having advanced stages of disease. During the course of
treatment, these patients can die or suffer other adverse medical effects for
reasons that may not be related to the pharmaceutical agent being tested but
which can nevertheless affect clinical trial results. A number of companies in
the pharmaceutical industry have suffered significant setbacks in advanced
clinical trials, even after promising results in earlier trials. If any of the
Company's products under development are not shown to be safe and effective in
clinical trials, the resulting delays in developing other compounds and
conducting related preclinical testing and clinical trials, as well as the need
for additional financing, would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Anesta's Products and Development Programs."
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT
The Company has experienced significant operating losses since its
inception in August 1985. As of March 31, 1996, the Company had an accumulated
deficit of approximately $13.5 million. Almost all of the Company's revenues to
date have been from research and development contracts and interest income. The
Company expects to incur operating losses over at least the next several years
as the Company's research and development efforts and preclinical and clinical
testing activities expand. The Company's ability to achieve profitability
depends in part upon its ability, alone or with others, to successfully complete
development of and to commercialize Actiq, to complete development of its other
proposed products, to obtain required regulatory approvals and to manufacture
and market such products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The development of the Company's technology and potential products will
require a commitment of substantial funds to conduct the costly and
time-consuming research, preclinical and clinical testing activities necessary
to develop and optimize such technology, to bring any such products to market
and, ultimately, to establish manufacturing and marketing capabilities. The
Company's future capital requirements will depend on many factors, including
continued scientific progress in the research and development of the Company's
technology and drug programs, the ability of the Company to establish and
maintain collaborative arrangements with others for drug development, progress
with preclinical and clinical trials, time and costs involved in obtaining
regulatory approvals, the costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims, competing technological and market
developments, changes in its existing research relationships and effective
product commercialization activities and arrangements.
The Company may seek additional funding through new collaborative
arrangements or the extension of existing arrangements or through public or
private equity or debt financings. There can be no assurance that additional
financing will be available on acceptable terms or at all. If additional funds
are raised by issuing equity securities, further dilution to stockholders may
result. If adequate funds are not available, the Company may be required to
delay, reduce the scope of or eliminate one or more of its research or
development programs or to obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates or products that the Company would
otherwise seek to develop or commercialize itself.
GOVERNMENT REGULATION
The Company's products require the approval of the FDA before they can be
marketed in the U.S. In addition, approvals are also required from health
authorities in virtually every foreign country before the Company's products can
be marketed in such countries. Before an NDA can be filed with the FDA, a
product
7
<PAGE> 8
must undergo, among other things, extensive clinical trials. The Company has
received approval from the FDA on the NDA filed for its initial product,
Fentanyl Oralet. The Company has not yet filed NDAs on any other products. The
regulatory process is expensive and time-consuming, and no assurance can be
given that any NDA or foreign regulatory submission submitted by the Company
will be approved on a timely basis, if at all. There can be no assurance that
problems will not arise that could delay or prevent the commercialization of the
Company's future products, or that the FDA and foreign regulatory agencies will
be satisfied with the information, including that emanating from clinical
trials, contained in submissions (such as NDAs) seeking approval and or that
such agencies will approve the marketing of future products.
There can be no assurance that any future products developed by the Company
alone or in conjunction with others will be proven to be safe and efficacious in
clinical trials and will meet all of the applicable regulatory requirements
needed to receive marketing approval. Data obtained from preclinical and
clinical testing activities can be susceptible to varying interpretations which
could delay, limit or prevent required regulatory approvals. In addition, delays
or denials of approval may be encountered based upon additional government
regulation resulting from future legislation or administrative action or changes
in FDA policy made during the period of product development and FDA regulatory
review. Similar delays may also be encountered in foreign countries. There can
be no assurance that even after such time and expenditures, regulatory approval
will be obtained for any future products developed by the Company. If regulatory
approval of a product is granted, such approval would be limited to those
therapeutic uses for which the product has been demonstrated through clinical
studies and other means to be safe and effective. Furthermore, approval may
entail ongoing requirements for, among other things, post-marketing studies.
Even if regulatory approval is obtained, a marketed product, its manufacturer
and its manufacturing facilities and pertinent operations are subject to
extensive regulation and periodic inspections. The regulatory requirements
pertinent to drug manufacturing and related activities are stringently applied
and enforced by the FDA. Discovery of previously unknown problems with a
product, manufacturer or facility, including pertinent operations, could result
in FDA restrictions being placed on such product or manufacturer, including an
order to withdraw a specific product from the market.
Because of initial safety concerns relating to the use of Fentanyl Oralet,
the FDA imposed significant marketing restrictions on Abbott's sales and
distribution activities for the product. While the FDA lifted most of these
restrictions in March 1996, there can be no assurance that in the future the FDA
or another governmental entity will not impose similar or additional
restrictions on the marketing or distribution of the Company's products, even
after the products have received FDA approval. Restrictions on the marketing or
sales of the Company's products could significantly limit the sales of the
Company's products, resulting in a material adverse impact on the Company's
financial performance.
The Company may establish collaborative relationships to conduct, among
other things, clinical testing and seek regulatory approvals to market its
products in major markets outside the U.S. There can be no assurance that the
Company will be successful in establishing such relationships or that such
approvals will be received in a timely manner, if at all. To market its products
abroad, the Company must comply with numerous and varying foreign regulatory
requirements implemented by foreign health authorities, governing, among other
things, the design and conduct of clinical trials, pricing regulations and
marketing approval. The approval procedure may vary among countries and can
involve, for example, 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 European Union (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.
The Company's first product contains a controlled substance regulated by
the Drug Enforcement Administration (DEA) and future products also may contain
controlled substances. The DEA has expressed concerns to the FDA regarding the
potential for abuse of the drug fentanyl, including intravenous, patch and
Oralet dosage forms. Although the DEA has not sought any specific restrictions
on the marketing of Fentanyl Oralet, there can be no assurance that the DEA will
not seek such restrictions in the future. Products
8
<PAGE> 9
containing controlled substances may generate public controversy. Persons
opposing the use of such products may seek restrictions on the marketing of such
products, withdrawal of regulatory approval and rejection by the medical
community. One such person, acting on behalf of a public interest group, has
made attempts to block the introduction of Fentanyl Oralet since 1989.
Notwithstanding his efforts to prevent regulatory approval, the FDA approved
Fentanyl Oralet for use as a surgical premedication and for monitored anesthesia
care in October 1993. On January 25, 1994, such person and several other people
wrote letters to the FDA urging that the FDA withdraw its approval for Fentanyl
Oralet. In February 1994, the same public interest group initiated a lawsuit
pursuant to the Freedom of Information Act against the FDA regarding trade
secret information about Fentanyl Oralet which had been filed with the FDA and
which had not been disclosed to the public. The Company and Abbott filed a
motion as defendant intervenors which asked that the trade secret information
remain confidential. Since September 1994 there has been no additional activity
with regard to this suit. The Company is not aware of any ongoing formal
proceeding being conducted by the FDA to consider the withdrawal of its approval
for Fentanyl Oralet. Political pressures and adverse publicity generated by such
persons could cause delays and increased expenses, and adversely affect the
marketing of Fentanyl Oralet and could similarly effect the introduction of
future products. If regulatory approval for the marketing of Fentanyl Oralet
were to be withdrawn or special restrictions in addition to those generally
applicable to controlled substances on the marketing of Actiq for cancer pain
were imposed by the FDA, the Company would be materially and adversely affected.
See "Business -- Government Regulation."
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in large part on its ability to obtain
patents, maintain trade secrets and operate without infringing on the
proprietary rights of others, both in the U.S. and in other countries. The
patent positions of pharmaceutical companies can be highly uncertain and involve
complex legal and factual questions, and therefore the breadth and
enforceability of claims allowed in pharmaceutical patents cannot be predicted.
The University of Utah and its assignee, the University of Utah Research
Foundation (collectively, the UURF), currently hold eight U.S. and 53 foreign
patents for the OT-system and have licensed these patents to Anesta on a
worldwide exclusive basis for the life of the patents. Licensing rights to
technology owned by the UURF depends, in part, upon the validity of and
protection provided by these patents. Any failure to file, prosecute or maintain
any such patents could adversely affect the Company's business. Anesta intends
to file additional patent applications when appropriate relating to its
technologies, improvements to its technologies and specific products it
develops. Anesta also intends to direct the UURF to file any additional patent
applications relating to the licensed technology. There can be no assurance that
any issued or pending patents will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection or meaningful competitive advantages to the Company.
The commercial success of the Company also will depend, in part, on Anesta
not infringing patents issued to others and not breaching the technology
licenses upon which any Company products are based. No assurance can be given
that the Company does not infringe the proprietary rights of others, and will
not be required to alter its products or processes, obtain licenses to such
third party rights or cease certain activities. In addition, if patents are
issued to others which contain competitive or conflicting claims and such claims
are ultimately determined to be valid, the Company may be required to obtain
licenses to these patents or to develop or obtain alternative technology. If the
Company is required to obtain such licenses, there can be no assurance that the
Company would be able to obtain any such licenses on commercially favorable
terms, if at all. The Company's breach of an existing license or failure to
obtain a license required to commercialize its products may have a material
adverse impact on the Company. Litigation, which could result in substantial
costs to the Company, may also be necessary to enforce any patents licensed or
issued to the Company or to determine the scope and validity of third party
proprietary rights. If competitors of the Company prepare and file patent
applications in the U.S. that claim technology also claimed by the Company, 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. An adverse outcome could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company to cease using such technology.
9
<PAGE> 10
The Company also relies on secrecy to protect its technology, especially
where patent protection is not believed to be appropriate or obtainable. Thus,
Anesta protects its proprietary technology and processes, in part, by
confidentiality agreements with its employees, consultants and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors. See "Business -- Patents, Proprietary Rights and
Licenses."
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's products use a new method of oral drug delivery, and no
assurance can be given that any of the Company's current or future products, if
any, will ever achieve market acceptance. Physicians will not prescribe the
Company's products unless they determine, based on experience, clinical data,
and other factors, that these products are a preferable alternative to currently
available products. To date, the Company's products have only been used by a
limited number of patients, and no assurance can be given that its products will
be adopted by a broader patient population. The Company believes that
recommendations and endorsements by influential physicians will be essential for
market acceptance of its products, and there can be no assurance that such
recommendations and endorsements will be obtained. In addition, the adoption of
new pharmaceuticals is greatly influenced by health care administrators,
inclusion on hospital formularies and reimbursement by third party payors. No
assurance can be given that health care administrators, hospitals or third party
payors will accept the Company's products on a timely basis, or at all. The
Company may be required to, among other things, offer substantial discounts on
its products or potential products to stimulate demand. In March 1996, the FDA
eased the conditions of the controlled roll-out that it had imposed on the
marketing of Fentanyl Oralet, however no assurance can be given that adoption of
Fentanyl Oralet by the market will be increased from current levels. Failure of
the Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Anesta's Products and Development
Programs."
LIMITED MANUFACTURING CAPABILITY
The Company currently has limited manufacturing capacity to produce its
OT-products for clinical studies. Therefore, the Company must rely on Abbott and
relationships with other large pharmaceutical companies to market and
manufacture commercial quantities of its OT-products. Except for the OT-fentanyl
product line, the other OT-products under development by the Company have never
been manufactured on a commercial scale and there can be no assurance that such
products can be manufactured at a cost or in quantities necessary to make them
commercially viable. Any delay in availability of products might result in delay
in the regulatory submissions or the market introduction and subsequent sale of
such products, which would have a material adverse effect on the Company.
Moreover, Abbott, as the Company's contract manufacturer, must adhere to, among
other requirements, current Good Manufacturing Practice (cGMP) regulations
enforced by the FDA through its facilities inspection program. If the facilities
and pertinent operations used by Abbott cannot pass a plant inspection by the
FDA, Abbott would not be able to manufacture the product. To the extent that the
Company enters into co-promotion or other licensing arrangements, any revenues
received by the Company will depend upon the efforts of third parties, and there
can be no assurance that such efforts will be successful.
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, among other requirements,
cGMP regulations enforced by the FDA's facilities inspection program. If the
Company's facilities and pertinent operations cannot pass the necessary FDA
plant inspections and comply with the applicable regulations, it would be unable
to manufacture the OT-nicotine or other products required for clinical studies.
Any delays resulting from problems with regulatory compliance or other
manufacturing issues would delay regulatory approval, market introduction and
subsequent sales of the Company's products which
10
<PAGE> 11
would have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Manufacturing."
LACK OF SALES AND MARKETING CAPABILITY
The Company has no experience in sales, marketing or distribution and has
entered into a distribution agreement with Abbott with regard to the OT-fentanyl
product line. To market any of its products directly, the Company would have to
develop a marketing and sales force with technical expertise and with supporting
distribution capability or enter into marketing agreements with Abbott or
another pharmaceutical company with an established distribution system and sales
force. There can be no assurance that the Company will be able to establish its
own sales and distribution capabilities or be successful in entering into
additional sales or marketing agreements with Abbott or other collaborative
partners. See "Business -- Collaborative Relationships; Abbott."
NEED TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS
The Company is highly dependent on the principal members of its scientific
and management staff. In addition, the Company relies on consultants and
advisors to assist the Company in formulating its research and development
strategy. Retaining and attracting qualified personnel, consultants and advisors
will be critical to the Company's success. In order to pursue its product
development and marketing plans, the Company will be required to hire additional
qualified scientific personnel to perform research and development activities,
as well as personnel with expertise in clinical testing, government regulation,
manufacturing and marketing. Expansion in product process development and
marketing is also expected to require the addition of management personnel and
the development of additional expertise by existing management personnel. The
Company faces competition for qualified individuals from numerous
pharmaceutical, health products and biotechnology companies, universities and
other research institutions. There can be no assurance that the Company will be
able to attract and retain such individuals on acceptable terms or at all. See
"Business -- Human Resources" and "Management."
The Company's clinical development is conducted under agreements with
universities and medical institutions. The Company depends on the availability
of a principal investigator for each such program and the Company cannot assure
that these individuals or their research staffs will be available to conduct
clinical development. The Company's academic collaborators are not employees of
the Company. As a result, the Company has limited control over their activities
and can expect that only limited amounts of their time will be dedicated to
Company activities. The Company's academic collaborators may have relationships
with other commercial entities, some of which could compete with the Company.
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE
Anesta is engaged in business in a rapidly changing field. Existing
products and therapies, as well as technological approaches to developing such
products and therapies, will compete directly with the products that the Company
is seeking to develop and market. Fentanyl Oralet will compete directly with
other drugs and drug delivery systems. There can be no assurance that Fentanyl
Oralet or any other Anesta product will have advantages which will be
significant enough to cause medical professionals to adopt its use. The new
products being developed by the Company will compete with drugs marketed in
other delivery forms, including oral doses, rectal doses, infusions, injections,
nasal and pulmonary inhalers and transdermal products. New drugs, or further
developments in alternative drug delivery methods, may provide greater
therapeutic benefits for a specific indication, or may offer comparable
performance at lower cost, than those products offered by the Company.
Competition from fully integrated pharmaceutical companies is expected to
increase. Most of these companies have significantly greater financial resources
and expertise in research and development, manufacturing, preclinical and
clinical testing, obtaining regulatory approvals and marketing than the Company.
Smaller companies may also prove to be significant competitors, particularly
through collaborative arrangements with larger pharmaceutical companies.
Academic institutions, governmental agencies and other public and private
research organizations also conduct research, seek patent protection and
establish collaborative arrangements for product and clinical development and
marketing. Many of these competitors have drug delivery products approved or in
development and operate large, well funded research
11
<PAGE> 12
and development programs in these fields. Moreover, these companies and
institutions are in the process of developing technology that could be developed
more quickly or ultimately prove safer or more effective than the Company's
technology. Anesta faces competition based on product efficacy, safety, the
timing and scope of regulatory approvals, availability of supply, marketing and
sales capability, reimbursement coverage, price and patent position. There is no
assurance that the Company's competitors will not develop more effective or more
affordable products, or achieve earlier patent protection or product
commercialization than the Company. See "Business -- Competition."
UNCERTAINTY OF PHARMACEUTICAL PRICING, THIRD PARTY REIMBURSEMENT AND HEALTH CARE
REFORM MEASURES
The business and financial condition of pharmaceutical companies will
continue to be affected by the efforts of governmental and third party payors to
contain or reduce the costs of health care. In the U.S. and in certain foreign
jurisdictions there have been, and the Company expects that there will continue
to be, a number of legislative and regulatory proposals aimed at changing the
health care system. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted or the effect that such
proposals may have on its business, the pendency or approval of such proposals
could have a material adverse effect on the Company's ability to raise capital
or to obtain additional collaborative partners, and the adoption of such
proposals could have a material adverse effect on the Company.
In both domestic and foreign markets, sales of the Company's products will
depend in part on the availability of reimbursement from third party payors such
as government health administration authorities, private health insurers and
other organizations. Third party payors are increasingly challenging the price
and cost-effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
Future legislation and regulations affecting the pricing of pharmaceuticals
could further limit reimbursement for medical products and services. There can
be no assurance that any of the Company's potential products will be considered
cost-effective or that adequate third party reimbursement would be available to
enable the Company to maintain price levels sufficient to realize an appropriate
return on its investment in product development. In addition, the trend toward
managed health care in the U.S. and the concurrent growth of organizations, such
as health maintenance organizations, which could control or significantly
influence the purchase of health care services and products, as well as
legislative proposals to reduce government insurance programs, may all result in
pricing pressure for current or future products of the Company. See
"Business -- Government Regulation."
RISK OF PRODUCT LIABILITY; POSSIBLE INABILITY TO OBTAIN INSURANCE
The testing, marketing and sale of pharmaceutical products for use by
humans involves unavoidable risks. The use of any of the Company's potential
products in clinical trials and the sale 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 on the business,
financial condition and future prospects of the Company. See
"Business -- Product Liability Insurance."
HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled
use of hazardous materials. Although the Company believes that its safety
procedures for handling and disposing of such materials comply in all material
respects with the standards prescribed by state and federal regulations, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
12
<PAGE> 13
resources of the Company. The Company may incur substantial costs to comply with
environmental regulations if the Company develops additional manufacturing
facilities and capacity.
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS
Following this offering, the present directors, executive officers and
principal stockholders of the Company and their affiliates will beneficially own
approximately 20.9% of the outstanding shares of Common Stock (approximately
20.0% if the Underwriters exercise their over-allotment option in full).
Accordingly, they will have the ability to control the election of a majority of
the Company's directors and most other stockholders' actions. In addition, the
Company's Certificate of Incorporation and Bylaws require that any action
required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by any consent in writing. Special meetings of the stockholders of
the Company may be called only by the Board of Directors, the Chairman of the
Board or the President of the Company. Charter provisions may discourage certain
types of transactions involving an actual or potential change in control of the
Company, including transactions in which the stockholders might otherwise
receive a premium for their shares over then current prices, and may limit the
ability of the stockholders to approve transactions that they may deem to be in
their best interests. In addition, the Board of Directors has the authority,
without action by the stockholders, to fix the rights and preferences of and
issue shares of Preferred Stock, which may have the effect of delaying or
preventing a change in control of the Company. See "Management," "Principal and
Selling Stockholders," "Description of Capital Stock -- Preferred Stock" and
"Description of Capital Stock -- Delaware Anti-Takeover Law and Certain Charter
Provisions."
HIGHLY VOLATILE STOCK PRICE
The market price of the shares of Common Stock, like that of the common
stock of many other early-stage pharmaceutical companies, is likely to be highly
volatile. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new commercial therapeutic
products by the Company or its competitors, progress with clinical trials,
governmental regulation, changes in reimbursement policies, developments in
patent or other proprietary rights, developments in the Company's relationship
with future collaborative partners, if any, public concern as to the safety and
efficacy of drugs developed by the Company and general market conditions may
have a significant effect on the market price of the Common Stock.
POTENTIAL SALE INTO THE PUBLIC MARKET OF OUTSTANDING SHARES
Sales of substantial amounts of Common Stock in the public market following
the offering made hereby could have an adverse effect on the price of the
Company's Common Stock. In addition to the 3,000,000 shares offered hereby,
approximately 2,841,025 shares of Common Stock will be eligible for sale in the
public market beginning 90 days from the date of this Prospectus subject to
compliance with Rule 144 or Rule 701 of the Securities Act of 1933, as amended
(the "Securities Act") upon the expiration of agreements not to sell such
shares. Montgomery Securities may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to
agreements not to sell. Additionally, the Company is a party to an agreement
with the holders of 3,714,015 shares of Common Stock whereby such holders are
entitled to certain piggyback and demand registration rights with respect to
such shares. If the Company is required to include in a Company-initiated
registration shares held by such holders pursuant to the exercise of their
registration rights, such sales may have an adverse effect on the Company's
ability to raise needed capital. See "Shares Eligible for Future Sale" and
"Description of Capital Stock -- Registration Rights."
DILUTION
The public offering price is substantially higher than the book value per
share of Common Stock. Investors purchasing shares of Common Stock in this
offering will therefore incur immediate, substantial dilution equal to $9.23 per
share, assuming a public offering price of $14.25 per share. See "Dilution."
13
<PAGE> 14
ABSENCE OF DIVIDENDS
The Company currently intends to retain any future earnings to finance the
growth and development of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future.
THE COMPANY
The Company was incorporated in Utah in August 1985 and changed its state
of incorporation to Delaware in December 1993. The Company's executive offices
are located at 4745 Wiley Post Way, Plaza 6, Suite 650, Salt Lake City, Utah
84116, and its telephone number is (801) 595-1405.
14
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be $26,415,000
($32,442,750 if the Underwriters' over-allotment option is exercised in full),
assuming a public offering price of $14.25 per share and after deducting the
estimated underwriting discount and offering expenses payable by the Company.
The Company will not receive any proceeds from the sale of the 1,000,000 shares
of Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
The Company intends to use approximately $17,400,000 of the proceeds of the
offering for research and development, including clinical and preclinical
testing of its products and hiring additional scientific, clinical and
management personnel, and approximately $8,600,000 to improve and equip its
research, development and manufacturing facilities, to obtain additional space
for its administrative office and market preparation activities. The remaining
proceeds will be used for working capital and general corporate purposes. The
amounts actually expended for each purpose may vary significantly, depending
upon numerous factors, including the progress of the Company's development
programs, the results of its clinical studies, the timing of regulatory
approvals, technological advances, determinations as to the commercial potential
of the Company's products and status of competitive products. Net proceeds of
this offering may also be used to acquire other companies, technology or
products that complement the business of the Company, although no such
transactions are being planned or negotiated as of the date hereof. The amounts
and timing of such expenditures will depend upon the receipt and timing of
regulatory approvals, the development of products by the Company, the progress
of ongoing research and development activities, the results of clinical studies,
determination of commercial potential, the status of competitive products, the
rate at which operating losses are incurred, the receipt of funding from Abbott
and other potential collaborative partners and other factors, many of which are
beyond the Company's control. Pending such uses, the net proceeds of this
offering will be invested in short-term, interest-bearing securities. See "Risk
Factors -- Future Capital Needs; Uncertainty of Additional Funding."
PRICE RANGE OF COMMON STOCK
The Common Stock began trading publicly in the over-the-counter market
through the Nasdaq National Market on January 28, 1994 under the symbol "NSTA."
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 table sets forth the closing information on the high and low
reported closing bid prices for the Company's Common Stock as reported on the
Nasdaq National Market for the periods indicated below. These prices do not
include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal 1996:
Second Quarter (through April 26, 1996).......................... $15.00 $13.25
First Quarter.................................................... 15.75 9.25
Fiscal 1995:
Fourth Quarter................................................... 11.75 9.00
Third Quarter.................................................... 13.00 8.75
Second Quarter................................................... 10.13 4.38
First Quarter.................................................... 5.75 4.75
Fiscal 1994:
Fourth Quarter................................................... 8.50 5.25
Third Quarter.................................................... 10.13 7.38
Second Quarter................................................... 10.50 6.25
First Quarter (from January 28, 1994)............................ 13.25 10.50
</TABLE>
As of April 24, 1996, there were approximately 100 holders of record of the
Common Stock. On April 26, 1996, the last reported sale price on the Nasdaq
National Market for the Common Stock was $14.25.
15
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996, and as adjusted to give effect to the sale of the 2,000,000 shares of
Common Stock being offered by the Company hereby, and the application of the
proceeds therefrom, at an assumed public offering price of $14.25 and after
deducting the underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of notes and capital leases payable........... $ 160 $ 160
-------- ---------
Long-term notes and capital lease payable, non-current
portion..................................................... 1,350 1,350
-------- ---------
Stockholders' equity (1):
Preferred stock, $.001 par value; 1,000,000 shares,
authorized; no shares issued or outstanding, actual or as
adjusted................................................. -- --
Common stock, $.001 par value; 15,000,000 shares authorized;
7,225,676 shares issued, actual; 9,225,676 shares issued,
as adjusted.............................................. 7 9
Additional paid-in capital.................................... 33,312 59,725
Deficit accumulated during development stage.................. (13,519) (13,519)
Treasury stock (345 shares), at cost.......................... (4) (4)
Notes receivable from issuance of common stock................ (7) (7)
Unrealized gain on marketable debt securities, available for
sale........................................................ 122 122
-------- ---------
Total stockholders' equity.................................. 19,911 46,326
-------- ---------
Total capitalization..................................... $ 21,421 $ 47,836
======== =========
</TABLE>
- ---------------
(1) Excludes 801,754 shares of Common Stock issuable upon exercise of stock
options at a weighted average exercise price of $5.31 per share outstanding
as of March 31, 1996.
16
<PAGE> 17
DILUTION
The net tangible book value of the Company as of March 31, 1996, was
approximately $19.9 million, or approximately $2.76 per share of Common Stock.
Net tangible book value per share represents the amount of the Company's
stockholders equity, divided by 7,225,331 shares of Common Stock outstanding.
Net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of the 2,000,000 shares of
Common Stock in the offering made hereunder and the pro forma net tangible book
value per share of Common Stock immediately after this offering. After giving
effect to the sale by the Company of 2,000,000 shares of Common Stock offered
hereby (at an assumed public offering price of $14.25 per share, and after
deduction of the underwriting discount and estimated offering expenses), the pro
forma net tangible book value of the Company as of March 31, 1996 would have
been approximately $46.3 million, or $5.02 per share. This represents an
immediate increase in pro forma net tangible book value of $2.26 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $9.23 per share to purchasers of Common Stock in this offering.
<TABLE>
<S> <C> <C>
Estimated public offering price per share........................... $14.25
------
Net tangible book value per share before offering................. $2.76
Increase per share attributable to new investors.................. 2.26
-----
Pro forma net tangible book value per share after offering.......... 5.02
------
Net tangible book value dilution per share to new investors......... $ 9.23
======
</TABLE>
The Company has reserved 801,754 shares of Common Stock for issuance upon
exercise of options outstanding as of March 31, 1996, at a weighted average
exercise price of $5.31. To the extent that such options are exercised in the
future, there will be further dilution to new investors.
DIVIDEND POLICY
The Company currently intends to retain any future earnings to finance the
growth and development of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future.
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<PAGE> 18
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data set forth below with respect to the Company's
statements of operations for each of the three years in the period ended
December 31, 1995 and balance sheets at December 31, 1995 and 1994, have been
derived from the financial statements of the Company included elsewhere in this
Prospectus, that have been audited by Coopers & Lybrand L.L.P., independent
accountants, as indicated in their report included elsewhere in this Prospectus.
The statement of operations data for the years ended December 31, 1992 and 1991
and the balance sheet data as of such dates, have been derived from the
financial statements audited by Coopers & Lybrand L.L.P. but not included in
this Prospectus. The financial data for the three months ended March 31, 1996
and 1995 and for the period from inception (August 1, 1985) to March 31, 1996,
have been derived from unaudited financial statements included elsewhere in this
Prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. Operating results for the three months ended March
31, 1996 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1996. The data set forth below should be
read in conjunction with the financial statements, including notes thereto,
included elsewhere in this Prospectus and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PERIOD
FROM
THREE MONTHS INCEPTION
ENDED (AUGUST 1,
YEAR ENDED DECEMBER 31, MARCH 31 1985) TO
----------------------------------------------- ----------------- MARCH 31,
1991 1992 1993 1994 1995 1995 1996 1996
------- ------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Product sales............................. $ -- $ -- $ -- $ 37 $ 61 $ 17 $ 20 $ 118
Contract research......................... 1,266 1,741 1,584 812 1,514 384 375 8,851
Royalties................................. -- -- -- 1 102 -- -- 103
------- ------- ------- ------- ------- ------- ------- --------
Total revenues............................ 1,266 1,741 1,584 850 1,677 401 395 9,072
Operating costs and expenses:
Cost of goods sold and royalties.......... -- -- -- 24 22 5 7 52
Research and development.................. 988 1,403 1,793 3,210 5,228 1,008 1,795 16,337
Depreciation and amortization............. 64 75 85 103 158 23 60 651
Selling, general and administrative....... 316 363 553 1,328 2,219 446 611 6,432
------- ------- ------- ------- ------- ------- ------- --------
Loss from operations........................ (102) (100) (847) (3,815) (5,950) (1,081) (2,078) (14,400)
Non operating income, net................... 33 17 8 866 1,250 430 282 2,414
Provision for income taxes.................. -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- --------
Loss before cumulative effect of change in
accounting................................ (69) (83) (839) (2,949) (4,700) (651) (1,796) (11,986)
Cumulative effect of change in accounting... -- -- -- -- (1,041) (1,041) -- (1,041)
------- ------- ------- ------- ------- ------- ------- --------
Net loss.................................... $ (69) $ (83) $ (839) $(2,949) $(5,741) $(1,692) $(1,796) $(13,027)
======= ======= ======= ======= ======= ======= ======= ========
Loss per common share amounts:
Loss before cumulative effect of change in
accounting.............................. $ (0.02) $ (0.08) $ (0.62) $ (0.51) $ (0.65) $ (0.09) $ (0.25)
Cumulative effect of change in accounting... -- -- -- -- (0.15) (0.15) --
------- ------- ------- ------- ------- ------- -------
Net loss per share.......................... $ (0.02) $ (0.08) $ (0.62) $ (0.51) $ (0.80) $ (0.24) $ (0.25)
======= ======= ======= ======= ======= ======= =======
Shares used in computing net loss per
share..................................... 1,010 1,047 1,345 6,721 7,177 7,146 7,221
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
AS
ACTUAL ADJUSTED(1)
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and other marketable securities....................................... $ 19,828 $ 46,243
Total assets................................................................................. 22,338 48,753
Long-term obligations, including current portion............................................. 1,510 1,510
Deficit accumulated during development stage................................................. (13,519) (13,519)
Stockholders' equity......................................................................... 19,911 46,326
</TABLE>
- ---------------
(1) Adjusted to reflect the sale of 2,000,000 shares of Common Stock by the
Company at an assumed public offering price of $14.25 per share and after
deducting the underwriting discount and estimated offering expenses, and
the application of the proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
OVERVIEW
Since its inception in August 1985, Anesta has been a development stage
company engaged in the research and development and commercialization of
pharmaceutical products incorporating its proprietary OT-system for drug
delivery. 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, preclinical studies, clinical trials and market preparation
activities. As of March 31, 1996, the Company's accumulated deficit was
approximately $13.5 million.
Initial orders for the Company's first product, Fentanyl Oralet, were
placed beginning in July 1994. The FDA-approved marketing plan for Fentanyl
Oralet contained a controlled roll-out of the product, under which the product
was sold only to a limited number of hospitals that received extensive training
in the proper use of the product by Abbott anesthesia specialists. As a result
of the controlled roll-out, only limited sales of Fentanyl Oralet occurred
during the first three months of 1996 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 salesforce.
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% to 70%.
In addition, the Company is entitled to receive a royalty on product sales by
Abbott.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Revenues
Total revenues decreased by $6,000 or 1.6% for the three months ended March
31, 1996 as compared to the corresponding period in 1995. The decrease is
primarily a result of revenues from other contract research which did not occur
in the first three months of 1996. The Company's product sales to Abbott were
$20,000 for the three months ended March 31, 1996 as compared to $17,000 for the
corresponding period in 1995. Substantially all revenues in both years were from
development funding and milestone payments under collaborative agreements with
Abbott relating to the Actiq cancer pain program. See Note 10 to Financial
Statements. Amounts earned under the collaborative agreements with Abbott may
vary substantially in the future.
Operating Expenses
Research and development expenses increased by $786,000 or 78% for the
three months ended March 31, 1996 as compared to the corresponding period in
1995. The increase in research and development expenses is due primarily to
higher expenditures for the Actiq cancer pain program, new product development,
manufacturing process development and other expenditures for product
development, including clinical trials. See Note 10 to Financial Statements. The
Company expects that its research and development expenses will grow
significantly during the remainder of 1996 as a result of anticipated increased
expenses related to the hiring of additional personnel, preclinical studies,
clinical trials, product development and process development activities.
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<PAGE> 20
Selling, general and administrative expenses increased by $166,000 or 37%
for the three months ended March 31, 1996 as compared to the corresponding
period in 1995. The increase in selling, general and administrative expenses is
due primarily to higher expenditures for rent on new facilities, travel and
corporate development activities. The Company expects that its selling, general
and administrative expenses will increase during the remainder of 1996 as a
result of the increased support required for research and development, patent
and corporate development activities.
Non Operating Income (Expense)
Interest income decreased by $130,000 for the three months ended March 31,
1996 as compared to the corresponding period in 1995 primarily due to lower
average balances invested. Interest expense increased by $18,000 for the three
months ended March 31, 1996 as compared to the corresponding period in 1995
primarily due to interest expense related to borrowings on the Company's
revolving/term loan in 1995.
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
for the three months ended March 31, 1996 was $1,796,000 or $0.25 per share as
compared to $1,692,000 or $0.24 per share for the same period in 1995. The net
loss in 1995 includes the cumulative effect of a change in accounting of
$1,041,000 or $0.15 per share.
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
Revenues
The Company's revenues increased to $1,677,000 in 1995 from $850,000 in
1994 and $1,584,000 in 1993. The increase in 1995 was primarily a result of
revenue recognized pursuant to a 1995 collaborative agreement with Abbott
relating to the Actiq cancer pain program. See Note 10 to Financial Statements.
The Company's product sales to Abbott were $61,000 for 1995, $37,000 for 1994
and there were no product sales for 1993. Substantially all revenues in 1994 and
1993 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.
Operating Expenses
The Company's research and development expenses increased to $5,228,000 in
1995 from $3,210,000 in 1994 and $1,793,000 in 1993. 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. 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 to
$2,219,000 in 1995 from $1,329,000 in 1994 and $553,000 in 1993. The increase in
selling, general and administrative expenses in 1995 was due primarily to higher
expenditures resulting from additional executives and employees, increased
support required for research and development, patent, market research and
corporate development activities. 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.
Non Operating Income (Expense)
The Company's interest income increased to $1,366,000 in 1995 from $883,000
in 1994 and $10,000 in 1993. The increase in 1995 was primarily due to higher
interest rates, partially offset by lower average balances
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<PAGE> 21
invested. 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 initial public offering.
The Company's interest expense increased to $100,000 in 1995 from $18,000
in 1994 and $5,000 in 1993 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 carry-forwards
of approximately $11,000,000 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
carry-forwards 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 (the Code). 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 $1,041,000 or $0.15 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 to $5,741,000 or $0.80 per share in 1995 from $2,949,000 or $0.51 per
share in 1994 and $839,000 or $0.62 per share in 1993.
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 $28,538,000 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 $492,000 was made in February 1994.
As of March 31, 1996, the Company had cash and cash equivalents totaling
$1,981,000, $1,530,000 in a certificate of deposit used as collateral for a
revolving/term loan as described below and $16,317,000 in marketable debt
securities which are available for sale. Thus cash, cash equivalents,
certificate of deposit and marketable debt securities totaled $19,828,000 as of
March 31, 1996. 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.
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<PAGE> 22
The Company used cash in operating activities of $2,018,000 for the three
months ended March 31, 1996 compared to $1,146,000 for the corresponding period
in 1995. The increase in cash used in the period was a direct result of the
increase in research and development and selling, general and administrative
activities discussed above.
The Company's use of cash in operating activities increased to $4,791,000
in 1995 from $2,529,000 in 1994 and $743,000 in 1993. The increase in cash used
was a direct result of the increase in research and development and selling,
general and administrative activities discussed above.
During the three months ended March 31, 1996, the Company made capital
expenditures of approximately $20,000 as compared to capital expenditures of
$625,000 during the corresponding period in 1995. The decrease in capital
expenditures is due to the Company's remodeling of new facilities which were
completed in May 1995. To help finance the remodeling of the facilities, in
January 1995 the Company secured a revolving/term loan in the amount of
$1,500,000, of which $468,000 was funded during the three months ended March 31,
1995. Such loan converted into a 10 year term loan on May 15, 1995. Such loan
bears interest at 1.6% above the lender's certificate of deposit rate and is
collateralized by a certificate of deposit in the amount of $1,530,000. During
1995, the Company made capital expenditures of approximately $1,592,000, as
compared to capital expenditures of $361,000 and $16,000 in 1994 and 1993
respectively. The increase in capital expenditures in 1995 was due to the
Company's remodeling of new facilities.
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 the three
months ended March 31, 1996, the Company paid approximately $23,000 in patent
costs compared to approximately $91,000 during the corresponding period in 1995.
During 1995, 1994 and 1993 the Company paid approximately $360,000 $190,000 and
$147,000 in patent costs, 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 the proceeds of this offering,
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 the next twenty-four
months. 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.
NEW ACCOUNTING PRONOUNCEMENTS
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 adoption of
SFAS No. 121 as of January 1, 1996 had no impact on the Company.
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.
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<PAGE> 23
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
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 dissolvable or non-dissolvable 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
premedication 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 persistent or constant pain. The
Company believes that the ability of Actiq to provide rapid relief from
breakthrough pain (onset of meaningful pain relief in 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 Actiq for breakthrough cancer pain in
early 1997.
Anesta also has several other products in clinical development, targeting
applications where the OT-system's 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 headaches 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.
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
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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 so 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, 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 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.
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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.
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.
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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 will be developed
successfully or approved in a timely manner.
<TABLE>
<CAPTION>
PRODUCT NAME INDICATION ACTIVE DRUG STATUS(1)
- ------------------ -------------------------------- ----------------- -----------------------------
<S> <C> <C> <C>
Fentanyl Oralet Surgical premedication Fentanyl Marketing
Conscious 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 sedation Etomidate Phase I Clinical Trials
OTDHE Migraine headache Dihydroergotamine Preclinical
OT-antiemetic Nausea/vomiting Chlorpromazine Research
Droperidol
Metoclopramide
Prochlorperazine
</TABLE>
- ---------------
(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 Actiq 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
more than 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 fentanyl Actiq 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 would 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 meetings 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 by the FDA include a nicotine gum, several transdermal nicotine
patches and a 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 to treat migraine headaches. Anesta is conducting preclinical
development of a product 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 further investigate treatment of migraine headaches and related
symptoms using the Company's OT-system. 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 headaches 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 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. 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,
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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 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,
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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. See
"Business -- Collaborative Relationships."
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 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
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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 a significant competitive advantage to the Company. 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 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,
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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 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
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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.
PROPERTIES
On March 31, 1996, 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.
36
<PAGE> 37
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 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
37
<PAGE> 38
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 1988 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. degree 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.
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.
38
<PAGE> 39
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.
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.
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.
39
<PAGE> 40
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.
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.
40
<PAGE> 41
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.
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
41
<PAGE> 42
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
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.
42
<PAGE> 43
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.
CERTAIN 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 unearned advance
royalty obligation to Abbott International, which amount was recognized as
royalty revenue during the year ended December 31, 1995. See
"Business -- Collaborative Relationships; Abbott."
43
<PAGE> 44
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.
44
<PAGE> 45
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 1996, and as
adjusted to reflect the sale of the Common Stock being offered hereby (assuming
no exercise of the Underwriters' over-allotment option) 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 and (v) the Selling Stockholders. 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 SHARES TO BE BENEFICIALLY
OF SHARES PERCENT NUMBER OWNED AFTER THIS OFFERING
BENEFICIALLY BENEFICIALLY OF SHARES --------------------------
NAME OF BENEFICIAL OWNER OWNED OWNED(1)(2) OFFERED NUMBER PERCENT(1)(2)
- ------------------------------------- ------------ ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Morgan, Holland Fund, L.P............ 1,412,345 19.5% 819,000 593,345 6.4%
c/o One Liberty Ventures
One Liberty Square,
Boston, Massachusetts 02109
Edwin M. Kania, Jr.(3)............... 1,418,845 19.6 819,000 599,845 6.5
c/o One Liberty Ventures
Morgan, Holland Fund, L.P.
One Liberty Square,
Boston, Massachusetts 02109
Abbott Laboratories.................. 1,202,840 16.6 -- 1,202,840 13.0
One Abbott Park Road, D-980, AP30
Abbott Park, IL 60064-3500
Theodore H. Stanley and Stanley
Research Foundation(4)............. 734,514 10.0 100,000 634,514 6.8
4745 Wiley Post Way
Plaza 6, Suite 650
Salt Lake City, UT 84116
William C. Moeller(5)................ 651,549 8.9 76,000 575,549 6.2
4745 Wiley Post Way
Plaza 6, Suite 650
Salt Lake City, UT 84116
The Capital Group Companies,
Inc.(6)............................ 460,000 6.4 -- 460,000 5.0
Daniel L. Kisner..................... -- -- -- -- --
Thomas B. King(7).................... 38,854 * -- 38,854 *
Richard H. Leazer(8)................. 5,187 * -- 5,187 *
Emanuel M. Papper(9)................. 21,353 * -- 21,353 *
Michael A. Busch(10)................. 48,764 * -- 48,764 *
Dennis L. Coleman(11)................ 59,632 * 5,000 54,632 *
Steven A. Shoemaker(12).............. 30,051 * -- 30,051 *
All executive officers and directors
as a group (10 persons) (3)-(5) and
(7)-(12)........................... 3,008,749 39.6% 1,000,000 2,008,749 20.9%
</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.
45
<PAGE> 46
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.
(2) Percentage of beneficial ownership is based on 7,225,331 shares of Common
Stock outstanding as of March 31, 1996 and 9,225,331 shares of Common Stock
outstanding after this offering.
(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.
46
<PAGE> 47
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 15,000,000 shares of Common Stock, $.001 par value, and
1,000,000 shares of Preferred Stock, $.001 par value.
COMMON STOCK
At March 31, 1996, there were 7,225,331 shares of Common Stock outstanding
held of record by approximately 100 stockholders.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding Preferred Stock. Holders of Common Stock have
no preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and all shares of
Common Stock to be outstanding upon completion of this offering will be, fully
paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 1,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by stockholders. The issuance of Preferred Stock could adversely
affect the voting power of holders of Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plan to issue any shares of Preferred Stock.
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement with the
holders of 3,714,015 shares of Common Stock (the Registrable Securities). Under
the agreement, such holders may require the Company to register the Registrable
Securities under the Securities Act. In addition, whenever the Company proposes
to register any of its securities under the Securities Act, the holders of
Registrable Securities are entitled, subject to certain restrictions, to include
their Registration Statement in such registration. The Company is required to
bear all registration expenses in connection with the registration of
Registrable Securities on the first demand registration and all Company
registrations.
Registration rights may be transferred to a transferee of such Registrable
Securities, provided that such transferee acquires at least 100,000 shares of
Registrable Securities. The registration rights may be amended or waived only
with the written consent of the Company and holders of a majority of the
Registrable Securities outstanding. The holders of the Registrable Securities
have waived their rights with respect to this offering. The registration rights
terminate on February 3, 1999.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the Delaware Law), an anti-takeover law. In general,
the statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business
47
<PAGE> 48
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
The Company's Restated Certificate of Incorporation also requires that any
action required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of the stockholders and may
not be effected by a consent in writing. Special meetings of the stockholders of
the Company may be called only by the Board of Directors, the Chairman of the
Board or the Chief Executive Officer. The Company's Restated Certificate of
Incorporation also provides that the authorized number of directors may be
changed only by resolution of the Board of Directors, and that directors can
only be removed for cause by a majority vote of the stockholders. These
provisions may have the effect of delaying, deterring or preventing a change in
control of the Company or depressing the market price of Common Stock or
discouraging hostile takeover bids in which stockholders of the Company could
receive a premium for their shares of Common Stock.
TRANSFER AGENT AND REGISTRAR
Boston Equiserve Services is the transfer agent and registrar for the
Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 9,225,331 shares of
Common Stock outstanding. Of these shares, the 2,500,000 shares sold in the
Company's initial public offering and the 3,000,000 shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company, as is defined
under the Securities Act. The remaining 3,725,331 shares of Common Stock are
"Restricted Shares" and are subject to restrictions under the Securities Act. Of
these shares, 2,841,025 are subject to lock-up agreements under which the
holders have agreed not to sell or otherwise dispose of any of their shares for
a period of 90 days after the date of this Prospectus without the prior written
consent of Montgomery Securities.
In general, under Rule 144, a person (or person whose shares are
aggregated) who has beneficially owned Restricted Shares for at least two years,
including a person who may be deemed an affiliate of the Company, is entitled to
sell within any three-month period a number of shares of Common Stock that does
not exceed the greater of 1% of the then-outstanding shares of Common Stock
(approximately 92,253 shares after giving effect to this offering) or the
average weekly trading volume of the Common Stock on the Nasdaq National Market
during the four calendar weeks preceding such sale. Sales under Rule 144 are
subject to certain restrictions relating to manner of sale, notice and the
availability of current public information about the Company. A person who has
not been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned shares for at least three years, would be
entitled to sell such shares without regard to the volume limitations, manner of
sale provisions and other requirements of Rule 144.
48
<PAGE> 49
UNDERWRITING
Montgomery Securities, Robertson, Stephens & Company LLC, and Volpe, Welty
& Company (the Underwriters), have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement (the Underwriting Agreement)
among the Company, the Selling Stockholders and the Underwriters, to purchase
from the Company and the Selling Stockholders the number of shares of Common
Stock indicated below opposite their respective names at the public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to certain conditions precedent, and that the Underwriters are committed
to purchase all of the shares if they purchase any of the shares.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
-------------------------------------------------------------------------- ----------
<S> <C>
Montgomery Securities.....................................................
Robertson, Stephens & Company LLC.........................................
Volpe, Welty & Company....................................................
---------
Total........................................................... 3,000,000
=========
</TABLE>
The Company has been advised by the Underwriters that they propose
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the public offering, the
offering price and other selling terms may be changed by the Underwriters. The
Common Stock is offered subject to receipt and acceptance by the Underwriters,
and to certain other conditions, including the right to reject orders in whole
or in part.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to a
maximum of 450,000 additional shares of Common Stock at the public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover
over-allotments made in connection with this offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
the Underwriters may be required to make in respect thereof.
Executive officers, directors and certain stockholders of the Company
holding in aggregate 2,841,025 shares of Common Stock and options to purchase
370,564 shares of Common Stock, have agreed not to directly or indirectly offer,
sell or otherwise dispose of any of such Common Stock or any securities
convertible into or exchangeable therefor for a period of 90 days after the date
of this Prospectus without the prior written consent of Montgomery Securities.
The Company has agreed that, for a period of 90 days after the date of this
Prospectus, it will not, without the prior written consent of Montgomery
Securities, issue, offer for sale, sell, transfer, grant options to purchase or
otherwise dispose of any shares of its Common Stock or securities convertible
into or exchangeable for its Common Stock or other equity security, except
pursuant to the Stock Option Plans. See "Shares Eligible for Future Sale."
In connection with this offering, certain Underwriters and selling group
members may engage in passive market making transactions in the Common Stock on
the Nasdaq National Market immediately prior to the commencement of sales in
this offering, in accordance with Rule 10b-6A under the Exchange Act. Passive
market making consists of displaying bids on the Nasdaq National Market limited
by the bid prices of independent market makers for a security and making
purchases of a security which are limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited to a
49
<PAGE> 50
specified percentage of the passive market maker's average daily trading volume
in the Common Stock during a specified prior period and must be discontinued
when such limit is reached. Passive market making may stabilize the market price
of the Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for the Company by Cooley Godward Castro Huddleson & Tatum, Boulder,
Colorado. Certain legal matters will be passed upon for the Underwriters by
Morrison & Foerster LLP, San Francisco, California.
EXPERTS
The financial statements of the Company included in this Registration
Statement have been audited by Coopers & Lybrand L.L.P., independent accountants
for the periods indicated in their reports thereon, appearing elsewhere in this
Registration Statement. The Financial Statements audited by Coopers & Lybrand
L.L.P. have been included in reliance upon such reports and upon the authority
of said firm as experts in accounting and auditing.
The portions of this Prospectus entitled "Risk Factors -- Uncertainty of
Protection of Patents and Proprietary Rights" and "Business -- Patents,
Proprietary Rights and Licenses" have been reviewed and approved by Workman,
Nydegger & Jensen, as experts in patent law. The portions of this Prospectus
entitled "Risk Factors -- Government Regulation" and "Business -- Government
Regulation" have been reviewed and approved by Burditt & Radzius, as experts in
the law relating to the FDA.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the Exchange Act), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the Commission). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities of the Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and at
500 West Madison Street, Chicago, Illinois 60661. Copies of such material can
also be obtained at prescribed rates from the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Common Stock of the Company is quoted on the Nasdaq National Market. The Common
Stock of the Company is quoted on the Nasdaq National Market. Reports and other
information concerning the Company may be inspected at the National Association
of Securities Dealers, Inc. at 9513 Key West Avenue, Rockville, Maryland 20850.
The Company has filed with the Commission a Registration Statement on Form
S-1, including amendments thereto, under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit or incorporated by reference to the Registration Statement
of which this Prospectus forms a part, each such statement being qualified in
all respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. Copies of the
Registration Statement and the exhibits and schedules thereto may be inspected,
without charge, at the offices of the Commission, or obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549.
50
<PAGE> 51
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-5
Statement of Changes in Stockholders' Equity.......................................... F-6
Statements of Cash Flows.............................................................. F-10
Notes to Financial Statements......................................................... F-12
</TABLE>
F-1
<PAGE> 52
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.
COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
March 1, 1996
F-2
<PAGE> 53
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $11,489,097 $ 3,540,147 $ 1,980,985
Current portion of certificate of deposit......... 153,000 153,000
Marketable debt securities, available-for-sale.... 14,903,346 16,773,547 16,317,313
Accounts receivable -- Abbott..................... 16,764 410,432 424,533
Prepaid expenses and other current assets......... 64,838 77,134 216,303
------------ -----------
Total current assets...................... 26,474,045 20,954,260 19,092,134
------------ -----------
Property and equipment, at cost:
Furniture and equipment........................... 812,857 870,042 889,825
Leasehold improvements............................ 251,507 1,509,430 1,509,430
Accumulated depreciation.......................... (335,191) (480,372) (540,359)
------------ -----------
729,173 1,899,100 1,858,896
------------ -----------
Other assets:
License agreements, net of accumulated
amortization
of $73,887 in 1994............................. 1,041,047
Certificate of deposit............................ 1,377,000 1,377,000
Other assets...................................... 15,987 11,568 10,339
------------ -----------
1,057,034 1,388,568 1,387,339
------------ -----------
Total assets.............................. $28,260,252 $24,241,928 $22,338,369
============ ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-3
<PAGE> 54
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Accounts payable................................ $ 535,855 $ 231,288 $ 275,802
Accrued liabilities:
Accrued compensation......................... 100,736 247,741 118,322
Other........................................ 69,957 219,131 173,318
Current portion of notes payable................ 150,000 150,000
Current portion of obligations under capital
leases....................................... 33,155 16,363 10,274
----------- ------------ ------------
Total current liabilities............... 739,703 864,523 727,716
Unearned advance royalty revenues................. 450,000 350,000 350,000
Obligations under capital leases.................. 18,756
Notes payable..................................... 1,350,000 1,350,000
----------- ------------ ------------
Total liabilities....................... 1,208,459 2,564,523 2,427,716
----------- ------------ ------------
Commitments (Notes 10 and 12)
Stockholders' equity:
Common stock, par value, $.001 per share;
Authorized: 15,000,000 shares; Issued:
7,102,023 in 1994, 7,207,716 in 1995 and
7,225,676 in 1996 (unaudited)................ 7,102 7,208 7,226
Additional paid-in capital...................... 33,104,620 33,270,848 33,311,893
Deficit accumulated during the development
stage........................................ (5,981,475) (11,723,314) (13,518,911)
Treasury stock (345 shares), at cost............ (4,226) (4,226) (4,226)
Notes receivable from issuance of common
stock........................................ (65,000) (7,000) (7,000)
Unrealized gain (loss) on marketable debt
securities, available-for-sale............... (9,228) 133,889 121,671
----------- ------------ ------------
Total stockholders' equity.............. 27,051,793 21,677,405 19,910,653
----------- ------------ ------------
Total liabilities and stockholders'
equity................................ $28,260,252 $ 24,241,928 $ 22,338,369
=========== ============ ============
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-4
<PAGE> 55
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD FROM INCEPTION
YEAR ENDED DECEMBER 31, MARCH 31, (AUGUST 1, 1985) THROUGH
---------------------------------------- ------------------------- ---------------------------
DECEMBER 31, MARCH 31,
1993 1994 1995 1995 1996 1995 1996
---------- ----------- ----------- ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales.............. $ 37,276 $ 60,725 $ 16,999 $ 19,583 $ 98,001 $ 117,584
Royalty revenue............ 1,116 101,775 467 572 102,891 103,463
Revenues from contract
research................. $1,583,696 811,710 1,514,000 384,000 375,000 8,475,931 8,850,931
----------- ----------- ----------- ----------- ----------- ------------ -------------
Total revenues....... 1,583,696 850,102 1,676,500 401,466 395,155 8,676,823 9,071,978
----------- ----------- ----------- ----------- ----------- ------------ -------------
Operating costs and expenses:
Cost of goods sold......... 21,628 18,771 4,924 6,054 40,399 46,453
Royalties.................. 2,500 2,500 492 605 5,000 5,605
Research and development... 1,792,648 3,210,177 5,228,392 1,008,546 1,794,575 14,542,006 16,336,581
Depreciation and
amortization............. 84,532 102,514 157,647 22,944 59,988 589,935 649,923
Selling, general and
administrative........... 553,021 1,328,790 2,219,229 445,912 611,477 5,820,718 6,432,195
----------- ----------- ----------- ----------- ----------- ------------ -------------
Total costs and
expenses........... 2,430,201 4,665,609 7,626,539 1,482,818 2,472,699 20,998,058 23,470,757
----------- ----------- ----------- ----------- ----------- ------------ -------------
Loss from
operations......... (846,505) (3,815,507) (5,950,039) (1,081,352) (2,077,544) (12,321,235) (14,398,779)
Non operating income
(expense):
Interest income............ 9,780 883,408 1,365,605 437,769 308,054 2,386,284 2,694,338
Interest expense........... (4,527) (17,628) (99,931) (7,589) (26,013) (241,470) (267,483)
Other...................... 2,772 602 (16,327) 6 (12,953) (12,947)
----------- ----------- ----------- ----------- ----------- ------------ -------------
Loss before provision
for income taxes,
extraordinary item
and cumulative
effect of
accounting
change............. (838,480) (2,949,125) (4,700,692) (651,172) (1,795,497) (10,189,374) (11,984,871)
Provision for income taxes... (100) (100) (100) (100) (100) (23,305) (23,405)
----------- ----------- ----------- ----------- ----------- ------------ -------------
Loss before
extraordinary item
and cumulative
effect of change in
accounting......... (838,580) (2,949,225) (4,700,792) (651,272) (1,795,597) (10,212,679) (12,008,276)
Extraordinary
item -- reduction of income
taxes arising from
carryforward of prior
years' operating losses.... 22,296 22,296
Cumulative effect of change
in accounting (Note 2)..... (1,041,047) (1,041,047) (1,041,047) (1,041,047)
----------- ----------- ----------- ----------- ----------- ------------ -------------
Net loss............. $ (838,580) $(2,949,225) $(5,741,839) $(1,692,319) $(1,795,597) $(11,231,430) $ (13,027,027)
=========== =========== =========== =========== =========== ============ =============
Loss per common share
amounts --
Loss before extraordinary
item and cumulative
effect of change in
accounting............... $ (0.62) $ (0.51) $ (0.65) $ (0.09) $ (.025)
Extraordinary item.........
Cumulative effect of change
in accounting............ (0.15) (0.15)
----------- ----------- ----------- ---------- ----------
Net loss per common
share.................... $ (0.62) $ (0.51) $ (0.80) $ (0.24) $ (0.25)
========== =========== ========== ========== ==========
Shares used in computing net
loss per common share...... 1,345,418 6,721,434 7,177,220 7,146,424 7,220,909
========== =========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-5
<PAGE> 56
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 1, 1985) TO MARCH 31, 1996
<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)
<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
</TABLE>
F-6
<PAGE> 57
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
FOR THE PERIOD FROM INCEPTION (AUGUST 1, 1985) TO MARCH 31, 1996
<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>
Exercise of stock options for
cash........................... 500 $ 5 $ 345
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>
Exercise of stock options for
cash........................... $ 350
Issuance of common stock for
consulting services on December
20, 1988 (at $.20 per share)... 797
for cash on August 1, 1985 (at
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>
F-7
<PAGE> 58
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
FOR THE PERIOD FROM INCEPTION (AUGUST 1, 1985) TO MARCH 31, 1996
<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 treasury 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 treasury 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>
F-8
<PAGE> 59
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
FOR THE PERIOD FROM INCEPTION (AUGUST 1, 1985) TO MARCH 31, 1996
<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>
Exercise of stock options in Jan.
1996 (at $.80 per share)
(unaudited).................... 2,500 $ 2 $ 1,998
Exercise of stock options in Jan.
1996 (at $5.25 per share)
(unaudited).................... 2,574 3 13,511
Exercise of stock options in Feb.
1996 (at $.80 per share)
(unaudited).................... 10,133 10 8,096
Exercise of stock options in Feb.
1996 (at $1.00 per share)
(unaudited).................... 83 0 83
Exercise of stock options in Feb.
1996 (at $6.75 per share)
(unaudited).................... 2,291 2 15,462
Exercise of stock options in Mar.
1996 (at $.80 per share)
(unaudited).................... 63 0 50
Exercise of stock options in Mar.
1996 (at $1.00 per share)
(unaudited).................... 50 0 50
Exercise of stock options in Mar.
1996 (at $6.75 per share)
(unaudited).................... 266 1 1,795
Net change in unrealized gain
(loss) on marketable debt
securities, available-for-sale
(unaudited)....................
Net loss (unaudited)............. $(1,795,597)
-------- -------- ----------- --------- -------- ----------- ------------
Balance at March 31, 1996
(unaudited).................... 7,225,676 $ 7,226 $33,311,893 $(13,518,911)
======== ======== =========== ========= ======== =========== ============
<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>
Exercise of stock options in Jan.
1996 (at $.80 per share)
(unaudited).................... $ 2,000
Exercise of stock options in Jan.
1996 (at $5.25 per share)
(unaudited).................... 13,514
Exercise of stock options in Feb.
1996 (at $.80 per share)
(unaudited).................... 8,106
Exercise of stock options in Feb.
1996 (at $1.00 per share)
(unaudited).................... 83
Exercise of stock options in Feb.
1996 (at $6.75 per share)
(unaudited).................... 15,464
Exercise of stock options in Mar.
1996 (at $.80 per share)
(unaudited).................... 50
Exercise of stock options in Mar.
1996 (at $1.00 per share)
(unaudited).................... 50
Exercise of stock options in Mar.
1996 (at $6.75 per share)
(unaudited).................... 1,796
Net change in unrealized gain
(loss) on marketable debt
securities, available-for-sale
(unaudited).................... $ (12,218) (12,218)
Net loss (unaudited)............. (1,795,597)
--- ------- --------- --------- -----------
Balance at March 31, 1996
(unaudited).................... 345 $(4,226) $ (7,000) $ 121,671 $19,910,653
=== ======= ========= ========= ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-9
<PAGE> 60
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
--------- ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ ($838,580) ($ 2,949,225) ($5,741,839) $(1,692,319) $(1,795,597)
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................... 84,532 102,514 157,647 22,944 59,988
Debt conversion expense.........................
Interest converted to equity....................
Compensatory stock options and stock............
(Gain) loss on retirement of assets............. (884) 24,417 10,985
Increase (decrease) due to changes in:
Accounts receivable........................... 49,510 233,726 (393,668) (389,920) (14,101)
Prepaid expenses and other current assets..... (741) (50,890) (12,296) (270,138) (139,169)
Other assets.................................. 1,950 (7,777) 4,418 1,229
Accounts payable.............................. 67,668 (14,004) (53,060) 181,492 44,514
Accrued liabilities........................... 17,160 132,400 296,179 (38,947) (175,232)
Unearned revenues from contract research...... (149,039)
Unearned advance royalty revenues............. 25,000 (100,000)
--------- ------------ ----------- ---------- ----------
Net cash used in operating activities..... (743,424) (2,528,839) (4,790,587) (1,145,841) (2,018,368)
--------- ------------ ----------- ---------- ----------
Cash flows from investing activities:
Capital expenditures................................ (16,035) (361,045) (1,591,940) (625,123) (19,784)
Proceeds from sale of assets........................ 7,550 550 1,875
Costs associated with license agreements............ (146,978) (189,626)
Advances to employees...............................
Proceeds from maturity of treasury bills............
Purchase of marketable debt securities,
available-for-sale................................ (14,912,574) (14,606,312) (1,495,913) (2,053,485)
Proceeds from sale of marketable debt securities,
available-for-sale................................ 12,879,228 2,497,501
Purchase of treasury bills..........................
Purchase of certificate of deposit.................. (1,530,000) (1,530,000)
--------- ------------ ----------- ---------- ----------
Net cash (used in) provided by investing
activities.............................. (155,463) (15,462,695) (4,847,149) (3,651,036) 424,232
--------- ------------ ----------- ---------- ----------
Cash flows from financing activities:
Principal payments on notes payable................. (37,500)
Principal payments on obligations under capital
leases............................................ (45,604) (56,503) (35,548) (11,215) (6,089)
Proceeds from issuance of notes payable............. 1,500,000 468,261
Proceeds from issuance of common stock.............. 384,390 30,275,271 166,334 51,392 41,063
Collections on notes receivable from issuance of
common stock...................................... 58,000
Proceeds from issuance of preferred stock...........
Deferred offering costs............................. (27,762) (249,341)
Dividends paid on preferred stock................... (491,884)
--------- ------------ ----------- ---------- ----------
Net cash provided by financing
activities.............................. 311,024 29,440,043 1,688,786 508,438 34,974
--------- ------------ ----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents......................................... (587,863) 11,448,509 (7,948,950) (4,288,439) (1,559,162)
Cash and cash equivalents at beginning of period..... 628,451 40,588 11,489,097 11,489,097 3,540,147
--------- ------------ ----------- ---------- ----------
Cash and cash equivalents at end of period........... $ 40,588 $ 11,489,097 $ 3,540,147 $7,200,658 $1,980,985
========= ============ =========== ========== ==========
<CAPTION>
PERIOD FROM INCEPTION
(AUGUST 1, 1985) TO
------------------------------------
DECEMBER 31, MARCH 31,
1995 1996
--------------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ ($ 11,231,430) $(13,027,027)
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................... 589,935 649,923
Debt conversion expense......................... 101,330 101,330
Interest converted to equity.................... 94,104 94,104
Compensatory stock options and stock............ 3,539 3,539
(Gain) loss on retirement of assets............. 36,614 36,614
Increase (decrease) due to changes in:
Accounts receivable........................... (410,432) (424,533)
Prepaid expenses and other current assets..... (77,134) (216,303)
Other assets.................................. (14,145) (12,916)
Accounts payable.............................. 231,288 275,802
Accrued liabilities........................... 466,872 291,640
Unearned revenues from contract research......
Unearned advance royalty revenues............. 350,000 350,000
------------- ------------
Net cash used in operating activities..... (8,818,412) (10,836,780)
------------- ------------
Cash flows from investing activities:
Capital expenditures................................ (2,267,250) (2,287,034)
Proceeds from sale of assets........................ 9,975 9,975
Costs associated with license agreements............ (1,109,533) (1,109,533)
Advances to employees............................... (1,650) (1,650)
Proceeds from maturity of treasury bills............ 1,174,419 1,174,419
Purchase of marketable debt securities,
available-for-sale................................ (29,518,886) (31,572,371)
Proceeds from sale of marketable debt securities,
available-for-sale................................ 12,879,228 15,376,729
Purchase of treasury bills.......................... (1,174,419) (1,174,419)
Purchase of certificate of deposit.................. (1,530,000) (1,530,000)
------------- ------------
Net cash (used in) provided by investing
activities.............................. (21,538,116) (21,113,884)
------------- ------------
Cash flows from financing activities:
Principal payments on notes payable................. (37,500) (37,500)
Principal payments on obligations under capital
leases............................................ (178,126) (184,215)
Proceeds from issuance of notes payable............. 2,537,700 2,537,700
Proceeds from issuance of common stock.............. 31,529,366 31,570,429
Collections on notes receivable from issuance of
common stock...................................... 58,000 58,000
Proceeds from issuance of preferred stock........... 756,222 756,222
Deferred offering costs............................. (277,103) (277,103)
Dividends paid on preferred stock................... (491,884) (491,884)
------------- ------------
Net cash provided by financing
activities.............................. 33,896,675 33,931,649
------------- ------------
Net increase (decrease) in cash and cash
equivalents......................................... 3,540,147 1,980,985
Cash and cash equivalents at beginning of period.....
------------- ------------
Cash and cash equivalents at end of period........... $ 3,540,147 $ 1,980,985
============= ============
</TABLE>
F-10
<PAGE> 61
ANESTA CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
--------- ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
The Company issued stock and stock options for:
Purchase of additional license
agreement.......................................
Notes receivable.................................. $ 58,000
The Company purchased leasehold improvements using
accounts payable.................................. $ 251,507
The Company entered into various capital lease
arrangements...................................... 46,487 14,460
The Company received stock as payment of a note
receivable........................................ 4,226
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.............. $ 12,045 $ 18,366 $ 95,370 $ 26,013
Cash paid during the year for taxes................. 100 100 100
<CAPTION>
PERIOD FROM INCEPTION
(AUGUST 1, 1985) TO
------------------------------------
DECEMBER 31, MARCH 31,
1995 1996
--------------------- ------------
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
The Company issued stock and stock options for:
Purchase of additional license
agreement....................................... $ 5,400 $ 5,400
Notes receivable.................................. 71,000 71,000
The Company purchased leasehold improvements using
accounts payable.................................. 251,507 251,507
The Company entered into various capital lease
arrangements...................................... 204,610 204,610
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.............. $ 141,152
Cash paid during the year for taxes................. 500
</TABLE>
The accompanying notes are an integral
part of the financial statements
F-11
<PAGE> 62
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
F-12
<PAGE> 63
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES: -- CONTINUED
Net Loss Per Share -- 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.
Unaudited Financial Information:
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position of the Company as of March
31, 1996 and the results of its operations and its cash flows for the three
month periods ended March 31, 1995 and 1996. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the SEC's rules and regulations. The results of operations for the
periods presented are not necessarily indicative of the results to be expected
for the full year.
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 was not material to 1995
results of operations or cash flow from operating activities.
F-13
<PAGE> 64
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACCOUNTING CHANGE: -- CONTINUED
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.
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>
F-14
<PAGE> 65
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT IN MARKETABLE DEBT SECURITIES: -- CONTINUED
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>
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,
F-15
<PAGE> 66
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTIONS: -- CONTINUED
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.
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
F-16
<PAGE> 67
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. CAPITAL STOCK: -- CONTINUED
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.
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.
F-17
<PAGE> 68
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: -- CONTINUED
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 Oralet and Actiq (formerly Oral
Transmucosal Fentanyl Citrate or OTFC) 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 premedication,
to fund 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
F-18
<PAGE> 69
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. RESEARCH AND DEVELOPMENT: -- CONTINUED
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 products 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.
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>
F-19
<PAGE> 70
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. LEASES: -- CONTINUED
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.
F-20
<PAGE> 71
[ARTWORK]
<PAGE> 72
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- --------------------------------------------------------------------------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering, other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the shares of Common Stock to which it relates, or an offer to, or a
solicitation of, any person in any jurisdiction where such offer or solicitation
would be unlawful. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to the date
hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
The Company........................... 14
Use of Proceeds....................... 15
Price Range of Common Stock........... 15
Capitalization........................ 16
Dilution.............................. 17
Dividend Policy....................... 17
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 23
Management............................ 37
Certain Transactions.................. 43
Principal and Selling Stockholders.... 45
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 48
Underwriting.......................... 49
Legal Matters......................... 50
Experts............................... 50
Available Information................. 50
Index to Financial Statements......... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
VOLPE, WELTY & COMPANY
, 1996
- --------------------------------------------------------------------------------
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