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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended JUNE 30, 1999
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 0-24972
INKINE PHARMACEUTICAL COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
New York 13-3754005
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1720 Walton Road, Suite 200
Blue Bell, Pennsylvania 19422
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 260-9350
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(Title of each class) (Name of each exchange on which registered)
None N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.0001 par value per share
(Title of Class)
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 for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $38,997,894. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the NASDAQ SmallCap Market of The Nasdaq Stock Market on September 17, 1999. For
purposes of this calculation only, the registrant has defined affiliates as
including all directors and executive officers. In making such calculation,
registrant is not making a determination of the affiliate or non-affiliate
status of any holders of shares of Common Stock. The number of shares of the
registrant's Common Stock outstanding as of September 17, 1999 was 23,362,218.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Registrant's 1999 Annual
Meeting of Shareholders to be filed within 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K are incorporated by reference
into Part III of this Form 10-K.
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INKINE PHARMACEUTICAL COMPANY, INC.
INDEX TO FORM 10-K
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Page
References
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PART I
ITEM 1. BUSINESS............................................................................ 1
ITEM 2. PROPERTIES.......................................................................... 22
ITEM 3. LEGAL PROCEEDINGS................................................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................. 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS................................................................. 23
ITEM 6. SELECTED FINANCIAL DATA............................................................. 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ................................................ 24
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK......................................................................... 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................... 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................................. 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................. 28
ITEM 11. EXECUTIVE COMPENSATION.............................................................. 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................................... 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................... 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K......................................................................... 29
EXHIBITS............................................................................ 29
SIGNATURES.......................................................................... 31
INDEX TO FINANCIAL STATEMENTS....................................................... F-1
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PART I
ITEM 1. BUSINESS.
OVERVIEW
InKine Pharmaceutical Company, Inc. ("InKine") formerly Panax
Pharmaceutical Company, Ltd. ("Panax") was incorporated in May 1993 to focus on
the development of new pharmaceutical compounds identified in and isolated from
plants. In early 1996, InKine modified its strategy, reducing its natural
product discovery activities and redirecting its principal efforts toward
expanding its pipeline of commercially viable pharmaceutical products by
licensing or acquiring specifically-targeted products developed for the
treatment of certain diseases.
In February 1997, InKine acquired the rights to develop and
commercialize a novel purgative tablet ("DIACOL(TM)") to clean the colon for any
medical purpose and for use as a laxative, with respect to which a Phase IIb
clinical trial for use prior to colonoscopy had been completed at that time.
Simultaneously with the consummation of a private placement in November 1997,
InKine acquired the rights to develop and commercialize two additional
technologies: (i) a Thrombospondin Technology (defined below) for the treatment
of cancer, specifically, the inhibition and prevention of tumor metastasis and
(ii) technologies to down or up-regulate the Fc receptors on macrophages and
other cells to treat serious autoimmune disorders and other diseases, including
asthma/allergy and certain serious infectious diseases (the "Fc Receptor
Technology"). The compounds and technologies making up the Fc Receptor
Technology and the Thrombospondin Technology are, like DIACOL, currently either
in clinical trials or earlier stages of development. Additionally, simultaneous
with the private placement in November 1997, Panax changed its name to InKine
Pharmaceutical Company, Inc and the management and Board were restructured.
DIACOL. On February 14, 1997, InKine entered into a License Agreement
(the "ALW License") with a partnership (the "ALW Partnership") whose partners
include Craig A. Aronchick, M.D. Dr. Aronchick is an attending
gastroenterologist and Head of the Endoscopy Unit at Pennsylvania Hospital in
Philadelphia and Associate Clinical Professor of Medicine at the University of
Pennsylvania School of Medicine. Pursuant to the ALW License, InKine acquired
the worldwide exclusive rights to sell, manufacture and sub-license DIACOL. On
April 1, 1997 a patent covering DIACOL issued in the United States to the ALW
Partnership.
DIACOL is a tablet form of the aqueous sodium phosphate purgative
formula used to clean the colon for any medical purpose with respect to which a
Phase I, Phase IIb dose ranging study and Phase III clinical trials for use
prior to colonoscopy have been completed. InKine believes that over 10 million
colonoscopies will be performed annually in the United States by the year 2003.
All ethical colonic cleansing products currently on the market are in liquid
form, require the ingestion of between one to four liters of fluid within 2 1/2
hours, and have either a very salty taste or a taste so foul that patients are
often unable to consume the required dosage and/or nausea and vomiting occurs.
Failure to ingest the required amount of liquid could result in incomplete
cleansing, and, in turn, an adenoma or benign polyp could be overlooked during
colonoscopy. A Phase III clinical study conducted by InKine found that DIACOL is
as effective a colonic cleanser, and better tolerated by patients, than the most
commonly prescribed liquid preparation. With respect to tolerance of each
preparation, over fifteen times the number of the patients taking the liquid
purgative found the taste "bad", "barely tolerable" or "very bad". Most patients
taking DIACOL found that the tablets had no taste or a pleasant taste.
The Thrombospondin Technology. In November 1997, InKine acquired an
exclusive worldwide license to the Thrombospondin Technology, a cancer treatment
technology previously owned by MCP Hahnemann University ("MCP").
Dr. George Tuszynski, Professor of Surgery, Medicine and Pathology at
MCP has found a specific amino acid sequence in Thrombospondin ("TSP-1") that is
believed to be responsible for promoting the effects of this molecule on tumor
cell adhesion and metastasis. From this discovery, Dr. Tuszynski invented a
series of peptide molecules for which a patent has been allowed in the United
States. These molecules significantly reduced metastasis of a mouse tumor cell
line and a human tumor cell line when injected into athymic mice. Dr. Tuszynski
has also developed a
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murine polyclonal antibody against the TSP-1 receptor which was also shown to
prevent or significantly reduce metastasis in athymic mice. InKine filed a
patent application directed to a novel sequence of the thrombospondin receptor
and monoclonal antibodies directed to the same in June 1999. (The peptide
molecules, the polyclonal antibody and the TSP-1 receptor are referred to herein
as the "Thrombospondin Technology"). Traditional methods of cancer treatment
include surgery, radiation therapy and chemotherapy, all of which remove or kill
cancer cells (and normal cells), but do not specifically prevent or inhibit
metastasis.
The Fc Receptor Technology. The focus of InKine in the Fc Receptor
Technology area is to discover and develop pharmaceuticals designed to modulate
the immune system by manipulating macrophage and mast cell function.
Specifically, InKine is focused on developing treatments in three therapeutic
areas: autoimmune disease, serious infections and asthma/allergy. Millions of
patients in the United States suffer from serious autoimmune diseases, including
rheumatoid arthritis, systemic lupus erythematosus ("lupus"), Graves Disease,
idiopathic thrombocytopenic purpura ("ITP") and others. The therapeutic agents
which have traditionally constituted the mainstay for the treatment of
autoimmune disorders are glucocorticoid hormones (typically prednisone), which
inhibit macrophage Fc receptor expression but which must be administered in high
dosages and/or for extended periods of time and which are accompanied by
substantial side effects, including exacerbation of diabetes, hypertension,
electrolyte imbalance, weight gain, osteoporosis and increased susceptibility to
infection. In the case of the autoimmune disease ITP, from which over 100,000
patients in the United States suffer, most patients relapse after glucocorticoid
treatment is tapered, and in a majority of such cases, surgical removal of the
spleen is ultimately required. The Fc Receptor Technology, developed under the
guidance of Alan D. Schreiber, M.D., Professor of Medicine and Assistant Dean
for Research at the University of Pennsylvania School of Medicine, consists of
progesterone derivatives which do not appear to have the toxic side effects of
glucocorticoid hormone treatments and many of which also do not have the
potentially undesirable hormonal effects normally associated with traditional
progesterone and other sex hormone treatments.
The most advanced product in the family of compounds comprising the Fc
Receptor Technology is CBP-1011, a potential treatment for ITP. The compound is
expected to receive protection under an orphan drug ("Orphan Drug") application
to be made for treatment of ITP under the Orphan Drug Act, as amended. The
results from two Phase II clinical studies completed to date suggest that
CBP-1011 appears safe and effective in the treatment of patients with ITP. In
March 1998, Phase III pivotal trials of CBP-1011 at 38 sites in the United
States were initiated under a revised protocol. In June 1999 InKine announced,
after reviewing unaudited interim Phase III efficacy and safety data with the
United States Food and Drug Administration ("FDA") that CBP-1011 appeared to
benefit certain patients with ITP without the side effects that would normally
be seen with the chronic administration of "classical steroids", such as
prednisone. Discussions with the FDA regarding the data to date were favorable
and InKine decided to continue the pivotal Phase III trial. Additionally,
CBP-1011 will be reformulated from its current capsule formulation to a tablet
formulation. This will take several months to complete and will require a
single-dose pharmacokinetic study to compare the new and old formulations.
InKine plans to develop CBP-1011 and second generation compounds derived
therefrom, if possible, to treat additional autoimmune diseases.
Since commencing operations, InKine has not generated any sales
revenue.
PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
The following table describes the major diseases upon which InKine intends
to focus its research and product development efforts at least through 2000, and
also sets forth the current development status of products or product candidates
in each area:
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PROGRAM THERAPEUTIC INDICATIONS DEVELOPMENT STATUS
CANCER DETECTION AND TREATMENT (DIACOL AND THROMBOSPONDIN TECHNOLOGY)
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DIACOL Cleansing of colon prior to colonoscopy Phase I completed
Phase IIb dose ranging completed
Phase III completed
NDA in progress
Cleansing of colon prior to sigmoidoscopy Phase I completed
Constipation Phase I completed
Thrombospondin Technology Prevention of metastatic cancer Preclinical (lead compound
including but not limited to breast, identified)
lung, prostate, pancreas and squamous Receptor cloned
cell cancer
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Fc RECEPTOR REGULATION (Fc RECEPTOR TECHNOLOGY)
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CBP-1011 Capsule Idiopathic Thrombocytopenic Purpura Phase III (in progress)
CBP-1011 Tablet Single dose PK study pending
Phase III pending
CBP-2011 series of compounds Autoimmune Hemolytic Anemia Preclinical
Systemic Lupus Erthematosus Early Preclinical
Rheumatoid Arthritis Early Preclinical
Gene Therapy Serious Infection Early Preclinical
Oligonucleotides Asthma/Allergy Early Preclinical
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InKine spent $6,565,000, $2,270,000 and $743,000 for research and
development during the years ended June 30, 1999, 1998 and 1997, respectively.
InKine incurred a $3,952,000 expense for purchased research and development for
the year ended June 30, 1998.
DIACOL
Colorectal Cancer and Colonoscopies; Background and Statistics. According
to the American Cancer Society, 1999 Cancer Facts and Figures, colorectal cancer
is the second leading cause of cancer related deaths in the United States, with
approximately 129,400 new cases and 56,600 deaths estimated for 1999. The
incidence of colorectal cancer has increased on a yearly basis and is higher in
women (55% of all colorectal cancer cases in the United States are in women)
than men (45% of all cases). Other statistics suggest that age-specific
incidence and mortality rates show that most cases are diagnosed in patients
over 50 years of age with most patients (65% of all cases diagnosed) being
diagnosed with advanced disease. The 5-year case fatality rate is 50%; however,
if the disease can be diagnosed in an earlier localized stage the survival rate
approaches 91%.
Published estimates taken from scientific literature state that 5% to 7% of
Americans will develop colorectal cancer. The reported risk of colorectal cancer
increases after age 40, rises sharply at ages 50-55, and doubles with each
succeeding decade until it peaks at age 75. It is fairly well established that
colorectal cancer begins as a benign polyp or adenoma and that a benign adenoma
may exist for five or ten years before degenerating into cancer. Therefore, with
colonoscopic and sigmoidoscopic surveillance, along with excision of the benign
polyp or adenoma, colorectal cancer appears to be a preventable disease. InKine
believes that screening colonoscopy is essential for high risk groups which
include those with a family or personal history of colorectal cancer. High risk
groups account for 20-30% of all colorectal cancers.
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Estimates from the National Cancer Institute suggest that between 65-75% of
early cancers can be detected by screening asymptomatic individuals over 50
years of age with a 60-cm flexible sigmoidoscope, and the detection rate
increases dramatically when a 165-cm colonoscopy device is utilized. As a result
of such recommendations, colonoscopies have increased in the United States.
InKine believes that a trend of increasing numbers of procedures will continue
and estimates that, by the year 2003, over 10 million colonoscopies will be
performed annually in the United States. InKine believes the number of
sigmoidoscopies performed each year significantly exceeds the number of
colonoscopies. Gastroenterologists and colorectal surgeons comprise the
substantial majority of professionals who perform colonoscopy. However, InKine
believes that flexible sigmoidoscopy is now routinely done by many generalists
(i.e., internists and family practitioners) in the United States.
Existing Colon Cleansing Products. Cleansing the colon is necessary prior
to colonoscopy or sigmoidoscopy, especially when the procedure is being used to
screen for pre-cancerous lesions which may be 1 mm or smaller in size.
Ineffective cleansing can result in poor visualization which, in turn, can cause
the screening physician to miss an adenoma or benign polyp.
The most frequently used products for cleansing the colon in the United
States contain either polyethylene glycol ("PEG") or sodium phosphate. Both
types of products work by drawing water from the body into the gut via an
osmotic effect. The accumulated fluid then passes through and flushes the
intestine causing a cleansing effect. Over the last 15 years, patient
intolerance to these methods of cleansing the colon has become a substantial
problem.
Purgative products are currently administered in liquid form. There are
three dominant products which use PEG: Golytely(R) and Nulytely(R), which are
manufactured by Braintree Laboratories, Inc. and Colyte(R) which is manufactured
by Schwarz Pharma, Inc. Each product requires the ingestion of 4 liters (over 1
gallon) of PEG in 2.5 hours. Additionally, PEG has an extremely salty taste.
More recently, aqueous sodium phosphate solution (Fleet's Phospho-soda,
manufactured by C.B. Fleet Company, Inc.) has been used as a purgatory
alternative. Aqueous sodium phosphate solution has been demonstrated to be as
effective as the PEG-electrolyte purge as a colonic cleanser. However, although
a smaller volume of liquid is required to be ingested for effective colonic
cleansing with aqueous sodium phosphate (between 1 and 2 liters of water), the
taste of the solution is so foul that nausea and vomiting frequently occur.
Claimed Advantages of Tablet for Clearing Colon Prior to Colonoscopy or
Sigmoidoscopy. Craig A. Aronchick, M.D., Scott H. Wright, M.D. and William H.
Lipshutz, M.D., (the "Partners") developed a tablet form of the aqueous sodium
phosphate purge formulation which InKine believes avoids the two major problems
associated with the current purgatives.
In 1994, Dr. Aronchick and his colleagues conducted a Phase IIb clinical
study at the Pennsylvania Hospital in Philadelphia to evaluate the efficacy of
the sodium phosphate tablet as compared to Fleet's Phospho-soda and Colyte. The
study was designed as a single blinded evaluation of colon cleansing in
outpatients undergoing elective colonoscopy. The study enrolled 342 patients who
were randomized to one of three purgative methods (Colyte, Fleet's Phospho-soda
or sodium phosphate tablets). The goals of the study were to: (i) determine the
efficacy of cleansing, (ii) determine the adverse effects of the preparation,
and (iii) evaluate patient tolerance of the preparation.
Quality of colon cleansing was evaluated by the physician performing the
colonoscopy in a semi-quantitative fashion. Physicians were blinded from knowing
which preparation the patient had received. The responses indicated that all
three preparations, when patients completed assigned doses, had equal efficacy
with respect to the quality of cleansing of the bowel surface.
With respect to patient tolerance of the preparations, over 40% of patients
taking Fleet's Phospho-soda and over 10% of the patients taking Colyte found the
taste unacceptable. Adverse effects included nausea and moderate to severe
vomiting occurring in greater than 6% of patients taking a liquid preparation.
All patients taking the sodium phosphate tablets found that the tablets had no
taste or a pleasant taste, and none experienced nausea or vomiting. Almost all
patients who took tablets during this study and had previously taken liquid
Colyte or liquid Fleet's Phospho-soda preferred the tablets for future
colonoscopies. Eighty percent (80%) of patients who took the sodium
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phosphate tablets found the tablet satisfactory, which was statistically
superior to the patients who took the Colyte preparation (50% found it
satisfactory) and the Fleet's Phospho-soda preparation (20% found it
satisfactory).
Results of Phase IIb Dose Ranging Study. In September 1998, InKine
concluded a Phase IIb dose ranging study of DIACOL to access the safety and
efficacy of three different doses of DIACOL. The results of the study were as
follows:
A total of 97 patients were randomized to receive 24, 42, or 60 grams of
DIACOL prior to colonoscopy to prepare their colon for examination. Half the
assigned dose was self-administered the evening prior to, and half the morning
of the colonoscopy. Physicians assessed efficacy by direct visualization of the
colon using a 4-point scale (excellent, good, fair, inadequate/reprep). Patients
assessed tolerance and compliance using a self-administered questionnaire.
A dose-response effect was observed for the efficacy of DIACOL. One hundred
percent of patients receiving the high dose, 88% of patients receiving the
mid-dose and 70% of patients receiving the low dose were observed to have an
"excellent" or "good" rating in their colon cleansing. The high dose group was
the only group in which no patient had an "inadequate or repreparation required"
rating. In the "high dose" group over 87% of patients preferred DIACOL tablets
compared to ethical liquid preparations available as an alternative for
colonoscopy preparation.
Clinically insignificant changes in serum electrolytes which almost always
returned to normal, or baseline values, within 48 to 72 hours were observed at
all dose levels. No serious adverse events were reported in any dose group.
InKine met with the FDA regarding the results of the Phase IIb study.
Following the meeting, InKine submitted a protocol for a Phase III clinical
study of DIACOL at a dose of 60 grams.
Results of Phase III Clinical Study. In April 1999, InKine concluded two
pivotal Phase III trials of DIACOL. In each trial, DIACOL tablets were as
effective as cherry flavored NuLYTELY(R) liquid in the quality of colonic
cleansing prior to colonoscopy. With a high degree of statistical significance,
each trial also indicated that DIACOL tablets were greatly preferred by patients
and were better tolerated than NuLYTELY.
Two identical, randomized, single blind, nationwide multicenter pivotal
trials compared the safety, efficacy, and patient preference of DIACOL tablets
with NuLYTELY, the leading prescription purgative agent, in patients requiring
colon cleansing prior to colonoscopy. Each trial included over 400 adults
undergoing colonoscopy. Patients were randomized to receive either DIACOL
tablets at a total dose of 60 grams or NuLYTELY at the usual total dose of 4
liters, as in the prescribing information. The gastroenterologist performing the
colonscopy was not aware of which drug the patient received. Using a validated
questionnaire, the gastroenterologist assessed the quality of colon cleansing.
The pivotal trials were designed to demonstrate equivalence of DIACOL
tablets to NuLYTELY, not the superiority of DIACOL tablets. In each trial,
DIACOL tablets demonstrated equivalence to NuLYTELY using the statistical test
that had been agreed to by the FDA. The vast majority of patients in each trial
were rated as having "excellent" or "good" colon cleansing. In each trial,
patients who took DIACOL tablets had a slightly better mean cleansing score than
those who took NuLYTELY, but these differences were not statistically
significant.
In patients undergoing colonoscopy, the most commonly reported clinical
adverse events associated with colonic purgation are bloating, nausea, abdominal
pain and vomiting. In each pivotal trial, according to investigator documented
adverse events, DIACOL tablets produced statistically significantly lower
incidences of nausea, vomiting and bloating when compared to NuLYTELY. For the
fourth symptom, abdominal pain, there was a statistically significant difference
favoring DIACOL tablets in one trial, and equivalence in the other trial.
There was no significant difference in the rate of serious adverse events
between DIACOL tablets and NuLYTELY in either trial or in each trial combined.
The overall rate of serious adverse events was less than 0.2% among patients who
took study drug.
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In each pivotal trial, after ingesting their study medication and prior to
their colonoscopy, patients completed a questionnaire evaluating their study
medication. Analysis of patient questionnaires also yielded a number of
statistically significant advantages for DIACOL tablets compared to NuLYTELY. In
each trial, at least five times as many NuLYTELY patients were unable to
complete the prescribed dose compared to patients given DIACOL tablets. In each
trial, if given a choice of a purgative product for future colonoscopy, 90% of
those taking DIACOL tablets and over 70% of those taking NuLYTELY liquid would
prefer to take DIACOL tablets. Approximately three times as many patients
reported that NuLYTELY was 'moderately' or 'extremely' difficult to ingest
compared to patients ingesting DIACOL tablets. Additionally, in each trial, over
fifteen times as many patients found the taste of cherry flavored NuLYTELY 'bad,
barely tolerable' or 'very bad, not tolerable' when compared to patients who
took DIACOL tablets. Finally, in each trial, to a high degree of statistical
significance, patients taking DIACOL tablets reported less nausea, bloating, and
vomiting.
Following such favorable clinical results, InKine is preparing to submit a
New Drug Application to the FDA. If approved by the FDA InKine intends to market
DIACOL to gastroenterologists throughout the United States.
Other Applications for DIACOL. InKine believes there are several other
potential indications for the use of DIACOL. Colonic purgation is required in
all pre-operative colonic surgical procedures and therefore could be used as a
pre-operative preparation in lieu of NuLYTELY which is currently used a majority
of the time. Colonic purgation is also required prior to other visualization
procedures such as barium enema examinations and flexible sigmoidoscopy. InKine
similarly believes that DIACOL may be effective as a laxative for chronic
constipation.
Acquisition of Proprietary Rights to DIACOL Pursuant to License Agreement.
On February 14, 1997 InKine entered into the ALW License with the ALW
Partnership formed by the Partners, pursuant to which InKine obtained an
exclusive worldwide license, in perpetuity (subject to expiration of underlying
patents and rights of termination in the event of breach by a party), to
develop, use, market, sell, manufacture, have manufactured and sub-license, in
the field of colonic purgatives or laxatives (the "Field of Use"), DIACOL along
with ALW's body of proprietary technical information, trade secrets and know-how
related thereto. A U.S. patent Non-Aqueous Colonic Purgative Formulations -- as
to DIACOL (covering any solid form of administration of sodium phosphate for use
as a colonic cleansing agent or as a laxative) was issued on April 1, 1997.
Patents on DIACOL are pending in PCT applications designating Europe, Japan, and
Canada.
To expand its product lines under the ALW License, InKine filed a patent
application covering alternative salt combinations which may be utilized in
place of the sodium phosphate formulation used in DIACOL. InKine's rights under
the ALW License automatically extend to improvements developed by InKine and/or
ALW which are derivative of DIACOL, and InKine has a right of first refusal with
respect to any new products which relate to the Field of Use but which are not
derivative of DIACOL.
THROMBOSPONDIN TECHNOLOGY
Cancer and Metastasis; Background and Statistics. Cancerous tumors are
believed to form when cancer cells multiply at a rate that is greater than the
rate at which the host defense system can destroy the cells. Traditional methods
of treating cancer generally include surgery, radiation therapy and
chemotherapy. Presently, chemotherapeutic approaches to cancer generally involve
the use of broad-based cytotoxic agents which kill many rapidly growing normal
cells in addition to cancer cells. Significant side effects result from
cytotoxic therapy. Most cancer will spread beyond its original site and invade
surrounding tissue, and may also metastasize to more distant sites and
ultimately cause death in the patient unless effectively treated. To be
effective, cancer treatment must not only target the primary site but also its
metastasis.
Tumor metastasis is a multi-step process involving cell adhesion,
migration, invasion, colonization of distant organs and angiogenesis. TSP-1 is a
large glycoprotein secreted by platelets and synthesized by many cell types,
including endothelial and tumor cells. TSP-1 has been implicated as a promoter
of tumor progression and angiogenesis. A number of studies have demonstrated
that TSP-1 can bind to multiple surface receptors on the same cell or bind to
different receptors on different cells, including carcinoma cells. InKine
believes that blocking the TSP-1 receptor may represent a novel approach for the
treatment and prevention of metastasis by uniquely acting on certain
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steps of the metastatic cascade. By antagonizing TSP-1, cancer cell adhesion,
migration, invasion and angiogenesis may all be inhibited.
The Thrombospondin Technology and its Applications. Dr. George Tuszynski
has performed laboratory studies suggesting that TSP-1 potentiates tumor
progression. In 1987 it was first shown that TSP-1 functioned as a tumor cell
and platelet adhesive protein. Subsequently four adhesive domains in the TSP-1
molecule were identified. Several laboratories have demonstrated that TSP-1
stimulated the migration of several types of human cancer. The interpretation
that TSP-1 promotes tumor metastasis is further supported by the observation
that TSP-1 injected intravenously into mice enhanced lung tumor colony formation
three-fold.
Dr. Tuszynski has found a specific amino acid sequence in TSP-1 that is
believed to be responsible for promoting the effects of this molecule on tumor
cell adhesion and metastasis. From this discovery, Dr. Tuszynski invented a
series of peptide molecules, and a patent for the molecules has been allowed in
the United States. These molecules significantly reduce metastasis of a mouse
tumor cell line and a human tumor cell line when injected into athymic mice. Dr.
Tuszynski has also developed a murine polyclonal antibody against the TSP-1
receptor which was also shown to prevent or significantly reduce metastasis in
athymic mice. In June 1999 InKine filed a patent application directed to a novel
sequence of the thrombospondin receptor and monoclonal antibodies directed to
the same. Dr. Tuszynski investigated the pattern of distribution of the TSP-1
receptor in breast carcinoma and squamous cell carcinomas of the head and neck.
His laboratory study showed strong localization of TSP-1 in the stroma of
malignant tumors with little or none in benign tissue. Importantly, the receptor
was expressed in carcinoma cells but was absent in normal cells. More recently
similar observations were made in prostate, pancreatic and hepatocellular
carcinomas.
To determine if the presence or the amount of the specific TSP-1 receptor
correlated directly to the capacity of tumor cells to invade and metastasize,
immunostained carcinoma specimens from humans were subjected to
computer-assisted image analysis with the purpose of quantifying the receptor
density on tumor cells. Dr. Tuszynski's results found that those patients with a
high positive stain score for specific receptors had a decreased overall
survival rate and all developed metastatic disease within sixteen months of
initial diagnosis. Patients with a low positive stain for the receptor were
found to be disease-free for at least two years. These studies, coupled with
preliminary studies using labeled peptides administered to animals, suggest that
several diagnostic products and therapies may be derived from this technology.
TSP-1 has been shown to modulate the behavior of endothelial and
non-endothelial cells involved in the regulation of angiogenesis. Antagonists of
the TSP-1 receptor appear to have effects on different steps of the angiogenic
process including, endothelial cell proliferation, migration and adhesion.
Research and Development Activities. Dr. Tuszynski has identified a
hexapeptide structure which appears to prevent the spread of human tumors in
animals by blocking the TSP-1 receptor. Preclinical testing is to be conducted
to determine if the pharmacokinetics and safety profile warrant the introduction
of this molecule into humans. InKine believes that because the lead compound
contains a hexapeptide, manufacturing would be inexpensive relative to other
peptide therapies. The prevention of the spread of small cell lung carcinoma has
been chosen as the initial target cancer. The survival term (generally six
months) for this type of cancer is extremely poor and should provide InKine with
an early indication of the compound's effectiveness.
Additionally, InKine intends to conduct an intensive program using
combinatorial chemistry capabilities to identify small organic molecules which
block the TSP-1 receptor. InKine is in a position to accomplish this since Dr.
Tuszynski cloned the TSP-1 receptor, thus providing InKine with chemical
screening capability which did not previously exist.
To develop this product, InKine intends to explore corporate partnerships
because of the expense involved in developing an agent used to treat or prevent
the spread of cancer. InKine has begun preliminary discussions with several
multinational pharmaceutical companies but there can be no assurance that a
corporate partnership or any cooperative agreement will be consummated.
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License of Proprietary Rights. InKine has licensed the rights to all the
U.S. and foreign patents and patent applications relating to Thrombospondin
Technology and the rights to all future research and development of the
Thrombospondin Technology conducted in Dr. Tuszynski's laboratory from Dr.
Tuszynski and MCP. The patents, pending patent applications and future patent
applications cover or are expected to cover areas such as composition of matter
for a number of peptides with anti-metastatic activity, a novel cell surface
receptor which is important to the metastatic process, a monoclonal antibody to
such cell surface receptor and cancer diagnostic applications, in addition to
potential applications and methods of inhibiting thrombotic activity and
enhancing wound healing, among other indications.
Fc RECEPTOR TECHNOLOGY
Autoimmune and Inflammatory Diseases: Background and Statistics. Millions
of patients in the United States suffer from a variety of serious autoimmune
disorders such as rheumatoid arthritis, lupus, Graves Disease and others,
including ITP. All of these disorders are antibody-mediated and involve
antibody-coated complexes which are central to disease pathophysiology. In
almost all cases, the current therapy of choice is to administer
glucocorticoids, such as prednisone at high doses and/or for extended periods of
time. Unfortunately there are many complications of glucocorticoid treatment;
adverse events are common and involve many major organ systems.
In autoimmune diseases such as ITP, there is an increased clearance of
platelets by macrophages in the spleen. ITP is caused by antiplatelet
antibodies, frequently of the IgG class, which form IgG-containing complexes
with the platelets. In the spleen, these IgG-coated platelets bind to the
macrophage at Fc receptor sites on the macrophage surface. Observations of
patients having ITP, lupus and autoimmune hemolytic anemia suggest that
interactions of IgG-containing complexes with the macrophage Fc (IgG) receptors
lead to tissue destruction in these immunologic disorders.
Diseases characterized by interactions of IgG-containing immune complexes
with macrophage Fc receptors are often chronic, involve much suffering and are
generally treated with agents having serious side-effects.
Most patients with ITP require chronic daily therapy over months or years.
InKine believes, therefore, that if CBP-1011 is successfully developed and
approved by the FDA, a significant market for CBP-1011 as a chronic daily
therapy may develop.
The following is the estimated U.S. population for select autoimmune
diseases published in 1994 by Drug and Marketing Development Inc. in the disease
categories noted below:
ESTIMATED U.S. PATIENT POPULATION
DISORDER NUMBER OF
PATIENTS
ITP 117,000
Autoimmune Hemolytic Anemia 41,000
Systemic Lupus Erthematosus 500,000
Rheumatoid Arthritis 2,100,000
Treatment Options; Glucocorticoid; Progesterone. InKine believes that a
number of autoimmune diseases may be treated by modulation of the Fc receptor.
For example, ITP, autoimmune hemolytic anemia, lupus and other systemic
vasculitis disorders (such as polyarteritis nodosa, Wegener's granulomatosis,
lymphomatoid granulomatosis and
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Sjogren's Syndrome) and rheumatoid arthritis are all antibody-mediated and
generally responsive to steroids. InKine further believes that by concentrating
on careful elucidation of mechanisms of autoimmune diseases and the role of
macrophage Fc receptors in the pathophysiology of these disorders, a series of
useful therapeutic agents can be identified.
Glucocorticoid hormones are small molecules which rank among the most
effective therapeutic agents in the treatment of autoimmune disorders. It has
been established that one important mechanism for their efficacy is their
ability to inhibit macrophage Fc receptor expression by down-regulating the
transcription of these receptors. While glucocorticoids are used widely in
autoimmune diseases, substantial side effects limit their overall effectiveness.
Toxic effects observed include exacerbation of diabetes, hypertension,
electrolyte imbalance, weight gain, osteoporosis and increased susceptibility to
infection.
InKine has focused its development efforts on a search for agents which
inhibit the clearance of antibody complexes without the accompanying toxicities
observed for many glucocorticoids. In that context, it has observed that some
progesterones may demonstrate the desired down-regulatory effect on macrophage
Fc receptor expression and antibody clearance but some may exert potentially
undesirable hormonal effects. Estrogens, meanwhile, enhance macrophage Fc
receptor expression and immune clearance. For treatments of diseases
characterized by interactions of IgG-containing immune complexes with macrophage
Fc receptors, InKine concentrated on progesterone derivatives which do not cause
the toxicities seen with glucocorticoids.
Claimed Therapeutic Advantages of CBP-1011. Initial clinical testing of
CBP-1011 has targeted ITP, one of several autoimmune disorders in which (a) the
pathophysiology involves the deposition of immune complexes in key organs and
(b) patients respond to treatment with glucocorticoids such as prednisone.
ITP, an orphan disease (a disease with less than 200,000 cases), is a
disorder which stems from Fc receptor-mediated macrophage phagocytosis of
antibody-coated platelet complexes. The purpura, when produced, is severe and
marked by copious hemorrhage from mucus membranes. If platelets are severely
depleted, hemorrhage into the brain can occur, which is often fatal. ITP is seen
alone (i.e., without concomitant autoimmune disease) as well as in up to 20% of
lupus patients and in HIV-infected patients.
Treatment of ITP typically begins with prednisone for variable periods of
one month or longer. A substantial portion of patients respond to treatment.
Patient tolerance is limited and most patients relapse as prednisone treatment
is tapered. Eventually the majority of patients advance to splenectomy to which,
again, a substantial portion respond.
Intravenous immunoglobulin ("IVIG") is used occasionally in very ill
patients or those refractory to prednisone, either before or following
splenectomy. IVIG treatment is believed to cause an antibody blockade of the Fc
receptor, inhibiting the clearance of IgG-coated platelets. Response rates are
similar to glucocorticoid therapy but immunoglobulin treatment is expensive and
relapse typically follows discontinuation of treatment. WinRho SD, a polyclonal
antibody product launched in 1995 which appears to work by inhibiting macrophage
Fc receptor mediated clearance of the IgG-coated platelet, is intended to be a
more convenient option to IVIG treatment in that WinRho SD can be rapidly
infused while IVIG cannot. WinRho SD still must be repeatedly administered
parenterally for this chronic disease, thus offering only modest benefit over
IVIG as well as continuing to raise certain safety issues regarding the product.
Human clinical data in ITP is currently being collected for CBP-1011 in a
pivotal Phase III trial. InKine believes this ITP program will represent
clinical proof of principle for autoimmune disease states and that an attractive
molecular-based rationale exists for potential effectiveness in lupus,
rheumatoid arthritis and other autoimmune diseases. Steroids are usually
effective in the treatment of a number of autoimmune diseases and have a rapid
effect. In addition to their ability to down-regulate Fc receptor production, a
second major mechanism of action of glucocorticoid therapy in autoimmune disease
is the inhibition of the release of biologically active products from macrophage
and other phagocytic and non-phagocytic cells.
CBP-1011's mechanism of action is similar to that of glucocorticoids on the
regulation of macrophage Fc receptor production and results in diminution of
IgG-containing complex engulfment. Given this insight, InKine believes that
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exploring related compounds with an improved safety profile over glucocorticoids
and progestins in lupus and rheumatoid arthritis has merit.
Upon successful development of CBP-1011, InKine anticipates that it will be
more readily accepted by patients because it will be better tolerated and
available as an oral formulation with a reduced side effect profile as compared
to IVIG, WinRho, or prednisone, although no assurance as to successful
development or patient acceptance can be given. CBP-1011 is a steroid analog,
demonstrating steroid-like properties but without the side-effect profile
commonly associated with glucocorticoids. An extensive body of experience in
human use exists and the drug is well characterized. No significant estrogenic
activity has been observed to date with CBP-1011.
Summary of Clinical Data. To date there have been two studies completed
that have assessed the effects of CBP-1011 on the platelet count of patients
with ITP. The results of the two studies indicate that CBP-1011 appears safe and
effective in the treatment of patients with ITP. A positive response, as
indicated by an increase in platelet count of at least 20,000/mm3 over baseline
was noted in 14 of 19 treated patients, while adverse events were transient in
nature and did not, with few exceptions, cause the patients to discontinue from
the trial.
Phase III (Pivotal) Trials Program; Trial Design. The United States pivotal
trial being conducted calls for 100 evaluable ITP patients to be enrolled at
approximately 38 sites in the United States. Patients must be newly diagnosed or
previously responsive to prednisone. Patients will be required to have a mean
platelet count between 15,000 and 75,000/mm(3) at entry. The primary efficacy
endpoint was defined as an increase in baseline platelet count of
> 20,000/mm(3). Dosing in this open-label, historically controlled, 42-day
course of treatment, commenced in March 1998.
Responders in the active disease phase will then be randomized in a
double-blind fashion, to one of three groups for an additional 42 days to assess
maintenance of effect: placebo, CBP-1011 at half-strength and CBP-1011 at full
strength. The primary efficacy endpoint in this phase is maintenance of the
therapeutic effect, e.g., by a sustained increase in baseline platelet count of
> 20,000/mm(3).
Interim Results of Phase III Data of CBP-1011. In June 1999, InKine
announced after reviewing unaudited interim Phase III efficacy and safety data
with the FDA that CBP-1011 appeared to benefit certain patients with ITP without
the side effects that would normally be seen with the chronic administration of
"classical steroids", such as prednisone. Discussions with the FDA regarding the
data to date were favorable and InKine decided to continue the pivotal Phase III
trial. Additionally, CBP-1011 will be reformulated from its current capsule
formulation to a tablet formulation. This will take several months to complete
and will require a single-dose pharmacokinetics study to compare the new and old
formulations.
Additional Therapeutic Opportunities Identified in the Fc Receptor Program.
In addition to the autoimmune program, InKine is pursuing two other novel
programs: serious infection and asthma/allergy. The relationship of the Fc
receptor to these disease areas has been identified and a number of preclinical
studies have been performed.
Dr. Alan D. Schreiber, M.D., who is conducting sponsored research for
InKine, demonstrated and published in peer-reviewed journals the feasibility of
conferring engulfment (phagocytic) properties to cells which are not normally
capable of phagocytosis by nature. In collaboration with a leading gene therapy
researcher, this conversion was possible by administering Fc receptor gene cDNA
to the cells of interest. The feasibility of converting a non-phagocytic cell to
a phagocytic cell could represent a critical step in the body's fight against
infectious microorganisms. Dr. Schreiber has developed novel therapeutic
strategies to facilitate the removal of bacteria from the lung and from the
systemic circulation (via the liver). Such new therapies might be used in
association with antibiotics for the treatment of serious pulmonary or systemic
infections and in the prevention of the onset of infection in disorders
predisposed to bacterial or opportunistic infections.
Cellular receptors in the lung, (the IgE receptors), induce the release of
histamine and other biologically active products important in the
pathophysiology of asthma and other allergic disorders. Dr. Schreiber has
developed strategies for the local and systemic administration of therapies to
potentially prevent and treat these disorders. Two distinct novel targets which
have been characterized in detail are: (1) the Fc receptor domain responsible
for initiating
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the downstream signaling events resulting in mast cell histamine release and
subsequent bronchoconstriction and (2) the kinase responsible for an initial
step in the signal transduction process. A peptide inhibitor which binds to the
intracellular Fc receptor domain has been made and delivery issues are currently
being addressed. Several oligonucleotide inhibitors of the second signal kinase
have been made and can suppress histamine release in-vitro and in-vivo. Animal
feasibility efficacy studies have commenced for oligonucleotide therapies.
A number of United States and foreign patent applications have been filed,
eight of which have been allowed in the United States which describe methods of
inhibiting or stimulating phagocytosis and methods of modulating clearance of
immune complexes. If the patents are issued, they will relate to therapies for
infectious diseases, asthma/allergy and autoimmune diseases.
License of Proprietary Rights. Rights to the Fc Receptor Technology are
owned by the University of Pennsylvania, pursuant to which InKine has obtained
an exclusive worldwide license for the term of the patents covered thereunder,
to make, have made, use, sell and to exploit all patent and other rights under
this license.
MANUFACTURING
InKine does not have the resources, facilities or capabilities to
manufacture any of its proposed products. InKine has no current plans to
establish a manufacturing facility. InKine expects that it will be dependent to
a significant extent on contract manufacturers for commercial scale
manufacturing of its proposed products in accordance with regulatory standards.
InKine's dependence on third parties for manufacturing may adversely affect
operating results as well as InKine's ability to develop and deliver products on
a timely and competitive basis.
Contract manufacturers may utilize their own technology, technology
developed by InKine, or technology acquired or licensed from third parties. When
contract manufacturers develop proprietary process technology and have ownership
of the Drug Master File, InKine's reliance on such contract manufacturer is
increased, and InKine may have to obtain a license from such contract
manufacturer to have its products manufactured by another party. Technology
transfer from the original contract manufacturer may be required. There can be
no assurance that any such license will be available on terms acceptable to
InKine, or, if available, that such technology will be successfully transferred
to InKine. Any such technology transfer may also require transfer of requisite
data for regulatory purposes, including information contained in a proprietary
Drug Master File held by a contract manufacturer. FDA approval of the new
manufacturer and manufacturing sight would also be required. There can be no
assurance that any such transfer can be completed.
MARKETING & SALES
In order to market any of its products directly, InKine must develop a
marketing and sales organization. There is no assurance that InKine has the
ability or the resources to develop a marketing and sales organization. However,
InKine may elect to enter into agreements with established pharmaceutical
companies with respect to the marketing of one or more of its products. Such
agreements may be exclusive or non-exclusive and may provide for marketing
rights worldwide or in specific markets.
COLLABORATIVE ARRANGEMENTS; RESEARCH AND LICENSE AGREEMENTS
InKine has rights under license agreements to several patents and patent
applications under which InKine expects to owe milestone payments and royalties
on sales of certain of its proposed products. Additionally, certain of these
agreements also provide that if InKine elects not to pursue the commercial
development of any licensed technology, or does not adhere to an acceptable
schedule of commercialization, then InKine's exclusive rights to such technology
would terminate. InKine also funds research at certain institutions, and these
relationships may provide InKine with an option to license any results of the
research.
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GOVERNMENT REGULATION
The production and marketing of InKine's products and its research and
development activities are subject to regulation by numerous governmental
authorities in the United States and other countries. In the United States,
biological products, drugs and diagnostic products are subject to rigorous
review by the FDA. The Federal Food, Drug, and Cosmetic Act, the Public Health
Service Act and other federal statutes and regulations govern or influence the
testing, manufacture, safety, efficacy, labeling, storage, recordkeeping,
approval, advertising and promotion of such products. Noncompliance with
applicable requirements can result in fines, recall or seizure of products,
refusal of the government to approve product and/or license applications or to
allow InKine to enter into government supply contracts, the withdrawal of
previously approved applications and criminal prosecution.
In order to obtain FDA approval of a new product, InKine must submit proof
of safety, purity, potency and efficacy. Such proof entails extensive and
time-consuming preclinical and clinical testing. The results of preclinical
studies are submitted to the FDA as part of an Investigational New Drug
Application ("IND"). Preclinical studies involve laboratory evaluation of
product characteristics and animal studies to assess the efficacy and safety of
the product. Once the IND is reviewed, human clinical trials may be conducted.
Human clinical trials are typically conducted in three sequential phases, but
the phases may overlap. Phase I trials consist of testing the product in a small
number of patients or healthy volunteer subjects primarily for safety at one or
more doses. During Phase II, in addition to safety, the efficacy of the product
is evaluated in a patient population somewhat larger than Phase I trials. Phase
III trials typically involve additional testing for safety and clinical efficacy
in an expanded population at geographically dispersed test sites. A clinical
plan, or "protocol," accompanied by the approval of the Institutional Review
Board reviewing and monitoring the trials, must be submitted to the FDA prior to
commencement of each clinical trial. Various reports must be submitted to the
FDA during the course of the trials, and the FDA may order the temporary or
permanent discontinuation of a clinical trial at any time.
The results of the clinical trials are submitted to the FDA as part of a
New Drug Application ("NDA"). Following extensive review of the NDA, the FDA may
grant marketing approval, require additional testing or information, or deny the
application. Sales of a new drug may commence following FDA approval of an NDA
and satisfactory completion of a pre-approval review of the manufacturing
facility and pertinent production records. If there are any modifications to the
drug, including any changes in indication, manufacturing process, labeling or
manufacturing facility, an NDA supplement may be required by the FDA.
There is no assurance that the FDA will act favorably or quickly in
reviewing submitted applications, and significant difficulties or costs may be
encountered by InKine in its efforts to obtain FDA approvals that could delay or
preclude InKine from marketing any products it may develop. The FDA may also
require post-marketing testing and surveillance to monitor the effects of
approved products or place conditions on any approvals that could restrict the
commercial applications of such products. Product approvals may be withdrawn if
compliance with regulatory standards is not maintained.
Continued compliance with all FDA requirements and conditions in an
approved application, including those concerning product specification,
manufacturing process, validation, labeling, promotional material, recordkeeping
and reporting requirements, is necessary for all products. Failure to comply
could lead to product recall or other FDA-initiated actions, which could delay
further marketing until the products are brought into compliance. Even after any
approval by the FDA and foreign regulatory authorities, products may later
exhibit adverse effects that could prevent their widespread use or necessitate
their withdrawal from the market.
Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval by comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing in those countries. The time required to obtain such approval may be
longer or shorter than that required for FDA approval.
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PATENT AND PROPRIETARY RIGHTS; LICENSED TECHNOLOGY
InKine's success will depend in part upon its ability to obtain patent
protection for compounds, uses of compounds, and processes. Patent matters
involve complex legal and factual issues, and can be highly uncertain. There can
be no assurance that any patent applications now pending or filed in the future
will result in patents being issued or that any patents now held by or licensed
to InKine, or issued or licensed to InKine in the future, will afford any
competitive advantages for InKine, will not be challenged by third parties, or
cannot be designed around by others. The cost of litigation to uphold the
validity and prevent infringement of patents and to enforce licensing rights can
be substantial. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate the technology owned by
or licensed to InKine or design around the patented aspects of such technology.
In addition, there can be no assurance that the products and technologies InKine
will seek to market will not infringe patents or other rights owned by others,
licenses to which may not be available to InKine.
InKine also relies upon unpatented proprietary technology, and may
determine in appropriate circumstances that its interest would be better served
by reliance on trade secrets or confidentiality agreements rather than patents.
No assurances can be given that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to such proprietary technology or that InKine can meaningfully
protect its rights in such unpatented proprietary technology. Additionally, if
InKine is unable to obtain strong proprietary rights protection of its products
after obtaining regulatory clearance, competitors may be able to market
competing products by obtaining regulatory clearance, by showing equivalency to
InKine's product, without being required to conduct the lengthy clinical tests
required to be conducted by InKine.
InKine has rights under license agreements to several patents and patent
applications under which InKine expects to owe milestone payments and royalties
on sales of certain of its proposed products. Additionally, certain of these
agreements also provide that if InKine elects not to pursue the commercial
development of any licensed technology, or does not adhere to an acceptable
schedule of commercialization, then InKine's exclusive rights to such technology
would terminate.
COMPETITION
The biopharmaceutical industry is highly competitive, including the
industry segments related to (i) receptor based technologies, which include the
Fc Receptor Technology, (ii) purgative agents for clearing the colon, which
include DIACOL, and (iii) the treatment and prevention of cancer, which includes
the Thrombospondin Technology. InKine is likely to encounter significant
competition with respect to its product candidates currently under development,
including, but not limited to, competition from (a) La Jolla Pharmaceutical
Company, GeneLabs Technologies, Inc., IDEC Pharmaceuticals Corporation, Immune
Response Corporation, Autoimmune, Inc. and Anergen, Inc. with respect to the
treatment of diseases targeted by the Fc Receptor Technology; (b) Braintree
Laboratories, Inc., Schwarz Pharma Inc. and C.B. Fleet Company, Inc. with
respect to the product applications targeted by DIACOL; and (c) Boston Life
Sciences, Inc., Entremed, Inc. and Human Genome Sciences, among others with
respect to the treatment of diseases targeted by the Thrombospondin Technology.
OTHER FACTORS TO BE CONSIDERED
InKine's business is subject to a number of risks and uncertainties. In
addition to the other information contained in this Annual Report on Form 10-K,
the following risks factors should be carefully considered.
InKine has no products, and it may take years before InKine has a fully
developed product that InKine can manufacture, market and sell to realize
revenues.
InKine has not completed the development of any product to date.
Accordingly, InKine has not begun to market or generate revenues from any of its
products. It will be several years, if ever, before InKine could realize
significant revenues from product sales or royalties.
InKine's technologies and products under development require significant,
time-consuming and costly research,
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development and testing prior to their commercialization. InKine's research and
development efforts could fail to produce safe, effective products with
therapeutic or diagnostic benefits.
Even if InKine successfully develops its products and they receive all
necessary approvals, InKine may not be able to effectively market or manufacture
its products. InKine will seek to enter into strategic alliances or
collaborative arrangements with marketing and manufacturing companies. InKine
may experience difficulty entering into these arrangements. Even if InKine
succeeds, there can be no assurance that the arrangements will be successful.
InKine or its collaborators may encounter problems and delays relating to
research and development, regulatory approval, manufacturing, marketing and
commercialization and obsolescence of product candidates. The failure by InKine
or its collaborators to successfully address these problems and delays could
have a material adverse effect on InKine's business, financial condition and
results of operations.
InKine needs substantial additional financing to continue its operations
beyond fiscal year 2000.
InKine will require substantial additional funds to develop, manufacture
and market its products. These funds will be necessary for the following:
- Research and development, including preclinical studies and clinical
trials;
- Seeking regulatory approval;
- Developing manufacturing and distribution capabilities; and
- Funding growth opportunities.
InKine expects that its current capital resources will be adequate to fund
its operations through fiscal year 2000. Unanticipated events may occur that
will make InKine's capital resources insufficient to fund its activities through
that date. InKine's future capital requirements will depend on several factors,
including the following:
- Continued progress in its research and development activities;
- Progress with preclinical studies and clinical trials;
- Prosecution and enforcement of patent claims;
- Technological and market developments;
- InKine's ability to establish product development arrangements;
- The cost of manufacturing scale-up and effective marketing activity;
and
- Joint marketing development or other collaborative arrangements.
In order to obtain the substantial additional funds that InKine will
require through fiscal year 2000 and beyond, InKine intends to seek financing
from a variety of sources, including, public or private financings, including
equity or debt financings and collaborative arrangements with corporate partners
and others.
Additional equity financings may cause further dilution to current
shareholders. No assurance can be given that additional financing will be
available when needed, if at all, or on terms acceptable to InKine. If adequate
additional funds are not available, InKine will be required to delay, scale back
or eliminate all or certain of its research or development activities and
marketing efforts. InKine may also be forced to license to third parties certain
products or technologies that InKine would otherwise attempt to develop itself.
InKine has no manufacturing capability or experience, and will therefore
have to rely on third party manufacturers to complete all regulatory
requirements of drug product development.
Regulatory requirements call for the production of qualification lots of
drug product on a commercial scale which is equivalent to the process used to
manufacture the drug product tested in all Phase III clinical studies. Failure
to replicate a drug product process on a commercially viable scale could
result in a rejection of approval by the FDA
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or delay the timing of an NDA submission. To date, InKine has not completed the
validation lots of DIACOL and there is no assurance that InKine will be able to
produce DIACOL on a commercially viable scale or that it will be able to repeat
the process used to manufacture the Phase III clinical lots of DIACOL. InKine's
inability to manufacture DIACOL would significantly delay InKine's
commercialization of this product. InKine is working with Pharmaceutical
Manufacturing Research Services ("PMRS"), a contract manufacturer, with regard
to development by PMRS of a GMP (Good Manufacturing Practice) tablet formulation
process to manufacture drug product for DIACOL on a commercial scale.
Additionally, in the event that DIACOL is not manufactured at PMRS, InKine
will need to secure other manufacturing arrangements. The process developed by
PMRS is proprietary, and in the event InKine desires to utilize, or have another
party utilize such technology, InKine may be required to make license payments
to PMRS. No assurance can be given that any such process would be accepted by
the FDA.
InKine also expects to conduct manufacturing development activities for its
other products under development. InKine is currently working with outside
contractors for the production of CBP-1011. InKine expects to expend significant
resources in the production of CBP-1011 and any other compounds under
development, and there can be no assurance that these efforts will be
successful.
Once developed, InKine's products will need to be manufactured in large
scale commercial quantities under strict GMP requirements prescribed by the FDA.
Because InKine has no manufacturing capabilities, it will need to depend on
collaborators, licensees or contract manufacturers for the manufacture of its
products. InKine may not be able to enter into acceptable manufacturing
arrangements and, even if it does, InKine will have limited control over the
manufacturers. There can be no assurance that the manufacturers will perform
their obligations in a satisfactory manner.
InKine has begun the process of seeking acceptable manufacturers for its
products. For example, InKine has identified a commercial manufacturer to handle
the production of DIACOL upon receiving FDA approval of the drug. In addition,
InKine is in the process of securing a commercial manufacturer for the
production of CBP-1011. There can be no assurance that InKine will be able to
enter into any of these manufacturing arrangements on acceptable terms, if at
all.
The FDA and other government agencies require extensive clinical testing
before biopharmaceutical products may be sold to consumers.
The research, testing, manufacture, distribution, advertising and marketing
of pharmaceutical products are subject to extensive regulation by governmental
authorities in the United States and other countries. For example, the FDA
requires Phase I, II and III clinical trials on all biopharmaceutical products.
The FDA must also confirm that current good manufacturing practices were
maintained during testing and manufacturing. This process can take many years
and requires substantial resources.
The FDA may not act favorably or quickly in reviewing submitted
applications. InKine may experience significant difficulties or costs as it
attempts to obtain FDA approvals. Such difficulties and costs could delay or
preclude InKine for marketing any products it may develop. The FDA may require
post-marketing testing and surveillance to monitor the effects of approved
products. The FDA may also place conditions on any approvals that could restrict
the commercial applications of such products. If InKine fails to comply with
these standards, the FDA may withdraw its product approval.
InKine is currently developing its products, however, none of InKine's
products have been approved by the FDA.
InKine's products are in various stages of development and the FDA approval
process, as set out below.
The Fc Receptor Technology
InKine is evaluating a number of product opportunities for the Fc Receptor
Technology, including the development of drugs for autoimmune diseases and other
diseases, including asthma, allergy and certain serious
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infectious diseases, which will require strategic alliances with other entities.
No assurance can be given regarding InKine's ability to establish these
alliances, or their successful timing. The compound CBP-1011, which targets the
Fc Receptors, is currently in Phase III clinical trials for the treatment of
ITP. There can be no assurance that CBP-1011 will prove to be safe and have the
desired effect in clinical trial. There can be no assurance that it will
receive the required FDA and other regulatory approvals. Even if the approvals
are obtained, there can be no assurance that InKine or its collaborators will
be able to successfully commercialize CBP-1011.
The Thrombospondin Technology
InKine is evaluating a number of product opportunities for the
Thrombospondin Technology, which is in the preclinical stage of development,
including its use as an agent to inhibit tumor metastasis and as a cancer
imaging agent. InKine will seek to expand the research and development of
Thrombospondin Technology applications primarily through strategic alliances
with other entities. No assurance can be given as to InKine's ability to
establish these alliances or the success of the ongoing research concerning the
Thrombospondin Technology.
DIACOL
A Phase I and Phase IIb dose ranging have been completed for DIACOL. In
April 1999, InKine concluded two pivotal Phase III clinical trials of DIACOL. In
each trial, DIACOL tablets were as effective as cherry flavored NuLYTELY Liquid
in the quality of colonic cleansing prior to colonoscopy. With a high degree of
statistical significance, each trial also indicated that DIACOL tablets were
better tolerated than NuLYTELY and were greatly preferred by patients. InKine is
preparing to submit a NDA for DIACOL to the FDA. There can be no assurance that
the NDA will be accepted by the FDA or that additional Phase III clinical trials
will not be required.
To date, no NDA has been submitted to the FDA for any product candidate
being developed by InKine and there can be no assurance that any the product or
compound will ever be submitted. InKine has not obtained approval by the FDA or
any other regulatory authority for marketing any drug. There can be no assurance
that there will even be approval for the FDA or any other regulatory authority
for any products developed by InKine or that InKine will be able to obtain the
labeling claims desired for its products or compounds. Data obtained from
preclinical studies and clinical trials are subject to varying interpretations,
which could delay, limit or prevent FDA regulatory approval. Delays or
rejections may be encountered based upon changes in FDA policy for drug approval
during the period of development and FDA regulatory review. Similar delays also
may be encountered in foreign countries. Any denials or delays in obtaining the
requisite approvals would likely have a material adverse effect on InKine.
InKine may never achieve a profitable level of operations.
InKine has incurred net operating losses since its inception on July 1,
1993. As of June 30, 1999, InKine had an accumulated deficit of approximately
$23.1 million. InKine expects to incur additional losses in the foreseeable
future. These losses are expected to increase and be substantial as InKine moves
closer to commercialization of its first product candidate, DIACOL. InKine also
expects its losses to increase as it expands its research and development
activities.
In addition, InKine has granted or committed to grant shares and options to
founding scientists and consultants to acquire an aggregate of 1,595,000 shares
of Common Stock. The issuance of these shares and options with respect to
950,000 shares will be subject to the satisfaction of product development
milestones tied to FDA filings and approvals and InKine's achievement of certain
net sales targets. InKine will incur substantial non-cash charges to earnings
equal to the fair value of these options, which will be charged to operations at
the time these milestones are achieved. Increases in InKine's net operating loss
or operating losses per share could have an adverse effect on InKine's ability
to secure additional financing.
InKine has no marketing, distribution or sales capabilities and little
experience in these areas. InKine will need to rely on third parties or develop
an internal sales and marketing group.
InKine has limited experience in marketing, distributing and selling
pharmaceutical products. InKine will need to develop an internal staff or rely
on collaborators, licensees or on arrangements with other third parties to
provide for the marketing, distribution and sales of its products. InKine may
not be able to enter into acceptable
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<PAGE> 19
marketing, distribution or sales arrangements with third parties and, even if it
does, InKine will have limited control over the third parties. There can be no
assurance that the third party will perform its obligations in a satisfactory
manner.
Substantially all of InKine's competitors have greater financial and
technological resources, better sales and marketing capabilities and more
experience in research and development than InKine.
InKine is developing products that will compete in three very competitive
segments of the biopharmaceutical industry. The three segments are those which
include (i) receptor based technologies, which include the Fc Receptor
Technology, (ii) purgative agents for clearing the colon, which include DIACOL,
and (iii) the treatment and prevention of cancer, which includes the
Thrombospondin Technology. Based on total assets and revenues, InKine is
significantly smaller than the majority of its competitors in these segments.
Therefore, InKine is likely to encounter significant competition with respect to
each of its product candidates primarily from the following competitors among :
<TABLE>
<CAPTION>
PRODUCT CANDIDATES
DIACOL Fc Receptor Technology Thrombospondin Technology
<S> <C> <C> <C>
COMPETITORS Braintree Laboratories, La Jolla Pharmaceutical Boston Life Sciences,
Inc. Company Inc.
Reedco, Inc. GeneLabs Technologies, Entremed, Inc.
C.B. Fleet Company, Inc. Human Genome Sciences
Inc. IDEC Pharmaceuticals
Schwarz Pharma Inc. Corporation
Immune Response
Corporation
Autoimmune, Inc.
Anergen, Inc.
</TABLE>
The financial strength of InKine's competitors is particularly important in
the biopharmaceutical industry, where technological innovations occur rapidly.
These technological innovations can dramatically effect the price and
effectiveness of a product line, and they can render a competing product line
obsolete. Therefore, InKine's competitors may use their financial resources to
develop competitive products that are cheaper and more effective than InKine's
products. These competitive products may render InKine's products obsolete. Even
if InKine's competitors do not develop better and more cost effective products,
they may be more successful than InKine in manufacturing and marketing their
products. InKine's competitors have greater financial resources, and have
developed successful sales and marketing programs. InKine has not developed any
sales and marketing programs.
In addition to InKine's competitors in the biotechnology industry, colleges
and universities, hospitals, government agencies and other research
organizations are conducting research and seeking patent protection for a
variety of products which may compete with InKine's products. Any of these
organizations could develop products which could render InKine's products
obsolete or non-competitive.
InKine's rights to develop all of its products are held pursuant to license
agreements. If any of these license agreements are terminated, the licensor
could demand the return of the licensed compound or technology and InKine would
no longer be able to develop, manufacture or sell the product covered by that
license.
InKine has acquired the worldwide exclusive rights to DIACOL, the Fc
Receptor Technology and the Thrombospondin Technology under various license
agreements. Each of the licensors under these agreements may terminate the
license prior to its expiration date under certain circumstances, including
InKine's failure to comply with product development commitments specified in the
licenses. For example, certain of InKine's licensing arrangements require
specified levels of research and development expenditures by InKine. If a
license agreement is terminated, the licensor could demand the return of the
licensed compound or technology to the licensor, and
-17-
<PAGE> 20
InKine would have to cease developing, manufacturing or selling the product
covered by that license. The termination provisions of each of the licenses for
InKine's products are outlined below.
The Fc Receptor Technology
The license with respect to the compounds comprising the Fc Receptor
Technology may be terminated by the licensor based on InKine's future
performance with respect to product development and InKine's failure to make
certain royalty payments. InKine is currently in compliance with all of the
requirements necessary to continue this license, but there can be no assurance
that it will continue to meet these obligations.
The ALW License for DIACOL
The ALW License, which covers DIACOL, may be terminated by the licensor
based on InKine's failure to commit certain development funding and make certain
royalty payments. InKine is currently in compliance with all of the requirements
necessary to continue this license, but there can be no assurance that it will
continue to meet these obligations. In addition, InKine's rights under the ALW
License will no longer be exclusive, and the minimum royalty payment will no
longer be due (although decreased accrual royalty payments will be due) if there
is no valid or enforceable patent on DIACOL or any other product under the ALW
License. InKine will owe royalties to the ALW Partnership on all sales of
DIACOL in the future.
The Thrombospondin Technology Royalty Agreement
InKine will owe the licensors royalties for the Thrombospondin Technology
based on sales. InKine will also owe the licensors options to purchase an
aggregate of up to 250,000 shares of common stock of InKine. The options shall
be issuable by InKine equally to MCP and Dr. Tuszynski upon the achievement of
certain milestones and targets. In addition, InKine will be obligated to pay MCP
royalties of 2% on net sales of the product based on the Thrombospondin
Technology by InKine or any of its sublicensees, and 10% of any consideration
received by InKine upon the achievement of certain milestones in connection with
the Thrombospondin Technology. Finally, InKine is to pay MCP $200,000 per year
to fund sponsored research for a minimum of two years, plus an additional
$200,000 for a third year upon FDA acceptance, if any, of a Company-sponsored
IND and $200,000 for a fourth year upon successful completion, if any, of a
Phase II clinical trial. InKine is currently in compliance with all of the
requirements necessary to continue this license, but there can be no assurance
that it will confirm to meet these obligations.
The termination of any of InKine's licenses or the loss of exclusivity
under any of the licenses could have a material adverse effect on InKine's
business, financial condition and results of operations because InKine may no
longer be able to develop, manufacture or sell its products.
InKine does not have patent protection for all its products. Without patent
protection, InKine faces the risk of competitors developing similar products
which could render InKine's products obsolete or potentially infringe on the
patents of others. Even if InKine has or receives patent protection, the patent
may not afford adequate protection for InKine's invention, particularly in the
biopharmaceutical patent area, where the scope of patents is often difficult to
determine.
One of the products in InKine's family of compounds, CBP-1011, is not
patentable. InKine expects this compound will receive protection based on
approval for an Orphan Drug indication. As a result, InKine will have an
exclusive right to commercialize the compound for that particular indication for
seven years. No assurance can be given that the compound will in fact receive
such protection. The other compounds, consisting of DIACOL and the TSP-1
peptide, are the subject of patents and/or patent applications. Although InKine
believes that such patents and patent applications will cover InKine's rights to
use such technologies and product candidates in the United States, there can be
no assurance patents that have been issued, or additional patents, if any, that
will issue from pending patent applications, will afford adequate protection
against competitors or companies with competitive product candidates or
technologies.
-18-
<PAGE> 21
A U.S. Patent issued in April 1997 covering the use of DIACOL prior to
colonoscopy and other uses and procedures, but patents on DIACOL are pending in
applications filed under the Patent Cooperation Treaty ("PCT") which designate
Europe, Japan and Canada. In addition, InKine has obtained the rights to foreign
patents pending and intends to apply for additional patents in foreign
jurisdictions covering its products and technologies. No assurance can be given
that any additional foreign patents will be issued or, if issued, that they will
afford adequate protection against foreign competitors or foreign companies with
competitive product candidates or technologies. In addition, there can be no
assurance that any domestic or foreign patents issued will not be challenged,
invalidated or circumvented, or that the scope of any claims granted thereunder
will provide meaningful proprietary protection or competitive advantages to
InKine, or, if challenged, that a court will find the patents to be valid and
enforceable. To date, there has emerged no consistent policy regarding the
breadth of claims that are properly accorded to biotechnology patents. The
commercial success of InKine will also depend upon avoiding infringement of
patents issued to competitors. InKine has not conducted an independent search to
determine the existence of any patents similar to those covering DIACOL or the
Thrombospondin Technology.
InKine's product candidates, DIACOL and CBP-1011 are still in the
development stage, and neither their formulations nor their methods of
manufacture have been finalized. No assurance can be given that the manufacture,
use or sale of InKine's product candidates will not infringe patent rights of
others. There can be no assurance that a license will be available to InKine, if
at all, upon terms and conditions acceptable to InKine or that InKine will
prevail in any patent litigation. If InKine does not obtain a license under any
such patents held by others, if such infringement claims are found to be valid,
or if InKine is not able to have such competing patents declared invalid, InKine
may be liable for significant money damages, may encounter significant delays in
bringing DIACOL and CBP-1011 to market, or may be precluded from participating
in the manufacture, use or sale of these products or methods of treatment
covered by such patents.
If InKine's employees, scientific consultants or collaborators develop
inventions or processes independently that may be applicable to InKine's product
candidates, disputes may arise about ownership of proprietary rights to those
inventions and processes. Such inventions and processes will not necessarily
become InKine's property, but may remain the property of those persons or their
employers. Protracted and costly litigation could be necessary to enforce and
determine the scope of InKine's proprietary rights. Failure to obtain or
maintain patent and trade secret protection, for any reason, could have a
material adverse effect on InKine.
Certain of InKine's patents, in particular the TSP-1 technology and
Fc-receptor technology may cover inventions developed with funds from United
States government agencies or within academic institutions from which InKine
acquired rights to such patents. As a result of these arrangements, the United
States government or such academic institutions may have rights to certain
inventions, including rights to the royalty-free use, but not sale, of the
invention or technology for its own purposes.
InKine will depend on reimbursement from third-party payors to reach its
sales goals. Third-party payors routinely limit reimbursement coverages and
exert pressure to reduce prices. InKine may receive less than full reimbursement
from government and other third party payors, and therefore InKine may have less
revenues from sales than if it had direct payments from its potential customers.
Successful sales, if any, of InKine's products in the United States and
other countries will depend on the availability of adequate reimbursement from
third-party payors such as governmental entities, managed care organizations and
private insurance plans. Reimbursement by a third-party payor may depend upon a
number of factors, including the payor's determination that use of a product is
safe and efficacious, medically necessary, appropriate for the specific patient,
cost effective and neither experimental nor investigational. Since reimbursement
approval is required from each payor individually, seeking these approvals is a
time-consuming and costly process. Third-parties routinely limit reimbursement
coverage and in many instances are exerting significant pressure on medical
suppliers to lower their prices. Significant uncertainty exists concerning
third-party reimbursement for the use of any pharmaceutical product
incorporating new technology. There is no assurance that third-party
reimbursement will be available for InKine's products, or that this
reimbursement, if obtained, will be adequate. Less than full reimbursement by
governmental and other third-party payors for products developed by InKine would
adversely affect the market acceptance of these products and would also have
-19-
<PAGE> 22
a material adverse effect on InKine's results of operations. Health care
reimbursement systems vary from country to country. As a result, InKine cannot
assume that third-party reimbursement will be made available for InKine's
products under any foreign reimbursement system.
Approximately 10.5 million, or 45% of InKine's total outstanding shares,
have been or will be registered for resale upon the exercise of currently
exercisable warrants and options. The exercise of these warrants or options
could affect InKine's ability to obtain additional equity investors and could
cause the market price of the common stock to drop.
InKine has registered the following shares for resale without restriction
upon the exercise of currently exercisable warrants and stock options:
- Approximately 1.7 million shares underlying warrants issued to
placement agents;
- Approximately .5 million (after anti-dilution adjustment) shares
underlying a warrant issued to an investment banking firm in October
1995;
- Approximately 3.9 million shares issuable upon exercise of options
granted under InKine's Stock Option Plan; and
- Approximately 1.8 million shares issuable upon exercise of options
granted under InKine's Consultant Stock Option Plan.
In addition, InKine has reserved approximately 2.4 million shares for
issuance upon exercise of options granted to Dr. Jacob, InKine's Chairman and
Chief Executive Officer, and approximately .2 million shares to certain
consultants, which have not been registered. Many of these options and warrants
are likely to be exercised at a time when InKine might be able to obtain
additional equity capital on more favorable terms. The exercise of the warrants
and options and the sale of the underlying shares could have a negative impact
on InKine's ability to raise new equity capital.
The relatively low level of trading in InKine's common stock may make it
highly volatile.
InKine's common stock trades on the Nasdaq SmallCap Market. The market
price of the common stock, like that of many other development-stage public
pharmaceutical or biotechnology companies, has been highly volatile and may
remain so for the foreseeable future. In addition, InKine's common stock has
been thinly traded on the Nasdaq SmallCap Market, which may affect the ability
of InKine's stockholders to sell shares of the common stock in the public
market. There can be no assurance that a more active trading market will develop
in the future.
InKine may be delisted from the Nasdaq SmallCap Market if it cannot meet
Nasdaq's listing criteria. Specifically, InKine's stock is at risk for dropping
below the minimum bid price requirement of $1.00 per share. If Nasdaq delists
InKine's stock, shareholders will have a much more difficult time selling their
shares.
InKine must meet specific requirements in order to maintain a listing of
its common stock on the Nasdaq SmallCap Market. InKine cannot be sure that it
will continue to meet these requirements. For example, Nasdaq requires a minimum
bid price of $1.00 per share and InKine's common stock dropped below $1.00 per
share on several occasions in the first two quarters of fiscal year 1999 but was
not delisted.
In the event of any delisting, investors would have to conduct trading in
the over-the-counter market. InKine's stock would trade on an electronic
bulletin board established for securities that do not meet the Nasdaq listing
requirements or in what are commonly referred to as the "pink sheets." As a
result, an investor would find it more difficult to dispose of, or to obtain
accurate price quotations for, InKine's securities. If InKine's stock was
delisted, and if it traded at prices below $5.00 per share, it would also be
subject to so-called "penny stock" rules. These rules impose additional sales
practice requirements on broker-dealers who sell these securities to persons
other than established customers and accredited investors. For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchase and must have received the purchaser's written
consent to the transaction prior to sale. Consequently, delisting from the
Nasdaq SmallCap Market, if it were to occur, could affect the ability of
broker-dealers to sell the common stock and the ability of InKine's
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<PAGE> 23
stockholder to sell their securities in the secondary market.
InKine's products bear certain product liability risks inherent in
biopharmaceutical products, and therefore, InKine could face significant
liability if claims are asserted against it for problems relating to the
clinical trials or subsequent sale of its products to consumers.
InKine's business may be affected by potential product liability risks
which are inherent in the testing, manufacturing and marketing of the products
being developed by InKine. There can be no assurance that if InKine's product
candidates are developed and marketed, product liability claims will not be
asserted against InKine, its collaborators or licensees. The use of products
developed by InKine in clinical trials and the subsequent sale of these products
is likely to cause InKine to bear all or a portion of those risks. These
litigation claims could have a material adverse effect on the business or
financial condition of InKine.
The license covering the Fc Receptor Technology requires InKine to maintain
general liability and product liability insurance in amounts not less than
$2,000,000 per occurrence and $4,000,000 in the aggregate upon commencement of
human clinical trials. InKine currently maintains a product liability policy
covering it and its subsidiaries in the amount of $2,000,000 per occurrence and
$4,000,000 in the aggregate. InKine intends to maintain product liability
insurance in per-occurrence and aggregate amounts as are believed by InKine to
be adequate under the circumstances. There can be no assurance, however, that
insurance coverage would be adequate to protect InKine against future claims or
that a medical malpractice claim or other claims.
InKine's Certificate of Incorporation and New York corporate law have
provisions that could restrict a potential takeover of InKine. These provisions
could discourage bids for the common stock at premium prices, reduce the market
price of the common stock and potentially limit the voting and other rights of
the holders of common stock.
The Certificate of Incorporation of InKine authorizes 5,000,000 shares of
"blank check" preferred stock, which may be issued without shareholder approval.
InKine's Board of Directors can designate the rights and preferences of the
preferred stock. The Board of Director's authority to issue and fix the rights
and preferences of this stock may have the effect of delaying, deterring or
preventing a change in control of InKine. In addition, issuing preferred stock
may discourage bids for the common stock at a premium over the market price and
may adversely affect market price for the common stock, and the voting rights
and other rights of the holders of the common stock.
New York corporate law places restrictions on transactions with beneficial
holders of 20% of the outstanding voting shares of a corporation. This
restriction could reduce the potential for a takeover of InKine and therefore
reduce the chances of shareholders receiving a premium for their shares over the
market price.
InKine may acquire additional pharmaceutical products either through the
acquisition of a business, license or otherwise, and there can be no assurance
that InKine can successfully and profitably integrate any new business into its
own.
One of InKine's strategies is to acquire, or acquire rights to develop and
commercialize, additional pharmaceutical products. While InKine may accomplish
this objective by entering into licensing arrangements with the owners of
patents and proprietary technology, such as they did with respect to DIACOL,
InKine may also acquire established businesses through business acquisitions,
including corporate mergers, for the purpose of acquiring the rights to product
candidates and products. There can be no assurance that InKine will be able to
effect any acquisitions on terms believed to be favorable to InKine, or
successfully integrate into its operations any business it may acquire.
Under New York law, various forms of business combinations can be effected
without stockholder approval. Accordingly, InKine's stockholders likely will not
receive or otherwise have the opportunity to evaluate any financial or other
information which may be made available to InKine in connection with any future
acquisition and must rely entirely upon the ability of management in selecting,
structuring and consummating acquisitions that are consistent with InKine's
business objectives. Although InKine will endeavor to evaluate the risks
inherent in a particular acquisition, there can be no assurance that InKine will
properly ascertain or assess all significant risk factors prior to consummating
any acquisition.
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<PAGE> 24
InKine relies heavily on independent contractors for important aspects of
its business. There can be no assurance that these contractors will provide
timely service or otherwise honor their obligations to InKine.
InKine relies on independent contractors, independent organizations,
advisors and consultants who are employed on a part-time basis to provide
services, including substantially all aspects of manufacturing, regulatory
approval and clinical management. The provision of these services on a part-time
basis presents potential conflicts of interest with respect to other
professional or employment positions that these contractors may hold, including
conflicts as to availability, interest and loyalty, and could result in material
detriment to InKine should these conflicts be resolved against InKine's best
interest. No assurance can be given that the services of independent
contractors, organizations, advisors and consultants will be available to InKine
on a timely basis.
To the extent that consultants, key employees, vendors or other third
parties apply technological information independently developed by them or by
others to InKine's proposed products, disputes may arise as to the proprietary
rights to such information, which may not be resolved in favor of InKine.
Members of InKine's Scientific Advisory Board and other consultants are employed
by or have consulting agreements with third parties, and any inventions
discovered by such individuals are not likely to become the property of InKine.
InKine's advisors and consultants generally sign agreements that provide
for confidentiality of InKine's proprietary information. However, there can be
no assurance that InKine will be able to maintain the confidentiality of
InKine's technology, the assurance that InKine will be able to maintain the
confidentiality of InKine's technology, the dissemination of which could have a
material adverse effect on InKine's business.
InKine's Quarterly results fluctuate greatly making it very difficult to
predict InKine's performance from quarter to quarter.
InKine's operating results fluctuate significantly and may continue to
fluctuate due to several factors, including the following:
- Timing of research and development expenditures;
- Timing of successful product development, if any;
- Timing of new product announcements, if any;
- Release of new products, if any, by InKine and its competitors; and
- Consummation of acquisitions.
As a result of such fluctuations, InKine's future performance related to
development and commercialization of its products and sales cannot be predicted
from quarter to quarter.
EMPLOYEES
As of June 30, 1999, InKine had 13 full-time employees. No employees are
covered by collective bargaining agreements, and InKine considers relations with
its employees to be good.
ITEM 2. PROPERTIES.
InKine occupies an aggregate of approximately 5,200 square feet of space in
Blue Bell, Pennsylvania, which is used as office space. InKine leases this space
pursuant to a lease expiring in January 2001, which provides for minimum annual
rent payments of approximately $104,000 in the fiscal year ending June 30, 2000
and is subject to increases on an annual basis for the remaining term.
ITEM 3. LEGAL PROCEEDINGS.
InKine is not a party to any material litigation.
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<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
InKine's common stock trades on the Nasdaq SmallCap Market under the symbol
INKP. The quarterly range of high and low closing sales prices of InKine's
common stock, as reported on the Nasdaq Stock Market, are shown below. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Year Ended June 30, 1999 High Low
------------------------ ---- ---
<S> <C> <C>
1st Quarter......................................................... $1.75 $0.88
2nd Quarter......................................................... $1.78 $0.84
3rd Quarter......................................................... $2.00 $1.06
4th Quarter.......................................................... $1.88 $1.13
Year Ended June 30, 1998 High Low
------------------------ ---- ---
1st Quarter......................................................... $2.19 $1.50
2nd Quarter......................................................... $2.69 $1.19
3rd Quarter......................................................... $1.38 $0.88
4th Quarter......................................................... $1.50 $1.18
</TABLE>
DIVIDENDS
InKine has not paid any cash dividends since its inception and does not
anticipate paying any cash dividends in the foreseeable future. It is the
present policy of the Board of Directors to retain all earnings, if any, to
finance the development of InKine's business.
NUMBER OF HOLDERS OF COMMON STOCK
At September 10, 1999 there were approximately 259 shareholders of
record and approximately 4,383 beneficial holders of InKine's Common Stock.
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<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected financial data. The
selected financial data is derived from, and is qualified by reference to, the
financial statements of InKine.
<TABLE>
<CAPTION>
July 1, 1993
(Inception)
Year Ended June 30, to June 30,
1999 1998 1997 1996 1995 1999
---- ---- ---- ---- ------ ----------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Cost and expenses:
Research and development............... $6,565 $2,270 $ 743 $ 644 $ 392 $ 10,743
Purchased research and development..... --- 3,952 --- --- --- 3,952
General and administrative............. 3,593 3,782 1,011 812 434 9,806
Write-off debt discount................ --- --- --- --- 52 75
------ ------ ------ ------ ----- ------
Loss from operations.................. 10,158 10,004 1,754 1,456 878 24,576
Interest income........................ (525) (515) (104) (239) (86) (1,468)
Interest expense....................... --- --- --- --- 7 7
------- ------- ------ ------ ------ ------
Loss.................................. $(9,633) $(9,489) $(1,650) $(1,217) $ (799) $ (23,115)
-------- -------- -------- ------- ------- ---------
Loss per share - basic and diluted..... $(0.42) $ (0.60) $ (0.51) $ (0.38) $ (0.31)
====== ======== ======== ========= ========
Weighted average shares outstanding.... 22,762 15,783 3,260 3,231 2,599
BALANCE SHEET DATA:
Cash and investments................... $ 6,862 $12,962 $ 1,176 $ 3,057 $ 4,246
Total assets........................... 7,162 13,366 1,785 3,192 4,323
Long-term liabilities.................. --- --- --- 141 141
Total liabilities...................... 1,449 246 188 212 206
Accumulated deficit.................... (23,115) (13,482) (3,993) (2,342) (1,125)
Shareholders' equity................... 5,713 13,120 1,597 2,980 4,118
</TABLE>
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Report contains, in addition to historical information, statements by
InKine with regard to its expectations as to financial results and other aspects
of its business that involve risks and uncertainties and may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements reflect management's current
views and are based on certain assumptions. Actual results could differ
materially from those currently anticipated as a result of a number of factors,
including, but not limited to, the risks and uncertainties discussed under the
caption "Other Factors to be Considered" in Part I of this Report. Given these
uncertainties, current or prospective investors are cautioned not to place undue
reliance on any such forward looking statements. Furthermore, InKine disclaims
any obligation or intent to update any such factors or forward-looking
statements to reflect future events or developments.
GENERAL
InKine is a biopharmaceutical company engaged in the research and
development of products which may be used in the diagnosis and treatment of
cancer and autoimmune diseases. InKine pursues these objectives through a
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<PAGE> 27
technology platform consisting of the Fc Receptor Technology, the Thrombospondin
Technology and DIACOL. InKine acquired these technologies in 1997. See Note 3 of
the Notes to Financial Statements.
Since commencing operations in 1993, InKine has not generated any sales
revenue. InKine has funded operations primarily from the proceeds of public and
private placements of securities. InKine has incurred net losses in each year
since its inception, and expects to incur additional losses in the foreseeable
future. InKine expects that losses will fluctuate from quarter to quarter, and
that such fluctuations may be substantial. At June 30, 1999, InKine's
accumulated deficit was approximately $23 million.
RESULTS OF OPERATIONS
InKine incurred losses of $9,633,000, $9,489,000, and $1,650,000 for the
years ended June 30, 1999, 1998 and 1997, respectively. InKine expects to incur
additional losses in the foreseeable future. The basic and diluted per share
loss was $0.42, $0.60, and $0.51 for the years ended June 30, 1999, 1998 and
1997, respectively. Losses are expected to increase in the forthcoming year as
InKine continues to develop DIACOL, the Thrombospondin Technology and Fc
Receptor Technology, and also incurs commercialization costs of DIACOL.
Research and development expenses increased on an annual basis from fiscal
year 1997 through fiscal year 1999 due to increases in manufacturing development
expenses and clinical and preclinical testing costs associated with DIACOL,
CBP-1011 and the Thrombospondin program. The increase in research and
development expenses from fiscal year 1998 to fiscal year 1999 of $4,295,000 is
principally due to conducting a Phase I, Phase IIb dose ranging and Phase III
clinical trial of DIACOL along with manufacturing costs associated with DIACOL.
The increase in research and development expenses of $1,527,000 from fiscal year
1997 to fiscal year 1998 is principally the result of conducting a Phase III
clinical trial for InKine's drug candidate, CBP-1011, and additional costs
associated with DIACOL. Research and development expenses are expected to
continue to increase in the future as InKine continues towards commercialization
of DIACOL. Additional research and development expenses will include hiring
personnel to direct the clinical and manufacturing activities with respect to
DIACOL and CBP-1011 and additional personnel to direct the research and
development activities on the Thrombospondin Technology and other technologies.
Substantial resources will continue to be expended on a Phase III trial
currently underway with respect to the Fc Receptor Technology and costs to
complete an NDA for DIACOL.
Purchased research and development amounted to $3,952,000 for the year
ended June 30, 1998 as a result of InKine's acquisition of the Fc Receptor
Technology and the Thrombospondin Technology in November 1997, along with
additional costs associated with the earlier purchase of DIACOL in fiscal year
ended June 30, 1997. A majority of the purchase price ($2,742,000) was a
non-cash charge to earnings related to the issuance of Common Stock and options
for the technologies.
General and administrative expenses amounted to $3,593,000, $3,782,000 and
$1,011,000 for the years ended June 30, 1999, 1998 and 1997, respectively. The
decrease in general and administrative expenses in fiscal year 1999 versus
fiscal year 1998 is due to reduced amortization of options in connection with
the restructuring of InKine in fiscal year 1998. The substantial increase of
$2,771,000 in general and administrative expenses in fiscal year 1998 compared
to fiscal year 1997 includes $1,926,000 of an earnings charge for options issued
to the CEO and COO of InKine in connection with the restructuring of InKine.
General and administrative expenses will continue to increase with the addition
of other administrative personnel, amortization of deferred compensation and an
expanded scale of operations associated with the development of multiple
technologies.
The increase in interest income in the year ended June 30, 1999 as compared
to the year ended June 30, 1998 is principally due to the earnings on an
increased investment balance. The increase in interest income in the year ended
June 30, 1998 compared to the year ended June 30, 1997 is principally due to the
earnings on an increased investment balance reflecting the proceeds from the
private placement in November 1997.
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<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, InKine had cash, cash equivalents and investments of
$6,862,000. Cash and cash equivalents is comprised primarily of the proceeds
from InKine's private placement in November 1997. In order to preserve principal
and maintain liquidity, InKine's funds are invested in U.S. Government
obligations and other secured short-term investments.
InKine believes that its financial resources are adequate for its
operations for at least the next 12 months. InKine's future capital requirements
will depend on numerous factors which cannot be quantified and many of which
InKine cannot control, including continued progress in its research and
development activities, commercialization costs of DIACOL, progress with
pre-clinical studies and clinical trials, prosecuting and enforcing patent
claims, technological and market developments, the ability of InKine to
establish product development arrangements, the cost of manufacturing scaleup,
effective marketing activities and arrangements, and licensing or acquisition
activity. InKine may seek to obtain additional funds through equity or debt
financing, collaborative or other arrangements with corporate partners and
others, and from other sources. No assurance can be given that necessary
additional financing will be available on terms acceptable to InKine, if at all.
If adequate additional funds are not available when required, InKine may have to
delay, scale back or eliminate certain of its research, drug discovery or
development activities or certain other aspects of its operations and its
business will be materially and adversely affected.
InKine plans to expend significant resources in new personnel in the next
12 months in connection with the expansion of its commercial activities
surrounding DIACOL. InKine anticipates incurring additional losses in the
foreseeable future, and such losses are expected to increase as InKine expands
its commercialization activities relating to DIACOL, and research and
development activities relating to the Thrombospondin Technology and Fc Receptor
Technology. To achieve profitability, InKine, alone or with others, must
successfully develop and commercialize its technologies and products, conduct
pre-clinical studies and clinical trials, obtain required regulatory approvals
and successfully manufacture, introduce and market such technologies and
products. The time required to reach profitability is highly uncertain, and
there can be no assurance that InKine will be able to achieve profitability on a
sustained basis, if at all.
IMPACT OF YEAR 2000
Many existing computer programs and systems, including certain of those
used by InKine for its own internal purposes and those used by its financial
institutions, suppliers, vendors and others, use only two digits to identify the
year in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
computer applications that utilize this two-digit format could fail or create
erroneous results by or at the year 2000 ("Y2K").
InKine has identified three main areas of Y2K risk:
1. InKine's internal computer systems could be disrupted or
fail, causing an interruption or decrease in productivity in
InKine's operations;
2. The computer systems of third parties with whom InKine
regularly deals, including but not limited to its financial
institutions, suppliers, vendors, utilities, and others
("Material Third Parties") could be disrupted or fail,
causing an interruption or decrease in InKine's ability to
continue its operations;
3. InKine's university-based research programs could be
disrupted, delayed or harmed due to the reliance on computer
based scientific instruments and scientific databases which
InKine has no control over.
InKine has evaluated the nature and extent of the Y2K issues related
to its internal systems. The evaluation indicated that the process of
making InKine's internal systems (which consists of a financial system for
the
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<PAGE> 29
accounting office and a network system for internal and external communications)
Y2K compliant was complete with respect to these systems as of June 30, 1999.
If any of InKine's Material Third Parties are not Y2K compliant and their
noncompliance causes a material disruption to any of their businesses, the
business of InKine could be materially adversely impacted. These disruptions
could include, among other things: a financial institution's inability to
process checks drawn on InKine's bank accounts, accept deposits or process wire
transfers; a supplier's, vendor's or financial institution's business failure;
an interruption in deliveries of supplies from vendors; a loss of voice and data
connections InKine uses to share information; a loss of electric power to
InKine's facilities; and other interruptions to the normal conduct of business
by InKine, the nature and extent of which InKine cannot foresee. InKine received
Y2K compliance letters from all banking institutions and major vendors
indicating compliance of Y2K. InKine will continue to evaluate the nature and
extent of third party Y2K risk, but at this time is unable to determine the
probability that any of such risks will be realized, or if they are, the nature
or length thereof, or effect, if any, they may have on InKine.
InKine is in the process of evaluating the extent to which Y2K impacts its
university-based sponsored research programs. General discussions with
university employees indicate that Y2K disruptions could include loss of
scientific data, inability to obtain supplies for scientific experiments, the
university's inability to process deposits to support research and all other
risks disclosed above for the university's suppliers and vendors. The
universities are in the process of addressing their own Y2K issues and InKine
has no control as to the outcome of these matters.
InKine has incurred costs to date of approximately $12,000 to remediate the
Y2K impact. InKine anticipates spending nominal amounts for computer consulting
to fix any additional issues in its internal systems, which may arise after
2000.
While InKine believes that it has addressed the Y2K issue, there can be no
assurance that InKine's Y2K analyses was accurate, or that the costs and
liabilities associated with the Y2K issue will not materially adversely impact
the business, prospects, revenues or financial position of InKine. InKine is
uncertain as to the worst case Y2K scenario and has not yet developed a
contingency plan to handle this worst case scenario.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (the
"Statement"). The Statement requires costs of start-up activities, including
organizational costs, to be expensed as incurred. Start-up activities are
defined as those one-time activities related to opening a new facility,
introducing a new product or service, conducting businesses in a new territory,
conducting business with a new process in an existing facility, or commencing a
new operation. The Statement is effective for fiscal years beginning after
December 15, 1998. The adoption of this standard will not have a material impact
on InKine's earnings or financial position.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
("Statement 133"). Statement 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure the instrument at fair value. The
accounting changes in the fair value of a derivative depend on the intended use
of the derivative and the resulting designation. This Statement is effective for
all fiscal quarters beginning after June 15, 2000. The adoption of this
standard will not have a material impact on InKine's earnings or financial
position.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
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<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
The information required by this item is set forth beginning on pages F-1
through F-17 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated herein by reference to
the similarly named section in InKine's Proxy Statement for the 1999 Annual
Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by reference to
the similarly named section in InKine's Proxy Statement for the 1999 Annual
Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by reference to
the similarly named section in InKine's Proxy Statement for the 1999 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by reference to
the similarly named section in InKine's Proxy Statement for the 1999 Annual
Meeting of Shareholders.
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<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS
The information required by this item is set forth in the Table of Contents
to Financial Statements on page F-1 hereof.
FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable, or not
required, or the information is shown in the Financial Statements or Notes
thereto.
REPORTS ON FORM 8-K
None.
EXHIBITS
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated parenthetically,
together with a reference to the filing indicated by footnote.
Exhibit No. Title
3.1 Certificate of Incorporation, as amended. (Exhibit 3.1)(1)
3.2 By-laws. (Exhibit 3.2)(2)
10.1 Agreement and Plan of Reorganization among Panax Pharmaceutical
Company, Ltd., CorBec Pharmaceuticals, Inc. and certain Security
Holders of CorBec Pharmaceuticals, Inc., dated October 31, 1997.
(Exhibit 10.1)(1)
10.2 Registration Rights Agreement among Panax Pharmaceutical Company,
Ltd. and the former security holders of CorBec Pharmaceuticals,
Inc. dated November 6, 1997. (Exhibit 10.2)(1)
10.3 Stock Purchase Agreement by and between Panax Pharmaceutical
Company, Ltd. and Leonard S. Jacob dated September 3, 1997.
(Exhibit 10.3)(1)
10.4 Employment Agreement between InKine Pharmaceutical Company, Inc.
and Leonard S. Jacob, dated November 6, 1997. (Exhibit 10.4)(1)
10.5 Employment Agreement between InKine Pharmaceutical Company, Inc.
and Taffy J. Williams, dated November 6, 1997. (Exhibit 10.5)(1)
10.6* Employment Agreement between InKine Pharmaceutical Company, Inc.
and Robert F. Apple, dated November 2, 1998.
10.7 Option to Purchase Shares of Common Stock of InKine Pharmaceutical
Company, Inc. dated November 6, 1997, issued to Leonard S. Jacob.
(Exhibit 10.6)(1)
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<PAGE> 32
10.8 Common Stock Purchase Option, dated November 6, 1997 issued to
Allegheny University of the Health Sciences. (Exhibit 10.7)(1)
10.9 Non-Milestone Common Stock Purchase Option, dated November 6,
1997 issued to George Tuszynski. (Exhibit 10.8)(1)
10.10 Common Stock Purchase Option, dated November 6, 1997 issued to
George Tuszynski. (Exhibit 10.9)(1)
10.11 Stock Option Plan, as amended. (Exhibit 99)(3)
10.12 1997 Consultant Stock Option Plan. (Exhibit 99)(4)
10.13 Form of Stock Option Agreement. (Exhibit 10(b))(5)
10.14 License Agreement with ALW Partnership. (Exhibit 10(1))(7)
10.15 Form of Consulting Agreement with Craig Aronchick. (Exhibit 10(m))
(7)
10.16 Form of Option granted to Partners of ALW Partnership. (Exhibit
10(n))(7)
10.17 Warrant Agreement with D.H. Blair and Company. (Exhibit 10(5))
(5)
23.1* Consent of KPMG LLP.
23.2* Consent of Richard A. Eisner & Company, LLP.
27* Financial Data Schedule.
- --------------
* Filed herewith.
(1) Filed as an Exhibit to InKine's Current Report on Form 8-K, dated
November 6, 1997 (as amended by Form 8-K/A filed on December 3, 1997)
with the Securities and Exchange Commission.
(2) Filed as an Exhibit to InKine's Registration Statement on Form S-1 (SEC
File No. 33-83628), dated November 18, 1994, with the Securities and
Exchange Commission.
(3) Filed as an Exhibit to InKine's Form S-8 (SEC File No. 333-58063), dated
June 29, 1998, with the Securities and Exchange Commission.
(4) Filed as Exhibit to InKine's Form S-8 (SEC File No. 333-58065) dated
June 29, 1998, with the Securities and Exchange Commission.
(5) Filed as an Exhibit to InKine's Annual Report on Form 10-KSB for the
year ended June 30, 1995 with the Securities and Exchange Commission.
(6) Filed as an Exhibit to InKine's Annual Report on Form 10-KSB for the
year ended June 30, 1997 with the Securities and Exchange Commission.
(7) Filed as an Exhibit to InKine's Current Report on Form 8-K dated
February 14, 1997 with the Securities and Exchange Commission.
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<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INKINE PHARMACEUTICAL COMPANY, INC.
Date: September 28, 1999 By: /s/Leonard S. Jacob, M.D., Ph.D.
------------------------------------
Leonard S. Jacob, M.D., Ph.D.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Leonard S. Jacob, M.D., Ph.D. Chairman and Chief September 28, 1999
- ------------------------------------------ Executive Officer and
Director
Leonard S. Jacob, M.D., Ph.D.
/s/Taffy J. Williams, Ph.D. President and September 28, 1999
- ------------------------------------------ Chief Operating Officer
Taffy J. Williams, Ph.D. and Director
/s/Robert F. Apple Sr. Vice President and September 28, 1999
- ------------------------------------------ Chief Financial Officer
Robert F. Apple (principal financial and
accounting officer)
/s/Martin Rose, M.D., J.D. Sr. Vice President Clinical September 28, 1999
- ------------------------------------------ Research and Regulatory
Martin Rose, M.D., J.D. Affairs
/s/J. R. LeShufy Director September 28, 1999
- ------------------------------------------
J. R. LeShufy
/s/Steven B. Ratoff Director September 28, 1999
- ------------------------------------------
Steven B. Ratoff
/s/Thomas P. Stagnaro Director September 28, 1999
- ------------------------------------------
Thomas P. Stagnaro
/s/Robert A. Vukovich, Ph.D. Director September 28, 1999
- ------------------------------------------
Robert A. Vukovich, Ph.D.
/s/Jerry Weisbach, Ph.D. Director September 28, 1999
- ------------------------------------------
Jerry Weisbach, Ph.D.
</TABLE>
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<PAGE> 34
INKINE PHARMACEUTICAL COMPANY, INC.
(a development stage company)
TABLE OF CONTENTS
PART II - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors KPMG LLP................................................................... F-2
Report of Independent Auditors Richard A. Eisner & Company, LLP........................................... F-3
Balance Sheets............................................................................................ F-4
Statements of Operations.................................................................................. F-5
Statements of Changes in Shareholders' Equity............................................................. F-6
Statements of Cash Flows.................................................................................. F-7
Notes to Financial Statements............................................................................. F-8
</TABLE>
F-1
<PAGE> 35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
InKine Pharmaceutical Company, Inc.
We have audited the accompanying balance sheets of InKine Pharmaceutical
Company, Inc. (a development stage company) as of June 30, 1999 and 1998 and the
related statements of operations, changes in shareholders' equity and cash flows
for the years then ended, and for the period from July 1, 1993 (commencement of
operations) through June 30, 1999. 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. The accompanying
financial statements of InKine Pharmaceutical Company Inc., as of June 30, 1997
were audited by other auditors whose report dated July 24, 1997 expressed an
unqualified opinion on those statements. Our opinion on the statements of
operations, changes in shareholders' equity and cash flows, insofar as it
relates to the amounts included for the period from July 1, 1993 (commencement
of operations) to June 30, 1997 is based solely on the report of the other
auditors which report has been furnished to us.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of InKine Pharmaceutical Company, Inc. (a development
stage company) as of June 30, 1999 and 1998, and the results of its operation
and its cash flows for the years then ended and for the period from July 1, 1993
(commencement of operations) through June 30, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
August 11, 1999
F-2
<PAGE> 36
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
InKine Pharmaceutical Company, Inc.
We have audited the accompanying statements of operations, changes in
shareholders' equity and cash flows of InKine Pharmaceutical Company, Inc. (a
development stage enterprise) for the year ended June 30, 1997 and for the
period (not separately presented herein) from July 1, 1993 (inception) to June
30, 1997. 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 enumerated above present
fairly, in all material respects, the results of operations and cash flows of
InKine Pharmaceutical Company, Inc. (a development stage enterprise) for the
year ended June 30, 1997 and for the period from July 1, 1993 (inception) to
June 30, 1997, in conformity with generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
New York, New York
July 24, 1997
F-3
<PAGE> 37
INKINE PHARMACEUTICAL COMPANY, INC.
(a development stage company)
BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................ $ 1, 968 $ 1,115
Short term investments ............................... 4,894 11,847
Prepaid expenses and other current assets ............ 100 214
-------- --------
6,962 13,176
Fixed assets, net ............................................. 200 190
-------- --------
Total assets ......................................... $ 7,162 $ 13,366
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................ $ 1,449 $ 246
-------- --------
Commitments, contingencies and other matters ..................
Shareholders' equity:
Preferred stock, $.0001 par value; authorized 5,000,000 shares;
none issued and outstanding .......................... -- --
Common stock, $.0001 par value; authorized 50,000,000 shares;
issued 23,117,336 and 22,719,690 shares respectively . 2 2
Additional paid-in capital .................................... 31,427 30,954
Deferred compensation ......................................... (2,560) (4,320)
Unrealized (loss)gain on investments .......................... (4) 3
Deficit accumulated during the development stage .............. (23,115) (13,482)
Less common stock held in treasury (16,515 shares) ............ (37) (37)
-------- --------
Total shareholders' equity ........................... 5,713 13,120
-------- --------
Total liabilities and shareholders' equity ........... $ 7,162 $ 13,366
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 38
INKINE PHARMACEUTICAL COMPANY, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from
July 1, 1993
(Commencement
of Operations)
Year Ended June 30, through June 30,
----------------------------------
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Costs and Expenses:
Research and development ............................ $ 6,565 $ 2,270 $ 743 $ 10,743
Purchased research and
development ......................................... -- 3,952 -- 3,952
General and administrative .......................... 3,593 3,782 1,011 9,806
Write-off of debt discount .......................... -- -- -- 75
-------- -------- -------- --------
$ 10,158 $ 10,004 $ 1,754 $ 24,576
Loss from operations ....................................... (10,158) (10,004) (1,754) (24,576)
Interest income ............................................ 525 515 104 1,468
Interest expense ........................................... -- -- -- (7)
-------- -------- -------- --------
Net loss ................................................... $ (9,633) $ (9,489) $ (1,650) $(23,115)
======== ======== ======== ========
Net loss per share - basic and diluted ..................... $ (0.42) $ (0.60) $ (0.51)
Weighted average shares
outstanding ......................................... 22,762 15,783 3,260
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 39
INKINE PHARMACEUTICAL COMPANY, INC.
(a development stage company)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Paid In Deferred Development
Shares Amount Capital Compensation Stage
<S> <C> <C> <C> <C> <C>
Common stock subscription ............... 2,000 -- $ -- $ -- $ --
Issuance of stock rights in conjunction
with notes payable ................. 75
Capital contribution -- expenses paid on
behalf of Company .................. 97
Net Loss ................................ (1,126)
Initial public offering, net of expense . 1,236 4,986
Value of options granted ................ 80
Proceeds from options and stock rights ..
80 5
-------- -------- ---------- ---------- --------
BALANCE -- JUNE 30, 1995 ................ 3,316 -- 5,243 -- (1,126)
======== ======== ========== ========== ========
Value of options and warrants granted ... 218 (218)
Amortization of deferred compensation ... 79
Common stock acquired ...................
Net Loss ................................ (1,217)
-------- -------- ---------- ---------- --------
BALANCE -- JUNE 30, 1996 ................ 3,316 -- 5,461 (139) (2,343)
======== ======== ========== ========== ========
Value of options and warrants granted ... 134 (134)
Amortization of deferred compensation ... 140
Proceeds from options ................... 31 25
Common stock issued to settle debt ...... 27 140
Common stock acquisition ................ (1,650)
Net Loss ................................ -------- -------- ---------- ---------- --------
BALANCE -- JUNE 30, 1997 ................ 3,374 -- 5,760 (133) (3,993)
======== ======== ========== ========== ========
Common stock issued pursuant to
private placement .................. 18,448 2 15,803
Fair of value of shares issued pursuant
to purchased research and development ... 875 2,742
Value of option and warrants granted .... 6,628 (6,628)
Proceeds from options ................... 23 21
Amortization of deferred compensation ... 2,441
Unrealized gain on investments ..........
Net Loss ................................ (9,489)
-------- -------- ---------- ---------- --------
BALANCE -- JUNE 30, 1998 ................ 22,720 2 30,954 (4,320) (13,482)
======== ======== ========== ========== ========
Value of option and warrants granted .... 122 (122)
Proceeds from options and warrants ...... 397 351
Amortization of deferred compensation ... 1,882
Carrying value adjustment ...............
Net Loss ................................ (9,633)
-------- -------- ---------- ---------- --------
BALANCE -- JUNE 30, 1999 ................ 23,117 $ 2 $ 31,427 $ (2,560) $(23,115)
======== ======== ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Total
Unrealized Shareholders'
Treasury Stock Gain on Equity
Shares Amount Investments (Deficiency)
<S> <C> <C> <C> <C>
Common stock subscription ............... -- $-- $ -- $ --
Issuance of stock rights in conjunction
with notes payable ................. 75
Capital contribution -- expenses paid on
behalf of Company .................. 97
Net Loss ................................ (1,126)
Initial public offering, net of expense . 4,986
Value of options granted ................ 80
Proceeds from options and stock rights .. 5
-------- ----- --------- --------
BALANCE -- JUNE 30, 1995 ................ -- -- -- 4,117
======== ===== ========= ========
Value of options and warrants granted ... --
Amortization of deferred compensation ... 79
Common stock acquired ................... (180) --
Net Loss ................................ (1,217)
-------- ----- --------- --------
BALANCE -- JUNE 30, 1996 ................ (180) -- -- 2,979
======== ===== ========= ========
Value of options and warrants granted ... --
Amortization of deferred compensation ... 140
Proceeds from options ................... 25
Common stock issued to settle debt ...... 180 -- 140
Common stock acquisition ................ (17) (37) (37)
Net Loss ................................ (1,650)
-------- ----- --------- --------
BALANCE -- JUNE 30, 1997 ................ (17) (37) -- 1,597
======== ===== ========= ========
Common stock issued pursuant to
private placement .................. 15,805
Fair of value of shares issued pursuant
to purchased research and development ... 2,742
Value of option and warrants granted .... --
Proceeds from options ................... 21
Amortization of deferred compensation ... 2,441
Unrealized gain on investments .......... 3 3
Net Loss ................................ (9,489)
-------- ----- --------- --------
BALANCE -- JUNE 30, 1998 ................ (17) (37) 3 13,120
======== ===== ========= ========
Value of option and warrants granted .... --
Proceeds from options and warrants ...... 351
Amortization of deferred compensation ... 1,882
Carrying value adjustment ............... (7) (7)
Net Loss ................................ (9,633)
-------- ----- --------- --------
BALANCE -- JUNE 30, 1999 (17) $ (37) $ (4) $ 5,713
======== ===== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 40
INKINE PHARMACEUTICAL COMPANY, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Period from
July 1, 1993
(Commencement of
Year Ended June 30, Operations) Through
1999 1998 1997 June 30, 1999
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss .......................................... $ (9,633) $ (9,489) $ (1,650) $(23,115)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Depreciation and amortization ..................... 59 54 33 213
Write-off of debt discount ........................ -- -- -- 75
Value of services paid by options and warrants .... -- -- -- 80
Amortization of deferred compensation ............. 1,882 2,441 139 4,541
Purchased research and development ................ -- 2,742 -- 2,742
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses
and other assets ................................ 114 (89) (49) (100)
Increase in accounts payable and
accrued expenses .................................. 1,203 58 115 1,475
Expenses paid by affiliate ........................ -- -- -- 97
Increase in management fees ....................... -- -- -- 113
-------- -------- -------- --------
Net cash used in operating activities ........... (6,375) (4,283) (1,412) (13,879)
Cash flows from investing activities:
Purchases of investments .......................... (10,968) (14,318) (2,157) (33,411)
Proceeds from maturities and sales of investments . 17,914 3,699 3,591 28,518
Deferred acquisition costs ........................ -- 84 (84) --
Capital expenditures .............................. (69) (214) (4) (415)
-------- -------- -------- --------
Net cash provided by (used in) investing activities 6,877 (10,749) 1,346 (5,308)
Cash flows from financing activities:
Proceeds from sale of stock and exercise of
options and warrants-net of expenses ............. 351 15,826 25 21,192
Deferred offering costs .......................... -- 220 (220) --
Cost of shares - acquired ......................... -- -- (37) (37)
-------- -------- -------- --------
Net cash provided by financing activities ..... 351 16,046 (232) 21,155
Net increase (decrease) in cash and cash equivalents ... 853 1,014 (298) 1,968
Cash and cash equivalents - beginning of period ........ 1,115 101 399 --
-------- -------- -------- --------
Cash and cash equivalents - end of period .............. $ 1,968 $ 1,115 $ 101 $ 1,968
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 41
INKINE PHARMACEUTICAL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY:
InKine Pharmaceutical Company, Inc. (the "Company"), (previously Panax
Pharmaceutical Company, Ltd.) was incorporated in July 1993. The Company is a
biopharmaceutical company with two late-stage clinical compounds: a purgative
product (DIACOL) for colonoscopies and other procedures and uses; and a steroid
molecule (CBP-1011) for the treatment of Idiopathic Thrombocytopenic Purpura
(ITP). The Company is focused on the diagnosis and treatment of cancer and
autoimmune diseases, and has the additional strategy of acquiring late-state
drug candidates with short timelines to commercialization.
The Company is in the development stage, and its efforts have been
principally devoted to research and development. The Company is subject to those
risks associated with development stage companies. Substantial financing will be
required by the Company to fund its research and development activities. There
is no assurance that such financing will be available when needed or that the
Company's research and development efforts will be successful.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents -- The Company considers all highly liquid
investment instruments purchased with a maturity of three months or less to be
cash equivalents.
Investments -- Investments purchased with a maturity of more than three
months, and which mature less than twelve months from the balance sheet date,
are classified as short-term investments. Long-term investments are those with
maturities greater than twelve months from the balance sheet date. The Company
generally holds investments to maturity, however, since the Company may, from
time to time, sell securities to meet cash requirements, the Company classifies
its investments as available-for-sale as defined by Statement of Financial
Accounting Standards ("SFAS"), No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Available-for-sale securities are carried at market
value with unrealized gains and losses reported as a separate component of
Shareholders' Equity. Gross realized gains and losses on the sales of investment
securities are determined on the specific identification method and are included
in interest income.
Concentration of Credit -- The Company invests generally in securities of
the U.S. Treasury, U.S. government agencies, and U.S. government security-based
money market funds. The Company has not experienced any losses on its
investments.
Fixed Assets and Depreciation -- Fixed assets are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized using the straight-line method
over the term of the respective lease, or their estimated useful lives,
whichever is shorter. Expenditures for maintenance and repairs are charged to
expense as incurred.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and related notes. Actual results could differ from those estimates.
Revenue Recognition -- Any revenues from research and development
arrangements are recognized pursuant to the terms of the related agreements as
work is performed, or as milestones are achieved.
Research and Development -- Research and development and patent costs are
expensed as incurred.
F-8
<PAGE> 42
Stock Based Compensation -- The Company accounts for stock-based employee
compensation under Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. The Company adopted
the disclosure-only provisions of Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123").
The Company accounts for stock-based compensation granted to non-employees
based on the fair value of the consideration received or the fair value of
instrument issued, whichever is more reliably measurable. The fair value is
amortized over the period of the respective services provided.
Income Taxes -- The Company accounts for income taxes using the liability
method as prescribed by Financial Accounting Standards Board ("FASB") Statement
No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The
measurement of deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits which are not expected to be realized. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that such tax rate changes are enacted.
Loss Per Share -- The Company calculates its loss per share under the
provisions of Statement of Financial Accounting Standard No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 requires a dual presentation of "basic" and
"diluted" loss per share on the face of the income statement. Basic loss per
share is computed by dividing loss by the weighted average number of shares of
common stock outstanding during each period. Diluted loss per share includes the
effect, if any, from the potential exercise or conversion of securities, such as
stock options and warrants, which would result in the issuance of incremental
shares of common stock. Only basic loss per share amounts have been presented on
the face of the statements of operations as the inclusion of incremental shares
would have been anti-dilutive.
Reclassification -- Certain reclassifications have been made to prior years'
financial statements to conform to the current year presentation.
3. ACQUISITIONS OF TECHNOLOGY:
As previously reported in the Company's reports filed under the Exchange
Act, as of November 6, 1997, the Company acquired all the outstanding capital
stock of CorBec Pharmaceuticals, Inc. ("CorBec"), a privately owned,
development-stage, bio-pharmaceutical company founded in 1993 to discover and
develop drugs to treat autoimmune disease, serious infections and
asthma/allergy, and Sangen Pharmaceutical Company ("Sangen"), a privately owned,
development-stage, bio-pharmaceutical company formed in early 1997 and focused
on the development of a potential cancer treatment technology. CorBec's
technology, which consists of compounds designed to modulate the immune system,
is licensed from the University of Pennsylvania and has been developed in the
laboratory of Alan D. Schreiber, M.D., Professor of Medicine and Assistant Dean
for Research at the University of Pennsylvania School of Medicine (the "Fc
Receptor Technology"). The most advanced product within this family of
compounds, CBP-1011, is in Phase III clinical trials for the treatment of
idiopathic thrombocytopenic purpura ("ITP"). Sangen's technology consists of
specific peptide molecules and a polyclonal antibody developed by Dr. George
Tuszynski, Professor of Surgery, Medicine and Pathology at MCP Hahnemann
University (MCP), based on a specific thrombospondin receptor, which Dr.
Tuszynski discovered (the "Thrombospondin Technology"). In addition, in early
1997, the Company acquired an exclusive, worldwide license to a tablet form of
the aqueous sodium phosphate purgative formula used to clean the colon for any
medical purpose and for use as a laxative ("DIACOL"). The Company licensed this
technology from a partnership of physicians ("ALW Partnership"), including Craig
A. Aronchick, M.D., an attending gastroenterologist and Head of the Endoscopy
Unit at Pennsylvania Hospital in Philadelphia and a Clinical Associate Professor
of Medicine at the University of Pennsylvania School of Medicine. As of November
6, 1997, certain rights of ALW Partnership to cancel this license lapsed. The
acquisitions of CorBec, Sangen and the DIACOL license are referred to
collectively herein as the "Acquisitions."
F-9
<PAGE> 43
Simultaneous with the Acquisitions, Dr. Leonard S. Jacob became Chairman of
the Board and Chief Executive Officer of the Company under a long-term
employment agreement and was issued a ten-year option entitling him to purchase
the number of shares of Common Stock equal to 7-1/2% of the fully diluted
capitalization of the Company. The exercise price of Dr. Jacob's option is (i)
$0.61 per share for 1,200,000 shares and (ii) $1.00 per share for approximately
1,200,000 shares. Dr. Taffy J. Williams, formerly the Company's President and
Chief Executive Officer, became President and Chief Operating Officer of the
Company following the Acquisitions. In January 1997, Dr. Williams received an
option to purchase 5% of the fully diluted capitalization of the Company. The
exercise price of Dr. Williams' option is (i) $0.61 per share for 500,000 shares
and (ii) $1.00 per share for approximately 1,000,000 shares. The exercise prices
of Dr. Jacob's and Dr. Williams' options were below the market value of $1.00 of
the Common Stock of the Company at the time of grant. Therefore, the Company has
incurred, and will continue to incur, a significant non-cash charge to
operations as a result of the option grants.
The Sangen acquisition included the grant to Dr. Tuszynski and MCP of
125,000 shares of Common Stock of the Company and options to purchase an
aggregate of 375,000 shares at $1.00 per share, of which options for 250,000
shares will be exercisable upon achievement of specified milestones in the
development of a new drug candidate. In addition, Dr. Tuszynski and MCP will be
entitled to cash royalties based on net sales and licensing fees derived from
the technology. The Company has agreed to fund additional research in Dr.
Tuszynski's laboratory in an amount ranging from $150,000 (in the first year) to
$1,350,000 (over seven years, inclusive). Dr. Tuszynski was engaged as a
consultant to the Company for a two-year period at a fee of $50,000 per year.
The stock issued resulted in a charge to purchased research and development for
the year ended June 30, 1998 of $305,000.
The acquisition of CorBec resulted in the payment of $750,000 and the
issuance of 750,000 shares of Common Stock of the Company with provisions for
additional cash payments and stock issuances based upon the achievement of
certain milestones for CorBec's most advanced drug candidate, CBP-1011, an
orally-administered glucocorticoid analog, which is in a Phase III pivotal
clinical trial in the United States. The shares issued resulted in a charge to
purchased research and development for the year ended June 30, 1998 of
$1,828,000. In addition, the Company entered into three-year consulting
agreements with Dr. Alan Schreiber, the inventor of the Fc Receptor Technology,
and with the former chief executive officer of CorBec, providing for aggregate
consulting fees over three years equal to $405,000, and for the grant of
options with respect to an aggregate of 170,000 shares of Common Stock. The
Company is also to fund up to $240,000 of sponsored research in Dr. Schreiber's
laboratory over the course of three years.
The following unaudited pro forma information is presented for the
Acquisitions, as if the Acquisitions had occurred on July 1, 1996. The pro forma
information does not purport to be indicative of the results that would have
been attained if the Acquisitions had actually been effective during the periods
presented, excludes the non-recurring purchased research and development charge
of $3,952,000 and is not necessarily indicative of operating results to be
expected in the future.
UNAUDITED PRO FORMA INFORMATION AS IF THE ACQUISITIONS OCCURRED ON JULY 1, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the year ended
June 30,
1998 1997
---- ----
<S> <C> <C>
Costs and expenses ........................ $ 6,857 $ 5,478
Net loss .................................. (6,342) (5,374)
Shares used in computing loss per share.... 16,248 4,315
Net loss per share - basic and diluted..... $ (0.39) $ (1.30)
</TABLE>
F-10
<PAGE> 44
4. INVESTMENTS:
The Company invests in U.S. Treasury and U.S. Government agency securities.
Excess cash is invested on a short-term basis in U.S. government based money
market funds. Unrealized losses at June 30, 1999 total $4,000. The Company has
not realized any losses on its investments.
5. FIXED ASSETS:
Fixed assets are stated at cost and are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Manufacturing equipment................................................ $ 39 $ 39
Office equipment and furniture......................................... 243 174
--- ---
Total.................................................................. 282 213
Less accumulated depreciation.......................................... 82 23
--- ---
$ 200 $ 190
======= =======
</TABLE>
During fiscal year 1998 the Company wrote-off $130,000 of fully depreciated
assets.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Accounts payable....................................................... $ 39 $ 56
Clinical trial costs................................................... 1,218 18
Professional fees...................................................... 54 68
Other.................................................................. 138 104
--- ---
$ 1,449 $ 246
======== ======
</TABLE>
7. RELATED PARTY TRANSACTIONS:
During the years ended June 30, 1999, 1998 and 1997, the Company paid
$48,000, $100,000 and $100,000 respectively to Amercom Funding Ltd.,
("Amercom"), a company owned by certain of its previous officers, previous
directors and Shareholders, pursuant to a management agreement ("Management
Agreement").
In June 1997, the Company forgave a debt of $25,250 of Amercom in
consideration of services conducted by Amercom in connection with a private
placement of the Company's securities.
In January 1997, the Company agreed to extend for two years the term of the
Management Agreement with Amercom, which would have expired on February 1, 1998,
upon the occurrence of a financing of at least $8,000,000. Amercom received
compensation of $100,000 for services during the first year of the extension and
an option for 175,000 shares of Common Stock at an exercise price of $.61 per
share as compensation for the second year of the extension. The Company also
agreed to issue under the 1993 Stock Option Plan, additional options to purchase
up to 225,000 shares of Common Stock at an exercise price of $0.61 per share.
F-11
<PAGE> 45
In October 1997, the Company renegotiated the Management Agreement where the
maximum amount of options available to Amercom changed from 225,000 options to
no greater than 75,000 options. The Agreement called for the 75,000 options to
be contingent on the Company successfully terminating its sub-lease of its New
York facility. These options were issued in fiscal year 1999. As of June 30,
1998 the Company was no longer obligated under the New York lease.
The Company does not anticipate entering into any type of agreement with
Amercom in the future.
8. SHAREHOLDERS' EQUITY:
Common Stock
In January 1995, the Company effected an initial public offering of its
securities. A total of 1,235,710 units, each comprised of one share of common
stock and one redeemable common stock purchase warrant, were sold yielding net
proceeds of approximately $4,986,000 after underwriting commissions and
expenses.
In June 1997, the shareholders of the Company approved an increase in the
authorized share capital to 50,000,000 shares of common stock and 5,000,000
shares of preferred stock.
In November 1997, the Company completed a private placement of 17,000,000
shares of common stock, together with underwriter warrants as described below,
with proceeds to the Company (after offering expenses) of approximately $15.8
million.
Also, in November 1997, in connection with the purchase of certain
technologies 875,000 shares of common stock were issued.
Warrants
In connection with the January 1995 initial public offering, the Company
issued warrants to the underwriter to purchase an aggregate of 183,632 shares of
common stock, exercisable at $4.00 per share (after antidilution adjustment).
These warrants expire in January 2000.
In October 1995, the Company issued a warrant to purchase an aggregate of
546,399 shares of common stock, exercisable at $0.59 per share (after
antidilution adjustment) for financial and business services to be provided by
an investment banking firm. These warrants expire in October 2000.
In connection with the November 1997 private placement, the Company issued
warrants to the placement agents to purchase an aggregate of 2,044,843 shares of
common stock, exercisable at $1.00 per share (subject to antidilution
adjustment). These warrants expire in November 2002. At June 30, 1999, 1,566,873
of these warrants are outstanding.
Treasury Stock
In December 1995, the Center of Efferent Therapy returned to the Company
30,000 shares of the Company's common stock upon termination of an agreement
pursuant to which the shares were issued in 1993 in connection with its
agreement to perform certain testing services on behalf of the Company. In
February 1996, the Vice President of Ethnobotany resigned and returned 150,000
shares of common stock to the Company which he received in 1993 in connection
with an employment agreement. Such returns of shares have been accounted for at
their value when originally issued (par value). In November 1996, the Company
issued 165,441 shares to Amercom for certain consulting services and 41,176
shares to a stockholder/officer in settlement of certain obligations of which
180,000 of such shares came from treasury. In May 1997, a stockholder/officer
transferred to the Company 16,515 shares previously issued to her in payment of
accrued salary; such transfer was made in satisfaction of her obligations to the
Company arising from the payment of withholding tax relating to the issuance.
The repurchased shares are being held by the Company as treasury shares.
F-12
<PAGE> 46
Stock Option Plans
In October 1997, the shareholders of the Company approved the amended Stock
Option Plan (the "1993 Plan") which as amended provides for the granting of up
to 4,200,000 shares of common stock, pursuant to which directors, employees,
non-employees, consultants and advisors are eligible to receive stock options.
Options granted under the 1993 Plan are exercisable for a period of up to 10
years from the date of grant at an exercise price which is not less than the
fair value on date of grant, except that the exercise period of options granted
to a stockholder owning more than 10% of the outstanding capital stock may not
exceed five years and their exercise price may not be less than 110% of the fair
value of the common stock at date of grant.
In October 1997, the shareholders approved the 1997 Consultant Stock Option
Plan (the "1997 Plan") which provides for the granting of up to 2,500,000 shares
of Common Stock, pursuant to which consultants and advisors to the Company are
eligible to receive stock options. Options granted under the 1997 Plan are
exercisable for a period not to extend beyond February 14, 2007 and at an
exercise price determined by the Board or Plan Administrator.
In addition to the shares of common stock issuable upon exercise of options
granted under the Company's stock option plans, 2,586,773 shares of common stock
are issuable upon exercise of outstanding options granted to an officer and a
consultant pursuant to other written agreements. The exercise price for these
options was set by the Board of Directors, or a committee designated by the
Board, based upon an evaluation of the fair market value of the Company's common
stock on the date of grant. The options vest over various periods, not exceeding
three years, and expire no later than ten years from the date of grant.
A summary of the status of the Company's stock options as of June 30, 1999, 1998
and 1997, and changes during the years ending on those dates is presented below
(in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
OPTIONS (000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
- ------- ----- -------------- ----- -------------- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.. 6,927 $ 0.84 2,145 $ 0.70 418 $ 1.10
Granted .......................... 1,339 $ 1.32 5,079 $ 0.89 1,799 $ 0.61
Exercised ........................ (1) $ 0.50 (23) $ 0.99 (31) $ 0.50
Forfeited ........................ (19) $ 0.84 (274) $ 0.73 (41) $ 0.98
------- -------- ------
Outstanding at end of year ....... 8,246 $ 0.92 6,927 $ 0.84 2,145 $ 0.70
Exercisable at end of year ....... 5,206(1) $ 0.84 4,357(2) $ 0.80 398 $ 1.03
</TABLE>
(1) Of these shares 971,254 options are subject to the Company's right to
repurchase at a nominal price.
(2) Of these shares 1,656,845 options are subject to the Company's right to
repurchase at a nominal price.
F-13
<PAGE> 47
The following table summarizes information about stock options outstanding at
June 30, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -------------------------------
RANGE OF SHARES WEIGHTED-AVERAGE SHARES
EXERCISE PRICES OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
AT 6/30/99 CONTRACTUAL LIFE EXERCISE PRICE AT 6/30/99 EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$0.50-$0.88............... 3,495 7.5 years $0.63 2,723 $0.64
$0.89-$1.42............... 4,067 8.3 years $1.05 2,357 $1.03
$1.43-$1.875.............. 684 8.8 years $1.49 126 $1.47
------ -------
$0.50-$1.875.............. 8,246 8.0 years $0.92 5,206 $0.84
</TABLE>
690,000 of the 1999 stock option grants vest upon the completion of certain
milestones including, FDA approval of DIACOL, certain business development
initiatives, submission of the NDA for DIACOL and other milestone-based business
activities.
In accordance with APB Opinion 25, the Company could take a significant
charge to earnings upon the successful completion of these events. Based upon
the closing price of the Company's stock as of June 30, 1999, the charge would
have been $116,000, assuming all milestones were met on that day. The following
paragraph which describes the pro forma impact under SFAS 123 does not include
the 690,000 options described above as the probability of their vesting is
uncertain.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its options. Accordingly, no compensation cost has been recognized for its
stock option grants to employees. Had compensation costs for the Company's stock
option grants to employees been determined based on the fair value at the grant
dates for awards consistent with the method of SFAS 123, the Company's net loss
per share would have been increased to the pro forma amounts indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net Loss As reported $(9,633) $(9,489) $(1,650)
Pro forma $(9,760) $(9,540) $(1,681)
Net Loss Per Share-basic As reported $(0.42) $(0.60) $(0.51)
Pro forma $(0.43) $(0.60) $(0.52)
</TABLE>
The resulting effect on pro forma net loss and net loss per share disclosed
above is not likely to be representative of the effects on net loss and net loss
per share on a pro forma basis in future years, because 1999, 1998 and 1997 pro
forma results include the impact of only two, three and four years,
respectively, of grants and related vesting, while subsequent years will include
additional years of grants and vesting.
F-14
<PAGE> 48
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Range of risk free interest rates.................. 5.0% 5.6% 5.84%-6.21%
Dividend yield..................................... 0% 0% 0%
Volatility factor.................................. 120% 82% 85%
Expected life of options (in years)................ 6 6 3-6
</TABLE>
The Weighted Average Fair Value of options granted was $1.10 in 1999, $.77
in 1998, and $.38 in 1997.
9. INCOME TAXES:
The Company has approximately $7,430,000 of net operating loss ("NOL")
carryforwards available to offset future federal taxable income and
approximately $5,900,000 of net operating loss carryforwards available to offset
future state taxable income. The NOL carryforwards are subject to examination by
the tax authorities and expire in various years from 2009 through 2012. The NOL
carryforward differs from the accumulated deficit due principally to differences
in the recognition of certain research and development expenses for financial
and federal income tax reporting. The Company is also entitled to Research and
Experimentation credits to offset future federal income tax liabilities, however
it has not quantified these credits.
The Tax Reform Act of 1986 contains provisions that may limit the NOL and
research and experimentation credit carryforwards available to be used in any
given year upon the occurrence of certain events, including significant changes
in ownership interest. Generally, a change in ownership of a company of greater
than 50% within a three year period results in an annual limitation on that
company's ability to utilize its NOL carryforwards and tax credits from tax
periods prior to the ownership change. The rules providing for the definition of
an ownership change are complex and a study needs to be performed to determine
if the Company has undergone a change in ownership. The Company believes that it
has undergone an ownership change and is subject to an annual limitation on the
use of its NOL carry forwards and tax credits pursuant to these provisions,
however, the Company has not undertaken any study to quantify the change or the
limitation. The Company does not believe that such limitation will have a
material adverse impact on the utilization of its carryforwards.
The Company's NOL carryforwards and temporary differences represent a
previously unrecognized tax benefit. Recognition of these benefits requires
future income. Because the attainment of future income is uncertain, the Company
has established a valuation allowance, which increased by approximately
$2,927,000 during the year ended June 30, 1999, for the entire amount of the tax
benefit.
Significant components of the Company's deferred tax assets as of June 30,
1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net operating loss carryforwards and credits .. $ 3,218 $ 2,280
Research and development costs ................ 3,358 1,560
Compensation .................................. 1,843 800
Other ......................................... 118 970
------- -------
Net deferred tax assets ....................... $ 8,537 $ 5,610
Valuation allowance for deferred tax assets $(8,537) $(5,610)
------- -------
Total deferred tax assets ..................... $ -- $ --
======= =======
</TABLE>
F-15
<PAGE> 49
10. 401(K) PLAN:
The Company maintains a 401(k) retirement plan available to all full-time,
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company, at its discretion, may make certain contributions to
the plan. During fiscal year 1999 and 1998 the Company provided a contribution
equal to 50% of the first 4% contributed by the employee. An expense of
approximately $23,000 and $8,000 was recognized in fiscal year 1999 and 1998
respectively.
11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
LICENSE AGREEMENTS
The Company's rights to DIACOL, its rights to certain compounds comprising
the Fc Receptor Technology and its rights to the Thrombospondin Technology are
held pursuant to license agreements. In addition, the Company anticipates
entering into licenses for other product candidates and technologies that may be
limited in scope and duration, and may authorize the development and marketing
of specified licensed products or technologies for a limited period of time. The
license agreements may be terminated prior to their expiration date under
certain circumstances, including the Company's failure to comply with product
development commitments specified therein.
The success of licensing arrangements depends on many factors, including
the reasonableness of license fees in relation to revenue generated by sales of
the licensed products and the viability and potential developmental success of
the licensed products. Certain of the Company's licensing arrangements require,
and future licensing arrangements may require, specified levels of research and
development expenditures by the Company. The inability of the Company to finance
any or all of such expenditures could result in the termination of affected
licenses, and the termination, cancellation or inability to renew any of its
existing licensing arrangements, coupled with the inability to develop and enter
into new licensing arrangements, could have a material adverse effect on the
Company's financial condition and results of operation.
Terms of the acquisition of CorBec (the "Fc Receptor Technology") on
November 6, 1997, required the Company to pay the CorBec shareholders an
aggregate of $750,000 and issue to them an aggregate of 750,000 shares of Common
Stock. Additional cash payments in the aggregate amount of $16,580,000 and
additional issuances of an aggregate of 720,000 shares of Common Stock are to be
made upon the achievement of the following milestones and targets: (i) $500,000
and 180,000 shares upon the Company's receipt of a letter of approval from the
FDA allowing for the commercial sale of CBP-1011; (ii) 80,000 shares following
the first fiscal year net revenues from CBP-1011 sales equals or exceeds
$20,000,000; (iii) $7,500,000 (payable in five equal annual installments)
following the first fiscal year net revenues from CBP-1011 equals or exceeds
$30,000,000; (iv) 180,000 shares following the first fiscal year net revenues
from CBP-1011 sales equals or exceeds $40,000,000; (v) $500,000 and 30,000
shares upon the Company's filing of an IND with the FDA with respect to a second
generation compound (a "Second Drug"); (vi) $80,000 upon the successful
completion of Phase II clinical trials with respect to a Second Drug; (vii)
120,000 shares upon the Company's filing of an NDA with respect to a Second
Drug; (viii) $500,000 and 130,000 shares upon receipt of a letter of approval
from the FDA allowing for the commercial sale of a Second Drug; and (ix)
$7,500,000 (payable in five equal annual installments) following the first
fiscal year net revenues from the Second Drug equals or exceeds $75,000,000. In
addition, the Company has entered into three-year consulting agreements with Dr.
Alan Schreiber, who is the inventor, and was an officer of CorBec, providing for
aggregate annual consulting fees of $150,000 during the first year, $170,000
during the second year and $185,000 during the third year. An option to purchase
an additional 200,000 shares at the market price on the date of grant for the
five year period following FDA approval, if any, of an IND and the commencement
of clinical trials with respect to a third generation compound is to be granted
to Dr. Schreiber. The agreement also requires the Company to fund up to $240,000
of sponsored research over the course of three years and at least $1,000,000 to
fund clinical trials of CBP-1011.
The ALW License, entered into February 1997, which covers DIACOL, may be
terminated by the licensor if
F-16
<PAGE> 50
(a) the Company fails to commit at least $1,000,000 of funding to the
development of DIACOL for the first two years following November 1997, (which
the Company has complied) (b) the Company fails to pay, commencing in February
2003, minimum royalties of $100,000 per year whether or not any sales have
occurred, or (c) there is no commercial sale of DIACOL or any product under the
ALW License by February 2005. In addition, the Company's rights under the ALW
License will no longer be exclusive, and the minimum royalty payment will no
longer be due (although decreased actual royalty payments will be due) if there
is no valid or enforceable patent on DIACOL or any other product under the ALW
License.
The Company has licensed rights from MCP Hahnemann University (MCP) and Dr.
Tuszynski pursuant to an exclusive, worldwide license, dated November 6, 1997,
to make, have made, use, sell, import, offer for sale and sublicense the
Thrombospondin Technology and to utilize and exploit the related patents and
proprietary information. The license agreement is to terminate, unless earlier
for breach or for failure of the Company to achieve certain FDA product approval
milestones within seven years, upon the expiration or abandonment of the last
patent related to the Thrombospondin Technology. The license required the
Company to issue to MCP 125,000 shares of Common Stock and options to purchase
125,000 shares, issue to Dr. Tuszynski ten-year options to purchase 250,000
shares of Common Stock, to pay MCP royalties of 2% of net sales of licensed
products, to provide MCP funding ranging from $150,000 (in the first year) to
$1,350,000 (over seven years, inclusive) for sponsored research and has
obligated the Company to engage Dr. Tuszynski as a consultant for two years at
$50,000 per year.
The termination of any license or the loss of exclusivity thereunder could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RENT
The Company has entered into a three-year operating lease for its corporate
office facility. The lease provides for minimum annual rent payments through
2001 as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending June 30,
<S> <C> <C>
2000 $104
2001 62
</TABLE>
The lease provides for escalations relating to increases in real estate
taxes and certain operating expenses.
Rent expense was approximately $100,000, $177,000, and $70,000 for the years
ended June 30, 1999, 1998, and 1997, respectively.
12. SUBSEQUENT EVENT (UNAUDITED):
On September 20, 1999 the Company received $3 million in connection with a
private placement pursuant to which it issued 2,307,691 shares of common stock
to certain accredited investors at a price per share of $1.30. The Company also
issued warrants in connection with such private placement to purchase an
aggregate of 761,538 shares of common stock at an exercise price of $1.78. The
warrants expire in September 2003. The Company intends to register with the
Securities and Exchange Commission the common stock issued in connection with
the private placement and the shares of common stock issuable upon the exercise
of the warrants within 30 days after the closing of the private placement.
F-17
<PAGE> 51
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Title
- ----------- -----
<S> <C>
3.1 Certificate of Incorporation, as amended. (Exhibit 3.1)(1)
3.2 By-laws. (Exhibit 3.2)(2)
10.1 Agreement and Plan of Reorganization among Panax Pharmaceutical Company, Ltd., CorBec Pharmaceuticals, Inc. and
certain Security Holders of CorBec Pharmaceuticals, Inc., dated October 31, 1997. (Exhibit 10.1)(1)
10.2 Registration Rights Agreement among Panax Pharmaceutical Company, Ltd. and the former security holders of CorBec
Pharmaceuticals, Inc., dated November 6, 1997. (Exhibit 10.2)(1)
10.3 Stock Purchase Agreement by and between Panax Pharmaceutical Company, Ltd. and Leonard S. Jacob dated September
3, 1997. (Exhibit 10.3)(1)
10.4 Employment Agreement between InKine Pharmaceutical Company, Inc. and Leonard S. Jacob, dated November 6, 1997.
(Exhibit 10.4)(1)
10.5 Employment Agreement between InKine Pharmaceutical Company, Inc. and Taffy J. Williams, dated November 6, 1997.
(Exhibit 10.5)(1)
10.6* Employment Agreement between InKine Pharmaceutical Company, Inc. and Robert F. Apple, dated November 2, 1998
10.7 Option to Purchase Shares of Common Stock of InKine Pharmaceutical Company, Inc. dated November 6, 1997, issued
to Leonard S. Jacob. (Exhibit 10.6)(1)
10.8 Common Stock Purchase Option, dated November 6, 1997 issued to Allegheny University of the Health Sciences.
(Exhibit 10.7)(1)
10.9 Non-Milestone Common Stock Purchase Option, dated November 6, 1997 issued to George Tuszynski. (Exhibit 10.8)(1)
10.10 Common Stock Purchase Option, dated November 6, 1997 issued to George Tuszynski. (Exhibit 10.9)(1)
10.11 Stock Option Plan, as amended. (Exhibit 99)(3)
10.12 1997 Consultant Stock Option Plan. (Exhibit 99)(4)
10.13 Form of Stock Option Agreement. (Exhibit 10(b))(5))
10.14 License Agreement with ALW Partnership. (Exhibit 10(l))(7)
10.15 Form of Consulting Agreement with Craig Aronchick. (Exhibit 10(m))(7)
10.16 Form of Option granted to Partners of ALW Partnership. (Exhibit 10(n))(7)
10.17 Warrant Agreement with D.H. Blair and Company. (Exhibit 10(5))(5)
23.1* Consent of KPMG LLP.
</TABLE>
<PAGE> 52
<TABLE>
<S> <C>
23.2* Consent of Richard A. Eisner & Company, LLP.
27* Financial Data Schedule.
</TABLE>
* Filed herewith.
(1) Filed as an Exhibit to InKine's Current Report on Form 8-K, dated November
6, 1997 (as amended by Form 8-K/A filed on December 3, 1997) with the
Securities and Exchange Commission.
(2) Filed as an Exhibit to InKine's Registration Statement on Form S-1 (SEC
File No. 33-83628), dated November 18, 1994, with the Securities and
Exchange Commission.
(3) Filed as an Exhibit to InKine's Form S-8 (SEC File No. 333-58063), dated
June 29, 1998, with the Securities and Exchange Commission.
(4) Filed as Exhibit to InKine's Form S-8 (SEC File No. 333-58065) dated June
29, 1998, with the Securities and Exchange Commission.
(5) Filed as an Exhibit to InKine's Annual Report on Form 10-KSB for the year
ended June 30, 1995 with the Securities and Exchange Commission.
(6) Filed as an Exhibit to InKine's Annual Report on Form 10-KSB for the year
ended June 30, 1997 with the Securities and Exchange Commission.
(7) Filed as an Exhibit to InKine's Current Report on Form 8-K dated February
14, 1997 with the Securities and Exchange Commission.
<PAGE> 1
Exhibit 10.6
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement") dated as of November 2, 1998 between
INKINE PHARMACEUTICAL COMPANY, INC., a New York corporation ("Employer"), and
ROBERT F. APPLE ("Employee")
Background. Employee has been employed by Employer in various capacities.
Employer and Employee mutually agree to the employment of Employee as Senior
Vice President and Chief Financial Officer.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. Employment. Employer hereby employs Employee, and Employee hereby
accepts such employment and agrees to perform his duties and responsibilities
hereunder, in accordance with the terms and conditions hereinafter set forth.
1.1 Employment Term. The employment term of this Agreement shall be for a
period of one year and may be renewed in accordance with Section 1.2.
The term "Employment Term" shall refer to the initial Employment Term,
which shall commence on the date hereof and shall continue and end on
the first anniversary date of this Agreement (unless terminated prior
thereto in accordance with Section 4 hereof and, to the extent this
Agreement is renewed pursuant to Section 1.2, to the last day of any
successive one year period.
1.2 Renewal. This Agreement shall be automatically renewed for
successive one year terms at the expiration of the initial Employment
Term, and any subsequent Employment Term, unless written notice to the
contrary is provided by either the Employer or the Employee at least
ninety days prior to the expiration of such Employment Term
1.3 Duties and Responsibilities.
a) During the Employment Term, Employee shall serve as
Senior Vice President and Chief Financial Officer for Employer
and shall perform all duties and accept all responsibilities
incidental to such position or as may be assigned to him by
Employer's Board of Directors, and he shall report to InKine's
Chief Executive Officer and shall cooperate fully with the Board
of Directors. Employee shall operate primarily out of Employer's
executive office, currently situated in Blue Bell, Pennsylvania.
b) Employee represents and covenants to Employer that he is
not subject to any agreement, covenant, understanding or
restriction which would prohibit Employee from executing this
Agreement and performing his duties and responsibilities
hereunder, or would in any manner, directly or indirectly, limit
or affect the duties and responsibilities which may now or in the
future be assigned to Employee by Employer.
1.4 Extent of Service; Noncompetition. During the Employment Term,
Employee agrees to use his best efforts to carry out his duties and
responsibilities under Section 1.3 hereof and to devote his full time,
attention and energy thereto. The foregoing shall not be construed as
preventing Employee from (a) serving as a consultant or director for one or
more other business enterprises, (b) engaging in charitable or civic
activities, (c) teaching, or (d) making investments in other businesses or
enterprises; provided that such activities in the aggregate shall not
prevent
<PAGE> 2
him from discharging his duties and responsibilities to Employer. During
the Employment Term, Employee may serve as a director of, but may not serve
as a consultant to, a business enterprise that is engaged in the
development of commercialization of technology which is directly
competitive with the technology then being developed or commercialized by
Employer. Nothing contained herein shall be construed to limit or otherwise
modify Employee's fiduciary and other obligations under applicable state
corporation laws or state and federal securities laws.
1.5 Base Salary. For the services rendered by Employee hereunder,
Employer shall pay Employee and annual salary at the rate of $150,000 for
the initial year of the Employment Term, less withholding required by law
or agreed to by Employee, payable in installments at such times as Employer
customarily pays its other executive officers. The annual base salary shall
be increased by the Board of Directors in its sole discretion, provided
that such annual increase shall be no less than an amount which reflects
the percentage increase (if any) in the Consumer Price Index published by
the United States Department of Labor for the Philadelphia SMASH for the
period since the prior base salary was determined.
1.6 Bonus and Other Benefits. During the Employment Term, Employee
shall be entitled to certain benefits and shall be eligible for certain
bonus compensation as follows:
a) Employee shall be paid an annual bonus, which shall be
determined by Employer's Board of Directors or an appropriate
committee of such Board.
b) Employee shall be entitled to all normal and usual benefits
provided by Employer to its executive employees, including, but not
limited to, participation in profit sharing, disability, health,
hospitalization and retirement plans and such other benefits as the
Board of Directors of Employer may from time to time determine based
upon the benefits paid to other executive officers of Employer.
Employee shall also be entitled to such executive benefits, including
executive disability and life insurance as shall be approved by
Employer's Board of Directors or an appropriate committee of the
Board.
c) Employee shall be eligible to receive such stock options or
other forms of stock grants as shall be determined by Employer's Board
of Directors or an appropriate committee of such Board.
d) Employee shall be entitled to paid vacation time during the
Employment Term in accordance with Employer's then existing vacation
policy for its executive employees.
1.7 Severance Compensation
a) If Employer terminates this Agreement, other than for "cause"
pursuant to Section 4 hereof during the Employment Term, Employer
shall pay to Employee an amount equal to 100% of Employee's base
annual salary, in effect at the date of such termination.
b) Such severance compensation shall be payable in full within
thirty days after the date of termination of this Agreement other than
for "cause" pursuant to Section 4 hereof.
c) Notwithstanding their terms, any options, warrants or other
rights to purchase shares of InKine's capital stock held by Employee
shall become immediately exercisable in full in the event Employer
terminates this Agreement other than for "cause" pursuant to Section 4
hereof. Such options, warrants or other rights shall be exercisable
for the
2
<PAGE> 3
balance of the term set forth in such option, warrant or right, and
otherwise in accordance with the term(s) thereof.
1.8 Expenses. Employee shall be reimbursed for the reasonable
business expenses incurred by him in connection with his performance
of services hereunder during the Employment Term upon presentation of
an itemized account and written proof of such expenses.
2. Confidentiality. The Employee agrees that he will not at any time,
either during or subsequent to the Employment Term, unless given express consent
in writing by the Employer, either directly or indirectly use or communicate to
any person or entity any confidential information of any kind concerning matters
affecting or relating to the names, addresses, buying habits or practices of any
of Employer" clients or customers; Employer" marketing methods, programs,
formulas, patterns, compilations, devices, methods, techniques or processes and
related data; the amount of compensation paid by Employer to employees and
independent contractors and other forms of their employment or contractual
relationships; other information concerning Employer's manner of operations.
(The foregoing shall not be deemed to prohibit the disclosure of information
which (i) is, at the time of disclosure, in the public domain other than as a
result of Employee's breach of this Agreement, or (ii) can be demonstrated by
Employee to be known by Employee on the date of his commencement of employment.)
The Employee agrees that the above information and items are important, material
and confidential trade secrets and that they affect the successful conduct of
the Employer's business and its good will. The Employee agrees that all business
procured by Employee while employed by the Employer is and shall remain the
permanent and exclusive property of the Employer. Employee further agrees that
Employer's relationship with each of its employees and independent contractors
is a significant and valuable asset of the employer. Any interference with the
Employer's business, property, confidential information, trade secrets, clients,
customers, employees or independent contractors by the Employee or any
employee's agents during or after the term of this Agreement shall be deemed a
material breach of this Agreement.
3. Equitable Relief.
a) Employee acknowledges that the restrictions contained in
Section 2 hereof are reasonable and necessary to protect the
legitimate interests of Employer and that any violation of such
restrictions would result in irreparable injury to Employer. If the
period of time or other restrictions specified in Section 2 should be
adjudged unreasonable at any proceeding, then the period of time or
such other restrictions shall be reduced by the elimination or
reduction of such portion thereof so that such restrictions may be
enforced in a manner adjudged to be reasonable. Employee acknowledges
that Employer shall be entitled to preliminary and permanent
injunctive relief for a violation of any such restrictions without
having to prove actual damages or to post bond; Employer shall also be
entitled to an equitable accounting of all earnings, profits and other
benefits arising from such violation, which rights shall be cumulative
and in addition to any other rights or remedies to which Employer may
be entitled in law or equity
b) Employee agrees that until the expiration of the covenants
contained in Section 2 of this Agreement, he will provide, and that
Employer may similarly provide, a copy of the covenants contained in
such Sections to any business or enterprise (i) which he may directly
or indirectly own, manage, operate, finance, join, control or
participate in the ownership, management, operation, financing,
control or control of, or (ii) with which he may be connected with as
an officer, director, employee, partner, principal, agent,
representative, consultant or otherwise, or in connection with which
he may use or permit his name to be used.
4. Termination. This Agreement shall terminate prior to the expiration
of the term set forth in Section 1.1 above upon the occurrence of any one of the
following events:
3
<PAGE> 4
4.1 Disability. In the event that Employee is unable fully to
perform his duties and responsibilities hereunder to the full extent
required by the Board of Directors of the Employer by reason of
illness, injury or incapacity for six consecutive months, during which
time he shall continue to be compensated as provided in Section 1.5
hereof (less any payments due Employee under disability benefit
programs, including Social Security disability, workers' compensation
and disability retirement benefits), this Agreement may be terminated
by Employer, and Employer shall have no further liability or
obligation to Employee for compensation hereunder; provided, however,
that Employee will be entitled to receive the payments prescribed
under any disability benefit plan which may be in effect for employees
of Employer and in which he participated. Employee agrees, in the
event of any dispute under this Section 4.1 to submit to a physical
examination by a licensed physician mutually agreed on by Employee and
the Board of Directors of Employer.
4.2 Death. In the event that Employee dies during the Employment
Term, Employer shall pay to his executors, legal representatives or
administrators an amount equal to the installment of his salary set
forth in Section 1.5 hereof for the month in which he dies, and
thereafter Employer shall have no further liability or obligation
hereunder to his executors, legal representatives, administrators,
heirs or assigns or any other person claiming under or through him;
provided, however, that Employee's estate or designated beneficiaries
shall be entitled to receive the payments prescribed for such
recipients under any death benefit plan which may be in effect for
employees of the Employer and in which Employee participated.
4.3 Cause. Notwithstanding any other provision hereof, Employer
may terminate this Agreement at any time for "cause". For purposes of
this Agreement, "cause" shall mean a material violation of a written
directive of InKine's Board of Directors, conviction of a crime
involving moral turpitude, willful misconduct which has a material
adverse effect on InKine as determined by a majority of InKine's Board
of Directors including each independent Director.
5. Survival. Notwithstanding the termination of this Agreement by
reason of Employee's disability under Section 4.1 or for cause under Section
4.3, his obligations under Section 2 hereof shall survive and remain in full
force and effect for the periods therein provided, and the provisions for
equitable relief against Employee in Section 3 hereof shall continue in force.
6. Governing Law. This Agreement shall be governed by and interpreted
under the laws of the Commonwealth of Pennsylvania.
7. Disputes and Arbitration. Any disputes arising hereunder, including
disputes arising from or relating to termination, shall be resolved by binding
arbitration. Notice of the demand for arbitration by either party shall be given
in writing to the other party to this Agreement. Upon such demand, the dispute
shall be settled by arbitration before a single arbitrator pursuant to the rules
of the American Arbitration Association (the "AAA"). Discovery shall be
permitted prior to arbitration and Pennsylvania law shall be applied. The
arbitrator shall be selected by the joint agreement of the parties, but if the
parties do not so agree within twenty days after the date of the notice referred
to above, the selection shall be made pursuant to the rules of, and from the
panels of arbitrators maintained by the AAA. Any award rendered by the
arbitrator shall be conclusive and binding upon the parties hereto; provided,
however, that any such award shall be accompanied by written opinion of the
arbitrator giving the reasons for the award. Each party shall pay its own
expenses of arbitration and the expenses of the arbitrator shall be equally
shared by the parties. Nothing herein shall prevent the parties from settling
any dispute by mutual agreement at any time.
8. Notices. All notices and other communications required or permitted
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when hand delivered or mailed by
registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
4
<PAGE> 5
If to Employer, to:
InKine Pharmaceutical Company, Inc.
1720 Walton Rd, Suite 200
Sentry Park East
Blue Bell, PA 19422
Attention: CEO
If to Employee, to:
Robert F. Apple
39 Lower Morrisville Road
Fallsington, PA 19054
Or to such other names or addresses as Employer or Employee, as the case may be,
shall designate by notice to each other person entitled to receive notices in
the manner specified in this Section.
9. Contents of Agreement: Amendment and Assignment.
a) This Agreement supersedes all prior agreements and sets forth
the entire understanding among the parties hereto with respect to the
subject matter hereof and cannot be changed, modified, extended or
terminated except upon written amendment approved by the Board of
Directors of Employer and executed on its behalf by a duly authorized
officer. Without limitation, nothing in this Agreement shall be
construed as giving Employee any right to be retained in the employ of
Employer beyond the expiration of the Employment Term, and Employee
specifically acknowledges that, unless this Agreement is renewed in
accordance with Section 1.2 hereof, he shall be an employee-at-will of
Employer thereafter, and thus subject to discharge by Employer with or
without cause and without compensation of any nature.
b) Employee acknowledges that from time to time, Employer may
establish, maintain and distribute employee manuals or handbooks or
personnel policy manuals, and officers or other representatives of
Employer may make written or oral statements relating to personnel
policies and procedures. Such manuals, handbooks and statements are
intended only for general guidance. No policies, procedures or
statements of any nature by or on behalf of Employer (whether written
or oral, and whether or not contained in any employee manual or
handbook or personnel policy manual), and no acts or practices of any
nature, shall be construed to modify this Agreement or to create
express or implied obligations of any nature to Employee.
c) All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the
respective heirs, executors, administrators, legal representatives,
successors and assigns of the parties hereto, except that the duties
and responsibilities of Employee hereunder are of a personal nature
and shall not be assignable or delegatable in whole or in part by
Employee.
10. Severability. If any provision of this Agreement or application
thereof to anyone or under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provision or application of this Agreement which can be given
effect without the invalid or unenforceable provision or application and shall
not invalidate or render unenforceable such provision or application in any
other jurisdiction.
5
<PAGE> 6
11. Remedies Cumulative: No Waiver. No remedy conferred upon Employer
by this Agreement is intended to be exclusive of any other remedy, and each and
every such remedy shall be cumulative and shall be in addition to any other
remedy given hereunder or now or hereafter existing at law or in equity. No
delay or omission by Employer in exercising any right, remedy or power hereunder
or existing at law or in equity shall be construed as a waiver thereof, and any
such right, remedy or power may be exercised by Employer from time to time and
as often as may be deemed expedient or necessary by Employer in its sole
discretion.
6
<PAGE> 7
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
Attest:
INKINE PHARMACEUTICAL COMPANY, INC.
/s/ Taffy J. Williams, Ph.D. /s/ Leonard S. Jacob, M.D., Ph.D.
- ---------------------------- ---------------------------------
By:
President Leonard S. Jacob, M.D., Ph.D.
Chairman and CEO
/s/ Robert F. Apple
-------------------
Robert F. Apple
7
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
InKine Pharmaceutical Company, Inc.:
We consent to incorporation by reference in registration statement nos.
333-42647 on Form S-3 and 333-58063 and 333-58065 on Form S-8 of InKine
Pharmaceutical Company, Inc. of our report dated August 11, 1999, relating to
the balance sheets of InKine Pharmaceutical Company, Inc. as of June 30, 1999
and 1998, and the related statements of operations, changes in shareholders'
equity, and cash flows for the years then ended which report appears in the June
30, 1999, annual report on Form 10-K of InKine Pharmaceutical Company, Inc.
/s/ KPMG LLP
Philadelphia, Pennsylvania
September 28, 1999
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the incorporation by reference in the Registration
Statements of InKine Pharmaceutical Company, Inc. on Form S-8 (Nos. 333-58063,
333-58065) and on Form S-3 (No. 333-42647) of our report dated July 24, 1997
relating to the statements of operations, changes in shareholders' equity and
cash flows of InKine Pharmacuetical Company, Inc. for the year ended June 30,
1997 and for the period from July 1, 1993 (commencement of operations) through
June 30, 1997, which report is included in the annual report InKine
Pharmaceutical Company, Inc. on Form 10-K for the year ended June 30, 1999.
/s/ Richard A. Eisner & Company, LLP
New York, New York
September 28, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION-EXTRACTED FROM (A) THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000929547
<NAME> INKINE PHARMACEUTICAL
<MULTIPLIER> (000's)
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,968
<SECURITIES> 4,894
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,962
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0
0
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</TABLE>
