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<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ to ____________________
Commission file number 000-28844
ALGOS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3142274
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1333 Campus Parkway, Neptune, New Jersey, 07753-6815
(Address of principal executive offices)
732-938-5959
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes __x__ No ____
The aggregate number of shares of the Registrant's common stock outstanding on
August 3, 1998 was 16,016,649
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 20,246,152 $ 308,127
Marketable securities, current 17,922,359 29,989,167
Interest receivable 484,789 680,445
Prepaid expenses 315,679 225,011
------------ ------------
Total current assets 38,968,979 31,202,750
Marketable securities, noncurrent 3,004,580 4,000,000
Restricted cash 150,000 150,000
Property and equipment, net 146,328 1,021,119
Other assets 90,591 30,582
------------ ------------
Total assets $ 42,360,478 $ 36,404,451
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,861,976 $ 3,749,039
Other current liabilities 739,415 349,305
------------ ------------
Total current liabilities 2,601,391 4,098,344
------------ ------------
Commitments
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 15,951,701 and 15,999,551 shares
outstanding as of December 31, 1997 and June 30,
1998, respectively 159,517 159,996
Additional paid-in-capital 56,151,504 56,645,431
Unearned compensation expense (753,707) (921,041)
Deficit accumulated during the development stage (15,798,227) (23,578,279)
------------ ------------
Total stockholders' equity 39,759,087 32,306,107
============ ============
Total liabilities and stockholders' equity $ 42,360,478 $ 36,404,451
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended Cumulative
June 30, June 30, from inception
-------------------------- ------------------------ to June 30,
1997 1998 1997 1998 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ -- $ 3,311,000
Operating expenses:
Research and development 1,968,683 3,783,018 5,134,043 7,003,478 22,580,109
General and administrative 617,594 1,114,847 1,234,331 1,856,379 8,969,629
----------------- ----------------- ----------------- ----------------- -----------------
Total operating expenses 2,586,277 4,897,865 6,368,374 8,859,857 31,549,738
----------------- ----------------- ----------------- ----------------- -----------------
Loss from operations (2,586,277) (4,897,865) (6,368,374) (8,859,857) (28,238,738)
Interest income 655,544 515,615 1,212,862 1,079,804 4,660,458
----------------- ----------------- ----------------- ----------------- -----------------
Net loss $ (1,930,733) $(4,382,250) $ (5,155,512) $ (7,780,053) $ (23,578,280)
================= ================= ================= ================= =================
Net loss per common share,
basic and diluted $ (0.12) $ (0.27) $ (0.33) $ (0.49)
Weighted average common
shares outstanding 15,818,662 15,999,551 15,799,475 15,977,459
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
from
For the six months ended inception to
June 30, June 30,
1997 1998 1998
---------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities $ (4,400,086) $ (6,079,205) $(18,316,022)
Cash flows from investing activities:
Purchases of marketable securities (30,813,025) (13,063,945) (60,877,393)
Redemption of marketable securities 26,816,072
Purchases of property and equipment (81,596) (918,000) (1,227,011)
----------------- ---------------- ---------------
Net cash used in investing activities (30,894,621) (13,981,945) (35,288,332)
----------------- ---------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 6,659,015
Proceeds from issuance of common stock 73,601 123,125 47,253,465
----------------- ---------------- ---------------
Net cash provided by financing activities 73,601 123,125 53,912,480
----------------- ---------------- ---------------
Net increase (decrease) in cash and cash
equivalents (35,221,106) (19,938,025) 308,127
Cash and cash equivalents, beginning of period 48,575,719 20,246,152 --
----------------- ---------------- ---------------
Cash and cash equivalents, end of period $ 13,354,613 $ 308,127 $ 308,127
================= ================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements presented herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X and are unaudited. In the opinion of management, the financial statements
reflect all adjustments (which consist of normal recurring accruals and
adjustments) necessary for a fair statement of the financial position and
results of the interim periods presented.
2. ACCOUNTING POLICIES
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income",
which establishes standards for determining and reporting comprehensive income
and its components. Comprehensive income represents the change in net assets of
a business enterprise as a result of nonowner transactions. The adoption of the
standard did not have an impact on the Company's financial statements.
3. LOSS PER SHARE
Since the Company incurred net losses in all periods presented,
outstanding options and warrants to purchase an aggregate of 1,020,642 and
1,270,415 shares of Common Stock at June 30, 1997 and 1998, respectively, and
100,000 shares of convertible Series B Preferred Stock which were outstanding at
June 30, 1997 were not included in diluted per share calculations, as their
effect would be antidilutive.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
<S> <C> <C>
Leasehold improvements $ 506,770
Office furniture and equipment $ 152,727 525,714
Computer equipment 156,284 194,527
---------- ----------
309,011 1,227,011
Less accumulated depreciation 162,683 205,892
---------- ----------
$ 146,328 $1,021,119
========== ==========
</TABLE>
5. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
<S> <C> <C>
Accrued research expenses $392,618 $166,273
Accrued compensation 346,797 183,032
-------- --------
$739,415 $349,305
======== ========
</TABLE>
5
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
6. COMMITMENTS
In April 1998, the Company relocated its executive offices and a
ten-year operating lease agreement signed in 1997 became effective. Minimum
annual lease payments are as follows:
<TABLE>
<S> <C>
1998 $179,080
1999 268,620
2000 268,620
2001 268,620
2002 268,620
Balance of Term 1,643,300
</TABLE>
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
Algos, a development stage company, is engaged primarily in the
development and commercialization of proprietary pharmaceutical products for
pain management. Since its formation in January 1992, the Company has devoted a
substantial amount of its efforts to licensing technology, recruiting key
management and staff, developing products, filing patents and other regulatory
applications and raising capital.
The Company has incurred losses since its inception and expects to
incur losses in the future. The Company expects that its product development
expenses will increase as the drugs that the Company currently has under
development move into advanced clinical trials and as additional drugs are
developed. In January 1998, the Company initiated the filing of a sequential NDA
for its most developmentally advanced drug, MorphiDex. Upon completion of an
NDA, the Company may incur significant costs associated with the possible
commercialization of MorphiDex prior to the first commercial sale of the
product, including inventory, the establishment of a sales force, initial
promotional activities and other administrative expenses.
Results of Operations
Three months ended June 30, 1997 and 1998
Research and development:
In the three months ended June 30, 1998, research and development
expenses were $3.6 million, an increase of approximately $1.6 million or 82%,
from 1997. In 1998, expenses increased significantly due to large-scale,
advanced clinical trials of MorphiDex. The Company also incurred higher expenses
due to increased development activity for HydrocoDex and the expansion of the
Company's development staff since the second quarter of the prior year. The
effect of these increases was partially offset by reduced expenses in other
development programs.
General and administrative:
In the three months ended June 30, 1998, general and administrative
expenses were $1.1 million, an increase of $0.5 million or 81%, from 1997. In
1998, expenses increased due to the general expansion of the Company's business
and preliminary activities related to the possible future commercialization of
products, including the addition of sales and marketing personnel and the
expansion of the Company's administrative offices.
Interest income:
Interest income decreased 21% in the three months ended June 30, 1998
to $0.5 million due to lower average cash and securities balances compared to
the second quarter of the prior year.
7
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<PAGE>
Six months ended June 30, 1997 and 1998
Research and development:
In the six months ended June 30, 1998, research and development
expenses were $6.8 million, an increase of approximately $1.7 million or 33%,
from 1997. In 1998, expenses increased significantly due to large-scale,
advanced clinical trials for MorphiDex and the expansion of the Company's
development staff since mid-1997. The effect of these increases was partially
offset by reduced expenses related to bioavailability studies and the costs of
manufacturing small-scale regulatory test batches of MorphiDex, which occurred
in 1997.
General and administrative:
In the six months ended June 30, 1998, general and administrative
expenses were $1.9 million, an increase of $0.6 million or 50%, from 1997. In
1998, expenses increased due to the general expansion of the Company's business
and preliminary activities related to the possible future commercialization of
products, including the addition of sales and marketing personnel and the
expansion of the Company's administrative offices.
Interest income:
Interest income decreased 11% in the six months ended June 30, 1998 to
$1.1 million as a result of lower average cash and securities balances.
Liquidity and Capital Resources
As a result of its drug development efforts, the Company has
experienced net cash outflows from operations since its inception in 1992. In
the six months ended June 30, 1998, cash outflows from operations amounted to
approximately $6.1 million compared to $4.4 million in the first six months of
1997, primarily as a result of its increased development spending on MorphiDex.
The Company's future funding requirements will depend on a number of
factors, including: the amount of resources required for the establishment of
sales and distribution capabilities; promotion and other activities in
preparation for the possible commercialization of MorphiDex; the results of its
development efforts; the timing and costs of obtaining required regulatory
approvals; the commercialization of competing products; the execution of
licensing or other collaborative research agreements on terms acceptable to the
Company; and the cost of prosecuting and defending patents.
The Company intends to continue certain ongoing large-scale clinical
trials for MorphiDex and has entered into several research and development
commitments for HydrocoDex. The Company expects that its product development
expenses will continue or increase as clinical trials of MorphiDex continue and
other drugs that the Company currently has under development, including
HydrocoDex, move into advanced clinical trials and as additional drugs are
developed. Additionally, the Company will incur increased expenses resulting
from the planned expansion of its research and development staff. The Company
currently expects that its cash and marketable securities at June 30, 1998 would
be sufficient to fund its development
8
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<PAGE>
activities for approximately two years, based upon the Company's current
schedule of clinical trials. If, however, a significant portion of these funds
is required in the commercialization of MorphiDex, or if additional trials are
necessary or advisable, or if additional products are developed, the Company may
require additional funds to complete such trials. In the event that revenue and
income from successful product introductions or other internally generated funds
are insufficient for such efforts, the Company will need to raise additional
funds either by incurring debt, issuing additional equity or through
collaborative or license arrangements to ensure continuity of operations. There
is no assurance that the Company would be able to obtain such additional
financing on terms acceptable to the Company.
YEAR 2000
The Company believes that its existing financial and operational
systems will function adequately with respect to the use of dates in the year
2000 and thereafter. The Company estimates that the costs associated with the
Year 2000 issue will not have a material impact on the Company's financial
position or operating results. However, there is no assurance that other
entities will not have Year 2000 problems that will affect the Company. In
addition, the Company may make significant additions to and changes in its
existing systems in anticipation of the possible commercialization of products
which would affect the Company's exposure to Year 2000 problems. Therefore,
the Company's assessment of its Year 2000 issues is not complete.
This Management's Discussion and Analysis of Financial condition and
Results of Operations contains "forward-looking" statements, within the meaning
of Section 27A of Securities Act of 1993, as amended and Section 21E of the
Securities Exchange Act of 1934, that are based on management's beliefs and
assumptions, current expectations, estimates and projections. Statements that
are not historical facts, including statements which are preceded by, followed
by, or that include the words "believes;" "anticipates;' "plans;" "expects;" or
similar expressions and statements about the Company's development schedule and
future use of funds are forward-looking statements. Many of the factors that
will determine the Company's future results are beyond the ability of the
Company to control or predict. These statements are subject to risks and
uncertainties and, therefore, actual results may differ materially. The reader
should not rely on any forward-looking statement. The Company undertakes no
obligations to update any forward-looking statement whether as a result of new
information, future events or otherwise. Important factors that may affect
future results include, but are not limited to: uncertainty associated with
pre-clinical studies and clinical trials and regulatory approval; uncertainty of
market acceptance of new products; impact of competitive products and pricing;
product development; changes in laws and regulations; customer demand; possible
future litigation; and the availability of future financing. Readers should
evaluate any statement in light of these important factors. See "Risk Factors".
9
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of Stockholders of Algos Pharmaceutical Corporation was
held on June 9, 1998.
(b) The following Directors nominated by the Company were elected for three-year
terms:
Roger H. Kimmel and Dieter A. Sulser
John W. Lyle, Donald G. Drapkin, Michael Hyatt and James R. Ledley
continue their terms as Director after the meeting.
(c) At the Annual Meeting, stockholders approved the following:
(i) Election of Directors:
<TABLE>
<CAPTION>
Votes For Votes Against Abstain
--------- ------------- -------
<S> <C> <C> <C>
Roger H. Kimmel 12,072,985 2,765 0
Dieter A. Sulser 12,072,985 2,765 0
</TABLE>
(ii) An increase in the number of shares which may be granted under the
Company's 1996 Incentive Stock Option Plan by 800,000 shares.
<TABLE>
<CAPTION>
Votes For Votes Against Abstain
--------- ------------- -------
<S> <C> <C> <C>
12,003,286 41,038 31,426
</TABLE>
10
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Title
---------------------------------------------------------------------------
<S> <C>
3.1 Form of Amended and Restated Certificate of Incorporation
of Algos Pharmaceutical Corporation(1)
3.2 Form of Amended and Restated By-laws of Algos Pharmaceutical Corporation(1)
4.1 Form of Stock Certificate of Common Stock(1)
5.1 Opinion of Latham & Watkins as to the validity of the Common Stock(1)
10.1.1 Employment Agreement with Respect to John W. Lyle(4)
10.1.3 Employment Agreement with Respect to Frank S. Caruso(1)
10.1.4 Employment Agreement with Respect to Joseph Sardella
10.2.1 1994 Stock Option Plan(1)
10.2.2 Form of 1996 Stock Option Plan(1)
10.2.3 Form of 1996 Non-Employee Director Stock Option Plan(2)
10.3.1 Algos Pharmaceutical Corporation Stockholders' Agreement(1)
10.4.1 License Agreement with The Medical College of Virginia(1)'D''D'
10.4.2 License Agreement with McNeil(1)'D''D'
10.4.3 Registration Rights Agreement with The Medical College of Virginia(1)
10.5 Lease Agreement with Commercial Realty & Resources Corp.(3)
21 Subsidiaries of the Registrant(1)
27 Financial Data Schedule
99 Risk Factors
</TABLE>
(1) Incorporated by reference to the Registrant's registration statement on
Form S-1 declared effective on September 25, 1996.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1997.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
'D''D' Portions of this Exhibit have received confidential treatment pursuant to
Rule 406(b) under the Securities Act.
Reports on Form 8K:
None
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALGOS PHARMACEUTICAL CORPORATION
Date August 14, 1998 /s/ John W. Lyle
------------------------- -------------------------------------
John W. Lyle
President and Chief Executive Officer
Date August 14, 1998 /s/ Gary R. Anthony
------------------------- -------------------------------------
Gary R. Anthony
Chief Financial Officer and Principal
Accounting Officer
12
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'
The dagger symbol shall be expressed as................................ 'D'
<PAGE>
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EXHIBIT 10.1.4
EMPLOYMENT AGREEMENT
PARTIES:
This Employment Agreement ("Agreement") made as of June 29, 1998 is
entered into by and between ALGOS PHARMACEUTICAL CORPORATION, having its
principal business address at 1333 Campus Parkway, Neptune, NJ 07753 (the
"Company"), and Joseph Sardella residing at 7 Adams Court, Hamilton Square, NJ
08690 ("Executive").
RECITALS:
The parties agree as follows:
A. The Company desires to retain Executive to provide the services
hereinafter set forth.
B. Executive is willing to provide such services to the Company on the
terms and conditions hereinafter set forth.
TERMS OF AGREEMENT:
1. Employment.
1.1 The Company hereby employs Executive, on a full-time basis
commencing on July 13, 1998 to be employed in an executive capacity as the
Company's Executive Vice President and Chief Administrative Officer during the
Employment Period (as defined below). The Executive shall perform such duties
and services, consistent with his position, as may be assigned to him from time
to time by the Board of Directors of the Company or its designee. In furtherance
of the foregoing, the Executive hereby agrees to perform well and faithfully the
aforesaid duties and responsibilities and the other reasonable senior executive
duties and responsibilities assigned to him from time to time by the Board of
Directors of the Company or its designee. During the Employment Period, the
Company shall provide the Executive with an office, secretarial and other
support services comparable to those provided to other senior executive officers
of the Company at its headquarters. Specifically, the Company will provide
Executive with an Administrative Assistant, to be selected by Executive. In
addition, the Executive will be responsible for hiring and supervising key
Managers. All hiring shall be subject to the approval of the Chief Executive
Officer and the Board of Directors, and in conformity with the Company's Hiring
Committee Procedures.
1.2 Executive hereby accepts this employment on and subject to the terms
and conditions set forth in this Agreement, and shall use his reasonable best
efforts to promote the Company's interests.
<PAGE>
<PAGE>
2. Compensation:
2.1 Salary. During the Employment Period, as compensation for
Executive's performance of Executive's duties under this Agreement, the Company
shall pay Executive a Base Salary ("Base Salary") at the annual rate of
$200,000.00 during the first twelve (12) months of employment. Thereafter, the
Base Salary shall be reviewed by the Board of Directors annually and shall be
increased such amount as the Board of Directors, in its sole discretion, may
deem appropriate. The Base Salary shall be payable in installments pursuant to
the Company's executive payroll policies in force at the time of payment (but
not less frequently than monthly) for the month or shorter pay period then
ended, subject to applicable withholding for FICA, income taxes and other
required payroll deductions.
2.1.1 The Executive's Base Salary will be supplemented by payment of
performance bonuses based upon Executive's performance against specific
milestone achievements. Milestone achievements will be mutually agreed upon and
set forth in writing by Executive and the Company's Board of Directors annually,
or more frequently as deemed appropriate. Attainment of milestone achievements
will result in a performance bonus of up to thirty-three percent (33%) of
Executive's Base Salary, depending upon the importance and number of the
milestone achievements attained.
2.2 Expenses. During the Employment Period, to the extent such
expenditures meet the requirements and the policies of the Company for senior
executives, the Company shall reimburse Executive promptly for all reasonable
travel, entertainment, parking, business meeting and similar expenditures in
pursuance and furtherance of the Company's business, upon presentation of proper
vouchers or receipts therefor.
2.3 Vacation, etc. During the Employment Period, Executive shall be
entitled to three weeks paid vacation for each 12 months of employment (i.e.,
after the first six months of employment at the Company, you will be eligible
for seven and one-half days paid vacation); up to four sick days (the Company
will pay 50% of unused sick days for that calendar year); and ten paid holidays
each calendar year
2.4 Other Benefits. Executive shall be entitled to participate, at
Executive's option and if eligible, in any Company plans for the benefit of
officers and key employees as from time to time established, including profit
sharing, pension plan, stock option plans and performance bonus plans. In
particular, Executive shall be entitled to the following Company paid benefits:
(i) If you are currently covered or can be covered under the
family major medical and family dental policy of your spouse, the Company will
pay 100% of the incremental premium cost, if any, for your coverage under your
spouse's family policy; if such insurance is not available to you, the Company
will pay eighty percent (80%) of the cost of family comprehensive major medical
and dental insurance;
(ii) the Company will pay 80% of the cost of a life insurance
policy in the amount of two times your base salary;
(vi) Dues reimbursement for professional associations and
meetings.
3. Employment Period and Termination.
<PAGE>
<PAGE>
3.1 Employment Period. Executive's employment term ("Employment Period")
shall commence on the date of July 13, 1998 and shall expire on December 31,
2001 (the "Employment Expiration Date"), unless earlier terminated pursuant to
Section 3.2.
3.2. Termination.
3.2.1 Termination for Cause. The Company may discharge Executive
and terminate the Employment Period for cause. Discharge for cause shall be
effective ten (10) days after Executive's receipt of written notice of discharge
or at such later date as may be specified in that notice, provided such notice
contains the specific reasons and specific events upon which discharge is
predicated. If Executive is discharged for cause, Executive shall only be
entitled to Base Salary through the effective date of the discharge or
termination. As used in this paragraph, "cause" shall mean any or all the
following:
(i) Willful or negligent action taken by Executive which
materially harms, or can reasonably be expected to harm, the Company;
(ii) Commission of fraud, misappropriation, embezzlement,
or criminal misconduct that would constitute a felony or any other act or
conduct, whether criminal or noncriminal and regardless of whether committed in
the course of the Company's business, which adversely affects the reputation of
the Company or otherwise brings disrepute on the Company or any of its
affiliates (for purposes of this Employment Agreement, the terms "affiliates"
shall be deemed to include, but not necessarily be limited to the corporation to
which the Company assigns its rights).
(iii) If Executive shall be in breach of, or in default
under, any provision, term or covenant of this Agreement (other than a breach or
default described in clauses (i) and (ii)).
3.2.2 Termination Without Cause. The Company may terminate the
employment of the Executive hereunder at any time during the Employment Period
without "cause" (such termination being herein referred to as "Termination
Without Cause") by giving the Executive written notice of such termination, upon
the giving of which such termination shall take effect immediately.
3.2.3 Involuntary Termination. If, during the Employment Period,
Executive becomes ill, disabled or otherwise incapacitated so as to be unable
regularly to perform his usual duties for a period in excess of 120 days in any
consecutive twelve month period (such condition being hereinafter referred to as
"Disability"), the Company shall have the right, with approval of a majority of
the members of the Board of Directors, to terminate Executive's employment on 30
days' written notice to Executive (such termination, or Executive's death, being
herein referred to as "Involuntary Termination"). If the Executive dies during
the Employment Period, his employment hereunder shall be deemed to have ceased
as of the date of his death.
3.2.4 Voluntary Termination. Any termination of the employment of
the Executive hereunder otherwise than as a result of an Involuntary
Termination, a Termination for Cause of a Termination Without Cause shall be
deemed to be a "Voluntary Termination." A Voluntary Termination shall be deemed
to be effective immediately upon such termination.
<PAGE>
<PAGE>
3.3 Effect of Termination of Employment.
3.3.1 Upon the termination of the Executive's employment
hereunder pursuant to a Voluntary Termination or a Termination for Cause,
neither the Executive nor his beneficiary or estate shall have any further
rights or claims against the Company under this Agreement except to receive:
(i) the unpaid portion of the Base Salary provided
for in Section 2.1, computed on a pro rata
basis to the date of termination; and
(ii) reimbursement for any expenses for which the
Executive shall not have theretofore been
reimbursed as provided in Section 2.2.
3.3.2 Upon the termination of the Executive's employment
hereunder pursuant to an Involuntary Termination, neither the Employee nor his
beneficiary or estate shall have any further rights or claims against the
Corporation under this Agreement except to receive:
(i) the unpaid portion of the Base Salary provided
for in Section 2.1, computed on a pro rata
basis to the date of termination;
(ii) reimbursement for any expenses for which the
Executive shall not have theretofore been
reimbursed as provided in Section 2.2.
(iii) a termination payment in an amount equal to
six (6) month's Base Salary, payable in six
(6) equal monthly installments; and
(iv) the continuation of the benefits afforded
pursuant to Section 2.4(i) for a period of six
(6) months from the effective date of
termination.
3.3.3 Upon the termination of the Executive's employment
hereunder pursuant to a Termination Without Cause, neither the Executive nor his
beneficiary or estate shall have any further rights or claims against the
Company pursuant to this Agreement except to receive:
(i) the unpaid portion of the Base Salary provided
for in Section 2.1, computed on a pro rata
basis to the date of termination;
(ii) reimbursement for any expenses for which the
Executive shall not have theretofore been
reimbursed as provided in Section 2.2;
(iii) a termination payment in an amount equal to
twelve (12) month's Base Salary, payable in
twelve (12) equal monthly installments; and
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(iv) the continuation of the benefits afforded
pursuant to Section 2.4(i) for a period of
twelve (12) months from the effective date of
termination.
4. Executive's Convenants.
4.1 Executive agrees that he will not from and after the date
hereof through the second anniversary of the Employment Expiration Date as
defined in Section 3.1 above, regardless of whether the Employment Period is
terminated earlier for any reason, directly or indirectly, through any other
person, firm or corporation, solicit, raid, entice, induce or encourage any
employee, sales representative, agent or consultant of or for the Company or its
affiliates, to (i) cease his or her association with or leave the employ of the
Company or its affiliates, (ii) solicit customers or suppliers of the Company or
its affiliates for Executive's or any other person's or entity's benefit or
(iii) otherwise act in violation of that person's obligations to the Company or
its affiliates, and Executive shall not authorize or knowingly approve the
taking of such actions by any other person.
4.2 Executive acknowledges that, by reason of his employment with
the Company, he will obtain confidential or non-public proprietary knowledge or
information pertaining to the business and policies of the Company and its
affiliates. Executive agrees that during and after the term of this Agreement,
he shall not disclose, without the prior written consent of the Board of
Directors of the Company or the Chief Executive Officer, any confidential or
non-public proprietary knowledge or information pertaining to the Company and
its affiliates ("Confidential Information"), including, but not limited to
information relating to management, financial condition, customer lists, sources
of supply, business methods and personnel policies, to any person, firm,
corporation or other entity, for any reason or purpose whatsoever. Confidential
Information shall not include information that: (a) was known to Executive prior
to his first employment with the Company or its affiliates, or (b) is public
knowledge, or becomes public knowledge other than by action (or omission) of (i)
Executive or persons obtaining access to such information directly or indirectly
from Executive or (ii) other persons disclosing such information in breach of
obligations to the Company.
4.3 Executive acknowledges and agrees that all memoranda, notes,
reports, records and other documents made or compiled by Executive, or made
available to Executive prior to or during the term of this Agreement concerning
the Company's and its affiliates' business, shall be the Company's or its
affiliates' property and shall be delivered to the Company on the termination of
this Agreement or at any other time on request by the Board of Directors or
Chief Executive Officer of the Company.
4.4 Executive agrees that he will not, from and after the date
hereof through the second anniversary of the Employment Expiration Date as
defined in Section 3.1 above, regardless of whether the Employment Period is
terminated earlier for any reason, (i) directly or indirectly engage in,
represent in any way, or be connected with, any business or activity (such
business or activity being hereinafter called a "Competing Business"), which
engages in the pain management field, within any state in which the Company or
its affiliates transact business, whether such engagement shall be as an
officer, director, owner, employee, partner, affiliate or other participant in
any Competing Business; or (ii) assist others in engaging in any Competing
Business in the manner described in the foregoing clause (i). The Executive
acknowledges and understands that the foregoing restrictions may limit his
ability to earn a livelihood in a business
<PAGE>
<PAGE>
similar to the business of the Company, but he nevertheless believes that he has
received and will receive sufficient consideration and other benefits in
connection with the Company's issuance of certain stock to the Executive, as an
employee of the Company and as otherwise provided hereunder to clearly justify
such restrictions which, in any event (given his education, skills and ability),
the Executive does not believe would prevent him from earning a living.
4.5 The Executive shall promptly disclose, grant and assign to
the Company for its sole use and benefit any and all inventions, improvements,
technical information and suggestions relating in any way to the business of the
Company, which he may develop or acquire during the Employment Period (whether
or not during usual working hours), together with all patent applications,
letters patent, copyrights and reissues thereof that may at any time be granted
for or upon any such invention, improvement or technical information. In
connection therewith:
(i) The Executive shall without charge, but at
the expense of the Company, promptly at the times hereafter execute and deliver
such applications, assignments, descriptions and other instruments as may be
reasonably necessary or proper in the reasonable opinion of the Company to vest
title to any such inventions, improvements, technical information, patent
applications, patents, copyrights or reissues thereof in the Company and to
enable it to obtain and maintain the entire right and title thereto throughout
the world; and
(ii) The Executive shall render to the Company
at its expense (including a reasonable payment for the time involved in case he
is not then in its employ) all such assistance as it may reasonably require in
the prosecution of applications for said patents, copyrights or reissues
thereof, in the prosecution or defense of interferences which may be declared
involving any said applications, patents or copyrights and in any litigation in
which the Company may be involved relating to any such patents, inventions,
improvements or technical information.
4.6 The provisions of this paragraph 4 shall survive the
termination or expiration of this Agreement irrespective of the reason therefor.
4.7 Executive acknowledges that the services to be rendered by
him are of a special, unique and extraordinary character and, in connection with
such services, he will have access to Confidential Information vital to the
Company's business. By reason of this, Executive consents and agrees that if he
violates any of the provisions of this Agreement with respect to the diversion
of the Company's or its affiliates' employees or confidentiality, the Company or
its affiliates would sustain irreparable harm, and, therefore, in addition to
any other remedies which the Company may have under this Agreement or otherwise,
the Company shall be entitled to apply to any court of competent jurisdiction
for an injunction restraining Executive from committing or continuing any such
violation of this Agreement, and Executive shall not object to any such
application.
5. Indemnification. The Company will defend, indemnify and hold harmless
Executive to the full extent permitted by law from and against any and all
losses, claims, damages or liabilities related to or arising out of the services
performed by Executive under this Agreement in the capacity of (and his status
as) an officer of the Company or in the capacity of (and his status as) an
officer or otherwise of the Company's affiliates, to the extent that those
companies do not indemnify Executive, and will promptly reimburse Executive for
any legal or
<PAGE>
<PAGE>
other expenses reasonably incurred by him in connection with (i) investigating
or defending any such loss, claim, damage or liability or (ii) any litigation or
investigation related to or arising out of such service or status (in either
case whether or not in connection with pending or threatened litigation to which
Executive is a party); provided, however that (i) the Company shall not be
liable to anyone for any such losses, claims, damages or liabilities which
result from the gross negligence or willful misconduct of Executive and (ii) the
Company shall not be liable for any legal fees or costs incurred by Executive,
except for counsel retained on behalf of Executive by the Company in connection
with any investigation, litigation or defense pursuant to this Section 5. Such
obligation of the Company to defend and indemnify the Executive shall survive
the termination of this Agreement notwithstanding anything contained herein to
the contrary.
6. Incentive Stock Option Plan.
6.1 Incentive Stock Option. As an additional inducement to
encourage the Executive to enter into this Agreement and as an incentive to
Executive during the course of the Employment Period, the Company agrees to
grant Executive options to purchase up to 100,000 shares of the Company's Common
Stock at a per share exercise price equal to the closing price of the Company's
common stock on the Executive's first day of employment subject to and in
accordance with the Company's 1996 Stock Option Plan (the "ISO Plan").
6.2 Option Vesting Schedule. The Company and Executive understand
and agree that the ISO Plan will provide that the right to exercise said options
to be granted to Executive pursuant to the ISO Plan will vest in accordance with
the following vesting schedule: (i) on December 31, 1998, Executive shall be
vested with the right to exercise options to purchase 25,000 shares of the
Common Stock of the Company; (ii) on December 31, 1999, Executive shall be
vested with the right to exercise options to purchase an additional 25,000
shares of the Common Stock of the Company for a total of 50,000 shares: (iii) on
December 31, 2000, Executive shall be vested with the right to exercise options
to purchase an additional 25,000 shares of the Common Stock of the Company for a
total of 75,000 shares, (iv) on December 31, 2001, Executive shall be vested
with the right to exercise options to purchase an additional 25,000 shares of
the Common Stock of the Company for a total of 100,000 shares and shall
thereupon be fully vested. Executive shall have no right to exercise any options
that have not vested as of the date of the termination of his employment with
the Company; provided, however, that the Company and Executive understand and
agree that in the event of the Executive's Involuntary Termination or
Termination Without Cause, the aforementioned vesting schedule shall be
accelerated by one year and the Executive shall also be deemed to be vested with
the right to exercise those additional shares that would have vested on the
December 31 next succeeding the effective date of Executive's termination as
determined pursuant to Section 3.2.2, in the case of a Termination Without
Cause, or pursuant to Section 3.2.3, in the case of an Involuntary Termination.
6.3 Option Rights Governed by ISO Plan. Notwithstanding anything
contained in this Agreement to the contrary, all of the Executive's rights
pursuant to this Section shall be subject to and governed by the terms and in
accordance with the Company's 1996 Stock Option Plan (the "ISO Plan"), as that
ISO Plan may be amended by the Board of Directors from time to time.
7. Renewal. This Employment Agreement shall be automatically renewed for
additional twelve (12) month terms unless either the Executive or the Company
shall notify the
<PAGE>
<PAGE>
other in writing at least sixty (60) days before expiration of the then current
12-month term that it does not wish to renew the Employment Agreement.
8. Miscellaneous.
8.1 Notices. Any notice or communication given by either party
hereto to the other party shall be in writing and shall be deemed duly given (i)
when personally delivered, or (ii) when five (5) days have elapsed after its
transmittal, by registered or certified mail, return receipt requested, postage
prepaid; or (iii) if transmitted by telecopy, when sent, or (iv) if transmitted
by telex (or equivalent service), when the sender's receiving apparatus has
printed the answer back of the addressee on a copy of the telex message. Notices
shall be addressed as follows:
If to the Company:
Algos Pharmaceutical Corporation
1333 Campus Parkway
Neptune, NJ 07753
Fax number: 732-983-2825
Attention: Chief Executive Officer
If to Executive:
Joseph Sardella
7 Adams Court
Hamilton Square, NJ 08690
With copies in each case to:
Latham & Watkins
885 Third Avenue
New York, NY 10022
Fax number: 212-751-4864
Attention: Roger H. Kimmel, Esq.
Any person entitled to receive notice (or a copy of thereof) may designate in
writing, by notice to the others, such other address to which notices to such
personal shall thereafter be sent.
8.2 Entire Agreement; Amendment; Waiver. This Agreement contains
the entire understanding of the parties covering its subject matter and
supersedes all prior agreements between the parties. This Agreement may be
amended or waived only by a writing signed by both parties. The waiver by either
party of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any other breach of that provision nor as a waiver of
any breach of another provision.
<PAGE>
<PAGE>
8.3 Headings. The headings of the paragraphs of this Agreement
are inserted for convenience only and shall not be considered a part of or be
referred to interpreting this Agreement.
8.4 Governing Law; Interpretation: Service of Process. This
Agreement shall be construed in accordance with and governed for all purposes by
the laws and public policies of the State of New Jersey applicable to contracts
executed and to be wholly performed in that State. Service of process in any
dispute shall be effective (a) upon the Company, if service is made on any
officer of the Company; (b) upon Executive, if service is made to Executive's
residence last known to the Company with an information copy of Executive at any
other residence, or care of a subsequent employer, of which the Company may be
aware.
8.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall constitute an original, but all of which
together shall constitute one and the same instrument.
8.6 Assignment. Assignment of the rights and obligations of this
Agreement shall bind and enure to the benefit of any successor of the Company by
reorganization, merger, or consolidation, or any assignee of all or
substantially all of the Company's business and properties, provided that the
successor shall assume the obligations of the Company under this Agreement.
Executive's rights or obligations under this Agreement may not be assigned by
Executive.
8.7 Further Assurances. Each of the parties agrees to execute,
acknowledge, deliver and perform, and/or cause to be executed, acknowledged,
delivered and performed, at any time and/or from time to time, as the case may
be, all such further acts, deeds, assignments, transfers, conveyances,
powers-of-attorney and/or assurances as may be necessary and/or proper to carry
out the provisions and/or intent of this Agreement.
8.8 Severability. If any one or more of the terms, provisions,
covenants or restrictions of this Agreement shall be determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated, unless the parties hereto would not have entered into this
Agreement without said invalid, void or unenforceable term, provision, covenant
or restriction. If, moreover, any one or more of the provisions contained in
this Agreement shall for any reason be determined by a court of competent
jurisdiction to be excessively broad as to duration, geographical scope,
activity or subject, it shall be construed by limiting or reducing it, so as to
be enforceable to the extent compatible with then applicable law.
<PAGE>
<PAGE>
EXECUTION
The parties have duly executed this Agreement as of the date first above
written whereupon this Agreement enters into full force and effect in accordance
with its terms.
ALGOS PHARMACEUTICAL CORPORATION
a Delaware Corporation
-------------------------------------
John W. Lyle,
President and Chief Executive Officer
-------------------------------------
Joseph Sardella
7 Adams Court
Hamilton Square, NJ 08690
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 308,127
<SECURITIES> 29,989,167
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<CURRENT-ASSETS> 31,202,750
<PP&E> 1,227,011
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<PAGE>
<PAGE>
EXHIBIT 99
RISK FACTORS
The Company operates in a rapidly changing environment that involves a
number of risks that may significantly affect the Company's results, some of
which are beyond the Company's control. The following discussion highlights some
of these risks, and others are discussed elsewhere herein and in other documents
filed by the Company with the Securities and Exchange Commission.
Development Stage of the Company; Continuing Losses; Uncertainty of Future
Profitability
Since its formation in January 1992, the Company has been engaged
primarily in organizational and start-up activities, conducting research and
development programs, recruiting officers and key scientists, and negotiating
and consummating technology licensing and research agreements. The Company has
no revenues from product sales and no history of manufacturing or marketing. To
date, substantially all of its funding has been provided by contributions of
capital made by its founders, sales of its stock and payments from McNeil
pursuant to the McNeil License Agreement. There can be no assurance that the
Company will have any source of product revenue or that its operations will
eventually generate sufficient revenues to achieve profitability. The Company
has experienced losses since its inception and losses are continuing and are
expected to continue. Therefore, the Company has a limited history upon which
investors may base an evaluation of its likely performance. The Company's
prospects must be considered in light of the potential problems, expenses,
complications and delays frequently encountered in connection with the
formation of a new business, the development of new pharmaceutical products,
including obtaining the necessary regulatory approvals, the utilization of
unproven technology and the competitive market environment in which the Company
plans to operate.
Uncertainty Associated with Pre-Clinical Studies and Clinical Trials
In order to receive regulatory approval to sell its products
commercially, the Company must demonstrate in pre-clinical studies and clinical
trials that its potential products are safe and effective in humans. Although
the results of the Company's initial pre-clinical studies and clinical trials to
date have been encouraging, the results of initial pre-clinical studies and
clinical trials are not by themselves predictive of results that will be
obtained from subsequent or more extensive trials. Furthermore, there can be no
assurance that clinical trials of products under development will demonstrate
the safety and efficacy of such products to the extent necessary to obtain
regulatory approvals. Many pharmaceutical companies have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. The failure to adequately demonstrate
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the safety and efficacy of a product could delay or prevent regulatory approval
of such product and could have a material adverse effect on the Company.
The rate of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment in the
Company's current trials or future clinical trials may result in increased
costs, program delays or both, which could have a material adverse effect on the
Company. There can be no assurance that if clinical trials are completed the
Company will be able to submit an NDA as scheduled or that any such application
will be reviewed and approved by the FDA in a timely manner, or at all. See
"Business -- Government Regulation" in the Company's 1997 Annual Report on
Form 10-K.
Government Regulation; No Assurance of United States or Foreign Regulatory
Approval
The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of therapeutic pharmaceutical products through
lengthy and detailed laboratory and clinical testing and other costly and
time-consuming procedures. Satisfaction of these requirements typically takes a
number of years, varies substantially based upon the type, complexity and
novelty of the pharmaceutical products and is subject to uncertainty. Government
regulation also affects the manufacture and marketing of pharmaceutical
products. Regulatory approvals, if granted, may include significant limitations
on the indicated uses for which a product may be marketed. The FDA actively
enforces regulations prohibiting marketing of products for non-indicated use.
Failure to comply with applicable regulatory requirements can result in, among
other things, government imposed fines, suspensions of approvals, seizures or
recalls of products, operating restrictions and criminal prosecutions.
Furthermore, changes in existing regulations or adoption of new regulations
could prevent the Company from obtaining, or affect the timing of, future
regulatory approvals. The effect of government regulation may be to delay
marketing of the Company's new products for a considerable period of time, to
impose costly procedures upon the Company's activities and to furnish a
competitive advantage to larger companies that compete with the Company. There
can be no assurance that FDA or other regulatory approval for any products
developed by the Company will be granted on a timely basis, if at all. Any such
delay in obtaining, or failure to obtain, such approvals would adversely affect
the marketing of the Company's products and the ability to generate product
revenue. The Company is also subject to certain DEA regulations, including
restrictions on storage, transportation and administration, for its
narcotic products. Government regulation may increase at any time, creating
additional hurdles for the Company. The extent of potentially adverse government
regulation which might arise from future legislation or administrative action
cannot be predicted. See 'Business -- Government Regulation' in the Company's
1997 Annual Report on Form 10-K.
Uncertainty of Market Acceptance
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Even if regulatory approvals are obtained, uncertainty exists as to
whether the Company's products will be accepted by the market. A number of
factors may limit the market acceptance of the Company's products, including the
timing of regulatory approvals and market entry relative to competitive
products, the availability of alternative products, the price of the Company's
products relative to alternative products, the availability of third-party
reimbursement and the extent of marketing efforts by third-party distributors or
agents retained by the Company. There can be no assurance of the Company's
ability, or the length of time required, to achieve market acceptance of the
Company's products. In addition, certain of the Company's products contain
narcotic ingredients that may require stringent record-keeping obligations,
strict storage requirements and other limitations on such products' availability
that could limit the commercial usage of such products.
Need for Additional Funds
The amount and timing of the Company's expenditures will depend on the
progress of its research and development, the cost and timing of regulatory
approvals, the amount of spending on sales, marketing and distribution
activities in preparation for the possible commercialization of MorphiDex,
general market conditions, relationships with potential strategic partners,
changes in the focus and direction of the Company's research and development
programs, competitive and technological advances and other factors. The
Company's cash requirements may vary materially from those now planned and no
assurance can be given that development costs will not exceed the amounts
budgeted for such purposes. The Company may require additional funding for its
research and product development programs, operating expenses, regulatory
clearances and sales and marketing expenses. Adequate funds for these purposes,
whether obtained through financial markets or through collaborative or other
arrangements with partners or from other sources, may not be available when
needed or on terms acceptable to the Company. Insufficient funds may require the
Company to delay, scale back or eliminate certain of its research and
development programs or to make arrangements with third parties to commercialize
products or technologies that the Company would otherwise seek to develop
itself. As a result, the Company may not be able to independently develop any or
all of the products described in this Report.
Limited Sales and Marketing Experience
The Company intends to market and sell certain of its products, if
successfully developed and approved, through a direct sales force in the United
States. The Company currently has no marketing and sales staff, and has yet to
establish any product distribution channels. In order to market its products
directly, the Company must develop a sales force with technical expertise. There
can be no assurance that the Company will be able to successfully establish a
direct sales organization or distribution channels. Failure to establish a sales
force capability in the U.S. may have a material adverse effect on the Company.
3
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Reliance on Third-Party Manufacturers
The Company currently uses, and expects to continue to use, outside
contractors to manufacture drug supplies for its clinical trials. In addition,
the Company currently intends to use outside contractors to manufacture products
approved for sale, if any. There is no assurance that supplies from any such
contractor will not be reduced or interrupted due to FDA and DEA regulatory
requirements or other reasons. Such a reduction or interruption could have a
material adverse effect on the Company's development and commercialization
activities. The Company currently uses a single contract manufacturer for
supplies of its most developmentally advanced product, MorphiDex'TM' and
suppliers of raw materials are limited. The regulatory qualification of
additional suppliers and/or manufacturers may require significant time and
expense. In addition, the acquisition of narcotics as components of certain of
the Company's products is subject to quota restrictions imposed and administered
by DEA. There is no assurance that the Company will be able to obtain its
requested quantities of such narcotics.
Dependence on Qualified Personnel
Because of the specialized scientific nature of the Company's business,
the Company is highly dependent upon its ability to attract and retain qualified
scientific and technical personnel. The loss of significant scientific and
technical personnel or the failure to recruit additional key scientific and
technical personnel could have a material adverse effect on the Company. While
the Company has consulting agreements with certain key individuals and
institutions and has employment agreements with its key executives, there can be
no assurance that the Company will be successful in retaining such personnel or
their services under existing agreements. The loss of John Lyle, the Company's
Chief Executive Officer, could have a material adverse effect on the Company.
The Company currently maintains a $6.0 million life insurance policy on Mr.
Lyle. There is intense competition for qualified personnel in the areas of the
Company's activities, and there can be no assurance that the Company will be
able to continue to attract and retain the qualified personnel necessary for the
development of its business.
Uncertain Ability to Protect Proprietary Technology
The Company's success, competitive position and amount of potential
future income will depend in part on its ability to obtain patent protection
relating to the technologies, processes and products it is developing and may
develop in the future. The Company's policy is to seek patent protection and
enforce intellectual property rights. No assurance can be given that any patent
issued or licensed to the Company will provide protection against competitive
products or otherwise be commercially viable. In this regard, the patent
position of pharmaceutical compounds
4
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and compositions is particularly uncertain. Even issued patents may later be
modified or revoked by the PTO or in legal proceedings. Moreover, the Company
believes that obtaining foreign patents may be more difficult than obtaining
domestic patents because of differences in patent laws, and accordingly, its
patent position may be stronger in the U.S. than abroad. In addition, foreign
patents may be more difficult to protect and/or the remedies available may be
less extensive than in the U.S. Patent applications in the U.S. are maintained
in secrecy until patents issue and, since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries. The
Company cannot be certain that it was the first creator of the inventions
covered by pending patent applications or the first to file patent applications
on such inventions. No assurance can be given that any of the Company's pending
patent applications will be allowed, or if allowed, whether the scope of the
claims allowed will be sufficient to protect the Company's products.
The Company also expects to rely upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain its competitive position. There can be no assurance that others will
not independently develop substantially equivalent proprietary information or be
issued patents that may prevent the sale of the Company's products or know-how
or require licensing and the payment of significant fees or royalties by the
Company in order to produce its products. Moreover, there can be no assurance
that the Company's technology does not infringe upon any valid claims of patents
owned by others. If the Company were found to be infringing on a patent held by
another, the Company might have to seek a license to use the patented
technology. There can be no assurance that, if required, the Company would be
able to obtain such a license on terms acceptable to the Company, if at all. If
a legal action were to be brought against the Company or its licensors, the
Company could incur substantial costs in defending itself, and there can be no
assurance that such an action would be resolved in the Company's favor. If such
a dispute were to be resolved against the Company, the Company could be subject
to significant damages and the testing, manufacture or sale of one or more of
the Company's technologies or proposed products, if developed, could be
enjoined.
No assurance can be given as to the degree of protection any patents will
afford, whether patents will be issued or whether the Company will be able to
avoid violating or infringing upon patents issued to others. Despite the use of
confidentiality agreements and non-compete agreements, which themselves may be
of limited effectiveness, it may be difficult for the Company to protect its
trade secrets. See "Risk Factors -- Dependence on Qualified Personnel."
Uncertain Availability of Health Care Reimbursement
The Company's ability to commercialize its pain management products may
depend in part on the extent to which reimbursement for the costs of such
products will be available from government health administration authorities,
private health insurers and others. There can be no assurance that third-party
insurance coverage will be
5
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adequate for the Company to establish and maintain price levels sufficient for
realization of an appropriate return on its investment. Government, private
insurers and other third-party payers are increasingly attempting to contain
health care costs by limiting both coverage and the level of reimbursement for
new products approved for marketing by the FDA and by refusing, in some cases,
to provide any coverage for uses of approved products for indications for which
the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and third-party payers for
uses of the Company's products, the market acceptance of these products could be
adversely affected.
No Product Liability Insurance
The Company will be exposed to potential product liability risks, which
are inherent in the testing, manufacturing and marketing of human therapeutic
products. The Company is contractually obligated under certain of its license
agreements to indemnify the individuals and/or institutions from whom it has
licensed the technology against claims relating to the manufacture and sale of
the products to be sold by the Company. McNeil, however, has agreed to indemnify
the Company for third party claims or suits resulting from the manufacture, use
or sale of the products pursuant to the McNeil License Agreement. The Company's
indemnification liability, as well as direct liability to consumers for any
defects in the products sold, could expose the Company to substantial risk and
losses. The Company currently carries liability insurance for its clinical trial
activities but does not have product liability insurance covering commercial use
of its products. The Company plans to purchase such product liability insurance
as it deems appropriate prior to marketing its products. McNeil is required by
the McNeil License Agreement to maintain product liability insurance and may
self-insure to cover its indemnification obligations to the Company. However,
there can be no assurance that the Company will be able to obtain or maintain
such insurance on acceptable terms or that any insurance obtained will provide
adequate coverage against potential liabilities.
Certain Risks Associated With the McNeil License Agreement
The McNeil License Agreement extends until the later of the expiration of
the Company's patent rights or ten years from the date of execution, provided
that the McNeil License Agreement is terminable: (i) by either party in the
event of a breach by the other party upon 90 days notice or upon certain events
of bankruptcy; (ii) by McNeil, at any time upon 60 days notice; and (iii) by the
Company upon certain other circumstances. Under certain circumstances, the
McNeil License Agreement could terminate with respect to either acetaminophen
or NSAID products without terminating with respect to the other category. In the
event of a termination by McNeil, McNeil must pay all royalty payments and
milestone payments due, if any, through the date of termination and the
technology licensed by McNeil reverts to the Company. In such event, the Company
retains the rights to the results of the two clinical studies funded by the
Company, and McNeil retains the rights to the results of the clinical studies
funded by McNeil during the term of the McNeil License Agreement.
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Competition and Technological Changes, Uncertainty and Obsolescence
The Company's success will depend, in part, upon its ability to
successfully achieve market share at the expense of existing and established
products in the Company's target markets. The Company's products will be
competing directly with the products of companies that are well-established and
which may have a significantly higher degree of brand and name recognition and
substantially more financial resources than those of the Company. The Company is
also in competition with other pharmaceutical companies, hospitals, research
organizations, individual scientists and non-profit organizations engaged in the
development of new pain management pharmaceuticals. Many of these companies and
entities have greater research and development capacities, experience,
recognition and marketing, financial and managerial resources than the Company
and represent significant competition for the Company. Also, the Company's
competitors may succeed in developing competing technologies and obtaining FDA
approval for products more rapidly than the Company. There can be no assurance
that developments by others will not render the Company's products or
technologies non-competitive or obsolete.
Concentration of Ownership
As of April 1998, the Company's directors and officers beneficially own
approximately 28% of the Company's Common Stock. In addition, the Company's
largest stockholder, Unifina AG, and related investors control approximately 11%
of the Common Stock. As a result, these stockholders, if they acted together,
would have the ability to influence significantly the election of the Company's
directors as well as the management and policies of the Company. This
concentration of ownership may have the effect of delaying or preventing a
change of control of the Company.
Possible Volatility of Stock Price
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. The market price of the Company's Common Stock may prove
to be highly volatile from a variety of variable influences. Announcements of
technological innovations, regulatory matters or new commercial products by the
Company or its competitors, developments or disputes concerning patent or
proprietary rights, publicity regarding actual or potential clinical results
relating to products under development by the Company or its competitors,
regulatory developments in both the U.S. and foreign countries, public concern
as to the safety of pharmaceutical products, economic and other external
factors, as well as period-to-period fluctuations in financial results, may have
a significant impact on the market price of the Company's Common Stock. The
timing and amount of the Company's development and commercialization
expenditures are subject to significant uncertainties; operating results for any
accounting period may not be indicative of expected results for future periods.
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Absence of Dividends
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
Effect of Anti-Takeover Provisions
The Company's Amended and Restated Certificate of Incorporation provides
for a classified Board of Directors and that members of the Board of Directors
may be removed only for cause upon the affirmative vote of holders of at least a
majority of the shares of capital stock of the Company entitled to vote. The
Company's Amended and Restated Certificate of Incorporation 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 stockholders and may not
be effected by any consent in writing, and will require reasonable advance
notice by a stockholder of a proposal or director nomination which such
stockholder desires to present at any annual or special meeting of stockholders.
Special meetings of stockholders may be called only by the Chief Executive
Officer or, if none, the President of the Company or by the Board of Directors.
In addition, the Board of Directors has the authority, without further action by
the stockholders, to fix the rights and preferences of, and issue shares of,
Preferred Stock. The Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibits the Company
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
first becomes an 'interested stockholder,' unless the business combination is
approved in a prescribed manner. The application of these provisions could have
the effect of delaying or preventing a change of control of the Company. Certain
other provisions of the Company's Amended and Restated Certificate of
Incorporation could also have the effect of delaying or preventing changes of
control or management of the Company, which could adversely affect the market
price of the Common Stock.
Forward Looking Statements
This Report contains "forward-looking" statements, within the meaning
of Section 27A of Securities Act of 1993, as amended and Section 21E of the
Securities Exchange Act of 1934, that are based on management's beliefs and
assumptions, current expectations, estimates and projections. Statements that
are not historical facts, including statements which are preceded by, followed
by, or that include the words "believes;" "anticipates;' "plans;" "expects;" or
similar expressions and statements about the Company's development schedule and
future use of funds are forward-looking statements. Many of the factors that
will determine the Company's future results are beyond the ability of the
Company to control or predict. These statements are subject
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to risks and uncertainties and, therefore, actual results may differ materially.
The reader should not rely on any forward-looking statement. The Company
undertakes no obligations to update any forward-looking statements whether as a
result of new information, future events or otherwise. Important factors that
may affect future results include, but are not limited to: uncertainty
associated with pre-clinical studies and clinical trials and regulatory
approval; uncertainty of market acceptance of new products; impact of
competitive products and pricing; product development; changes in laws and
regulations; customer demand; possible future litigation; and the availability
of future financing. Readers should evaluate any statement in light of these
important factors.
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