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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
__X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1996
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to _______.
Commission File Number: 0-26862
DEPOTECH CORPORATION
(Exact name of Registrant as specified in its charter)
CALIFORNIA 33-0387911
(State or other jurisdiction (I.R.S. Employer
or incorporation or organization) Identification No.)
10450 Science Center Drive, San Diego, California 92121
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (619) 625-2424
Securities registered pursuant to Section 12(b) of
the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, no par value
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 Regulation 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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of March 3, 1997 was approximately $148,638,414. For the
purposes of this calculation, shares owned by officers, directors and 10%
shareholders known to the registrant have been deemed to be owned by affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares outstanding of the registrant's Common Stock as of
March 3, 1997 was 13,077,905.
Documents Incorporated by Reference
Portions of the Registrant's 1996 Annual Report to Shareholders, a copy of
which is attached hereto as Exhibit 13.1, are incorporated as provided in Part
II.
Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held on May 14, 1997, to be filed on or about April
7, 1997, referred to herein as the "Proxy Statement", are incorporated as
provided in Part III.
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PART I
Item 1. BUSINESS
The discussion of the Company's business contained in this Annual Report
on Form 10-K may contain certain projections, estimates and other
forward-looking statements that involve a number of risks and uncertainties,
including those discussed below at "Risks and Uncertainties." While this outlook
represents management's current judgment on the future direction of the
business, such risks and uncertainties could cause actual results to differ
materially from any future performance suggested below. The Company undertakes
no obligation to release publicly the results of any revisions to these
forward-looking statements to reflect events or circumstances arising after the
date hereof.
OVERVIEW
DepoTech Corporation ("DepoTech" or the "Company") is a drug delivery
company engaged in the development and manufacture of sustained-release
therapeutic products based on its DepoFoam(TM) injectable drug delivery
technology ("DepoFoam"). The Company does not engage in the discovery of new
chemical entities. DepoFoam consists of microscopic, spherical particles
composed of hundreds to thousands of nonconcentric chambers each separated from
adjacent chambers by a bilayer lipid membrane. The Company has developed
DepoFoam formulations which release drugs over an extended period of time, such
as several weeks, or over a shorter period, such as a few days. The breadth of
the Company's technology is illustrated by its ability to encapsulate and
control the release of a wide spectrum of water-stable drugs, including small
molecules, proteins, peptides and various forms of genetic material. The
technology allows for injection of sustained release forms of these
pharmaceutical products via several routes including under the skin, within
muscle tissue, into cerebrospinal fluid, within joints and within the abdominal
cavity. These features allow DepoTech to develop new formulations of products in
a variety of therapeutic areas. The Company is currently developing products in
cancer, anti-infectives, pain management, cardiovascular applications, and
rheumatologic diseases.
The Company's lead product, DepoCyt(TM) sustained-release encapsulated
cytarabine ("DepoCyt"), is a proprietary DepoFoam formulation of a generic,
anti-cancer drug also known as ara-C. DepoCyt is being developed in
collaboration with Chiron Corporation ("Chiron") in the United States, Canada
and Europe for the treatment of neoplastic meningitis ("NM"), the spread of
cancers to the soft tissue membrane of the brain and spinal cord (known as the
meninges) due to cancers arising from either solid tumors, leukemia (a form of
cancer involving white blood cells) or lymphoma (a form of cancer involving
tissues of the lymphatic system). Since April 1994, the Company has been
carrying out clinical trials of DepoCyt for the treatment of NM arising from
each of these types of cancer. In May 1996, enrollment of solid tumor patients
into the trial was completed and, subsequently, the Company completed its
analysis of the data from the solid tumor arm of the trial which compared
DepoCyt with the current standard therapy (methotrexate). Data from this pivotal
Phase III clinical trial (with a data cut-off date of October 1, 1996) suggest
that treatment with DepoCyt resulted in a higher complete response rate,
extended survival and longer time to disease progression when compared to
standard treatment.
Based on the data above and other data still being analyzed from the
trial, the Company is completing the filing a new drug application ("NDA") with
the U.S. Food and Drug Administration ("FDA") for the treatment of NM arising
from solid tumors. The filing commenced in the fourth quarter of 1996 with the
Chemistry, Manufacturing and Controls section of the NDA. The Company plans to
complete the filing of the NDA as soon as practicable. Following the completion
of the NDA filing, the Company intends to submit data pertaining to efficacy on
available lymphoma and leukemia patients. The Company is continuing the pivotal
Phase III trial of DepoCyt for patients with lymphoma and leukemia and plans to
submit supplements to the NDA for the treatment of these diseases.
The Company estimates, based on market survey data, that the current
treated market for NM is approximately 20,000 patients per year in the United
States. Based on data derived from autopsies, the Company estimates that
approximately 65,000 patients per year in the United States develop NM.
In addition to DepoCyt, the Company is developing the following products
based on DepoFoam technology: (i) DepoMorphine(TM) sustained-release
encapsulated morphine sulfate ("DepoMorphine"), for acute post-surgical pain
management; (ii) DepoAmikacin(TM) sustained-release encapsulated amikacin
("DepoAmikacin"), a potent, broad-spectrum antibiotic for the treatment and
prevention of bacterial infections; and (iii) D0601, a DepoFoam formulation of
insulin-like growth factor 1 ("IGF-1"), a Chiron proprietary protein, for
rheumatologic diseases. Furthermore, the Company and Chiron are assessing the
feasibility of developing F0602, a second formulation of IGF-1, and F0303, a
DepoFoam formulation of a gene therapy product for an undisclosed indication.
For DepoMorphine, DepoTech has completed formulation, preclinical studies and
scale-up of the manufacturing process to a scale appropriate to provide clinical
trial materials. In March 1997, DepoTech commenced a Phase I safety and
pharmacokinetics study for DepoMorphine. The Company completed a Phase I
clinical trial for DepoAmikacin in April 1996 in which the drug
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was found to be well-tolerated for all dosage levels studied. The Company and
Chiron are performing various pre-clinical studies on D0601, conducting a
feasibility study on F0602 and planning to conduct a feasibility study in 1997
on F0303. DepoTech is also evaluating, internally and in conjunction with
certain corporate sponsors, DepoFoam formulations of several additional
compounds which may offer significant medical benefits and substantial market
potential, in the fields of anti-infectives, cancer, local anesthetics and
cardiovascular medicine.
Since March 1994, DepoTech and Chiron have collaborated in the development
of DepoCyt and DepoFoam formulations of certain of Chiron's proprietary
products, including IGF-1. The contractual arrangement provides for the future
development of additional DepoFoam formulations of other Chiron proprietary
products, including certain therapeutic proteins, vaccines, and gene therapy
products. The contractual arrangement (the "Agreement") between DepoTech and
Chiron grants Chiron rights to market and sell DepoCyt in the United States,
Canada and Europe. DepoTech will manufacture DepoCyt, Chiron will market, sell,
and distribute DepoCyt, and the parties will share profits equally. Chiron will
make payments to DepoTech upon filing of an NDA and upon achievement of certain
milestones in the European development of DepoCyt. Chiron also has a right of
first refusal to obtain a license to alternate DepoFoam formulations of
cytarabine under terms and conditions to be negotiated in the future. Following
an evaluation of the markets and certain other factors, the Company and Chiron
mutually agreed not to further develop any additional generic cancer compounds
named in the Agreement.
The Agreement also provides for the joint development of DepoFoam
formulations of certain compounds proprietary to Chiron ("Chiron Products"),
including D0601, F0602 and F0303 discussed above. In 1998 and thereafter, Chiron
must fund one feasibility program for a Chiron Product per year or lose its
option to develop DepoFoam formulations of additional Chiron proprietary
compounds. The Agreement provides that Chiron will pay DepoTech for the
Company's feasibility efforts, and that Chiron will be responsible for all
development costs thereafter. The Agreement also provides for payments by Chiron
to DepoTech upon achievement of certain development milestones with regard to
Chiron Products. Chiron will have exclusive, worldwide distribution rights to
all Chiron Products and will manufacture the bulk unencapsulated drug. DepoTech
will then encapsulate the bulk drug in DepoFoam creating the Chiron Product, and
Chiron will market, sell and distribute the Chiron Products. Chiron will
compensate DepoTech based on both manufacturing costs, including a manufacturing
profit, and a percent of Chiron's sales of the Chiron Products. Both DepoTech
and Chiron have the ability to terminate a portion or all of the collaboration
at certain intervals and with advance notice. In addition, Chiron has the
ability to terminate the development of a Chiron Product with a limited amount
of advance notice.
The Company's strategy is focused on the development and commercialization
of proprietary DepoFoam formulations of generic drugs or, in collaboration with
corporate partners, the development of DepoFoam formulations of compounds
proprietary to the corporate partners. The Company is implementing this strategy
by: (i) developing high value-added DepoFoam formulations of approved or
late-stage drugs; (ii) expanding the product pipeline by identifying new product
opportunities according to stringent criteria and by conducting feasibility
studies; (iii) establishing collaborative and funding arrangements for
development and commercialization of new DepoFoam products; and (iv) retaining
certain manufacturing rights to DepoFoam formulations. The Company believes this
strategy minimizes certain risks associated with pharmaceutical discovery and
development, including risks associated with determining the efficacy and safety
of the underlying drug.
Since 1995, the Company has manufactured clinical material in a 14,400
square foot manufacturing plant built for this purpose. This manufacturing plant
has completed validation to comply with current Good Manufacturing Practices
("cGMP") regulations for the manufacture of pharmaceuticals and was inspected by
the California Department of Health Services Food and Drug Branch and received a
license from the State of California to manufacture drugs. This manufacturing
plant has undergone an initial pre-approval inspection ("PAI") from the FDA for
the manufacture of DepoCyt. The Company has received written inspectional
observations from the FDA and has responded in writing to such observations as
requested by the FDA. The Company believes that it will be able to address all
of the observations from the PAI in a timely fashion. The completion of a PAI
and satisfactory resolution of the inspectional observations is a precondition
for approval of DepoCyt. In addition, the Company completed construction and
occupied an 82,000 square foot facility to house its administrative, research
and development and future manufacturing activities in September 1995.
DEPOFOAM TECHNOLOGY
DepoFoam is a proprietary enabling drug delivery technology that permits
the formulation of sustained release therapeutic products. DepoFoam consists of
microscopic, spherical particles composed of hundreds to thousands of
nonconcentric internal aqueous chambers containing the encapsulated drug, with
each chamber separated from adjacent chambers by a bilayer lipid membrane.
DepoFoam formulations can be administered by a number of routes, including
subcutaneous, intramuscular, intra-articular, epidural and intrathecal. Because
the components of DepoFoam are synthetic duplicates of lipids normally present
in the body, the material is biodegradable and biocompatible. Typically, a
DepoFoam particle consists of less than 10% lipid, with the remaining 90%
consisting of drug in aqueous solution. The resulting DepoFoam formulation is
stored under refrigeration in ready-to-use form.
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The Company has tested DepoFoam formulations that release drugs over a
period of days to weeks with the period of release defined by the lipid
composition, chemistry of the encapsulated drug and manufacturing parameters of
the DepoFoam particles. The Company believes drugs may be released from DepoFoam
particles as the drugs diffuse and/or leach through the walls and by gradual
erosion of the outside surface. The nature of drug release may also be
determined by the specific chemistry and size of each drug molecule. As a
result, the Company has demonstrated the ability to develop DepoFoam
formulations which release drugs over an extended period of time, such as
several weeks, or over a shorter period, such as one to two days. DepoTech has
demonstrated that its proprietary DepoFoam technology can be used to encapsulate
a wide spectrum of generic and proprietary water-stable drugs, including small
molecules, proteins, peptides, antisense oligonucleotides and DNA, for a range
of therapeutic indications.
ADVANTAGES OF DEPOFOAM
The Company believes the DepoFoam technology addresses many of the
limitations associated with traditional drug delivery technologies. Most drugs
are administered orally, by injection in intermittent and frequent doses or by
continuous infusion. These routes of administration are not optimal for several
reasons, including difficulty in achieving therapeutic drug levels over time,
problems with toxicity, high costs due to frequent or continuous administration
and poor patient compliance. Furthermore, innovations in biotechnology have led
to an increase in the number of large-molecule protein and peptide drugs under
development. These therapeutics, because of their large molecular size and
susceptibility to degradation in the gastrointestinal tract or in the blood,
must usually be administered by multiple injections often in a hospital or other
clinical setting.
The Company believes that the DepoFoam technology's key advantage over
traditional methods of drug delivery, including bolus injections and oral
administration, is that the sustained-release characteristics of DepoFoam
particles allow drugs to be administered less frequently and more conveniently.
To attain the desired therapeutic effect, conventional drug delivery often
results in a dosage that delivers an initially high level of the drug followed
by a sharp decline over time, whereas DepoFoam formulations can provide a more
consistent drug level over an extended period, thus, potentially improve safety
and efficacy. For example, DepoCyt clinical trials to date have shown that
DepoCyt has a therapeutic life of up to two weeks after a single intrathecal
injection, compared to one day with unencapsulated cytarabine.
The Company believes that key features of the DepoFoam technology,
including lower initial drug levels and delivery of therapeutic drug levels over
an extended period of time, make it superior to traditional drug delivery
techniques, as well as other sustained-release delivery formulations. DepoFoam
may:
- Enhance safety and efficacy. The Company believes DepoFoam drug delivery
may improve the ratio of therapeutic effect to toxicity by decreasing the
initial peak concentrations of drug associated with toxicity, while
maintaining levels of drug at therapeutic, sub-toxic concentrations for an
extended period of time. Many drugs demonstrate optimal efficacy when
concentrations are maintained at therapeutic levels over an extended
period of time. When a drug is administered intermittently, the
therapeutic concentration is often exceeded for some period of time, and
then the concentration rapidly drops below effective levels. Excessively
high concentrations are a major cause of side effects, and sub-therapeutic
concentrations are ineffective.
- Improved convenience and lower overall treatment costs. To be commercially
viable in today's health care market, drugs must be convenient to use and
show cost effectiveness, as well as therapeutic effectiveness. The Company
believes that DepoFoam formulations of drugs may offer substantial cost
savings by reducing the need for continuous infusion, the frequency of
administration and the number of visits a patient must make to the doctor.
These formulations may furthermore enable some patients that are typically
treated in a hospital to be treated as out-patients, reduce the need for
diagnostic monitoring of some products, reduce complications of therapy
caused by poor compliance and eliminate the need for additional procedures
or equipment.
- Expand types of drugs capable of delivery over an extended period of time.
Proteins, peptides and nucleic acids, because of their large molecular
size and susceptibility to degradation in the gastrointestinal tract and
other sites, must currently be administered frequently by injection or by
continuous infusion, typically in a hospital or other clinical setting.
The Company believes DepoFoam may be able to deliver these drugs more
effectively.
- Expand indications of currently-marketed drugs. The Company believes that
the therapeutically useful release of drugs from a DepoFoam formulation
may allow such drugs to be marketed for indications where they are
currently not thought to be useful because of the limitations of current
delivery methods. For example, the Company believes DepoCyt will be
indicated for treating solid tumor and lymphoma metastases in NM even
though the active ingredient of DepoCyt, cytarabine, is currently not
labeled for these indications.
- Improve profit margins through proprietary reformulation. The Company
believes DepoFoam offers the potential
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to produce new proprietary formulations of generic products that may be
differentiated from the nonsustained-release versions by virtue of reduced
dosing requirements, improved efficacy, additional applications or
decreased toxicity. The Company believes the proprietary position of such
DepoFoam formulations will be based on the proprietary nature of DepoFoam
particles, and may offer more attractive margins and increased sales
relative to the generic competition.
DEPOTECH'S STRATEGY
DepoTech's strategy is focused on the development and commercialization of
proprietary DepoFoam formulations of generic drugs or, in collaboration with
corporate partners, the development of DepoFoam formulations of compounds
proprietary to its corporate partners. The Company is implementing this strategy
by:
- Developing high value-added DepoFoam formulations of approved or
late-stage drugs. The Company's product development efforts are focused
primarily on drugs that either have proven safety and efficacy and are
approved for marketing or are in late-stage clinical trials. The Company
does not engage in basic research to discover new molecular entities.
- Expanding the product pipeline by identifying new product opportunities
according to stringent criteria and by conducting feasibility studies. The
Company focuses its efforts on selecting new drug candidates based on
stringent criteria and developing DepoFoam formulations of drugs where
sustained-release formulations offer a clear medical or cost benefit. Once
a candidate compound passes these screening criteria, DepoTech performs a
limited set of tests to establish technical feasibility for the product
before undergoing expensive clinical development. The Company believes
that proprietary DepoFoam formulations will add additional value to such
drugs by potentially increasing their level of efficacy, reducing their
toxicity and side effects, lowering overall treatment costs and expanding
the indications they address.
- Establishing collaborative and funding arrangements for development and
commercialization of new DepoFoam products. As part of its
commercialization strategy, the Company intends to focus its efforts on
establishing collaborative arrangements with corporate partners to obtain
access to specific compounds, obtain marketing and distribution
capabilities and fund product development. With respect to products that
are proprietary to the partner, DepoTech will seek to have the partner
fund the feasibility, formulation, development, clinical testing and
regulatory costs of the DepoFoam formulations of the product and will
generally grant worldwide distribution rights to the DepoFoam formulation
to the partner. In March 1994, the Company entered into a collaboration
with Chiron that contained these strategic elements. In addition, in
selected instances, DepoTech may retain certain marketing or co-promotion
rights.
- Retaining certain manufacturing rights to DepoFoam formulations. A key
strategy of the Company is to seek to maintain exclusive formulation and
manufacturing rights to DepoFoam encapsulated drugs, including proprietary
products of corporate partners. The Company believes it has developed
significant proprietary expertise in the formulation and manufacture of
DepoFoam and expects to receive compensation for its expertise and effort
in manufacturing DepoFoam formulations of drugs.
PRODUCT RESEARCH AND DEVELOPMENT PROGRAMS
The table below summarizes DepoTech's portfolio of products currently
under development and formulations undergoing feasibility testing.
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<TABLE>
<CAPTION>
CORPORATE
PRODUCT (ACTIVE COMPOUND) INTENDED USE STATUS(1) PARTNER(2)
- ------------------------------------------------------------------------------------------------------
PRODUCT PROGRAMS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DepoCyt (cytarabine) Neoplastic meningitis
solid tumors NDA/Phase IV Chiron
leukemia/lymphoma Phase III Chiron
pediatric use Phase I, dose finding Chiron
Neoplastic meningitis Pharmacokinetics Chiron
study (Europe)
DepoMorphine (morphine) Acute post-operative pain Phase I None
DepoAmikacin (amikacin) Bacterial infections Phase I None
D0601 (IGF-1) Rheumatologic diseases Preclinical Chiron
- ------------------------------------------------------------------------------------------------------
<CAPTION>
FEASIBILITY PROGRAMS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Antisense oligonucleotides CMV retinitis Feasibility Isis
(Isis 2922)
F0103 (undisclosed) Undisclosed Feasibility Johnson & Johnson
F0503 (undisclosed) Cardiovascular Feasibility LEO Pharmaceutical
Products, Ltd.
F0602 (IGF-1) Undisclosed Feasibility Chiron
F0303 (undisclosed) Undisclosed Feasibility Chiron
Local anesthetics Acute post-operative pain Feasibility None
(bupivacaine)
</TABLE>
(1) "Feasibility" means initial laboratory testing to determine the ability to
encapsulate the drug efficiently in DepoFoam, establish preliminary
stability, engineer appropriate in vitro release rates and conduct limited
animal studies. "Preclinical" means formulation optimization, scale-up
experiments, additional stability testing following initial feasibility
studies and other studies, including additional animal studies focused on
toxicology and efficacy, necessary to prepare and file an IND. "Dose
finding study" means a study to determine the appropriate dose established
in one patient population in a different patient population (e.g.,
pediatric patients). "Phase I" means initial human studies designed to
establish the safety, dose tolerance and sometimes pharmacokinetics of a
compound. "Phase III" means human studies designed to lead to accumulation
of data sufficient to support an NDA. "Phase IV" means human studies that
are generally performed after approval of a new drug. In the case of
DepoCyt, as with all drugs subject to accelerated approval, the FDA has
requested that the Company submit a Phase IV protocol prior to submission
of an NDA. Completion of a Phase IV study is not a prerequisite for review
of an NDA by the FDA. "Pharmacokinetics study" as used above means human
studies to confirm that therapeutic levels of drug in the CSF can be
achieved by the lumbar route of administration.
(2) The Company will seek to maintain manufacturing rights to DepoFoam
formulations of compounds and will generally grant worldwide distribution
rights to the DepoFoam formulation to the partner. For instance, in its
collaboration with Chiron, DepoTech will manufacture DepoCyt and will
encapsulate Chiron's proprietary compounds in a DepoFoam formulation.
DepoCyt
The Company's lead product, DepoCyt sustained-release encapsulated
cytarabine, is a proprietary DepoFoam formulation of a generic anti-cancer drug,
also known as ara-C. DepoCyt is being developed in collaboration with Chiron in
the United States, Canada and Europe for the treatment of three subtypes of NM
arising from solid tumors, leukemia and lymphoma. The Company commenced filing
an NDA initially for the treatment of NM arising from solid tumors in the fourth
quarter of 1996 and plans to complete this filing as soon as practicable.
Background. NM is a form of metastatic cancer arising from the spread of
leukemia, lymphoma or solid tumors to the tissue, known as the meninges, which
surrounds the brain and spinal cord and encloses the CSF. Because of the
blood-brain barrier, drugs in the bloodstream do not penetrate well into the
CSF. Thus, when cancer cells metastasize to the meninges, the most effective
therapy is to inject anti-cancer drugs directly into the CSF. Cytarabine is one
of the two drugs most commonly used for this therapy. Cytarabine acts by
inhibiting a vital enzyme in DNA synthesis, DNA polymerase, causing a halt to
the synthesis of DNA and resulting in death of the cell. Therefore, the
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best results are obtained when the drug is localized in the vicinity of dividing
cancer cells for an extended period.
Because the therapeutic half-life of cytarabine in the CSF is relatively
short, frequent and repeated injections are necessary for effective treatment.
For safety reasons, continuous intrathecal infusion of cytarabine is not a
viable option. The result is that NM cannot be treated effectively without the
use of repeated, intrathecal injections that are inconvenient and uncomfortable
for patients, require physician supervision and increase the risk of infection.
Because of these and other factors, the disease is often under-diagnosed and
frequently left untreated. Without effective treatment, life expectancy for
patients diagnosed with this disease is between two and four months. Clinical
trials to date have shown that DepoCyt maintained therapeutically useful
concentrations of cytarabine in the CSF for two weeks after a single intrathecal
injection as compared to less than one day with traditional intrathecal
injections of cytarabine. As a consequence, the use of DepoCyt results in less
frequent injections and extended therapeutic levels of the drug in the CSF.
Markets. The Company estimates that the current treated market for NM is
approximately 20,000 patients per year in the United States. However, the
Company expects the treatment market to grow and estimates that approximately
65,000 patients per year in the United States develop this disease. In June
1993, the Company obtained orphan drug designation for DepoCyt from the FDA to
treat NM.
Clinical Development. In the Phase III clinical trial as originally
designed and initiated in April 1994, patients with one of the three subtypes of
NM selected from multiple centers were randomized to receive either DepoCyt or
standard therapy. Standard therapy for metastases of solid tumors is
methotrexate and the standard therapy for metastases of leukemia and lymphoma is
unencapsulated cytarabine. Within each subtype, at least 20 patients are to
receive DepoCyt and at least 20 patients are to receive standard therapy. A
total of 40 patients are to be treated for each subtype of the disease and a
minimum total of only 120 patients are required to complete all three arms of
the study. Enrollment of patients into the Phase III trial for NM arising from
solid tumors was completed in May 1996 and the data from the trial was analyzed
subsequently based on a data cutoff date of October 1, 1996. Data from the
pivotal Phase III clinical study of DepoCyt in solid tumor patients suggest a
higher complete response rate, extended survival and longer time to disease
progression, compared to the standard treatment.
Based on the data above and other data still being analyzed from the
trial, the Company is completing the filing of an NDA with the FDA for the
treatment of NM arising from solid tumors. The filing commenced in the fourth
quarter of 1996 with the Chemistry, Manufacturing and Controls section of the
NDA. The Company plans to complete the filing of the NDA as soon as practicable.
Following the completion of the NDA filing, the Company intends to submit data
pertaining to efficacy on available lymphoma and leukemia patients. The Company
is continuing the pivotal Phase III trial of DepoCyt for patients with lymphoma
and leukemia and plans to submit supplements to the NDA for the treatment of
these diseases.
The development of DepoCyt is being performed under the expedited
development process of the FDA regulations, which is available for therapeutic
products to treat life-threatening illnesses for which no satisfactory
alternative therapies exist. The FDA has advised the Company that it could file
an NDA with data collected from any one individual subtype in advance of
accruing patients and completing the analyses on the other two subtypes.
In the case of DepoCyt, as with all drugs subject to accelerated approval,
the FDA had requested that the Company submit a Phase IV protocol prior to
submission of an NDA. Completion of a Phase IV study is not a prerequisite for
review of an NDA by the FDA. The Company has initiated a multicenter Phase IV
study of DepoCyt for the treatment of NM arising from solid tumors in the United
States and Canada. This study is a non-randomized trial intended to collect
further data relating to safety and efficacy. The study also permits additional
injections of DepoCyt for patients who fail to respond completely during the
initial induction period of the study or who relapse 30 days following
completion of the treatment protocol. See "-- Government Regulation."
Additional Territories and Indications. Chiron is currently carrying out
pharmacokinetic studies of DepoCyt for the treatment of NM in Europe. In
addition, DepoTech plans to start a trial of DepoCyt in Japan. This trial is
designed to confirm the applicability of the dosing regimen used in the North
American and European trials to the Japanese population. In parallel, the
Company intends to submit an orphan drug application for the accelerated
marketing approval of DepoCyt in Japan.
To establish the appropriate use of DepoCyt in children afflicted with NM,
DepoTech, in conjunction with Chiron, has begun a multi-center pediatric dose
finding trial. This study will evaluate the safety and pharmacokinetics of
DepoCyt in children of various ages. In addition, the study is expected to
provide information regarding the efficacy of DepoCyt in children and to collect
data on the long-term use of the drug.
The Company is also exploring additional indications for DepoCyt,
including its use in the treatment of other cancers including ovarian, lung and
breast cancer, as well as neuroglioma and AIDS-related non-Hodgkin's lymphoma.
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DepoMorphine
DepoTech is developing DepoMorphine sustained-release encapsulated
morphine sulfate for use in moderating acute pain following surgery. This
product is intended for epidural administration and may replace repeated
epidural or intravenous administration of opiates or patient controlled
analgesia for two to four days following surgery.
The Company believes that DepoMorphine could be used in management of pain
associated with many types of surgery, including Cesarean sections (epidural
morphine is often used in Cesarean sections in the United States),
hysterectomies, deep abdominal surgeries, hip and knee replacements and other
surgical procedures. In 1995, the Company identified a total of approximately
5.6 million procedures occurring in the United States that may have been
candidates for DepoMorphine. The Company estimates the target market to be
approximately 3.8 million procedures. In 1995, morphine worldwide unit sales
were approximately 64.0 million units, including 41.6 million units in the
United States, 9.8 million units in Japan and 12.6 million units in Europe. The
Company believes that DepoFoam offers the opportunity to reformulate morphine
sulfate, which has been a generic product for many years, into a proprietary new
product with traditional pharmaceutical margins.
DepoTech has completed formulation development, initial manufacturing
scale-up and preclinical studies of DepoMorphine. Preclinical studies in animals
showed that DepoMorphine provided a minimum of two to three days of pain control
following a single epidural injection. One characteristic of certain DepoFoam
formulations of drugs is that an enhanced local effect may occur with limited
systemic toxicity. A number of pharmacokinetic studies in animals have confirmed
that there are high levels of morphine at the injection site and in the local
cerebral spinal fluid with very low levels in the blood. These data also show a
sustained effect of the morphine and reproducibility from multiple batches of
DepoMorphine.
In December 1996, The Company filed an IND with the FDA to begin clinical
studies of DepoMorphine for the management of acute post-operative pain. In
March 1997, DepoTech began a Phase I dose-escalation study that will assess the
safety and pharmacokinetics of single doses of DepoMorphine administered
epidurally to healthy volunteers. The study will also provide a preliminary
assessment of DepoMorphine's ability to inhibit the transmission of pain. Up to
30 healthy subjects will be enrolled, and the study will be conducted at a
single site under the leadership of members of the Department of Anesthesiology,
Stanford University Medical Center.
DepoAmikacin
DepoTech is developing DepoAmikacin sustained-release encapsulated
amikacin, a DepoFoam formulation of a potent, broad-spectrum antibiotic. The
Company believes that DepoFoam offers the opportunity to reformulate amikacin,
which became a generic antibiotic in 1990, into a proprietary new product and to
improve its therapeutic profile. The Company has successfully encapsulated
amikacin in DepoFoam and has tested various formulations in animals. DepoTech
completed a Phase I clinical trial for DepoAmikacin in April 1996 in which the
drug was found to be well-tolerated for all dosage levels studied. The Company
is currently conducting formulation optimization and scale-up studies and is
preparing for additional clinical testing.
Background. Bacteria cause a wide range of illnesses in people, ranging
from clinically unimportant infections to fatal diseases. Injectable forms of
antibiotics are important tools of the physician, especially for more acutely
ill patients. However, most antibiotics that are administered orally, by bolus
injection or by continuous infusion achieve high systemic concentrations but
lesser concentrations in infected tissue, and are generally eliminated from the
body within several hours of administration. Furthermore, the concentration of
certain antibiotics, including amikacin, that can be achieved in the infected
tissue using current formulations is limited by the amount of drug that the body
can tolerate in the bloodstream without causing damage to the kidneys and
auditory nerves.
DepoAmikacin can be administered directly into the site of infection and
may deliver therapeutic levels of amikacin while reducing certain systemic
toxicities associated with this drug. Consequently, DepoAmikacin may be able to
expand the indications for amikacin and result in more attractive prices and
margins. The Company believes DepoAmikacin may be used in many applications,
including treatment and prophylaxis of bacterial infections associated with open
fractures, indwelling vascular catheters, orthopedic implants, peritonitis and
vascular grafts.
Markets. In 1995, there were reported to be a total of over 7.0 million
procedures occurring in the United States in which site-specific antibiotic
treatment may have been appropriate. DepoTech estimates the target United States
market for DepoAmikacin to be approximately 5.6 million procedures. Worldwide
1995 sales of the general class of antibiotics known as aminoglycosides, which
includes amikacin, were approximately $447.0 million. In 1995, amikacin
worldwide unit sales were approximately 8.4 million units, including 631,000
units in the United States, 5.7 million units in Japan and 2.0 million units in
Europe.
Clinical Development. In animal studies performed by the Company, a single
injection of DepoAmikacin
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administered locally at the site of an intentionally infected implanted foreign
body significantly reduced the number of bacteria present versus the use of
either systemic or local injection of free amikacin. This animal model is
analogous to many surgical situations, from complicated hip replacement surgery
to insertion of catheters. Additional animal models of infection, including
models for peritonitis and infected surgical wounds, are currently underway.
Information from these studies will be used to support the selection and design
of follow-on studies, including a Phase II clinical study of efficacy.
Chiron Proprietary Products
Under its agreement with Chiron, two Chiron proprietary proteins, IGF-1
and IL-2, were chosen as the first two proprietary compounds to be developed
into DepoFoam formulations. Feasibility studies including formulation
development and in vivo animal studies on IGF-1 and IL-2 were completed and
D0601 (DepoFoam encapsulated IGF-1) was chosen for further development. D0601
scale-up and preclinical development are currently underway. In addition, Chiron
and the Company have initiated another feasibility study on an additional
DepoFoam formulation of IGF-1, F0602 for undisclosed indications. In March 1997,
Chiron selected a gene therapy product for an undisclosed indication as the 1997
feasibility study candidate.
New Product Feasibility Programs
DepoTech is also evaluating DepoFoam formulations of several additional
compounds which may offer significant medical benefits and substantial market
potential, including antisense oligonucleotides, local anesthetics,
antithrombotics and certain proprietary molecules of LEO Pharmaceutical
Products, Ltd. ("LEO") and Johnson and Johnson's The R. W. Johnson
Pharmaceutical Research Institute, a Division of Ortho Pharmaceutical
Corporation. The objectives of the feasibility programs are to: (i) determine
the ease and efficiency of encapsulation of candidate drugs; (ii) evaluate in
vitro and in vivo drug release characteristics; and (iii) conduct initial
efficacy and/or safety studies in animal models to demonstrate potential
clinical utility and advantages of the DepoFoam formulations.
Antisense Oligonucleotides. In August 1995, DepoTech signed a research
agreement with Isis Pharmaceuticals, Inc. ("Isis"). Under the terms of the
agreement, DepoTech has successfully encapsulated two Isis compounds and
completed in vitro release and characterization studies of DepoFoam formulations
of proprietary Isis antisense oligonucleotides. Isis has performed
pharmacokinetic studies in animal models demonstrating prolonged release of
DepoFoam encapsulated antisense oligonucleotides. Based on these preliminary
studies, Isis and DepoTech elected to extend the research agreement to conduct
additional feasibility studies with Isis 2922 for use in CMV-induced retinitis.
CMV retinitis is a localized, infectious disease that progressively destroys the
retina and eventually results in blindness in AIDS patients.
Local Anesthetics. DepoTech is conducting feasibility studies on DepoFoam
formulations of local anesthetics, such as bupivacaine, for use in alleviating
local pain following surgery or injury. The Company has successfully
encapsulated bupivacaine into DepoFoam. Pharmacokinetic studies have shown that
DepoFoam encapsulated bupivacaine is released slowly from the site of injection,
resulting in prolonged duration (more than 24 hours) of analgesia following a
single-dose administration. The Company is now optimizing the DepoFoam
bupivacaine formulation. DepoTech believes that a DepoFoam formulation of a
local anesthetic may complement its current DepoMorphine program and that the
DepoMorphine and local anesthetic formulations may give physicians significantly
improved drugs to manage post-operative pain.
Pain associated with surgery or injury is often treated with local
anesthetics. However, the usefulness of local anesthetics is frequently limited
by their short half-lives which results in recurrence of pain and the need for
repeated drug administration by a medical professional. A DepoFoam formulation
of a local anesthetic may be useful either locally or regionally (e.g.,
epidurally) to provide long-lasting pain relief of more than 24 hours and to
reduce systemic central nervous system and cardiovascular toxicity associated
with currently-used drugs.
The Company believes there are more than 5 million surgical procedures and
serious trauma injuries per year that may benefit from longer lasting analgesia.
The current pain relief drugs are short-acting and frequently do not provide
adequate duration of pain relief. The Company believes that a long-lasting, safe
DepoFoam formulation of a local anesthetic, such as bupivacaine, could become
the drug of choice for controlling post-operative and post-injury pain.
STRATEGIC ALLIANCES
As part of its commercialization strategy, the Company intends to focus
its efforts on establishing collaborative arrangements with corporate partners
to obtain access to specific compounds, obtain access to distribution
organizations and fund development work. The Company intends to seek to
collaborate with major pharmaceutical or fully-integrated biotechnology
companies that have significant clinical development, financial and marketing
resources.
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With respect to products that are proprietary to its partners, DepoTech
will seek to have its partners fund the feasibility, formulation, development,
clinical testing and regulatory costs associated with the product and will
generally grant worldwide distribution rights to the DepoFoam formulation to the
partner. A key strategy of the Company is to retain exclusive formulation and
manufacturing rights to any DepoFoam encapsulated drugs, including proprietary
products of corporate partners. Under these collaborative arrangements, DepoTech
expects to receive compensation based on both the partner's sales of the product
and manufacturing costs of the product.
The Company will have limited or no control over the resources that any
partner may devote to the Company's products, over partners' development
efforts, including the design and conduct of clinical trials, or over the
pricing of products. There can be no assurance that any of the Company's present
or future collaborative partners will perform their obligations as expected or
will devote sufficient resources to the development, clinical testing or
marketing of the Company's potential products. Any parallel development by a
partner of alternate drug delivery technologies, preclusion from entering into
competitive arrangements, failure to obtain timely regulatory approvals,
premature termination of a collaborative agreement or failure by a partner to
devote sufficient resources to the development and commercialization of the
Company's products would have a material adverse effect on the Company.
Chiron
In March 1994, the Company entered into the Agreement with Chiron. The
objective of the collaboration is to develop and commercialize DepoCyt for use
in the treatment of cancer, and to explore the use of the Company's DepoFoam
technology for certain compounds proprietary to Chiron. DepoTech believes that
Chiron's pharmacological, clinical development and marketing resources in these
areas complement DepoTech's resources. See "-- Product Research and Development
Programs."
The Agreement grants Chiron rights to market and sell DepoCyt in the
United States, Canada and Europe. Chiron has funded and will continue to fund
50% of the clinical development expenses in the United States. Canadian
registration expenses will be funded by Chiron. Any additional clinical trials
required in Europe will be funded by Chiron. DepoTech will manufacture DepoCyt,
Chiron will market, sell, and distribute DepoCyt, and the parties will share all
profits equally. Chiron will make payments to DepoTech upon completion of filing
of an NDA and upon achievement of certain milestones in the European development
of DepoCyt. Chiron also has a right of first refusal to obtain a license to
alternate DepoFoam formulations of cytarabine under terms and conditions to be
negotiated in the future. Following an evaluation of the markets and certain
other factors, the Company and Chiron mutually agreed not to further develop
certain additional generic cancer compounds named in the Agreement.
The Agreement also provides for the joint development of DepoFoam
formulations of certain compounds proprietary to Chiron ("Chiron Products").
Feasibility studies, including formulation development and in vivo animal
studies on IGF-1 and IL-2, have been completed and D0601 (a DepoFoam formulation
of IGF-1) scale-up and preclinical development are currently underway. In
addition, Chiron and the Company have initiated another feasibility study on an
additional formulation of IGF-1, F0602, for undisclosed indications. In March
1997, Chiron selected a gene therapy product for an undisclosed indication as
the 1997 feasibility study candidate. In 1998 and thereafter, Chiron must fund
one feasibility program for a Chiron Product per year or lose its option to
develop DepoFoam formulations of additional Chiron proprietary compounds. The
agreement provides that Chiron will pay DepoTech for the Company's feasibility
efforts, and that Chiron will be responsible for all development costs
thereafter. The agreement also provides for payments by Chiron to DepoTech upon
achievement of certain development milestones with regard to the Chiron
Products. Chiron will have exclusive, worldwide distribution rights to all
Chiron Products and will manufacture the bulk unencapsulated drug. DepoTech will
then encapsulate the bulk drug in DepoFoam creating the Chiron Product, and
Chiron will market, sell and distribute the Chiron Products. Chiron will
compensate DepoTech based on both manufacturing costs, including a manufacturing
profit, and a percentage of Chiron's sales of the Chiron Products.
Both DepoTech and Chiron have the ability to terminate a portion or all of
the collaboration at certain intervals and with advance notice. In addition,
Chiron has the ability to terminate the development of a Chiron Product with a
limited amount of advance notice.
In connection with the Agreement, Chiron made a $2.5 million equity
investment in the Company. In addition, Chiron paid $1.0 million in March 1994
for a warrant which was converted in January 1995 to a DepoCyt marketing rights
fee. Finally, in January 1995, upon achievement of a development milestone,
Chiron reimbursed DepoTech approximately $2.5 million for Chiron's share of
DepoCyt's clinical trial and development costs from July 1993 through December
1994 and will continue to share equally in DepoCyt's United States clinical
trials and development costs. The Company will fund 50% of the sales and
marketing expenses incurred for DepoCyt. DepoTech may receive additional
payments upon achievement of certain other developmental milestones.
MANUFACTURING
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In connection with its collaborative arrangements, DepoTech intends to
maintain exclusive formulation and manufacturing rights to any DepoFoam
encapsulated drugs, including proprietary products of corporate partners, and
expects to receive compensation based on both manufacturing costs of the product
and the value added by the Company's technology to the partner's product. To
date, the Company has manufactured its drug delivery formulations only for
clinical trials and testing formulations of certain potential therapeutic
products and has no experience manufacturing products for commercial purposes.
Since 1995, the Company has manufactured clinical material in a 14,400 square
foot manufacturing plant built for this purpose. This manufacturing plant has
completed validation to comply with cGMP regulations for the manufacture of
pharmaceuticals and was inspected by the California Department of Health
Services Food and Drug Branch and received a license from the State of
California to manufacture drugs. This manufacturing plant has undergone an
initial PAI from the FDA for the manufacture of DepoCyt. The Company has
received written inspectional observations from the FDA and has responded in
writing to such observations as requested by the FDA. The Company believes that
it will be able to address all of the observations from the PAI in a timely
fashion. The completion of a PAI and satisfactory resolution of the inspectional
observations is a precondition for approval of DepoCyt. Prior to marketing
DepoCyt (and any other pharmaceutical products), the Company will need to meet
applicable regulatory standards, achieve prescribed product quality and reach
necessary levels of production of such products and obtain marketing approvals.
In addition, the Company completed construction and occupied an 82,000
square foot facility to house its administrative, research and development and
future manufacturing activities in September 1995. Prior to commencing
commercial manufacturing operations from this facility, the Company will need to
comply with additional and necessary validation, regulatory and inspection
requirements.
The Company currently relies on a limited number of suppliers to provide
the materials used to manufacture its DepoFoam formulations. Certain of these
materials are purchased only from one supplier. In the event the Company could
not obtain adequate quantities of necessary materials from its existing
suppliers, there can be no assurance that the Company would be able to access
alternative sources of supply within a reasonable period of time or at
commercially reasonable rates. Regulatory requirements applicable to
pharmaceutical products tend to make the substitution of suppliers costly and
time-consuming. The unavailability of adequate commercial quantities, the
inability to develop alternative sources, a reduction or interruption in supply
or a significant increase in the price of materials could have a material
adverse effect on the Company's ability to manufacture and market its products.
To date, the Company has relied on a particular proprietary method of
manufacture. There can be no assurance that this method will be applicable to
all pharmaceuticals the Company desires to commercialize. Further, the yield of
product incorporated into the delivery system may be highly variable for
different therapeutic agents. Finally, the Company will need to successfully
meet any manufacturing challenges associated with the characteristics of the
drug to be encapsulated. The physical and chemical stability of the DepoFoam
formulation may vary with each therapeutic agent over time and under various
storage conditions. There can be no assurance that the manufacturing process
will result in economically viable yields of product or that it will produce
formulations of therapeutic products sufficiently stable under suitable storage
conditions to be commercially useful.
In the event that the Company decides to pursue alternative manufacturing
methods for some or all of its drugs, there can be no assurance that these
methods will prove to be commercially practical or that the Company will have or
be able to acquire rights to use such alternative methods.
GOVERNMENT REGULATION
DepoTech's research and development activities are, and its future
business will be, subject to significant regulation by governmental authorities
in the United States, primarily the FDA. Pharmaceutical products intended for
therapeutic use in humans are governed principally by the Federal Food, Drug,
and Cosmetic Act, as amended, and by FDA regulations in the United States and by
comparable laws and regulations in foreign countries. The process of completing
clinical testing and obtaining FDA approval for new drugs or biological products
requires a number of years and the expenditure of substantial resources.
DepoTech will also be subject to regulation under the food and drug statutes and
regulations of the State of California.
Pharmaceutical products developed by DepoTech likely will be classified by
the FDA as "new drugs" even though the active ingredient in the product was
previously approved. This is because the Company's products will be intended for
new indications or routes of administration, will provide significantly
different pharmacokinetics or will claim to provide significantly increased
safety or efficacy, requiring approval under an NDA. In some cases, the
Company's products may be marketed as "new drugs" under abbreviated provisions
for generic drugs (e.g., "paper NDA") where there are substantial similarities
with a currently marketed product that is not protected by patents. It is also
likely that some of the drugs developed by the Company will be classed as
"biologics" under the Public Health Service Act and relevant portions of the
Federal Food, Drug, and Cosmetic Act. In this case, the products will be subject
to somewhat different regulations.
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Prior to marketing a new drug product in the United States, other than a
generic drug, it is necessary to complete the following: (i) preclinical
laboratory and animal tests; (ii) submission to the FDA of an application for an
IND, allowing clinical and other studies to assess safety and parameters of use;
(iii) adequate and well-controlled clinical trials to establish the safety and
effectiveness of the drug; (iv) submission of an NDA to the FDA; and (v) FDA
approval of the NDA. For biological products, the process is similar, but not
identical to that described above for drugs, with the NDA being replaced with a
Product License Application ("PLA"). For marketing of a product under the
generic drug provisions, an Abbreviated New Drug Application ("ANDA") must be
submitted to the FDA and approved prior to commercial sale or shipment of the
drug.
Typically, for non-generic new drugs and therapeutic biological products,
preclinical studies are conducted in the laboratory and in animal model systems
to gain preliminary information about the drug's pharmacology and toxicology and
to identify any potential safety problems. The results of these studies are
submitted to the FDA as part of the IND application. Testing in humans may
commence after clearance of the IND by the FDA. A three-phase clinical trial
program is usually required for FDA approval of a pharmaceutical product. Phase
I clinical trials are designed to determine the metabolism and pharmacological
effects of the drug in humans and the side effects associated with increasing
doses. Phase II studies are conducted to evaluate the effectiveness of the drug
for a particular indication and provide evidence of the short-term side effects
and risks associated with the drug or biologic and are generally designed to
provide the substantial evidence of safety and effectiveness of a drug or
biologic required to obtain FDA approval. Phase III clinical trials often
involve a substantial number of patients in multiple study centers and may
include chronic administration of the agent in order to assess the overall
risk/benefit relationship of the drug or biologic. A clinical trial may combine
the elements of more than one phase and typically two or more Phase III studies
are required. Generally, as the Company intends to utilize active ingredients in
its products that have previously been approved or are in a late stage of
development, these requirements may be somewhat abbreviated.
Upon completion of clinical testing that the Company believes demonstrates
that the product is safe and effective for a specific indication, an NDA or PLA
may be submitted to the FDA. The FDA closely monitors the progress of each of
the three phases of clinical testing and may, at its discretion, re- evaluate,
alter, suspend or terminate the testing based on the data that have been
accumulated to that point and its assessment of the risk to the patient. The
clinical testing and FDA review process for new drugs or biologics will require
substantial time, effort and expense. There can be no assurance that any
approval will be granted to the Company on a timely basis, if at all. The FDA
may refuse to approve an NDA or PLA and may require additional testing or
information. There can be no assurance that such additional testing or the
provision of such information, if required, will not have a material adverse
effect on the Company. Also, the regulatory process can be modified by Congress
or the FDA in a manner that could materially affect the Company.
In 1988, the FDA issued regulations intended to expedite the development,
evaluation and marketing of new therapeutic products to treat life-threatening
and severely debilitating illnesses for which no satisfactory alternative
therapies exist. These regulations provide for early consultation between the
sponsor and the FDA in the design of both preclinical studies and clinical
trials. In some cases, the objectives of the Phase I and Phase II studies are
combined as a single Phase I/II study. If the results of Phase I and Phase II
trials support the safety and effectiveness of the therapeutic agent, and their
design and execution are deemed satisfactory upon review by the FDA, marketing
approval may be sought at the end of Phase II trials or only limited Phase III
trials may be required. NDA or PLA approval granted under these regulations may
be restricted by the FDA as necessary to ensure the safe use of the drug. In
addition, post-marketing clinical studies, sometimes called Phase IV studies,
may be required. If, after approval, a post-marketing clinical study establishes
that the drug does not perform as expected, or if post-marketing restrictions
are not adhered to or are not adequate to ensure the safe use of the drug, FDA
approval may be withdrawn. The expedited approval may shorten the traditional
drug development process by as much as two to three years.
At the present time, DepoCyt is being developed under such an accelerated
program. There can be no assurance, however, that any future products the
Company may develop will be eligible for evaluation by the FDA under the 1988
regulations. In addition, there can be no assurance that DepoCyt or any future
products (if eligible) will be approved for marketing at all or, if approved for
marketing, will be approved for marketing sooner than would be traditionally
expected.
Once the sale of a product is approved, the FDA regulates production,
marketing and other activities under the Federal Food, Drug, and Cosmetic Act
and the FDA's implementing regulations. Post-marketing reports are required to
monitor the product's usage and effects. Product approvals may be withdrawn, or
other actions may be ordered, or sanctions imposed, including criminal
prosecution, if compliance with regulatory requirements is not maintained. Other
countries in which any products developed by the Company or its licensees may be
marketed impose a similar regulatory process.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a "rare disease or condition," which generally is a
disease or condition that affects populations of fewer than 200,000 individuals
in the United States. Orphan drug designation must be requested before
submitting an NDA or PLA, and
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after the FDA grants orphan drug designation, the generic identity of the
therapeutic agent and its potential orphan use are publicly disclosed by the
FDA. Under current law, approval of the first NDA for a drug with orphan drug
designation confers United States marketing exclusivity to market such
designated drug for the designated indication for a period of seven years
following approval of the NDA, subject to certain limitations. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory approval process.
In June 1993, the Company obtained orphan drug designation for DepoCyt
from the FDA to treat NM. There can be no assurance that the Company will
receive the first FDA approval to market DepoCyt to treat NM and thus take
advantage of orphan drug exclusivity for DepoCyt to treat NM arising from
leukemia, lymphoma or solid tumor metastases. Although obtaining FDA approval to
market a product with an orphan drug exclusivity can be advantageous, there can
be no assurance that the scope of protection or the level of marketing
exclusivity that is currently afforded by orphan drug designation will remain in
effect in the future.
In addition to regulations enforced by the FDA and the State of
California, the Company also is subject to regulation under the Occupational
Safety and Health Act, the Controlled Substances Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other similar federal, state and local regulations governing
permissible laboratory activities, waste disposal handling of toxic, dangerous
or radioactive materials and other matters. The Company believes that it is in
compliance with such regulations. These regulations are subject to change,
however, and may, in the future, require substantial effort and cost to the
Company to comply with each of the regulations, and may possibly restrict the
Company's business activities.
For marketing outside the United States, the Company will be subject to
foreign regulatory requirements governing human clinical trials, manufacturing
and marketing approval for drugs and biologics. The requirements relating to the
conduct of clinical trials, manufacturing, product licensing, pricing and
reimbursement vary widely from country to country. For DepoMorphine, there may
be additional regulatory requirements relating to controlled substances for sale
in foreign countries.
PATENTS AND PROPRIETARY RIGHTS
DepoTech relies on a combination of technical leadership, patent, trade
secret, copyright and trademark protection and nondisclosure agreements to
protect its proprietary rights. As of March 1, 1997, the Company owned or had
exclusive rights to five issued United States patents, 10 pending United States
patent applications, 42 issued foreign patents and 42 pending foreign
applications on file covering various aspects of its drug delivery technology.
The Company intends to file additional patent applications in the future. There
can be no assurance that the Company will be issued any additional patents or
that, if any patents are issued, they will provide the Company with significant
protection or will not be challenged. Even if such patents are enforceable, the
Company anticipates that any attempt to enforce its patents would be time
consuming and costly. Moreover, the laws of some foreign countries do not
protect the Company's proprietary rights in the products to the same extent as
do the laws of the United States. The United States Patent and Trademark Office
("PTO") has instituted changes to the United States patent law including
changing the term to 20 years from the date of filing for applications filed
after June 8, 1995. While one of the above applications was filed after June 8,
1995, the Company cannot predict the effect that such changes on the patent laws
may have on its business, or on the Company's ability to protect its proprietary
information and sustain the commercial viability of its products.
In February 1994, the Company entered into an Assignment Agreement with
the Research Development Foundation ("RDF"), pursuant to which RDF assigned to
DepoTech exclusive rights to certain intellectual property relating to the
DepoFoam technology, including corresponding patents and patent applications for
such property (the "RDF Technology"). The Company is obligated under the
Assignment Agreement to prosecute certain patent applications and maintain
issued patents relating to the RDF Technology. The term of the Assignment
Agreement extends through the life of the last to expire of the patents or
patent applications included in the RDF Technology. RDF retains the right to
terminate the agreement or to convert the exclusive nature of the rights granted
under the agreement into a nonexclusive license in the event that the Company
does not satisfy its contractual obligations, including making certain minimum
annual payments. Additional termination events include bankruptcy, an uncured
material breach of the agreement or a contest by DepoTech of the patents
included in the RDF Technology. The termination of the Assignment Agreement or
the conversion of its exclusive nature to a nonexclusive agreement would have a
material adverse effect on the Company.
The patent positions of pharmaceutical, biotechnology and drug delivery
companies, including DepoTech, are uncertain and involve complex legal and
factual issues. Additionally, the coverage claimed in a patent application can
be significantly reduced before the patent is issued. As a consequence, there
can be no assurance that any of the Company's patent applications will result in
the issuance of patents or, if any patents issue, that they will provide
significant proprietary protection or will not be circumvented or invalidated.
Because patent applications in the United States are maintained in secrecy until
patents issue and publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, the Company cannot be certain
that it was the first inventor of inventions covered
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by its pending patent applications or that it was the first to file patent
applications for such inventions. Moreover, the Company may have to participate
in interference proceedings declared by the PTO to determine priority of
invention that could result in substantial cost to the Company, even if the
eventual outcome is favorable to the Company. There can be no assurance that the
Company's patents, if issued, would be held valid by a court of competent
jurisdiction. An adverse outcome of any patent litigation could subject the
Company to significant liabilities to third parties, require disputed rights to
be licensed from or to third parties or require the Company to cease using the
technology in dispute.
There can be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such assertions will not
result in costly litigation or require the Company to obtain a license to
intellectual property rights of such parties. There can be no assurance that any
such licenses would be available on terms acceptable to the Company, if at all.
Furthermore, parties making such claims may be able to obtain injunctive or
other equitable relief that could effectively block the Company's ability to
further develop or commercialize its products in the United States and abroad
and could result in the award of substantial damages. Defense of any lawsuit or
failure to obtain any such license could have a material adverse affect on the
Company. Finally, litigation, regardless of outcome, could result in substantial
cost to and a diversion of efforts by the Company.
As part of its confidentiality procedures, the Company generally enters
into nondisclosure agreements with its employees and suppliers, and limits
access to and distribution of its proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's technology without authorization. Accordingly, there can
be no assurance that the Company will be successful in protecting its
proprietary technology or that DepoTech's proprietary rights will preclude
competitors from developing products or technology equivalent or superior to
that of the Company.
The Company may require additional technology in the formulation and
manufacture of DepoFoam formulations to which the Company currently does not
have rights. If the Company determines that this additional technology is
relevant to the development of future products and further determines that a
license to this additional technology is needed, there can be no assurance that
the Company can obtain a license from the relevant party or parties on
commercially reasonable terms, if at all. There can be no assurance that the
Company can obtain any license to any technology that the Company determines it
needs, on reasonable terms, if at all, or that DepoTech could develop or
otherwise obtain alternate technology. The failure of the Company to obtain
licenses, if needed, would have a material adverse affect on the Company.
The Company's ability to develop and commercialize its technology will be
affected by the Company's or its partners' access to the drugs that are to be
formulated. The Company intends in certain circumstances to rely on the ability
of its partners to provide access to the drugs that are to be formulated for use
with DepoFoam. There can be no assurance that the Company's partners will be
able to provide access to drug candidates for formulation in DepoFoam, or that,
if such access is provided, the Company or its partner will not be alleged or
determined to be infringing on third parties' rights and will not be prohibited
from using the drug or be found liable for damages that may not be subject to
indemnification. Any restriction on access or liability for damages would have a
material adverse effect on the Company.
COMPETITION
The drug delivery, pharmaceutical and biotechnology industries are highly
competitive and rapidly evolving, with significant developments expected to
continue at a rapid pace. The Company's success will depend upon maintaining a
competitive position and developing products and technologies for efficient and
cost-effective drug delivery. The Company's products will compete with other
formulations of drugs and with other drug delivery systems. There can be no
assurance that any of the Company's products will have advantages that will be
significant enough to cause medical professionals to adopt their use. DepoTech
believes that its products will compete on the basis of quality, efficacy, cost,
convenience, safety and patient compliance. New drugs or further development in
alternative drug delivery methods may provide greater therapeutic benefits for a
specific drug or indication, or may offer comparable performance at lower cost
than those offered by the Company's DepoFoam drug delivery system.
The Company is aware of many other competitors in the field of drug
delivery, including competitors developing injectable or implantable drug
delivery systems, oral drug delivery technologies, passive transdermal systems,
electrotransport systems, oral transmucosal systems and inhalation systems.
There can be no assurance that developments by others will not render the
Company's products or technologies uncompetitive or obsolete. Many of the
Company's existing or potential competitors have substantially greater research
and development capabilities, experience, manufacturing, marketing, financial,
and managerial resources than the Company. Furthermore, acquisitions of
competing drug delivery companies by large pharmaceutical companies could
enhance competitors' financial, marketing and other resources. Accordingly, the
Company's competitors may succeed in developing competing technologies,
obtaining FDA approval or gaining market share for products more rapidly than
the Company.
SALES AND MARKETING
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Commercialization of the Company's products is expected to be expensive
and time-consuming. In the event that the Company elects to participate directly
in sales and marketing efforts for the Company's products, the Company will need
to build such capability in the targeted markets. The Company currently has a
limited marketing staff. There can be no assurance that the Company will be able
to establish an adequate sales and marketing capability in any or all targeted
markets or that it will be successful in gaining market acceptance for its
products. To the extent the Company enters into co-promotion or other licensing
arrangements, any revenues received by the Company will be dependent on the
efforts of third parties and there can be no assurance that such efforts will be
successful. To the extent the Company relies on its collaborators, there can be
no assurance that any of these collaborators or their sublicensees will
successfully market or distribute the Company's products or that the Company
will be able to establish a successful direct sales organization, co-promotion
or distribution arrangements.
HUMAN RESOURCES
As of March 1, 1997, DepoTech had approximately 137 full-time employees,
including 120 in research, development and operations, and 17 in finance and
administration. Of these employees, 46 hold advanced degrees, of which 26 are
M.D.s, D.Pharm.s, Ph.D.s or D.V.M.s. The Company's future success will depend in
large part upon its ability to attract and retain highly qualified personnel.
The Company's employees are not represented by any collective bargaining
agreements, and the Company has never experienced a work stoppage. The Company
believes that its employee relations are good.
RISKS AND UNCERTAINTIES
Early Stage Company. DepoTech's products are at an early stage of
development, and, to date, only two of the Company's DepoFoam formulations,
DepoCyt and DepoAmikacin, have been subject to any human clinical testing, with
one additional product, DepoMorphine, recently commencing such testing. The
Company's potential products will require extensive research, formulation,
development, preclinical and clinical testing, and may involve a lengthy
regulatory approval process prior to commercialization. There can be no
assurance that DepoCyt, DepoAmikacin, DepoMorphine or any of the Company's other
products or potential products, will prove safe and effective in clinical
trials, meet applicable regulatory standards, be capable of being produced in
commercial quantities at acceptable cost or be successfully commercialized. In
addition, there can be no assurance that preclinical or clinical testing will
accurately predict safety or efficacy in broader human use, or that delays in
the regulatory approval process will not arise, delaying approval longer than
currently expected by the Company. Even if all of the Company's products prove
to be safe and effective and are approved for marketing by the FDA and other
regulatory authorities, there can be no assurance that health care providers,
payors and patients will accept the Company's products. Any failure of the
Company to achieve technical feasibility, demonstrate safety, achieve clinical
efficacy, obtain regulatory approval or, together with its partners,
successfully market products would have a material adverse effect on the
Company.
As with all drugs subject to accelerated approval, the FDA requested that
the Company conduct a Phase IV clinical trial. The trial is in process. There
can be no assurance that the data from the solid tumor arm of the DepoCyt Phase
III clinical trial reported to date regarding DepoCyt will be sufficient to gain
FDA approval, that additional results from the still ongoing arms of the pivotal
Phase III trial for NM arising from lymphoma and leukemia, will generate
positive results and/or confirm earlier results or that the Phase IV, pediatric,
European and other clinical trials of DepoCyt will generate positive results.
Any of these occurrences could have a material adverse effect on the Company and
its ability to fund the further development and commercialization of DepoCyt and
its other products.
Government Regulation; Uncertainty of Obtaining Regulatory Approval.
DepoTech's research and development activities are, and its future business will
be, subject to significant regulation by governmental authorities in the United
States, primarily by the FDA. Pharmaceutical products intended for therapeutic
use in humans are governed principally by the Federal Food, Drug, and Cosmetic
Act, as amended, and by the FDA regulations in the United States and by
comparable laws and regulations in foreign countries. DepoTech is also subject
to regulation under the food and drug statutes and regulations of the State of
California.
DepoTech has announced certain results of the solid tumor arm of the Phase
III clinical trial for DepoCyt and filed data within various sections of the
DepoCyt NDA. There can be no assurance that these results and data will meet the
requirements for regulatory approvals necessary to commercialize DepoCyt in the
United States or otherwise.
The clinical testing and FDA review process for new drugs or biologics
requires substantial time, effort and expense. There can be no assurance that
any approval will be granted to the Company on a timely basis, if at all. The
FDA may refuse to approve a product for commercial sale or shipment if
applicable statutory and/or regulatory criteria are not satisfied, or may
require additional testing or information. There can be no assurance that such
additional testing or the provision of such information, if required, will not
have a material adverse effect on the Company. Also, the regulatory process can
be modified by Congress or the FDA in a manner that could materially affect the
Company.
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In 1988, the FDA issued regulations intended to expedite the development,
evaluation and marketing of new therapeutic products to treat life-threatening
and severely debilitating illnesses for which no satisfactory alternative
therapies exist. These regulations provide for early consultation between the
sponsor and the FDA in the design of both preclinical studies and clinical
trials. At the present time, DepoCyt is being developed under such an
accelerated program. There can be no assurance, however, that any future
products the Company may develop will be eligible for evaluation by the FDA
under the 1988 regulations. In addition, there can be no assurance that DepoCyt
or any future products (if eligible) will be approved for marketing at all or,
if approved for marketing, will be approved for marketing sooner than would be
traditionally expected. Regulatory approval granted under these regulations may
be restricted by the FDA as necessary to ensure the safe use of the drug. In
addition, post-marketing clinical studies, sometimes called Phase IV studies,
will be required for products approved under this provision.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a "rare disease or condition," which generally is a
disease or condition that affects populations of fewer than 200,000 individuals
in the United States. Under current law, orphan drug designation confers United
States marketing exclusivity upon the first company to receive FDA approval to
market such designated drug for the designated indication for a period of seven
years following approval of the NDA, subject to certain limitations. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory approval process. In June 1993, the Company obtained an orphan drug
designation for DepoCyt from the FDA to treat NM. There can be no assurance that
the Company will receive the first FDA approval to market DepoCyt to treat NM,
and thus, receive market exclusivity for DepoCyt to treat NM arising from
leukemia, lymphoma or solid tumor metastases. There can be no assurance that the
scope of protection or the level of marketing exclusivity that is currently
afforded by orphan drug designation and marketing approval will remain in effect
in the future.
For marketing outside the United States, the Company will be subject to
foreign regulatory requirements governing human clinical trials, manufacturing
and marketing approval for drugs and biologics in such foreign jurisdictions.
The requirements relating to the conduct of clinical trials, manufacturing,
product licensing, pricing and reimbursement vary widely from country to country
and there can be no assurance that the Company or any of its partners will meet
and sustain any such requirements.
Limited Manufacturing Experience, Risk of Scale-Up. The Company has no
experience manufacturing products for commercial purposes. The Company has
scaled up its manufacturing operations to meet commercial requirements for
DepoCyt but these operations will require the completion of a PAI and
satisfactory resolution of inspectional observations. For all other products,
the Company will need to significantly scale-up its current manufacturing
operations and comply with cGMPs and other regulations prescribed by various
regulatory agencies in the United States and other countries to achieve the
prescribed quality and required levels of production of such products and to
obtain marketing approval. Failure by the Company to successfully scale-up its
manufacturing operations or to comply with cGMPs and other regulations would
have a material adverse impact on the Company, including the loss of
manufacturing rights under the Chiron agreement.
History of Operating Losses; Uncertainty of Future Profitability. The
Company has incurred an accumulated deficit of $42.4 million through December
31, 1996. The Company expects to continue to incur substantial losses over at
least the next 18 months as the Company's research and development efforts,
preclinical and clinical testing activities and manufacturing scale-up and sales
and marketing arrangement efforts expand. All of the Company's revenues to date
have consisted of contract revenues, milestone payments and interest income. No
revenues have been generated from product sales. There can be no assurance that
the Company can generate sufficient product or contract revenue to become
profitable or sustain profitability.
Dependence Upon Partners for Development and Commercialization. The
Company does not currently possess all the resources necessary to develop,
complete the FDA approval process for and commercialize any of its potential
therapeutic products. The Company intends to enter into collaborative
arrangements with other companies to fund research, development and clinical
trials, to assist in obtaining regulatory approvals in the United States and
internationally and to commercialize its products. In addition, the Company's
ability to apply its drug delivery technology to a broad range of
pharmaceuticals will depend upon its ability to establish and maintain
collaborative arrangements because the rights to many of the pharmaceuticals
most suited to the Company's drug delivery technology are currently owned by
third parties. While the Company has entered into preliminary collaborations to
test feasibility of its delivery technology with certain compounds and has
entered into a collaboration with Chiron, there can be no assurance that the
Company will be able to enter into additional collaborations to develop
commercial applications of its drug delivery technology. In addition, there can
be no assurance that the Company will be able to enter into or maintain existing
or future collaborations or that such collaborations will be successful. The
failure of the Company to enter into a collaboration with the owner of rights to
a particular formulation or pharmaceutical would preclude the Company from
developing its drug delivery technology with respect to such formulation or
pharmaceutical. The failure to enter into or maintain existing or future
collaborations would have a material adverse effect on the Company.
The Company's partners may pursue parallel development of other drug
delivery technologies that may
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<PAGE> 17
compete with the Company's drug delivery technology. In addition, definitive
agreements negotiated with such partners may provide that these partners may
terminate the collaboration at any time without significant penalty. Both the
Company and Chiron have the ability to terminate a portion or all of the
collaboration at certain intervals and with advance notice. In addition, Chiron
has the ability to terminate the development of a proprietary Chiron compound
with a limited amount of advance notice. Termination of a portion or all of the
collaboration with Chiron would have a material adverse effect on the Company.
To date the Company has retained the rights to formulate and manufacture its
products and intends in the future generally to formulate and manufacture
pharmaceuticals for partners, certain partners may choose to formulate or
manufacture their own formulations, thereby limiting one or more potential
sources of revenue for DepoTech. In addition, the Company believes that it may
be precluded from entering into arrangements with companies whose products
compete with products sold by its partners. The Company also will have limited
or no control over the resources that any partner may devote to the Company's
products, over partners' development efforts, including the design and conduct
of clinical trials, or over the pricing of products. There can be no assurance
that any of the Company's present or future collaborative partners will perform
their obligations as expected or will devote sufficient resources to the
development, clinical testing or marketing of the Company's potential products.
Any parallel development by a partner of alternate drug delivery technologies,
preclusion from entering into competitive arrangements, failure to obtain timely
regulatory approvals, premature termination of a collaborative agreement or
failure by a partner to devote sufficient resources to the development and
commercialization of the Company's products would have a material adverse effect
on the Company.
Dependence on Suppliers. The Company currently relies on a limited number
of suppliers to provide the materials used to manufacture its DepoFoam
formulations. Certain of these materials are purchased only from one supplier.
In the event the Company could not obtain adequate quantities of necessary
materials from its existing suppliers, there can be no assurance that the
Company would be able to access alternative sources of supply within a
reasonable period of time or at commercially reasonable rates. Regulatory
requirements applicable to pharmaceutical products tend to make the substitution
of suppliers costly and time-consuming. The unavailability of adequate
commercial quantities, the inability to develop alternative sources, a reduction
or interruption in supply or a significant increase in the price of materials
could have a material adverse effect on the Company's ability to manufacture and
market its products.
Reliance on Manufacturing Process. To date, the Company has relied on a
particular proprietary method of manufacture. There can be no assurance that
this method will be applicable to all pharmaceuticals or biologics the Company
desires to commercialize. Further, the yield of product incorporated into the
delivery system may be highly variable for different therapeutic agents.
Finally, the Company will need to successfully meet any manufacturing challenges
associated with the characteristics of the drug to be encapsulated. The physical
and chemical stability of the DepoFoam formulation may vary with each
therapeutic agent over time and under various storage conditions. There can be
no assurance that the manufacturing process will result in economically viable
yields of product or that it will produce formulations of therapeutic products
sufficiently stable under suitable storage conditions to be commercially useful.
In the event that the Company decides to pursue alternative manufacturing
methods for some or all of its drugs, there can be no assurance that these
methods will prove to be commercially practical or that the Company will have or
be able to acquire rights to use such alternative methods.
Limited Sales and Marketing Capability. Commercialization of the Company's
products is expected to be expensive and time-consuming. In the event that the
Company elects to participate directly in sales and marketing efforts for the
Company's products, the Company will need to build such capability in the
targeted markets. The Company currently has a limited marketing staff. There can
be no assurance that the Company will be able to establish an adequate sales and
marketing capability in any or all targeted markets or that it will be
successful in gaining market acceptance for its products. To the extent the
Company enters into co-promotion or other licensing arrangements, any revenues
received by the Company will be dependent on the efforts of third parties and
there can be no assurance that such efforts will be successful. To the extent
the Company relies on its collaborators, there can be no assurance that any of
these collaborators or their sublicensees will successfully market or distribute
the Company's products or that the Company will be able to establish a
successful direct sales organization, co-promotion or distribution arrangements.
Reliance on Technology Rights From Research Development Foundation. In
February 1994, the Company entered into an Assignment Agreement with the RDF,
pursuant to which RDF assigned to DepoTech exclusive rights to the RDF
Technology. As consideration for the assignment of the RDF Technology, DepoTech
will pay RDF an earned royalty on gross revenues from the sale by DepoTech or
its collaborators of products incorporating the RDF Technology. The Company's
products, including DepoCyt, incorporate the RDF Technology. In certain other
circumstances, DepoTech will pay RDF a percentage of the royalties or other
consideration received by DepoTech from licensees (or, if greater, the amount of
royalty DepoTech would have owed had it engaged in the same conduct as the
licensees). In addition, RDF retains the right to terminate the agreement or to
convert the exclusive nature of the rights granted under the agreement into a
nonexclusive license in the event that the Company does not satisfy its
contractual obligations, including making certain minimum annual payments.
Additional termination events include bankruptcy, a material uncured breach of
the agreement by DepoTech or a contest by DepoTech of the patents included in
the RDF Technology. The termination of the Assignment Agreement or the
conversion of its exclusive nature to a
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<PAGE> 18
nonexclusive agreement would have a material adverse effect on the Company.
Patents and Proprietary Technology. DepoTech relies on a combination of
technical leadership, patent, trade secret, copyright and trademark protection
and nondisclosure agreements to protect its proprietary rights. As of March 1,
1997, the Company owned or had exclusive rights to five issued United States
patents, 10 pending United States patent applications, 42 issued foreign patents
and 42 pending foreign applications on file covering various aspects of its drug
delivery technology. The Company intends to file additional patent applications
in the future. There can be no assurance that the Company will be issued any
additional patents or that, if any patents are issued, they will provide the
Company with significant protection or will not be challenged. Even if such
patents are enforceable, the Company anticipates that any attempt to enforce its
patents would be time consuming and costly. Moreover, the laws of some foreign
countries do not protect the Company's proprietary rights in the products to the
same extent as do the laws of the United States.
The patent positions of pharmaceutical, biotechnology and drug delivery
companies, including DepoTech, are uncertain and involve complex legal and
factual issues. Additionally, the coverage claimed in a patent application can
be significantly reduced before the patent is issued. As a consequence, there
can be no assurance that any of the Company's patent applications will result in
the issuance of patents or, if any patents issue, that they will provide
significant proprietary protection or will not be circumvented or invalidated.
Because patent applications in the United States are maintained in secrecy until
patents issue and publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, the Company cannot be certain
that it was the first inventor of inventions covered by its pending patent
applications or that it was the first to file patent applications for such
inventions. Moreover, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office to
determine priority of invention that could result in substantial cost to the
Company, even if the eventual outcome is favorable to the Company. There can be
no assurance that the Company's patents, if issued, would be held valid by a
court of competent jurisdiction. An adverse outcome of any patent litigation
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from or to third parties or require the Company
to cease using the technology in dispute.
There can be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such assertions will not
result in costly litigation or require the Company to obtain a license to
intellectual property rights of such parties. There can be no assurance that any
such licenses would be available on terms acceptable to the Company, if at all.
Furthermore, parties making such claims may be able to obtain injunctive or
other equitable relief that could effectively block the Company's ability to
further develop or commercialize its products in the United States and abroad
and could result in the award of substantial damages. Defense of any lawsuit or
failure to obtain any such license could have a material adverse affect on the
Company. Finally, litigation, regardless of outcome, could result in substantial
cost to and a diversion of efforts by the Company.
Access to Drugs. The Company's ability to develop and commercialize its
technology will be affected by the Company's or its partners' access to the
drugs that are to be formulated. The Company intends in certain circumstances to
rely on the ability of its partners to provide access to the drugs that are to
be formulated for use with DepoFoam. There can be no assurance that the
Company's partners will be able to provide access to drug candidates for
formulation in DepoFoam, or that, if such access is provided, the Company or its
partner will not be alleged or determined to be infringing on third parties'
rights and will not be prohibited from using the drug or be found liable for
damages that may not be subject to indemnification. Any restriction on access or
liability for damages would have a material adverse effect on the Company. See
"--Dependence Upon Partners for Development and Commercialization."
Future Capital Needs. The development and commercialization of the
Company's products will require substantial funds to conduct research and
development and preclinical and clinical testing of products and to manufacture
and commercialize any products that are approved for commercial sale. The
Company has a contractual commitment arising from the Chiron collaboration to
fund 50% of the sales and marketing expenses incurred for DepoCyt in the United
States, Canada and Europe. In addition, in December 1994, the Company entered
into an agreement to lease an 82,000 square foot facility for a 20-year term
with a future minimum rental commitment ranging from approximately $2.1 million
to $4.3 million per year, based upon pre-established annual rent increases.
Further, the Company plans to install a manufacturing line in this facility to
support clinical and commercial production of products under development. The
cost of equipment and tenant improvement expenses are estimated to total
approximately $6.1 million in 1997. This cost is expected to be financed through
new and existing bank credit facilities. Finally, the Company has a right of
first refusal and right of first offer to purchase land located adjacent to its
headquarters which must be exercised on or before October 15, 1997. At present,
the Company has not made a decision concerning the exercise of such option. The
Company's future capital requirements will depend on many factors, including
continued scientific progress in its products and process development programs,
progress with preclinical testing and clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in filing
patents, competing technological and market developments, changes in existing
collaborative relationships, the ability of the Company to establish development
arrangements, the cost of establishing effective sales and marketing
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<PAGE> 19
arrangements. To date, the Company has not received any revenues from product
sales. The Company anticipates that its existing available cash, cash
equivalents and short-term investments, committed future contract revenue,
projected funding from equipment and other financing and interest income will be
adequate to satisfy its capital requirements and fund operations at least into
1998.
Uncertainty of Additional Funding. The Company intends to seek additional
funding through collaborative arrangements, contract research or through public
or private financing. There can be no assurance that additional financing will
be available on acceptable terms or at all. If additional funds are raised by
issuing equity securities, further dilution to then existing shareholders may
result. If adequate funds are not available, the Company may be required to
delay, scale back or eliminate one or more of its research and development
programs or seek to obtain funds through arrangements with collaborative
partners or others even if the arrangements would require the Company to
relinquish certain rights to certain of its technologies, product candidates or
products that the Company would not otherwise relinquish.
Dependence on Key Personnel. The success of the Company is highly
dependent, in part, on its ability to retain highly qualified personnel,
including senior management and scientific personnel. Competition for such
personnel is intense and the inability to retain additional key employees or the
loss of one or more current key employees could adversely affect the Company.
There can be no assurance that the Company will be successful in retaining
required personnel in the future. The Company has not entered into employment
agreements with any executive officers.
Highly Competitive Industry. The drug delivery, pharmaceutical and
biotechnology industries are highly competitive and rapidly evolving, with
significant developments expected to continue at a rapid pace. The Company's
success will depend upon maintaining a competitive position and developing
products and technologies for efficient and cost-effective drug delivery. The
Company's products will compete with other formulations of drugs and with other
drug delivery systems. There can be no assurance that any of the Company's
products will have advantages that will be significant enough to cause medical
professionals to use them. DepoTech believes that its products will compete on
the basis of quality, efficacy, cost, convenience, safety and patient
compliance. New drugs or further development in alternative drug delivery
methods may provide greater therapeutic benefits for a specific drug or
indication, or may offer comparable performance at lower cost than those offered
by the Company's DepoFoam drug delivery system. The Company is aware of many
other competitors in the field of drug delivery, including competitors
developing injectable or implantable drug delivery systems, oral drug delivery
technologies, passive transdermal systems, electrotransport systems, oral
transmucosal systems and inhalation systems. There can be no assurance that
developments by others will not render the Company's products or technologies
uncompetitive or obsolete. Many of the Company's existing or potential
competitors have substantially greater research and development capabilities,
experience, manufacturing, marketing, financial and managerial resources than
the Company. Furthermore, acquisitions of competing drug delivery companies by
large pharmaceutical companies could enhance competitors' financial, marketing
and other resources. Accordingly, the Company's competitors may succeed in
developing competing technologies, obtaining FDA approval or gaining market
share for products more rapidly than the Company.
Product Liability; Availability of Insurance. The design, development and
manufacture of the Company's products involve an inherent risk of product
liability claims and associated adverse publicity. The Company obtained clinical
trial product liability insurance for its human clinical trials and intends to
obtain insurance for future clinical trials of other products under development
and for potential product liability associated with the commercial sale of the
Company's products. There can be no assurance, however, that the Company will be
able to obtain or maintain insurance for any of its clinical trials or
commercial products. Although the Company currently maintains general liability
insurance, there can be no assurance that the coverage limits of the Company's
insurance policies will be adequate. Product liability insurance is expensive,
difficult to obtain and may not be available in the future on acceptable terms
or at all. A successful claim brought against the Company in excess of the
Company's insurance coverage would have a material adverse effect upon the
Company.
Hazardous Materials. The Company's research and development involves the
controlled use of hazardous materials, chemicals and various radioactive
compounds. The risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
exceed the resources of the Company. The Company may incur substantial cost to
comply with environmental regulations.
Possible Volatility of Stock Price. Factors such as the announcements of
technological innovations or new products by the Company, its competitors and
other third parties, as well as variations in the Company's results of
operations, market conditions, analysts' estimates and the stock market
generally (and stock market perceptions of the pharmaceutical, biotechnology
and/or drug delivery industries specifically) may cause the market price of the
Company's Common Stock to fluctuate significantly. Companies such as DepoTech
have, in recent years, experienced dramatic stock price volatility. Also, future
sales of shares by existing shareholders pursuant to Rule 144 of the
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Securities Act, or through the exercise of outstanding registration rights,
could have an adverse effect on the price of the Company's Common Stock.
No Dividends. The Company currently intends to retain any future earnings
for use in its business and does not anticipate paying any cash dividends in the
future.
Uncertainty of Health Care Reform Measures and Third-Party Reimbursement.
The uncertainty created by a series of legislative and regulatory proposals
announced in recent years could have a materially adverse effect on the
Company's ability to raise capital and to identify and reach agreements with
potential partners. In the event such proposals are eventually adopted, they
could have a material adverse effect on the Company. Furthermore, the Company's
ability to commercialize its potential product portfolio may be adversely
affected to the extent that such proposals have a material adverse effect on the
business, financial condition and profitability of other companies that are
current or prospective collaborators for certain of the Company's proposed
products.
In both domestic and foreign markets, sales of the Company's potential
products, if any, will depend in part on the availability of reimbursement of
third-party payors such as government health administration authorities, private
health insurers and other organizations. Third-party payors are increasingly
challenging the price and cost-effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. There can be no assurance that the Company's proposed
products will be considered cost effective or that adequate third-party
reimbursement will be available to enable the Company to maintain price levels
sufficient to realize an appropriate return on its investment in product
development. Legislation and regulations affecting the pricing of
pharmaceuticals may change before the Company's proposed products are approved
for marketing and any such changes could further limit reimbursement for medical
products and services.
Possible Anti-Takeover Effect of Certain Charter Provisions. The Company's
Articles of Incorporation include, among other things, a provision (the "Fair
Price Provision") that requires the approval of the holders of two-thirds of the
Company's voting stock as a condition to a merger or certain other business
transactions with, or proposed by, a holder of 15% or more of the Company's
voting stock, except in cases where certain directors approve the transaction or
certain minimum price criteria and other procedural requirements are met. The
Fair Price Provision and other charter provisions may discourage certain types
of transactions involving an actual or potential change in control of the
Company, including transactions in which the shareholders might otherwise
receive a premium for their shares over then current market prices, and may
limit the ability of the shareholders to approve transactions that they may deem
to be in their best interests. The Board of Directors also has the authority to
issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix
the rights, priorities, preferences, qualifications, limitations and
restrictions, including the dividend rates, conversion rights, voting rights,
terms of redemption, terms of sinking funds, liquidation preferences and the
number of shares constituting any series, without any further vote or action by
the shareholders, which could decrease the amount of earnings and assets
available for distribution to holders of Common Stock or adversely affect the
rights and powers, including voting rights, of the holders of the Common Stock.
The issuance of Preferred Stock may have the effect of delaying or preventing a
change in control of the Company and may adversely affect the rights of the
holders of Common Stock.
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Item 2. PROPERTIES
The Company currently maintains its headquarters in leased facilities in
San Diego, California, that contain all administrative, research and development
and manufacturing activities in 82,000 square feet of space. The future minimum
rental commitment for this facility will range from approximately $2.1 million
to $4.3 million per year over 19 years, based upon pre-established annual rent
increases. The Company also maintains a 14,400 square foot manufacturing plant
for its production needs. The Company has subleased certain of its existing
facilities with annual rental income ranging from $223,000 to $290,000. The
Company believes its existing facilities will be adequate to meet its needs
through 1998.
In addition, the Company has a right of first refusal and right of first
offer to purchase land located adjacent to its headquarters which must be
exercised on or before October 15, 1997. At present, the Company has not made a
decision concerning the exercise of such option.
Item 3. LEGAL PROCEEDINGS
From time to time, DepoTech may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of the
date of this Annual Report, the Company is not a party to any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned "Price Range
of Common Stock" of the Registrant's 1996 Annual Report to Shareholders, a copy
of which is attached hereto as Exhibit 13.1.
Item 6. SELECTED FINANCIAL DATA
The information required by Item 6 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned "Selected
Financial Data" of the Registrant's 1996 Annual Report to Shareholders, a copy
of which is attached hereto as Exhibit 13.1.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by Item 7 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
Registrant's 1996 Annual Report to Shareholders, a copy of which is attached
hereto as Exhibit 13.1.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements at December 31, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996, and the Report of
Ernst & Young LLP, independent auditors, are included the Registrant's 1996
Annual Report to Shareholders and are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The information under the caption
"Election of Directors," appearing in the Proxy Statement, is incorporated
herein by reference.
-21-
<PAGE> 22
(b) Identification of Executive Officers. The information under the
headings "Executive Officers," appearing in the Proxy Statement, is incorporated
herein by reference.
(c) Section 16(a) Beneficial Ownership Regarding Compliance. The
information under the heading "Compliance with Section 16 of the Exchange Act,"
appearing in the Proxy Statement, is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information under the headings "Executive Compensation and Other
Information," appearing in the Proxy Statement, is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the headings "Principal Shareholders" and "Common
Stock Ownership of Management," appearing in the Proxy Statement, is
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Certain Transactions," appearing in the
Proxy Statement, is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Page No.
Financial Statements............................................. *
Balance Sheets at December 31, 1996 and 1995..................... *
Statements of Operations for Fiscal 1996, 1995 and 1994.......... *
Statements of Cash Flows for Fiscal 1996, 1995 and 1994.......... *
Statements of Shareholders' Equity for Fiscal 1996, 1995 and 1994 *
Notes to Financial Statements.................................... *
Report of Ernst & Young LLP, Independent Auditors................ *
- -------------------------------
* Incorporated herein by reference to the Registrant's 1996 Annual Report to
Shareholders, a copy of which is attached hereto as Exhibit 13.1.
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable, and therefore have been omitted.
(b) No reports on Form 8-K have been filed during the last quarter of
the period covered by this report.
(c) Exhibits
Exhibit Page
Number ----
-------
#3.1 Fourth Restated Articles of Incorporation of the Company --
(Exhibit 3.2).
#3.2 Amended and Restated Bylaws of the Company (Exhibit 3.4). --
#4.1 Form of Certificate for Common Stock. --
#10.1 Form of Written Consent of Holders of Series A, Series, --
Series C and Series D Preferred
-22-
<PAGE> 23
Exhibit Page
Number ----
-------
Stock to conversion.
#10.2 Form of Waiver of Registration Rights, effective August 14, --
1995.
#10.3 Amended and Restated Investors' Rights Agreement among the --
Company and certain shareholders of the Company, dated
December 16, 1994, as amended pursuant to the Amendment to
the Investors' Rights Agreement dated May 24, 1995.
#10.7 Series D Preferred Stock and Warrant Purchase Agreement --
among the Company and the purchasers identified on Schedule
1 to the Agreement, dated December 16, 1994.
#10.10 Master Equipment Lease Agreement dated November 26, 1993 --
between the Company and Phoenix Leasing Incorporated.
#10.11 Warrant Agreement dated January 1, 1994 between the Company --
and Phoenix Leasing Incorporated.
#10.12 Master Equipment Lease dated March 20, 1995 between the --
Company and Phoenix Leasing Incorporated.
#10.13 Master Lease Agreement Number 10476 dated December 21, 1994, --
between the Company and Lease Management Services, Inc.
#10.14 Addendum to Master Lease Agreement 10476 dated December 21, --
1994, between the Company and Lease Management Services, Inc.
#10.15 Negative Covenant Pledge Agreement dated December 21, 1994, --
between the Company and Lease Management Services, Inc.
#10.17 Addendum to Equipment Financing Agreement 10776 dated --
January 5, 1995, between the Company and Lease Management
Services, Inc.
#10.18 Lease for the Company's facilities at 11025 North Torrey --
Pines Road dated April 2, 1992, as amended.
#10.19 Industrial Real Estate Triple Net Lease for the Company's --
facilities at 11011 North Torrey Pines Road dated August 17,
1993
#10.20 Torrey Pines Science Center Industrial Real Estate Lease, --
dated December 8, 1994.
#10.21 Sublease for the Company's facilities at 11025 North Torrey --
Pines Road dated July 9, 1993.
#10.27 Form of Series B Preferred Stock Purchase Warrant dated July --
14, 1992, July 15, 1992, October 15, 1992 and October 27,
1992 between the Company and certain individuals listed on
the attached schedule.
#10.30 Form of Series D Preferred Stock Purchase Warrant dated --
December 16, 1994 between the Company and certain
individuals listed on the attached schedule.
#10.31 Series D Preferred Stock Purchase Warrant dated December 16, --
1994 between the Company and LASDK, a California Limited
Partnership
#10.32 Form of Amendment to Series B Warrant and Agreement to --
Exercise.
#10.33 Assignment Agreement dated February 9, 1994 by and between --
the Company and Research Development Foundation (with certain
confidential portions omitted).
#10.36 Collaboration Agreement dated March 31, 1994 between the --
Company and Chiron Corporation (with certain confidential
portions omitted).
#+10.40 Consulting Agreement dated November 1, 1993 between the --
Company and Stephen B. Howell, M.D., as amended May 24, 1995.
#+10.41 The Company's 1991 Stock Option Plan, as amended. --
#+10.42 1991 Stock Option Plan Form of Incentive Stock Option --
Agreement, as amended.
#+10.43 1991 Stock Option Plan Form of Nonstatutory Option Agreement. --
-23-
<PAGE> 24
Exhibit Page
Number ----
-------
#+10.44 1991 Stock Option Plan Form of Notice of Exercise and Stock --
Purchase Agreement.
#+10.45 The Company's 1994 Stock Option Plan. --
#+10.46 1994 Stock Option Plan Form of Notice of Grant. --
#+10.47 1994 Stock Option Plan Form of Stock Option Agreement. --
#+10.48 1994 Stock Option Plan Form of Stock Purchase Agreement. --
#+10.49 The Company's 1995 Stock Option Plan. --
#+10.50 1995 Stock Option Plan Form of Notice of Grant. --
#+10.51 1995 Stock Option Plan Form of Stock Option Agreement. --
#+10.52 1995 Stock Option Plan Form of Stock Purchase Agreement. --
#+10.53 The Company's 1995 Stock Option/Stock Issuance Plan. --
#+10.54 1995 Employee Stock Purchase Plan. --
#10.55 Form of Employee Proprietary Information Agreement. --
#10.56 Form of Indemnification Agreements between the Company and --
each of its directors.
#10.57 Form of Indemnification Agreement between the Company and --
each of its officers.
#10.58 Research Agreement between the Company and Isis --
Pharmaceuticals, Inc. dated August 16, 1995 (with certain
confidential portions omitted).
#10.59 Loan and Security Agreement dated August 16, 1995 between --
the Company and Silicon Valley Bank.
#10.60 Series D Preferred Stock Purchase Warrant dated August 16, --
1995 between the Company and Silicon Valley Bank.
#10.61 Registration Rights Agreement dated August 16, 1995 between --
the Company and Silicon Valley Bank.
#10.62 Commitment Agreement dated August 16, 1995 among the Company --
and the lenders listed on attached Exhibit A.
#10.63 Continuing Guaranty dated August 16, 1995 between the --
Company and funds affiliated with Sanderling Ventures.
#10.64 Subordination Agreement dated August 16, 1995 between the --
Company and the lenders listed on Exhibit A to the Commitment
Agreement.
*10.65 Extension to Equipment Financing Agreement 10776 dated --
December 8, 1995 between the Company and Lease Management
Services, Inc.
+10.66 Confidential Early Retirement and Separation Agreement __
between the Company and David B. Thomas dated November 4,
1996.
10.67 Stock Purchase Agreement dated November 18, 1996. __
11.1 Computation of pro forma net loss per share. __
13.1 1996 Annual Report to Shareholders __
23.1 Consent of Ernst & Young LLP, Independent Auditors. __
24.1 Power of Attorney (see page 26).
27.1 Financial Data Schedule. __
- ---------
+ Management contract or compensatory plan.
-24-
<PAGE> 25
# Incorporated by reference to the same-numbered exhibit (except as
otherwise indicated) to the Company's Registration Statement on Form
S-1 (No. 33-95890), as amended.
* Incorporated by reference to the same-numbered exhibit (except as
otherwise indicated) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
Supplemental Information
Copies of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held May 14, 1997 and copies of the form of proxy to be used
for such Annual Meeting were furnished to the Commission prior to the time they
were distributed to the shareholders.
-25-
<PAGE> 26
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.
DEPOTECH CORPORATION
Date: March 31, 1997 By: /s/ Edward L. Erickson
----------------------------------------
Edward L. Erickson
President and Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Edward L. Erickson or Dana S. McGowan, his or her
attorney-in-fact, with power of substitution in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his or her substitute or substitutes may do or cause to be
done by virtue hereof.
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.
Signature Title Date
--------- ----- ----
/s/ Fred A. Middleton Chairman of the Board March 31, 1997
- -------------------------
(Fred A. Middleton)
/s/ Edward L. Erickson President, Chief Executive March 31, 1997
- ------------------------- Officer and Director
(Edward L. Erickson) (Principal Executive
Officer)
/s/ Dana S. McGowan Chief Financial Officer March 31, 1997
- ------------------------- (Principal Financial and
(Dana S. McGowan) Accounting Officer)
/s/ Jean Deleage Director March 31, 1997
- -------------------------
(Jean Deleage)
/s/ Roger C. Davisson Director March 31, 1997
- -------------------------
(Roger C. Davisson)
/s/ George W. Dunbar, Jr. Director March 31, 1997
- -------------------------
(George W. Dunbar, Jr.)
/s/ Stephen B. Howell Director March 31, 1997
- -------------------------
(Stephen B. Howell)
/s/ Peter Preuss Director March 31, 1997
- -------------------------
(Peter Preuss)
-26-
<PAGE> 1
EXHIBIT 10.66
Date: November 4, 1996
To: David B. Thomas
From: Ed Erickson
Subject: Confidential Early Retirement And Separation Agreement
Dear David:
Consistent with our discussions concerning your early retirement and separation
from DepoTech Corporation (the "Company"), this letter will constitute the
Confidential Early Retirement And Separation Agreement (the "Agreement")
setting forth the terms of your employment from and after the date of this
agreement, and separation of employment from the Company. By signing this
Agreement, you will be agreeing to these terms. It is important that you
understand clearly both what your benefits and obligations are and what is
expected of you by the Company.
1. Transition Period: Commencing on the date of this Agreement, and
continuing through the date of the first commercial sale of DepoCyt in the
United States, (hereinafter referred to as the "Transition Period"), you
and the Company are in agreement on the future discontinuance of your
employment with the Company. Subject to the terms and conditions of this
Agreement, inclusive but not limited to, Section 6, during the Transition
Period, you shall remain a regular full-time employee and officer of the
Company. The parties may mutually agree in writing to extend the
Transition Period, but neither is under any obligation to do so
(hereinafter referred to as the "extended Transition Period").
On the date of the Company's first commercial sale of DepoCyt in the
United States, provided you have continued employment with the Company
through the date of such first commercial sale, you and the Company will
execute a Consulting Agreement as specified in Attachment A ("Consulting
Agreement").
2. Duties: During the Transition Period you will be responsible for
performing those assignments you currently perform and duties substantially
similar to such assignments, plus any other project assignments agreed
with the Chief Executive Officer (CEO) of the Company. In addition, you
will make yourself available to the Company for the purpose of
transitioning your work to other employees and to answer any questions
regarding matters assigned to you before the effective date of Separation,
as defined below. During the Transition Period, you will devote your full
energies, efforts and abilities to achieving FDA approval of DepoCyt,
toward making significant progress on and achieving milestones in other
key projects and to your employment with the Company.
3. Position Title and Salary: Effective as of August 27, 1996, your title
will be Senior Vice President, Quality Assurance and Regulatory Affairs.
In addition, the Company agrees to retroactively increase your base salary
to $14,167.00 per month. The "new base salary" will be subject to the
normal review of, and changes to, salaries of all SMC members, effective
January 1, 1997. All salary payments will be less customary and applicable
deductions for taxes and health and other benefits. All salary payments
during the Transition Period shall be made on or about the time of the
Company's normal bi-monthly pay cycle.
<PAGE> 2
4. Benefits: During the Transition Period, the Company will continue your
current health benefits, Long Term Disability, Life Insurance, and
participation in the Company's 401(k) and ESPP plans.
5. Expiration of Transition Period/Early Retirement And Separation of
Employment: Your early retirement and separation of employment with the
Company will occur on the last day of the Transition Period, unless your
separation of employment occurs sooner pursuant to Section 6, or is
extended pursuant to Section 1, (the "Transition Period"). As part of
this, the Company agrees to provide you with the following additional
compensation and benefits package:
a. Cash Bonus: Upon issuance by the FDA, of an "Approvable Letter"
for DepoCyt, the Company will pay you a cash bonus of forty thousand
dollars ($40,000), providing such issuance occurs during the
Transition Period.
b. Accelerated Stock Option Grant Vesting: If you remain employed
with the Company until the FDA issues an "Provisional Approval Letter"
for DepoCyt, the Company agrees to accelerate the vesting of Stock
Options remaining unvested as of the date of such issuance, and
awarded in these quantities and on the following dates:
ISO GRANT 40,000 SHARES GRANTED 07-01-93
ISO GRANT 10,000 SHARES GRANTED 03-23-94
ISO GRANT 200 SHARES GRANTED 09-28-95
ISO GRANT 6,750 SHARES GRANTED 01-16-96
In addition, the Company confirms that the vesting of Stock Options
remaining will accelerate in their entirety by these terms in the
event of (1) a change of control of the Company and (2) disability
longer than three (3) months or death.
c. Management Incentive Bonus: During the Transition Period, you
will be eligible for 1996 Management Incentive Bonus consideration to
be paid out in 1997, based on the combination of your performance and
that of the Company during the 1996 fiscal year. The Management
Incentive Bonus target for 1996 is twenty percent (20%) of base
salary, however it can be as little as 0% or as high as 33% of base
salary depending on overall company and individual performance.
d. Extended Benefits: You and your eligible dependents will be
entitled to continue your medical coverage, pursuant to COBRA, for 18
months following the effective date of Separation at your own expense.
It is understood that the Company reserves the right to change health
plans at any time. All other employee benefits, including Long Term
Disability, Life Insurance, 401(k) and ESPP plan participation will
expire on the effective date of the Separation.
e. FTO Balance: The Company further agrees to pay you all earned but
unused FTO pay as of the date of Separation.
In consideration for the above package, you will be required to sign a release
agreement with the Company releasing it from any and all litigation or claims
which is set for at Section 11 of this Agreement.
6. Termination: Either party may terminate your employment during the
Transition Period or any extended Transition Period, under the following
terms and conditions:
2
<PAGE> 3
a. You may terminate your employment with the Company during the
Transition Period, for any reason, upon thirty (30) days written
notice to the Company. Upon such a termination, your employment
will be terminated and all compensation and benefits pursuant to
Sections 3 and 4 will end. If you resign, you will not be
entitled to any compensation or benefits described in Section 5
subsections (a-c).
b. The Company reserves the right to terminate your employment during
the Transition Period or any extended Transition Period "for
cause". "For cause" termination includes: (a) a material breach
of the terms of this Agreement; (b) refusal or failure to perform
the duties assigned to you pursuant to this Agreement, following
notice from the company of such refusal or failure and a
reasonable opportunity to cure; (c ) major infractions of the
Company's standards of conduct as set forth in Company policies,
following notice from the Company of such infractions and a
reasonable opportunity to cure; (d) your acceptance of employment
or consultancy with another entity or person such that you can no
longer devote your full energies to employment with the Company;
or (e) disability longer than three (3) months or death. Upon
termination "for cause', all compensation and benefits pursuant to
Sections 3 and 4 will end. In addition, you will not be entitled
to any compensation or benefits described in Section 5 subsections
(a -c), except in the case of (e) disability longer than three (3)
months or death, you will be entitled to the benefits described in
Section 5 subsection (b) Accelerated Stock Option Grant Vesting.
7. Confidentiality: You agree that as a specific condition to the performance
of this Agreement by the Company, you will not disclose for any purpose,
the fact of this Agreement, the terms of this Agreement or the negotiations
leading up to this Agreement to any person, except to your immediate family
or as may be necessary for purposes of securing legal or tax advice or as
otherwise may be required by law.
8. Inventions/Confidential Information: You agree that the Employee
Proprietary Information and Inventions Agreement signed by you shall remain
in full force and effect following the effective date of Separation. In
addition, we wish to remind you of your obligations regarding the
confidentiality of the Company's commercial and technical proprietary
information. You understand and agree that all confidential and
proprietary information that you may have received during your employment
or may receive during the Transition Period with the Company shall remain
strictly confidential and held by you in confidence.
9. Goodwill and Compliance with Company Policies: You agree that you shall
not make, encourage or otherwise cause to be made any negative or
disparaging comments or statements (whether verbal or written) about the
Company or take any action which will place the Company in a bad light or
false light. You further agree that during the Transition Period you will
abide by and comply with the policies and procedures of the Company.
10. No Admission: This Agreement shall not be construed or used as an
admission of liability or wrongdoing by either you or the Company.
11. Release: In return for the above promises and payments to you, you agree
that you will not file or cause to be filed any charges, lawsuits, or other
actions of any kind against the Company, its agents, successors, officers,
directors, or employees, arising out of, or relating in any way to, your
employment and/or separation of your employment with the Company including,
but not limited to actions alleging breach of contract, tort, legal actions
under Title VII of the Civil Rights Act of 1964, as amended, Section 1981
of the Civil rights Act of 1866, the Veterans Readjustment Assistance Act,
3
<PAGE> 4
the Rehabilitation Act of 1973, the Americans with Disabilities Act, or any
other State, Federal or local law concerning age, race, religion, national
origin, handicap, or any other form of discrimination, or any other law or
regulation.
You understand and agree that all rights under Section 1542 of the Civil
Code of the State of California are hereby expressly waived. It is
understood that Section 1542 of the California Civil Code provides as
follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
12. Entire Understanding: This Agreement, including the attachments hereto,
contains the entire understanding between you and the Company relating to
your continued employment, Early Retirement And Separation package,
superseding all prior understandings and agreements between the parties, if
any.
13. Arbitration: In the event of a dispute over the performance,
interpretation or validity of this Agreement, the parties agree to submit
any and all disputes relating to this Agreement to binding arbitration
before JAMS/Endispute, Southern California. Any arbitration award shall be
final and binding on the parties and may be entered in any court having
jurisdiction.
14. Applicable Law: This Agreement will be governed by laws of the State of
California, without regard to the principles of conflicts of laws.
David, you are entitled by law to review this Agreement for a period of 21
days. The Company encourages you to use this opportunity to review the
Agreement with an attorney. Should you decide not to use the full 21 days,
then you knowingly and voluntarily waive any claims that you were not in fact
given 21 days to consult an attorney and/or review the Agreement.
In addition, for a period of seven (7) days following your execution of this
Agreement, you may revoke this Agreement, and the Agreement shall not become
effective or enforceable until the revocation period has expired. Any
revocation within the seven days must be in writing, addressed to Thomas
Swedberg SPHR at DepoTech Corporation's address (10450 Science Center Drive,
San Diego, CA 92121). If you revoke this Agreement, it shall not be effective
or enforceable and you will not receive the benefits described in Sections 3, 4
and 5 (a-c).
If you agree with the foregoing package and release, please sign below. You
agree that you have read and understand this Agreement, and that you have
signed it freely and voluntarily.
Sincerely,
/s/ Edward L. Erickson
Edward L. Erickson
President and CEO
Agreed:
/s/ David B. Thomas November 5, 1996
________________________________________ _______________________
David B. Thomas Date
4
<PAGE> 5
EXHIBIT A
CONSULTING AGREEMENT
This consulting agreement is made and entered into this ( ) day of (Month),
1997, by and between DepoTech Corporation, a California corporation, having its
principal place of business at 10450 Science Center Drive, San Diego,
California 92121 ("Company") and David B. Thomas, an individual, residing at
325 Punta Baja Drive, Solana Beach, California 92075-1720 (Consultant).
WHEREAS, Company desires to retain Consultant to perform certain services, and
Consultant is agreeable to doing so;
NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual
covenants and conditions set forth below, the parties agree as follows:
1. Services Fees. Consultant hereby is retained as an independent contractor
to provide consulting services described in Exhibit A1 hereto. Consultant
shall receive consulting fees for such services and reimbursement for
reasonable business travel and expenses as set forth in Exhibit A1 hereto.
Such consulting services shall be performed as requested from time to time by
the Company's executive officers.
2. Term. The initial term of this Agreement shall commence on the date hereof
and continue for a period of one (1) year ("Consulting Period"). Consultant's
services shall be rendered as requested by Company and in a manner satisfactory
to Company. Consultant and Company agree that during the term of this
Agreement, Consultant will provide approximately One Hundred Sixty Two (162)
days of consulting services. This Agreement shall be cancelable by either
party upon the giving of ninety (90) days prior written notice.
3. Manner of Performance. Consultant represents that Consultant has the
requisite expertise, ability and legal right to render the consulting services,
and will perform the consulting services in an efficient manner and in
accordance with the terms of this Agreement. Consultant will abide by all
laws, rules and regulations that apply to the performance of the consulting
services and when on Company premises, will comply with Company's policies with
respect to conduct of visitors.
4. Confidentiality.
(a) Consultant recognizes that in performing services under this Agreement he
will have contact with information of substantial value to Company, which
is not generally known and which gives Company an advantage over its
competitors who do not know or use it, including but not limited to
improvements to the DepoFoam Technology, techniques, drawings, processes,
inventions, developments, sales and customer information, and business and
financial information, relating to the business, products, practices or
techniques of Company and of any other corporation or entity that may be a
party to a particular transaction with the Company (hereinafter referred to
as "Confidential Information"). Confidential Information shall also
include information belonging to a third party which Company is obligated
to keep confidential from others. Consultant agrees, at all times, to
regard and preserve as confidential such Confidential Information, and to
refrain from publishing or disclosing any part of such Confidential
Information and from using it except on behalf of Company, without prior
written consent of Company. Consultant further agrees, at all times, to
refrain from any other acts or omissions that would reduce the value of
such Confidential Information to Company.
1
<PAGE> 6
(b) Upon termination of this Agreement, Consultant agrees to promptly surrender
to Company all documents or items which are the property of Company or
which contain or comprise such Confidential Information.
(c) Consultant's duties of confidence to Company and other duties pursuant to
this Agreement, shall survive the termination of this Agreement for any
reason.
5. Reports. Any reports, specifications or other materials prepared by
Consultant for the purpose of or pursuant to this Agreement shall be the
property of Company exlclusively and shall be maintained in confidence by
Consultant.
6. Inventions.
(a) Consultant agrees to promptly and fully disclose in writing to Company any
invention, discovery, development, improvement, method or product, know-how
and data, whether or not patentable, which are made, conceived or reduced to
practice by Consultant during the term of this Agreement that result from
any work performed by Consultant for Company pursuant to this Agreement.
(b) Consultant agrees that such inventions shall be the sole property of
Company and agrees to assign and hereby assigns to Company such inventions.
7. Independent Contractor. Consultant's relationship with the Company is and
shall be that of an independent contractor, and neither party is authorized to
nor shall act as the agent of the other. Consultant agrees that he will be
solely responsible for the payment of all taxes relating to the compensation
paid pursuant to this Agreement.
8. Notices. Unless otherwise provided, any notice required or permitted under
this agreement shall be given in writing and shall be deemed effectively given
upon personal delivery to the party to be notified or upon deposit with the
United States Post Office, by registered or certified mail, postage prepaid and
addressed to the party to be notified at the address for such party set forth
in the introductory paragraph above, or at such other address as such party may
designate by ten (10) days' advance written notice to the other parties.
9. Remedies. Consultant acknowledges that any disclosure or unauthorized use
of Confidential Information will constitute a material breach of this Agreement
and cause substantial harm to Company for which damages would not be a fully
adequate remedy, and, therefore, in the event of any such breach, in addition,
to other available remedies, Company shall have the right to obtain injuctive
relief.
10. Attorneys' Fees. If any action at law or in equity is necessary to enforce
or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to other relief to which such party may be entitled.
11. Successors and Assigns. This Agreement shall be binding upon Consultant,
and inure to the benefit of, the parties hereto and their respective heirs,
successors, assigns, and personal representatives; provided, however, that it
shall not be assignable by Consultant.
12. Amendment and Modification. No amendment, modification or supplement of
this Agreement shall be binding unless executed in writing and signed by all of
the parties hereto.
2
<PAGE> 7
13. Entire Agreement: Governing Law. This Agreement contains the entire
understanding of the parties with respect to the matters contained herein.
This Agreement shall supersede any and all previous and existing Consulting
Agreements between Company and Consultant. This Agreement shall be governed by
and construed in accordance with the laws of the State of California, without
regard to principles of conflicts of law.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of
the date first above written.
DepoTech Corporation, a California corporation
By: ______________________________________
CONSULTANT
By:_______________________________________
(Name)
3
<PAGE> 8
EXHIBIT A1
Scope of Services of Consutant.
The scope of consulting work contemplated by this Agreement shall be as
follows:
Provide consultation on an as requested basis concerning Quality Assurance,
Quality Control, Regulatory Affairs, Clinical Data Management and Clinical
Studies work, issues, plans and actions. Provide information and assistance to
the heads of these functions to improve the overall content, quality, cost or
timeliness of the work being done within their organizations.
Provide consultation on an as requested basis to the heads of Quality
Assurance, Quality Control, Regulatory Affairs, Clinical Data Management and
Clinical Studies to increase their knowledge, skills and competencies in their
respective area(s) of responsibility.
Provide consultation to the President and SMC on an as requested basis for
long and short term strategic and operational planning, marketing and business
development planning and other general planning.
Participate on an as requested basis in meetings with vendors, customers,
regulatory agencies and other organizations to provide historical and practical
knowledge and perspective for information sharing and decision making.
Consulting Fees.
Consultant shall be compensated as follows:
Consultant shall receive a retainer of Thirteen Thousand Five Hundred Dollars
($13,500.00) per month. Consultant's services are expected to be required for
no less than one hundred sixty two (162) days during the Consulting Period.
Consultant will submit to the Company a record of all days worked during each
month, plus an invoice for all reasonable business related travel and expenses.
Company will accelerate vesting of Stock Options remaining unvested and awarded
in the quantity of 10,000 Shares, Granted 03-23-94, with a vesting start date
of July 1, 1997. The remaining unvested shares will vest equally on a monthly
basis during the Consulting Period.
Consultant will be reimbursed for all reasonable business related travel and
entertainment expenses according to Company policy.
4
<PAGE> 1
EXHIBIT 10.67
PURCHASE AGREEMENT
THIS AGREEMENT is made as of the 18th day of November, 1996,
by and between DepoTech Corporation (the "Company"), a corporation organized
under the laws of the State of California, with its principal offices at 10450
Science Center Drive, San Diego, California 92121 and the purchaser whose name
and address is set forth on the signature page hereof (the "Purchaser").
IN CONSIDERATION of the mutual covenants contained in this
Agreement, the Company and the Purchaser agree as follows:
SECTION 1. Authorization of Sale of the Shares. Subject to
the terms and conditions of this Agreement, the Company has authorized the sale
of up to an aggregate of 1,500,000 shares of the common stock (the "Common
Stock"), no par value per share (the "Shares"), of the Company.
SECTION 2. Agreement to Sell and Purchase the Shares. On the
Closing Date (as defined in Section 3), the Company, subject to the terms of
this Agreement, will sell to the Purchaser the number of Shares indicated
below, and the Purchaser will buy from the Company such Shares, upon the terms
and conditions hereinafter set forth, the aggregate number of such Shares (at
the purchase price) shown below:
<TABLE>
<CAPTION>
Number of Price Per
Shares to be Share In Aggregate
Purchased Dollars Price
------------ -------- ---------
<S> <C> <C>
1,500,000 $13.50 $20,250,000.00
</TABLE>
The Company proposes to enter into this same form of purchase
agreement with certain other investors (the "Other Purchasers") and expects to
complete sales of the Shares to them. The Purchaser and the Other Purchasers
are hereinafter sometimes collectively referred to as the "Purchasers," and
this Agreement and the agreements executed by the Other Purchasers are
hereinafter sometimes collectively referred to as the "Agreements." The term
"Placement Agent" shall mean Vector Securities International, Inc.
SECTION 3. Delivery of the Shares at the Closing. The
completion of the purchase and sale of the Shares (the "Closing") shall occur
as soon as practicable following notification by the Securities and Exchange
Commission (the "Commission") to the Company of the Commission's willingness to
declare effective the registration statement to be filed by the Company
pursuant to Section 7.1 (the "Registration Statement") at a place and time (the
"Closing Date") to be agreed upon by the Company and the
<PAGE> 2
Placement Agent and of which the Purchasers will be notified by facsimile
transmission or otherwise.
At the Closing, the Company shall deliver to the Purchaser one
or more stock certificates registered in the name of the Purchaser, or in such
nominee name(s) as designated by the Purchaser, representing the number of
Shares set forth in Section 2 above. The name(s) in which the stock
certificates are to be registered are set forth in the Stock Certificate
Questionnaire attached hereto as part of Appendix I. The Company's obligation
to complete the purchase and sale of the Shares and deliver such stock
certificate(s) to the Purchaser at the Closing shall be subject to the
following conditions, any one or more of which may be waived by the Company:
(a) receipt by the Company of New York Clearing House funds in the full amount
of the purchase price for the Shares being purchased hereunder; (b) completion
of the purchases and sales under the Agreements with Other Purchasers; and (c)
the accuracy of the representations and warranties made by the Purchasers and
the fulfillment of those undertakings of the Purchasers to be fulfilled prior
to the Closing. The Purchaser's obligation to accept delivery of such stock
certificate(s) and to pay for the Shares evidenced thereby shall be subject to
the following conditions: (a) the Commission has notified the Company of the
Commission's willingness to declare the Registration Statement effective on or
prior to the 60th day after the date such Registration Statement was filed by
the Company; and (b) the accuracy in all material respects of the
representations and warranties made by the Company herein and the fulfillment
in all material respects of those undertakings of the Company to be fulfilled
prior to Closing. The Purchaser's obligations hereunder are expressly not
conditioned on the purchase by any or all of the Other Purchasers of the Shares
that they have agreed to purchase from the Company.
SECTION 4. Representations, Warranties and Covenants of the
Company. The Company hereby represents and warrants to, and covenants with, the
Purchaser as follows:
4.1. Organization and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to conduct its business as currently conducted.
4.2. Authorized Capital Stock. Except as disclosed in or
contemplated by the Confidential Private Placement Memorandum dated November 1,
1996 prepared by the Company (the "Private Placement Memorandum"), the Company
has authorized and outstanding capital stock as set forth in the Private
Placement Memorandum; the issued and outstanding shares of the Company's Common
Stock have been duly authorized and validly issued, are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights
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<PAGE> 3
to subscribe for or purchase securities, and conform to the description thereof
incorporated by reference in the proposed draft, dated November 1, 1996, of the
Registration Statement on Form S-3, attached as Exhibit C to the Private
Placement Memorandum. Except as disclosed in the Private Placement Memorandum,
or as contemplated by the Private Placement Memorandum, the Company does not
have outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock, stock bonus and other
stock plans or arrangements and the options or other rights granted and
exercised thereunder, incorporated by reference in the proposed draft, dated
November 1, 1996, of the Registration Statement on Form S-3 attached as Exhibit
C to the Private Placement Memorandum accurately and fairly presents the
information required to be shown with respect to such plans, arrangements,
options and rights.
4.3. Issuance, Sale and Delivery of the Shares. The Shares
to be sold by the Company have been duly authorized and, when issued, delivered
and paid for in the manner set forth in this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable, and will conform to
the description thereof incorporated by reference in the proposed draft, dated
November 1, 1996, of the Registration Statement on Form S-3 attached as Exhibit
C to the Private Placement Memorandum. No preemptive rights or other rights to
subscribe for or purchase exist with respect to the issuance and sale of the
Shares by the Company pursuant to this Agreement. No shareholder of the
Company has any right, which has not been waived or has not expired by reason
of lapse of time following notification of the Company's intent to file the
Registration Statement, to require the Company to register the sale of any
shares owned by such shareholder under the Securities Act of 1933, as amended,
(the "Securities Act") in the Registration Statement. No further approval or
authority of the shareholders or the Board of Directors of the Company will be
required for the issuance and sale of the Shares to be sold by the Company as
contemplated herein.
4.4. Due Execution, Delivery and Performance of the
Agreements. The Company has full legal right, power and authority to enter
into the Agreements and perform the transactions contemplated hereby. The
Agreements have been duly authorized, executed and delivered by the Company.
The making and performance of the Agreements by the Company and the
consummation of the transactions herein contemplated will not violate any
provision of the articles of incorporation or bylaws, or other organizational
documents, of the Company, and will not conflict with, result in the breach or
violation of, or constitute, either by itself or upon notice or the passage of
time or both, a default under any material agreement, mortgage,
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<PAGE> 4
deed of trust, lease, franchise, license, indenture, permit or other instrument
to which the Company is a party or by which the Company or its properties may
be bound or affected, any statute or any authorization, judgment, decree,
order, rule or regulation of any court or any regulatory body, administrative
agency or other governmental body applicable to the Company or any of its
properties. No consent, approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental body is required
for the execution and delivery of this Agreement or the consummation of the
transactions contemplated by this Agreement, except for compliance with the
Blue Sky laws applicable to the offering of the Shares. Upon their execution
and delivery, and the respective Purchasers, the Agreements will constitute
valid and binding obligations of the Company, enforceable in accordance with
their respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' and contracting parties' rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
and except as the indemnification agreements of the Company in Section 7.3
hereof may be legally unenforceable.
4.5. Accountants. Ernst & Young LLP, who have expressed
their opinion with respect to the financial statements and schedules
incorporated by reference in the Registration Statement, are independent
accountants as required by the Securities Act and the rules and regulations
promulgated thereunder (the "Rules and Regulations").
4.6. No Defaults. Except as incorporated by reference in the
proposed draft, dated November 1, 1996, of the Registration Statement on Form
S-3, attached as Exhibit C to the Private Placement Memorandum, and except as
to defaults, violations and breaches which individually or in the aggregate
would not be material to the Company, the Company is not in violation or
default of any provision of its articles of incorporation or bylaws, or other
organizational documents, or is not in breach of or default with respect to any
provision of any agreement, judgment, decree, order, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument to which it is
a party or by which it or any of its properties are bound; and there does not
exist any state of fact which constitutes an event of default on the part of
the Company as defined in such documents or which, with notice or lapse of time
or both, would constitute such an event of default except such defaults which
individually or in the aggregate would not be material to the Company.
4.7. Contracts. The contracts so described in the Private
Placement Memorandum or incorporated by reference therein are in full force and
effect on the date hereof; and neither the Company, nor to the best of the
Company's knowledge, any other
-4-
<PAGE> 5
party is in breach of or default under any of such contracts except such breach
or default which individually or in the aggregate would not be material to the
Company.
4.8. No Actions. Except as disclosed in the Private
Placement Memorandum or incorporated by reference therein, there are no legal
or governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company is or may be a part or of
which property owned or leased by the Company is or may be the subject, or
related to environmental or discrimination matters, which actions, suits or
proceedings might, individually or in the aggregate, prevent or adversely
affect the transactions contemplated by this Agreement or result in a material
adverse change in the condition (financial or otherwise), properties, business,
results of operations or prospects of the Company, and no labor disturbance by
the employees of the Company exists or is imminent which might be expected to
affect adversely such condition, properties, business, results of operations or
prospects. The Company is not party nor subject to the provisions of any
material injunction, judgment, decree or order of any court, regulatory body
administrative agency or other governmental body.
4.9. Properties. The Company has good and marketable title
to all the properties and assets reflected as owned by it in the financial
statements included in the Private Placement Memorandum or incorporated by
reference therein, subject to no lien, mortgage, pledge, charge or encumbrance
of any kind except (i) those, if any, reflected in such financial statements,
or (ii) those which are not material in amount and do not adversely affect the
use made and promised to be made of such property by the Company. The Company
holds its leased properties under valid and binding leases, with such
exceptions as are not materially significant in relation to the business of the
Company. Except as disclosed in the Private Placement Memorandum or
incorporated by reference therein, the Company owns or leases all such
properties as are necessary to its operations as now conducted.
4.10. No Material Change. Since June 30, 1996 and except as
described in or specifically contemplated by the Private Placement Memorandum,
(i) the Company has not incurred any material liabilities or obligations,
indirect, or contingent, or entered into any material verbal or written
agreement or other transaction which is not in the ordinary course of business
or which could reasonably be expected to result in a material reduction in the
future earnings of the Company; (ii) the Company has not sustained any material
loss or interference with its businesses or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance;
(iii) the Company has not paid or declared any dividends or other distributions
with respect to its capital stock and the Company is not in default in the
payment of principal or interest on any outstanding debt obligations; (iv)
there has not been any change in the capital stock of the Company
-5-
<PAGE> 6
(other than the sale of the Shares hereunder, or indebtedness material to the
Company (other than in the ordinary course of business); and (v) there has not
been any material adverse change in the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company.
4.11. Intellectual Property. Except as disclosed in or
specifically contemplated by the Private Placement Memorandum, the Company
believes it has sufficient trademarks, trade names, patent rights, copyrights,
licenses, approvals and governmental authorizations to conduct its businesses
as now conducted; and the Company has no knowledge of any material infringement
by it of trademark, trade name rights, patent rights, copyrights, licenses,
trade secrets or other similar rights of others, and no claim has been made
against the Company regarding trademark, trade name, patent, copyright,
license, trade secrecy or other infringement which could have a material
adverse effect on the condition (financial or otherwise), business, results of
operations or prospects of the Company.
4.12. Compliance. The Company has not been advised, and has
no reason to believe, that it is not conducting business in compliance with all
applicable laws, rules and regulations of the jurisdictions in which it is
conducting business, including, without limitation, all applicable local, state
and federal environmental laws and regulations; except where failure to be so
in compliance would not materially adversely affect the condition (financial or
otherwise), business, results of operations or prospects of the Company.
4.13. Taxes. The Company has filed all necessary federal,
state and foreign income and franchise tax returns and has paid or accrued all
taxes shown as due thereon, and the Company has no knowledge of tax deficiency
which has been or might be asserted or threatened against the Company which
could materially adversely affect the business condition (financial or
otherwise), results of operations or prospects of the Company.
4.14. Transfer Taxes. On the Closing Date, all stock
transfer or other taxes (other than income taxes) which are required to be paid
in connection with the sale and transfer of the Shares to be sold to the
Purchaser hereunder will be, or will have been, fully paid or provided for by
the Company and all laws imposing such taxes will be or will have been fully
complied with.
4.15. Investment Company. The Company is not required to
register as an "investment company" as such term is defined in the Investment
Company Act of 1940, as amended.
4.16. Offering Materials. The Company has not distributed
and will not distribute prior to the Closing Date any offering material in
connection with the offering and sale of the
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<PAGE> 7
Shares other than the Private Placement Memorandum or any amendment or
Supplement thereto.
4.17. Insurance. Except as disclosed in the Private
Placement Memorandum, the Company maintains insurance of the types and in the
amounts generally deemed adequate for its business, including, but not limited
to, insurance covering all real and personal property owned or leased by the
Company against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect.
4.18. Additional Information. The Company represents and
warrants that the information contained in the following documents, which the
Placement Agent has furnished to the Purchaser, or will furnish prior to the
Closing, is or will be true and correct in all material respects as of their
respective filing dates:
(a) Annual Report on Form 10-K for the year ended
December 31, 1995;
(b) Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996;
(c) the Confidential Private Placement Memorandum dated
November 1, 1996 containing certain summary
information relating to the sale by the Company of
the Shares pursuant to the Agreements, including all
addenda and exhibits thereto (other than the
Appendices) (the "Private Placement Memorandum"); and
(d) the proposed form of Registration Statement on
Form S-3 (draft dated November 1, 1996)
(e) all other documents, if any, filed by the Company
with the Securities and Exchange Commission since
December 31, 1995 pursuant to Sections 13 or 15(d) of
the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
4.19. Legal Opinion. Prior to the Closing, Brobeck, Phleger
& Harrison LLP, counsel to the Company, will deliver its legal opinion to the
Placement Agent reasonably satisfactory to the Placement Agent and counsel to
the Placement Agent. Such opinion shall also state that each of the Purchasers
may rely thereon as though it were addressed directly to such Purchaser.
4.20. Intellectual Property Opinion. Prior to the Closing,
Fish & Richardson, P.C. patent counsel for the Company, will deliver its legal
opinion to the Placement Agent reasonably satisfactory to the Placement Agent
and counsel to the Placement Agent. Such opinion shall state that each of the
Purchasers may
-7-
<PAGE> 8
rely thereon as though it were addressed directly to such Purchaser.
4.21. Regulatory Opinion. Prior to the Closing, Hyman, Phelps
& McNamara, P.C. special regulatory advisor for the Company will deliver its
legal opinion to the Placement Agent reasonably satisfactory to the Placement
Agent and counsel to the Placement Agent. Such opinion shall state that each
of the Purchasers may rely thereon as though it were addressed directly to such
Purchaser.
4.22. Certificate. A certificate of the Company executed by
the Chairman of the Board or President and the chief financial or accounting
officer of the Company, to be dated the Closing Date in form and substance
satisfactory to the Purchasers to the effect that the representations and
warranties of the Company set forth in this Section 4 are true and correct as
of the date of this Agreement and as of the Closing Date, and the Company has
complied with all the agreements and satisfied all the conditions on its part
to be performed or satisfied on or prior to such Closing Date.
SECTION 5. Representations, Warranties and Covenants of the
Purchaser. (a) The Purchaser represents and warrants to, and covenants with,
the Company that: (i) the Purchaser, taking into account the personnel and
resources it can practically bring to bear on the purchase of the Shares
contemplated hereby, is knowledgeable, sophisticated and experienced in making,
and is qualified to make, decisions with respect to investments in shares
presenting an investment decision like that involved in the purchase of the
Shares, including investments in securities issued by the Company, and has
requested, received, reviewed and considered all information it deems relevant
in making an informed decision to purchase the Shares; (ii) the Purchaser is
acquiring the number of Shares set forth in Section 2 above in the ordinary
course of its business and for its own account for investment (as defined for
purposes of the Hart-Scott-Rodino Antitrust Improvement Act of 1976 and the
regulations thereunder) only and with no present intention of distributing any
of such Shares or any arrangement or understanding with any other persons
regarding the distribution of such Shares; (iii) the Purchaser will not,
directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of
(or solicit any offers to buy, purchase or otherwise acquire or take a pledge
of) any of the Shares except in compliance with the Securities Act, the Rules
and Regulations and any applicable state securities or blue sky laws; (iv) the
Purchaser has completed or caused to be completed the Registration Statement
Questionnaire and the Stock Certificate Questionnaire, both attached hereto as
Appendix I, for use in preparation of the Registration Statement and the
answers thereto are true and correct to the best knowledge of the Purchaser as
of the date hereof and will be true and correct as of the effective date of the
Registration Statement; (v) the Purchaser has, in connection with its decision
to purchase the number of Shares set
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<PAGE> 9
forth in Section 2 above, relied solely upon the Private Placement Memorandum
and the documents included therein and the representations and warranties of
the Company contained herein; and (vi) the Purchaser is an "accredited
investor" within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act.
(b) The Purchaser hereby covenants with the Company not to
make any sale of the Shares without effectively causing the prospectus delivery
requirement under the Securities Act to be satisfied, and the Purchaser
acknowledges and agrees that such Shares are not transferable on the books of
the Company unless the certificate submitted to the transfer agent evidencing
the Shares is accompanied by a separate officer's certificate: (i) in the form
of Appendix II hereto, (ii) executed by an officer of, or other authorized
person designated by, the Purchaser, and (iii) to the effect that (A) the
Shares have been sold in accordance with the Registration Statement, the
Securities Act and the Rules and Regulations and any applicable state
securities or blue sky laws and (B) the requirement of delivering a current
prospectus has been satisfied. The Purchaser acknowledges that there may
occasionally be times when the Company must suspend the use of the prospectus
forming a part of the Registration Statement until such time as an amendment to
the Registration Statement has been filed by the Company and declared effective
by the Commission, or until such time as the Company has filed an appropriate
report with the Commission pursuant to the Exchange Act. The Purchaser hereby
covenants that it will not sell any Shares pursuant to said prospectus during
the period commencing at the time at which the Company gives the Purchaser
notice of the suspension of the use of said prospectus and ending at the time
the Company gives the Purchaser notice that the Purchaser may thereafter effect
sales pursuant to said prospectus. The Purchaser further covenants to notify
the Company promptly of the sale of all of its Shares.
(c) The Purchaser further represents and warrants to, and
covenants with, the Company that (i) the Purchaser has full right, power,
authority and capacity to enter into this Agreement and to consummate the
transactions contemplated hereby and has taken all necessary action to
authorize the execution, delivery and performance of this Agreement, and (ii)
upon the execution and delivery of this Agreement, this Agreement shall
constitute a valid and binding obligation of the Purchaser enforceable in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' and contracting parties' rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
and except as the indemnification agreements of the Purchaser in Section 7.3
hereof may be legally unenforceable.
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<PAGE> 10
SECTION 6. Survival of Representations, Warranties and
Agreements. Notwithstanding any investigation made by any party to this
Agreement or by the Placement Agent, all covenants, agreements, representations
and warranties made by the Company, and the Purchaser herein and in the
certificates for the Shares delivered pursuant hereto shall survive the
execution of this Agreement, the delivery to the Purchaser of the Shares being
purchased and the payment therefor.
SECTION 7. Registration of the Shares; Compliance with the
Securities Act.
7.1. Registration Procedures and Expenses. The Company
shall:
(a) as soon as practicable, prepare and file with the
Commission the Registration Statement on Form S-3
relating to the sale of the Shares by the Purchaser
from time to time through the automated quotation
system of The Nasdaq Stock Market or the facilities
of any national securities exchange on which the
Company's common stock is then traded or in
privately-negotiated transactions;
(b) use its reasonable efforts, subject to receipt of
necessary information from the Purchasers, to cause
the Commission to notify the Company of the
Commission's willingness to declare the Registration
Statement effective within 60 days after the
Registration Statement is filed by the Company;
(c) prepare and file with the Commission such amendments
and supplements to the Registration Statement and the
prospectus used in connection therewith as may be
necessary to keep the Registration Statement
effective until the date on which the Shares may be
resold by the Purchasers without registration, by
reason of Rule 144(k) under the Securities Act or any
other rule of similar effect;
(d) furnish to the Purchaser with respect to the Shares
registered under the Registration Statement (and to
each underwriter, if any, of such Shares) such
reasonable number of copies of prospectuses and such
other documents as the Purchaser may reasonably
request, in order to facilitate the public sale or
other disposition of all or any of the Shares by the
Purchaser, provided, however, that the obligation of
the Company to deliver copies of prospectuses to the
Purchaser shall be subject to the receipt by the
Company of reasonable assurances from the Purchaser
that the
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<PAGE> 11
Purchaser will comply with the applicable provisions
of the Securities Act and of such other securities or
blue sky laws as may be applicable in connection with
any use of such prospectuses;
(e) file documents required of the Company for normal
blue sky clearance in states specified in writing by
the Purchaser, provided, however, that the Company
shall not be required to qualify to do business or
consent to service of process in any jurisdiction in
which it is not now so qualified or has not so
consented; and
(f) bear all expenses in connection with the procedures
in paragraphs (a) through (e) of this Section 7.1 and
the registration of the Shares pursuant to the
Registration Statement, other than fees and expenses,
if any, of counsel or other advisers to the Purchaser
or the Other Purchasers or underwriting discounts,
brokerage fees and commissions incurred by the
Purchaser or the Other Purchasers, if any.
7.2. Transfer of Shares After Registration. The Purchaser
agrees that it will not effect any disposition of the Shares or its right to
purchase the Shares that would constitute a sale within the meaning of the
Securities Act or pursuant to any applicable state securities or blue sky laws
except as contemplated in the Registration Statement referred to in Section 7.1
and that it will promptly notify the Company of any changes in the information
set forth in the Registration Statement regarding the Purchaser or its Plan of
Distribution.
7.3. Indemnification. For the purpose of this Section 7.3:
(i) the term "Purchaser" shall include the Purchaser and
any affiliate of such Purchaser;
(ii) the term "Registration Statement" shall include any
final prospectus, exhibit, supplement or amendment
included in or relating to the Registration Statement
referred to in Section 7.1; and
(a) The Company agrees to indemnify and hold harmless each of
the Purchasers and each person, if any, who controls any Purchaser within the
meaning of the Securities Act, against any losses, claims, damages, liabilities
or expenses, joint or several, to which such Purchasers or such controlling
person may become subject, under the Securities Act, the Exchange Act, or any
other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written
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<PAGE> 12
consent of the Company), insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof as contemplated below) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, including the
prospectus, financial statements and schedules, and all other documents filed
as a part thereof, as amended at the time of effectiveness of the Registration
Statement, including any information deemed to be a part thereof as of the time
of effectiveness pursuant to paragraph (b) of Rule 430A, or pursuant to Rule
434, of the rules and regulations of the Commission under the Securities Act
(the "Regulations"), or the prospectus, in the form first filed with the
Commission pursuant to Rule 424(b) of the Regulations, or filed as part of the
Registration Statement at the time of effectiveness if no Rule 424(b) filing is
required (the "Prospectus"), or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state in any of
them a material fact required to be stated therein or necessary to make the
statements in any of them not misleading, or arise out of or are based in whole
or in part on any inaccuracy in the representations and warranties of the
Company contained in this Agreement, or any failure of the Company to perform
its obligations hereunder or under law, and will reimburse each Purchaser and
each such controlling person for any legal and other expenses as such expenses
are reasonably incurred by such Purchaser or such controlling person in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage, liability or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, the Prospectus or any amendment or
supplement thereto in reliance upon and in conformity with written information
furnished to the Company (i) by or on behalf of the Purchaser expressly for use
therein or (ii) the failure of such Purchaser to comply with the covenants and
agreements contained in Sections 5(b) or 7.2 hereof respecting sale of the
Shares, the inaccuracy of any representations made by such Purchaser herein or
any statement or omission in any Prospectus that is corrected in any subsequent
Prospectus that was delivered to the Purchaser prior to the pertinent sale or
sales by the Purchaser.
In addition to its other obligations under this paragraph (a),
the Company agrees that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission, or
any inaccuracy in the representations and warranties of the Company in this
Agreement or failure to perform its obligations in this Agreement, all as
described in this paragraph (a), it will reimburse each Purchase on a quarterly
basis for all reasonable legal or other expenses incurred in connection with
investigating
-12-
<PAGE> 13
or defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Company's obligation, to reimburse each
Purchaser for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, each Purchaser shall promptly return it to the Company together with
interest, compounded daily, determined on the basis of the Prime Rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by Bank of America National Trust and Savings Association,
San Francisco, California (the "Prime Rate"). Any such interim reimbursement
payments which are not made to a Purchaser within 30 days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which
the Company may otherwise have.
(b) Each Purchaser will severally indemnify and hold
harmless the Company, each of its directors, each of its officers who signed
the Registration Statement and each person, if any, who controls the Company
within the meaning of the Securities Act, against any losses, claims, damages,
liabilities or expenses to which the Company, each of its directors, each of
its officers who signed the Registration Statement or controlling person may
become subject, under the Securities Act, the Exchange Act, or any other
federal or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected with
the written consent of such Purchaser) insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any failure to comply with the covenants and
agreements contained in Sections 5(b) or 7.2 hereof respecting the sale of the
Shares, the inaccuracy of any representation made by such Purchaser herein or
any untrue or alleged untrue statement of any material fact contained in the
Registration Statement, the Prospectus, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, the Prospectus, or any
amendment or supplement thereto, in reliance upon and in conformity with
written information furnished to the Company by or on behalf of any Purchaser
expressly for use therein, and will reimburse the Company, each of its
directors, each of its officers who signed the Registration Statement or
controlling person for any legal and other expense reasonably incurred by the
Company, each of its directors, each of its officers who signed the
Registration Statement or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim,
-13-
<PAGE> 14
damage, liability, expense or action. In addition to its other obligations
under this paragraph (b), each Purchaser severally agrees that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any failure to comply, statement
or omission, or any alleged failure to comply, statement or omission, described
in this paragraph (b) which relates to written information furnished to the
Company by or on behalf of any Purchaser, it will reimburse the Company (and,
to the extent applicable, each officer, director or controlling person) on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with the investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Purchaser's obligations to reimburse the Company (and, to the extent
applicable, each officer, director or controlling person) for such expenses and
the possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company (and, to
the extent applicable, each officer, director or controlling person) shall
promptly return it to such Purchaser together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company within 30 days of a request for
reimbursement shall bear interest at the Prime Rate form the date of such
request. This indemnity agreement will be in addition to any liability which
such Purchaser may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 7.3 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section 7.3 notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
for contribution or otherwise than under the indemnity agreement contained in
this Section 7.3 or to the extent it is not prejudiced as a proximate result of
such failure. In case any such action is brought against any indemnified party
and such indemnified party seeks or intends to seek indemnity from an
indemnifying party, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with all other indemnifying
parties similarly notified, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be a conflict between the positions of the indemnifying party
and the indemnified party in conducting the defense of any such action or that
there may be legal defenses available to it and/or other indemnified parties
which are different from or additional
-14-
<PAGE> 15
to those available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assume such legal defenses
and to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of
such action and approval by the indemnified party of counsel, the indemnifying
party will not be liable to such indemnified party under this Section 7.3 for
any legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof unless (i) the indemnified party shall have
employed such counsel in connection with the assumption of legal defenses in
accordance with the proviso to the preceding sentence (it being understood,
however, that the indemnifying party shall be not liable for the expenses of
more than one separate counsel, approved by such indemnifying party in the case
of paragraph (a), representing the indemnified parties who are parties to such
action) or (ii) the indemnified party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of action, in each
of which cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(d) If the indemnification provided for in this Section 7.3
is required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
(a), (b), (c) or (d) of this Section 7.3 in respect to any losses, claims,
damages, liabilities or expenses referred to herein, then each applicable
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of any losses, claims, damages, liabilities or
expenses referred to herein (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Purchaser from the
placement of Common Stock or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
the relative fault of the Company and the Purchaser in connection with the
statements or omissions or inaccuracies in the representations and warranties
in this Agreement which resulted in such losses, claims, damages, liabilities
or expenses, as well as any other relevant equitable considerations. The
respective relative benefits received by the Company on the one hand and each
Purchaser on the other shall be deemed to be in the same proportion as the
amount paid by such Purchaser to the Company pursuant to this Agreement for the
Shares purchased by such Purchaser that were sold pursuant to the Registration
Statement bears to the difference (the "Difference") between the amount such
Purchaser paid for the Shares that were sold pursuant to the Registration
Statement and the amount received by such Purchaser from such sale. The
relative fault of such Selling Shareholders and each Purchaser shall be
determined by reference to, among other things, whether the untrue or
-15-
<PAGE> 16
alleged statement of a material fact or the omission or alleged omission to
state a material fact or the inaccurate or the alleged inaccurate
representation and/or warranty relates to information supplied by the Company
or by such Purchaser and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in paragraph (d) of this Section 7.3 any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim. The provisions set forth
in paragraph (d) of this Section 7.3 with respect to notice of commencement of
any action shall apply if a claim for contribution is to be made under this
paragraph (e); provided, however, that no additional notice shall be required
with respect to any action for which notice has been given under paragraph (d)
for purposes of indemnification. The Company and each Purchaser agree that it
would not be just and equitable if contribution pursuant to this Section 7.3
were determined solely by pro rata allocation (even if the Purchaser were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to in this
paragraph. Notwithstanding the provisions of this Section 7.3 no Purchaser
shall be required to contribute any amount in excess of the amount by which the
Difference exceeds the amount of any damages that such Purchaser has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Purchasers' obligations to contribute pursuant to this
Section 7.3 are several and not joint.
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in paragraphs (a)
and (b) of this Section 7.3, including the amounts of any requested
reimbursement payments and the method of determining such amounts, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of The New York Stock Exchange, Inc. Any such
arbitration must be commenced by service of a written demand for arbitration or
written notice of intention to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration does not make such
designation of any arbitration tribunal in such demand or notice, then the
party responding to said demand or notice is authorized to do so. Such an
arbitration would be limited to the operation of the interim reimbursement
provisions contained in paragraphs (a) and (b) of this Section 7.3 and would
not resolve the ultimate propriety or enforceability of the obligation to
reimburse expenses which is created by the provisions of such paragraphs (a)
and (b).
-16-
<PAGE> 17
7.4. Termination of Conditions and Obligations. The
conditions precedent imposed by Section 5 or this Section 7 upon the
transferability of the Shares shall cease and terminate as to any particular
number of the Shares upon the passage of thirty-six months from the effective
date of the Registration Statement or at such time as an opinion of counsel
satisfactory to the Company shall have been rendered to the effect that such
conditions are not necessary in order to comply with the Securities Act.
7.5. Information Available. So long as the Registration
Statement is effective covering the resale of Shares owned by the Purchaser,
the Company will furnish to the Purchaser:
(a) as soon as practicable after available (but in the
case of the Company's Annual Report to Shareholders,
within 120 days after the end of each fiscal year of
the Company), one copy of (i) its Annual Report to
Shareholders (which Annual Report shall contain
financial statements audited in accordance with
generally accepted accounting principles by a
national firm of certified public accountants), (ii)
if not included in substance in the Annual Report to
Shareholders, its Annual Report on Form 10-K, (iii)
if not included in substance in its Quarterly Reports
to Shareholders, its quarterly reports on Form 10-Q,
and (iv) a full copy of the particular Registration
Statement covering the Shares (the foregoing, in each
case, excluding exhibits); and
(b) upon the reasonable request of the Purchaser, a
reasonable number of copies of the prospectuses to
supply to any other party requiring such
prospectuses;
and the Company, upon the reasonable request of the Purchaser, will meet with
the Purchaser or a representative thereof at the Company's headquarters to
discuss all information relevant for disclosure in the Registration Statement
covering the Shares, subject to appropriate confidentiality limitations.
SECTION 8. Broker's Fee. The Purchaser acknowledges that the
Company intends to pay to the Placement Agent a fee in respect of the sale of
the Shares to the Purchaser. Each of the parties hereto hereby represents
that, on the basis of any actions and agreements by it, there are no other
brokers or finders entitled to compensation in connection with the sale of the
Shares to the Purchaser.
SECTION 9. Notices. All notices, requests, consents and
other communications hereunder shall be in writing, shall be mailed by
first-class registered or certified airmail, or nationally recognized overnight
express courier postage prepaid,
-17-
<PAGE> 18
and shall be deemed given when so mailed and shall be delivered as addressed as
follows:
(a) if to the Company, to:
DepoTech Corporation
10450 Science Center Drive
San Diego, California 92121
Attn: Edward L. Erickson
with a copy so mailed to:
Brobeck, Phleger & Harrison LLP
550 West "C" Street, Suite 1300
San Diego, California 92101
Attn: Faye H. Russell, Esq.
or to such other person at such other place as the
Company shall designate to the Purchaser in
writing; and
(b) if to the Purchaser, at its address as set forth at
the end of this Agreement, or at such other address
or addresses as may have been furnished to the
Company in writing.
SECTION 10. Changes. This Agreement may not be modified or
amended except pursuant to an instrument in writing signed by the Company and
the Purchaser.
SECTION 11. Headings. The headings of the various sections
of this Agreement have been inserted for convenience of reference only and
shall not be deemed to be part of this Agreement.
SECTION 12. Severability. In case any provision contained
in this Agreement should be invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
SECTION 13. Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York without
regard to the conflicts of law principles thereof and the federal law of the
United States of America.
-18-
<PAGE> 19
SECTION 14. Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall constitute an original, but all
of which, when taken together, shall constitute but one instrument, and shall
become effective when one or more counterparts have been signed by each party
hereto and delivered to the other parties.
-19-
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives as of the day
and year first above written.
<TABLE>
<S> <C>
DepoTech Corporation
By_________________________________
Edward L. Erickson
President and Chief Executive
Officer
Print or Type:
Name of Purchaser
(Individual or Institution):
---------------------------------
Name of Individual representing
Purchaser (if an Institution):
---------------------------------
Title of Individual representing
Purchaser (if an Institution):
---------------------------------
Signature by:
Individual Purchaser or Individual
representing Purchaser:
---------------------------------
Address:___________________________
Telephone:_________________________
Telecopier:________________________
</TABLE>
-20-
<PAGE> 21
<TABLE>
<CAPTION>
Maximum Number of
Shares Being
Name and Address Offered
- ---------------- -----------------
<S> <C>
Abydos & Co. (1) ................................................... 670,000
Franklin Select Series - Small Capital Growth Fund (2) ............. 269,100
SE Banken Fonder AB ................................................ 200,000
The Aries Trust (3) ................................................ 105,000
Franklin Valuemark Annuity Funds - Small Cap
Growth Fund (2) .................................................... 70,900
Aries Domestic Fund, L.P. (3) ...................................... 45,000
Lawrence F. DeGeorge ............................................... 30,000
WPG Life Sciences Funds, L.P. (4) .................................. 30,000
WPG Institutional Life Sciences Fund, L.P. (4) ..................... 20,000
Clarion Partners, LP ................................................ 16,000
1801 E. 9th Street, Suite 510
Cleveland, Ohio 44114
Essex Special Growth Opportunities Fund LP (5) ...................... 12,000
Essex High Technology Fund, L.P. (5) ............................... 8,000
Bear Stearns Securities Corporation f.b.o. EAG
Enterprises LTD (6) ................................................ 5,000
Bear Stearns Securities Corporation f.b.o. Pogue
Capital International Ltd. (6) ..................................... 5,000
Clarion Offshore Fund, Ltd. ........................................ 4,000
c/o Citco Fund Services
Corporate Center
West Bay Road
Leeward One - 2nd Floor
P.O. Box 31106 SMB
Grand Cayman, Cayman Islands
British West Indies
Bear Stearns Securities Corporation f.b.o. Closefire Ltd. (6) ...... 2,000
Bear Stearns Securities Corporation f.b.o. Hapna
Foundation (6) ..................................................... 2,000
Bear Stearns Securities Corporation f.b.o. Charles
Kleinow (6) ........................................................ 2,000
Bear Stearns Securities Corporation f.b.o. Niloufar
Pahlavi (6) ........................................................ 2,000
Bear Stearns Securities Corporation f.b.o. Barbara
Tiffany (6) ........................................................ 2,000
</TABLE>
- ---------------
(1) The address for the above named entity is: 50 California Street, Suite
2700, San Francisco, California 94111.
(2) The address for the above named entities is: 777 Mariners Island Blvd.,
San Mateo, California 94404.
(3) The address for the above named entities is: 787 7th Avenue, New York,
New York 10019.
(4) The address for the above named entities is: c/o Weiss, Peck and Greer,
LLC, 1 New York Plaza, New York, New York 10004.
(5) The address for the above named entities is: 125 High Street, 29th Floor,
Boston, Massachusetts 02110.
(6) The address for the above named individuals is Bear Stearns Securities
Corporation, One Metrotech Center North, Brooklyn, New York 11201, Attn:
Mr. Anthony Dejohn, Specialist - Clearing 5th Floor.
-21-
<PAGE> 22
SUMMARY INSTRUCTION SHEET FOR PURCHASER
(to be read in conjunction with the entire
Purchase Agreement which follows)
A. Complete the following items on BOTH Purchase Agreements:
1. Page 20 - Signature:
(i) Name of Purchaser (Individual or Institution)
(ii) Name of Individual representing Purchaser (if an
Institution)
(iii) Title of Individual representing Purchaser (if an
Institution)
(iv) Signature of Individual Purchaser or Individual
representing Purchaser
2. Appendix I - Stock Certificate Questionnaire:
Provide the information requested by the Stock Certificate
Questionnaire.
Appendix I - Registration Statement Questionnaire:
Provide the information requested by the Registration
Statement Questionnaire.
3. Return BOTH properly completed and signed Purchase Agreements
including the properly completed Appendix I to:
Vector Securities International, Inc.
Suite 350
1751 Lake Cook Road
Deerfield, Illinois 60015
Attn: Marina Bozilenko
Facsimile: (847) 940-0774
B. Instructions regarding the transfer of funds for the purchase of
Shares will be sent by facsimile to the Purchaser by the Placement
Agent at a later date.
C. Upon the resale of the Shares by the Purchasers after the Registration
Statement covering the Shares is effective, as described in the
Purchase Agreement, the Purchaser:
1
<PAGE> 23
(i) must deliver a current prospectus of the Company to
the buyer (prospectuses must be obtained from the
Company at the Purchaser's request); and
(ii) must send a letter in the form of Appendix II
to the Company so that the Shares may be properly
transferred.
2
<PAGE> 24
Appendix I
(one of two)
STOCK CERTIFICATE QUESTIONNAIRE
Pursuant to Section 3 of the Agreement, please provide us with the
following information:
1. The exact name that your Shares are to be registered in (this is the
name that will appear on your stock certificate(s)). You may use a
nominee name if appropriate:
_______________________
2. The relationship between the Purchaser of the Shares and the
Registered Holder listed in response to item 1 above:
3. The mailing address of the Registered Holder listed in
response to item 1 above:
______________________
______________________
______________________
______________________
4. The Social Security Number or Tax Identification Number of the
Registered Holder listed in response to item 1 above:
______________________
C-1
<PAGE> 25
Appendix I
(two of two)
REGISTRATION STATEMENT QUESTIONNAIRE
In connection with the preparation of the Registration Statement,
please provide us with the following information:
1. Pursuant to the "Selling Shareholders" section of the
Registration Statement, please state your or your organization's name exactly
as it should appear in the Registration Statement:
2. Please provide the number of shares that you or your
organization will own immediately after Closing, including those Shares
purchased by you or your organization pursuant to this Purchase Agreement and
those shares purchased by you or your organization through other transactions:
3. Have you or your organization had any position, office or
other material relationship within the past three years with the Company or its
affiliates?
_____ Yes _____ No
If yes, please indicate the nature of any such relationships
below:
________________________________________
________________________________________
________________________________________
C-2
<PAGE> 26
APPENDIX II
Attention:
PURCHASER'S CERTIFICATE OF SUBSEQUENT SALE
The undersigned, [an officer of, or other person duly
authorized by] _______________________________________________
[fill in official name of individual or institution] hereby certifies
that he/she [said institution] is the Purchaser of the shares evidenced by
the attached certificate, and as such, sold such shares on __________________
[date]
in accordance with Registration Statement number _________________________
[fill in the number of or
__________________________________________, the Securities Act of 1933, as
otherwise identify Registration Statement]
amended, and any applicable state securities or blue sky laws and
the requirement of delivering a current prospectus by the
Company has been complied with in connection with such sale.
Print or Type:
Name of Purchaser
(Individual or
Institution): ______________________
Name of Individual
representing
Purchaser (if an
Institution) ______________________
Title of Individual
representing
Purchaser (if an
Institution): ______________________
Signature by:
Individual Purchaser
or Individual repre-
senting Purchaser: ______________________
C-3
<PAGE> 1
EXHIBIT 11.1
Computation of proforma net loss per share
<PAGE> 2
EXHIBIT 11.1
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1996 1995 1994
-----------------------------------------
<S> <C> <C>
Net loss ($16,775,605) ($8,020,547) ($8,561,487)
============ =========== ===========
Calculation of shares used in computing net
loss per share:
Weighted average common shares
outstanding used in calculating net loss
per share in accordance with generally
accepted accounting principles 11,451,334 2,498,295 1,422,478
Adjustments to reflect certain
requirements of the SEC:
Effects of SAB 83 224,839 332,175
Conversion of preferred stock-
weighted average shares 5,994,416 5,018,525
------------ ----------- -----------
Shares used in computing net loss per share 11,451,334 8,717,550 6,773,178
============ =========== ===========
Net loss per share ($1.46) ($0.92) ($1.26)
============ =========== ===========
</TABLE>
<PAGE> 1
Exhibit 13.1
1996 Annual Report to Shareholders (to be
deemed filed only to the extent required by the
instructions to exhibits for reports on Form 10-K).
<PAGE> 2
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
o Overview
Since its inception in October 1989, DepoTech Corporation (the "Company") has
devoted substantially all of its resources to the development of its potential
products. To date, the Company has not received any revenues from the sale of
products. The Company has funded its development programs primarily from
equity-derived working capital and through strategic alliances with other
companies. The Company has been unprofitable since its inception and expects
to incur additional operating losses over at least the next 18 months. As of
December 31, 1996, the Company's accumulated deficit was approximately $42.4
million.
The following discussion is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Annual Report, including information under "Risk and Uncertainties."
o Results of Operations
The Company had total revenues of $4.4 million for the year ended December 31,
1996 compared to $6.8 million for 1995 and $0.6 million for 1994. Total
revenues were principally attributed to the Company's collaborative agreement
with Chiron. Total revenues were primarily derived from reimbursement of 50%
of the clinical trial and manufacturing scale-up expenses for the Company's
lead product, DepoCyt, under the Chiron agreement. In addition, Chiron
reimbursed DepoTech for 100% of pre-clinical development costs for DepoIGF-1
and feasibility studies performed on their behalf. Total revenues in 1995
included a one-time marketing rights fee and reimbursement of prior year
clinical trial expenses for DepoCyt totaling $3.5 million, earned by the
Company upon achievement of a development milestone under the Chiron agreement.
Revenues from the reimbursement of clinical trial expenses from prior years and
the marketing rights fee were one time payments which will not re-occur in
future periods. Revenues may fluctuate from year to year depending on the
level of clinical and development activity for projects under collaborative
agreements with Chiron and other companies and the achievement of future
milestones.
Research and development expenses increased to $18.0 million for the year ended
December 31, 1996, from $12.7 million in 1995 and $7.4 million in 1994. Factors
contributing to these increases include substantial expansion in staff,
research and process development supplies, payments to clinical sites, and the
expansion of manufacturing and laboratory facilities and equipment depreciation
expense in support of clinical trials and manufacturing scale-up of products
under development. During 1996, DepoTech completed a Phase III clinical trial
for DepoCyt in the solid tumor indication and a Phase I clinical trial of
DepoAmikacin. The Company has Phase III clinical trials in progress for two
other indications of DepoCyt and has begun a Phase IV clinical trial. Other
pre-clinical development programs included DepoMorphine and DepoIGF-1. In
addition, the Company is evaluating the feasibility of developing several early
stage compounds. Research and development expenses are expected to continue to
increase in 1997 as a result of: (1) on-going or new clinical trials for
DepoCyt, DepoMorphine and DepoAmikacin; (2) manufacturing scale-up for
DepoMorphine and (3) preclinical development and feasibility efforts associated
with other potential DepoFoam products.
General and administrative expenses increased to $4.1 million during 1996 from
$2.8 million in 1995 and $1.9 million in 1994. The increases were primarily
due to expansion in administrative staffing, higher facility expenses and costs
associated with being a public company. Included in general and administrative
expenses for 1996 were 50% of the pre-launch expenses, or $0.6 million,
incurred for DepoCyt prior to the onset of any product revenue. Under the
collaborative agreement with Chiron, the Company is obligated to share in the
funding of these expenses. DepoCyt sales and marketing expenses are expected
to increase significantly in 1997 in anticipation of the possible launch of
DepoCyt. Other general and administrative expenses are expected to increase
modestly during 1997.
Interest income was $1.7 million for the year ended December 31, 1996 compared
to $1.1 million in 1995 and $0.3 million in 1994. The increases were
principally due to higher average cash investment balances and increases in
available market interest rates. Interest expense was $0.8 million for the
year ended December 31, 1996 compared to $0.4 million in 1995 and $0.1 million
in 1994. The increases in interest expense were due to higher balances
outstanding for obligations under capital leases and a note payable.
12
<PAGE> 3
o Liquidity and Capital Resources
Since its inception, DepoTech has financed its operations primarily through
public and private placements of equity securities, which provided aggregate
net proceeds of approximately $67.5 million through December 31, 1996, and
through capital equipment lease financing. In October 1995, the Company
completed an initial public offering ("IPO") of common stock which raised net
proceeds of $38.1 million. In January 1997, the Company completed a private
placement of newly issued shares of common stock which raised net proceeds of
$19.1 million.
Working capital decreased to $14.9 million as of December 31, 1996 compared to
$35.4 million as of December 31, 1995. The decrease in working capital in 1996
was primarily due to cash used to fund operations of $15.0 million. As of
December 31, 1996, DepoTech had cash, cash equivalents and short-term
investments totaling $18.2 million. During 1996, the Company entered into an
agreement to expand an existing leaseline from $2.6 million to $5.1 million.
The incremental borrowing amount of $2.5 million was used principally to
finance certain tenant improvement and equipment costs incurred in 1996. In May
1996, the Company signed a bank credit facility for $9.0 million to finance
future capital equipment purchases, of which $2.2 million was utilized through
December 31, 1996. The Company believes the impact of inflation on its
business activities has not been significant to date.
Through December 31, 1996, the Company has invested an aggregate of $19.8
million in leasehold improvements and manufacturing, laboratory and office
equipment, of which $11.4 million has been funded through capital leases or
bank credit facilities. The Company intends to continue to fund capital
expenditures through external financing supplemented by internal cash resources
where appropriate. In September 1995, the Company occupied the initial phase
(50,000 square feet) of an 82,000 square foot build-to-suit facility housing
its administrative, research and clinical activities. DepoTech began paying
rent in mid-March 1996 for the remaining space (32,000 square feet) which is
intended to provide future manufacturing and process development capabilities.
The minimum rental commitment for this facility ranges from approximately $2.1
million to $4.3 million per year, over 20 years, based upon pre-established
annual rent increases. The Company is installing a manufacturing line in this
facility to support clinical and commercial production of DepoFoam products
under development. The cost of equipment and tenant improvement expenses are
estimated to total approximately $8.1 million through 1997. DepoTech intends
to finance such expenditures through new and existing bank credit facilities.
The Company has a right of first refusal and right of first offer to purchase
land located adjacent to its headquarters which must be exercised on or before
October 15, 1997. At present, the Company has not made a decision concerning
the exercise of such option.
The Company's operations to date have consumed substantial amounts of cash,
which is expected to continue over the foreseeable future. The amount of net
losses and the time required for the Company to achieve profitability are
highly uncertain. There can be no assurance that the Company will be able to
achieve profitability at all or on a sustained basis. It is the Company's
intention to fund product research and development, manufacturing, and sales
and marketing costs through additional collaborative relationships with
suitable corporate partners. There can be no assurance that the Company will
enter into collaborative arrangements with corporate partners or that any
agreements resulting from these discussions will successfully reduce the
Company's funding requirements. Additional equity or debt financing will be
required, and there can be no assurance that these funds will be available on
terms favorable to the Company, if at all. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate one or
more of its product development programs or obtain funds through arrangements
with collaborative partners or others that may require the Company to
relinquish rights to certain of its technologies, product candidates or
products that the Company would not otherwise relinquish.
DepoTech anticipates that its existing available cash, cash equivalents and
short-term investments, committed future contract revenue, projected funding
from equipment leases and interest income will be adequate to satisfy its
capital requirements and fund operating losses into 1998. The Company's future
capital requirements will depend on many factors, including continued
scientific progress in its products and process development programs, progress
with preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in filing and maintaining
patents, competing technological and market developments, changes in existing
collaborative relationships, the ability of the Company to establish
development arrangements, the cost of manufacturing scale-up, and the
establishment of effective sales and marketing arrangements.
13
<PAGE> 4
SELECTED FINANCIAL DATA
DepoTech Corporation
<TABLE>
<CAPTION>
Years Ended December 31,
(dollars, except share amounts) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues $4,391,024 $6,825,784 $582,120 $69,500 $15,000
Total expenses 22,039,072 15,525,785 9,307,676 4,058,419 1,175,662
Net loss (16,775,605) (8,020,547) (8,561,487) (3,896,906) (1,209,506)
Net loss per share (1.46) (0.92) (1.26) (0.78) (0.52)
Shares used in computing
net loss per share 11,451,334 8,717,550 6,773,178 4,989,332 2,326,059
Balance Sheet Data:
Cash, cash equivalents and
short-term investments 18,198,097 38,661,534 9,983,046 7,519,096 6,095,987
Total assets 37,608,405 48,977,573 15,346,654 10,107,087 6,333,479
Long-term liabilities 7,272,025 3,218,957 2,618,664 408,538 90,148
Shareholders' equity 25,229,234 41,505,530 10,903,253 8,702,521 6,170,556
</TABLE>
15
<PAGE> 5
STATEMENTS OF OPERATIONS
DepoTech Corporation
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Contract revenue $ 4,391,024 $ 5,825,784 $ 582,120
Marketing rights fee - 1,000,000 -
------------ ----------- -----------
Total revenues 4,391,024 6,825,784 582,120
Costs and expenses:
Research and development 17,951,636 12,699,247 7,426,815
General and administration 4,087,436 2,826,538 1,880,861
------------ ----------- -----------
Total costs and expenses 22,039,072 15,525,785 9,307,676
------------ ----------- -----------
Loss from operations (17,648,048) (8,700,001) (8,725,556)
Interest income 1,659,852 1,084,244 286,984
Interest expense (787,409) (404,790) (122,915)
------------ ----------- -----------
Net loss $(16,775,605) $(8,020,547) $(8,561,487)
============ =========== ===========
Net loss per share $(1.46) $(0.92) $(1.26)
============ =========== ===========
Shares used in computing net loss per share 11,451,334 8,717,550 6,773,178
============ =========== ===========
</TABLE>
See accompanying notes.
16
<PAGE> 6
BALANCE SHEETS
DepoTech Corporation
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,966,626 $ 5,883,911
Short-term investments 16,231,471 32,777,623
Accounts receivable from Chiron collaboration 614,580 400,000
Other current assets 1,160,394 566,924
----------- -----------
Total current assets 19,973,071 39,628,458
Property and equipment, net 16,851,574 8,610,978
Restricted cash 289,023 420,860
Deposits and other assets 494,737 317,277
----------- -----------
Total assets $37,608,405 $48,977,573
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,633,756 $ 1,741,724
Current portion of note payable 493,481 -
Other accrued liabilities 939,331 705,868
Current portion of obligations under capital leases and loans 2,040,578 1,805,494
----------- -----------
Total current liabilities 5,107,146 4,253,086
Deferred revenue 54,839 -
Obligations under capital leases, less current portion 4,129,750 2,831,010
Note payable, less current portion 1,709,813 -
Deferred rent 1,377,623 387,947
Commitments
SHAREHOLDERS' EQUITY
Common stock, no par value; 30,000,000 shares authorized; 11,543,816 and
11,285,630 shares issued and outstanding
at December 31, 1996 and 1995,respectively 67,797,617 67,133,738
Deferred compensation related to stock options (161,960) (214,448)
Unrealized (loss) gain on short-term investments (10,886) 206,172
Accumulated deficit (42,395,537) (25,619,932)
----------- -----------
Total shareholders' equity 25,229,234 41,505,530
----------- -----------
Total liabilities and shareholders' equity $37,608,405 $48,977,573
=========== ===========
</TABLE>
See accompanying notes.
17
<PAGE> 7
STATEMENTS OF CASH FLOWS
DepoTech Corporation
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(16,775,605) $ (8,020,547) $ (8,561,487)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 1,512,151 837,168 582,939
Deferred revenue from Chiron collaboration - (1,000,000) 1,000,000
Amortization of deferred compensation 52,488 47,990 -
Deferred rent 989,676 275,602 7,173
Deferred revenue 54,839 - -
Issuance of note payable in exchange for acquired technology - - 231,938
Forgiveness of employee notes receivable 39,283 56,333 128,508
Changes in operating assets and liabilities:
Accounts receivable from Chiron collaboration (214,580) (156,123) (243,877)
Other current assets (632,753) (494,873) 22,662
Deposits and other assets (196,931) (115,614) (162,064)
Accounts payable and other accrued liabilities 125,495 1,376,791 592,537
------------ ------------ ------------
Net cash used by operating activities (15,045,937) (7,193,273) (6,401,671)
INVESTING ACTIVITIES
Purchases of short-term investments (17,244,027) (38,410,705) (12,228,388)
Proceeds from sale or maturities of short-term investments 33,573,121 11,171,032 6,896,610
Purchases of property and equipment (6,395,815) (1,419,044) (1,362,231)
Restricted cash 131,837 16,740 166,651
------------ ------------ ------------
Net cash provided (used) by investing activities 10,065,116 (28,641,977) (6,527,358)
FINANCING ACTIVITIES
Repayment of capital lease obligations (1,803,637) (831,262) (300,842)
Proceeds from notes payable 2,203,294 - -
Proceeds from issuance of common stock, net 663,879 38,163,652 69,395
Proceeds from issuances of convertible preferred stock, net - - 10,678,720
Repayment of facilities payable - (237,569) (413,000)
Proceeds from bank borrowing - 4,000,000 -
Repayment of bank borrowing - (4,000,000) -
------------ ------------ ------------
Net cash provided by financing activities 1,063,536 37,094,821 10,034,273
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (3,917,285) 1,259,571 (2,894,756)
Cash and cash equivalents at the beginning of year 5,883,911 4,624,340 7,519,096
------------ ------------ ------------
Cash and cash equivalents at the end of year 1,966,626 5,883,911 4,624,340
Short-term investments at the end of year 16,231,471 32,777,623 5,358,706
------------ ------------ ------------
Cash, cash equivalents and short-term investments at
the end of year $ 18,198,097 $ 38,661,534 $ 9,983,046
============ ============ ============
SUPPLEMENTAL INFORMATION
Property and equipment acquired through capital leases
and loans $ 3,337,461 $ 3,677,018 $ 1,661,036
============ ============ ============
Facilities payable recorded for leasehold improvements $ - $ - $ 237,569
============ ============ ============
Issuance of common stock in exchange for note payable $ - $ 231,938 $ -
============ ============ ============
Interest paid $ 787,409 $ 404,790 $ 122,915
============ ============ ============
</TABLE>
See accompanying notes.
18
<PAGE> 8
STATEMENTS OF SHAREHOLDERS' EQUITY
DepoTech Corporation
<TABLE>
<CAPTION>
Deferred
Convertible Notes Compensation Unrealized
Preferred Stock Common Stock Receivable Related Gain Total
------------------- ------------------------- from to Stock (Loss) on Accumulated Shareholders'
Shares Amount Shares Amount Shareholders Options Investments Deficit Equity
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1994 4,379,101 $14,008,505 1,309,111 $13,091 $(9,600) $- $ - $ (5,309,475) $ 8,702,521
Issuance of
common stock - - 222,152 69,395 - - - - 69,395
Issuance of
convertible
preferred stock 1,603,890 10,656,296 - - - - - - 10,656,296
Accretion on
convertible
preferred stock - 1,896,029 - - - - - (1,896,029) -
Forgiveness of
notes receivable
from shareholders - - - - 9,600 - - - 9,600
Unrealized gain
on investments - - - - - - 26,928 - 26,928
Net loss - - - - - - - (8,561,487) (8,561,487)
--------- ----------- --------- ------- ------ -- -------- ------------ -----------
Balance at
December 31, 1994 5,982,991 26,560,830 1,531,263 82,486 - - 26,928 (15,766,991) 10,903,253
Issuance of
common stock - - 78,908 36,306 - - - - 36,306
Exercise of warrants - - 242,468 308,654 - - - - 308,654
Deferred compensation
related to issuance
of stock options - - - 262,438 - (262,438) - - -
Amortization of
deferred compensation - - - - - 47,990 - - 47,990
Accretion on convertible
preferred stock - 1,832,394 - - - - - (1,832,394) -
Unrealized gain
on investments - - - - - - 179,244 - 179,244
Issuance of common
stock upon initial
public offering, net - - 3,450,000 38,050,630 - - - - 38,050,630
Conversion of
convertible preferred
stock upon initial
public offering (5,982,991) (28,393,224) 5,982,991 28,393,224 - - - - -
Net loss - - - - - - - (8,020,547) (8,020,547)
--------- ----------- --------- ------- ------ -- -------- ------------ -----------
Balance at
December 31, 1995 - - 11,285,630 67,133,738 - (214,448) 206,172 (25,619,932) 41,505,530
Issuance of
common stock - - 258,186 663,879 - - - - 663,879
Amortization of
deferred compensation - - - - - 52,488 - - 52,488
Unrealized loss
on investments - - - - - - (217,058) - (217,058)
Net loss - - - - - - - (16,775,605) (16,775,605)
--------- ----------- --------- ------- ------ -- -------- ------------ -----------
Balance at
December 31, 1996 - $ - 11,543,816 $67,797,617 $ - $(161,960) $(10,886) $(42,395,537) $25,229,234
========= =========== ========== =========== ====== ========= ======== ============ ===========
</TABLE>
See accompanying notes.
19
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
DepoTech Corporation
December 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
o Organization and Business Activities
DepoTech Corporation (the "Company") was incorporated in California on October
30, 1989. The Company is a drug delivery company engaged in the development and
manufacture of sustained-release therapeutic products based on DepoFoam, an
injectable, depot drug delivery technology.
o Cash, Cash Equivalents and Short-Term Investments
The Company invests its excess cash in deposit accounts, money market accounts,
commercial paper and U.S. Government securities. The Company has established
guidelines relative to diversification and maturities that maintain safety and
an adequate level of liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends in yields and interest rates.
The Company considers all highly liquid investments with a maturity of three
months or less from the date of purchase that are readily convertible into cash
to be cash equivalents. Short-term investments are classified as
available-for-sale, and are carried at market value, in accordance with
Financial Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The unrealized gain or loss on such
investments is reported as a separate component of shareholders' equity.
o Property and Equipment
Property and equipment consist primarily of manufacturing, laboratory and
office equipment and leasehold improvements and are stated at cost. Property
and equipment under capital leases are recorded at the present value of the
minimum lease payments. Depreciation and amortization are calculated using the
straight-line method over the shorter of the estimated useful life of the
assets (ranging from three to fifteen years) or the lease term.
o Restricted Cash
Restricted cash consists of certificates of deposit maintained as collateral
for letters of credit securing certain lease agreements.
o Patent Costs
Deposits and other assets consist primarily of patent and trademark filing
costs totaling approximately $453,000 and $299,000 at December 31, 1996 and
1995, respectively, which are amortized over the estimated economic life of the
patents or trademarks.
o Deferred Rent
Rent expense is recognized on a straight-line basis over the term of the lease.
Accordingly, rent expense incurred in excess of rent paid is accrued and
recorded as deferred rent in the accompanying balance sheets.
o Contract Revenues and Expenses
Contract revenue is recorded as earned based on the performance requirements of
the contract. Research and development costs are expensed as incurred.
o Accounting Standard on Impairment of Long-Lived Assets
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("FAS 121"), regarding the
impairment of long-lived assets, identifiable intangibles and goodwill related
to those assets. The adoption of FAS 121 had no effect on the accompanying
financial statements.
o Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
20
<PAGE> 10
o Net Loss Per Share
For periods subsequent to the completion of the Company's initial public
offering ("IPO") in October 1995, net loss per share is computed using the
weighted average number of common shares outstanding. Common share equivalents
have not been included in computing net loss per share since the effect would
be antidilutive.
Prior to the IPO, net loss per share is computed using the weighted average
number of common shares outstanding during the period. Pursuant to the
requirements of the Securities and Exchange Commission ("SEC"), common stock
issued by the Company during the twelve months immediately preceding the IPO,
plus the number of common equivalent shares which were granted or issued during
the same period pursuant to the grant or issuance of stock options and
warrants, have been included in the calculation of the shares used in computing
net loss per share as if these shares were outstanding for all periods
presented using the treasury stock method. In addition, pursuant to SEC
policy, the calculation of the shares used in computing net loss per share also
includes convertible preferred shares which converted into common shares
immediately prior to the closing of the IPO as if they were converted into
common shares as of the original dates of issuance.
o Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
NOTE 2 - CHIRON COLLABORATION
In March 1994, the Company entered into a collaboration agreement ("the
Collaboration Agreement") with Chiron Corporation ("Chiron") to develop and
commercialize sustained release formulations of selected generic products and
certain Chiron proprietary products using the Company's drug delivery
technology. Under the agreement, Chiron purchased 400,000 shares of the
Company's Series C preferred stock for $6.25 per share, for an aggregate
consideration of $2.5 million, and a warrant to purchase 365,000 shares of
Series C preferred stock at an exercise price of $6.25 per share for $1
million. The warrant was terminated and converted into a marketing rights fee
to the Company upon the achievement of a development milestone in January 1995.
The Collaboration Agreement grants Chiron rights to market and sell the
Company's initial product, DepoCyt(TM), in the United States, Canada and Europe
(the "Territory"). Phase III clinical trial costs of DepoCyt incurred
subsequent to June 1993 will be shared equally by Chiron and the Company. Any
additional clinical trials required in Europe will be funded entirely by
Chiron. Canadian registration expenses will be funded by Chiron. The Company
will manufacture DepoCyt in the Territory, Chiron will market, sell and
distribute the product in the Territory, and the parties will share all profits
equally. Chiron will make additional payments to the Company upon achievement
of certain milestones in the development of DepoCyt. Chiron also has a right
of first refusal to obtain a license to alternate DepoFoam formulations of
cytarabine under terms and conditions to be negotiated in the future.
Reimbursable clinical and manufacturing scale-up costs for DepoCyt incurred by
the Company totaled $3,194,312, $2,541,847 and $1,790,460 for the years ended
December 31, 1996, 1995 and 1994, respectively. The cumulative amount due
through December 31, 1994 became billable and was recognized as contract
revenue upon the achievement of a development milestone in January 1995.
The Collaboration Agreement also provides for the joint development of DepoFoam
formulations of certain compounds proprietary to Chiron ("Chiron Products").
Chiron must fund one feasibility program for a Chiron Product per year or lose
its option to develop DepoFoam formulations of additional Chiron proprietary
compounds. Through 1996, the Company has completed feasibility studies on two
Chiron proprietary proteins, one of which has been selected for further
preclinical development. A third feasibility study is on-going. The agreement
provides that Chiron will pay the Company for its feasibility efforts, and that
Chiron will be responsible for all development costs thereafter. The agreement
also provides for Chiron to make payments to the Company upon achievement of
certain development milestones for the Chiron Products. Chiron will have
exclusive, worldwide distribution rights to all Chiron Products and will
manufacture the bulk unencapsulated drug. The Company will then encapsulate
the bulk drug in DepoFoam creating the Chiron Products, and Chiron will market,
sell and distribute the Chiron Products. Chiron will compensate the Company
based on its manufacturing costs, including a manufacturing profit, and a
percentage of Chiron's net sales of the Chiron Products.
Both the Company and Chiron have the ability to terminate a portion or all of
the collaboration at certain intervals and with advance notice. In addition,
Chiron has the ability to terminate the development of a Chiron Product with a
limited amount of advance notice.
21
<PAGE> 11
NOTE 3 - SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale short-term investments:
<TABLE>
<CAPTION>
Gross Gross
DECEMBER 31, 1996 Cost Unrealized Gains Unrealized Losses Estimated Fair Value
<S> <C> <C> <C> <C>
U.S. government securities $12,208,677 $ - $ (13,986) $ 12,194,691
Certificates of deposit 498,940 1,020 - 499,960
Corporate obligations 3,534,740 2,080 - 3,536,820
----------- --------- --------- ------------
$16,242,357 $ 3,100 $ (13,986) $ 16,231,471
----------- --------- --------- ------------
DECEMBER 31, 1995
U.S. government securities $32,072,511 $ 205,047 $ - $ 32,277,558
Certificates of deposit 498,940 1,125 - 500,065
----------- --------- --------- ------------
$32,571,451 $ 206,172 $ - $ 32,777,623
=========== ========= ========== =============
</TABLE>
The amortized cost and estimated fair value of short-term investments at
December 31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Cost Estimated Fair Value
<S> <C> <C>
Due in one year or less $ 8,879,965 $ 8,882,591
Due after one year through three years 7,362,392 7,348,880
----------- -----------
$16,242,357 $16,231,471
=========== ===========
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1996 1995
Manufacturing, laboratory and office equipment $12,254,274 $ 7,184,905
Leasehold improvements 2,041,001 1,989,257
Leasehold improvements and manufacturing equipment under construction 5,552,015 939,853
----------- ------------
19,847,290 10,114,015
Less accumulated depreciation and amortization (2,995,716) (1,503,037)
----------- ------------
$16,851,574 $ 8,610,978
=========== ============
</TABLE>
NOTE 5 - TECHNOLOGY ASSIGNMENT
In 1994, in connection with an assignment agreement under which the Company was
assigned exclusive rights to certain intellectual property, the Company issued
108,029 shares of common stock and a warrant to purchase 154,327 shares of
preferred stock at $2.00 per share. The Company also issued a non-interest
bearing note payable in the amount of $231,938, which was expensed as acquired
in-process research and development. Upon the completion of the IPO, the
warrant was exercised and the note and cash were exchanged for common stock.
Royalties or a percentage of royalties will be paid to the assignor on net
revenues in connection with the sale of products incorporating the acquired
intellectual property or received by the Company from licensees.
22
<PAGE> 12
The assignor has the right to terminate the agreement or to convert the
exclusive nature of the rights granted under the agreement into a nonexclusive
license in the event that the Company does not make certain minimum annual
payments or upon certain other events.
NOTE 6 - COMMITMENTS
o Lease Obligations
The Company leases its facilities and certain equipment under operating and
capital leases. Provisions of the facilities leases provide for abatement of
rent during certain periods and escalating rent payments during the lease terms
which extend through August 1, 2015. Included in restricted cash and deposits
and other assets are $300,709 and $449,107 related to these agreements at
December 31, 1996 and 1995, respectively. Annual future minimum lease payments
as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Operating Leases Capital Leases
<S> <C> <C>
1997 $3,128,085 $ 2,661,423
1998 3,228,701 2,409,226
1999 3,312,314 1,628,090
2000 3,432,296 631,866
2001 3,560,700 -
Thereafter 52,360,160 -
---------- -----------
Total $69,022,256 7,330,605
==========
Less amount representing interest (1,160,277)
-----------
Present value of net minimum payments 6,170,328
Less current portion (2,040,578)
-----------
Amounts due after one year $ 4,129,750
===========
</TABLE>
The Company subleased certain of its existing laboratory and administrative
facilities. Rental income from the sublease agreement over the next four years
will range from $223,000 to $290,000 per year.
Assets acquired under capital leases consist of manufacturing, laboratory and
office equipment, and leasehold improvements with an aggregate cost of
approximately $9.1 million and $5.8 million at December 31, 1996 and 1995,
respectively. Accumulated amortization of assets acquired under these
arrangements is included in total depreciation and amortization.
Rent expense was approximately $3,895,000, $1,467,000 and $583,000 during the
years ended December 31, 1996, 1995 and 1994, respectively.
o Note Payable
During June 1996, the Company established a credit line with a bank for
borrowing up to $9 million to finance certain capital equipment expenditures.
Borrowing under the credit line bears interest at a floating rate equal to
prime plus .5% (8.75% at December 31, 1996) on the outstanding balance. The
credit line expires on June 30, 2001 and all borrowings are secured by the
capital equipment financed. At December 31, 1996, approximately $6,797,000
remains available for future equipment acquisitions. Annual future minimum
payments as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 650,074
1998 650,074
1999 650,075
2000 650,075
----------
Total 2,600,298
Less amount representing interest (397,004)
----------
Present value of net minimum payments 2,203,294
Less current portion (493,481)
----------
Amounts due after one year $1,709,813
==========
</TABLE>
23
<PAGE> 13
NOTE 7 - SHAREHOLDERS' EQUITY
o Stock Purchase Warrants
In connection with various stock purchase or lease financing transactions, the
Company has issued warrants to purchase 42,354, 22,400 and 503,287 shares of
common stock at prices of $2.75, $6.25 and $7.00 per share, respectively. The
warrants are generally exercisable through 2001, and these warrants remain
outstanding at December 31, 1996.
o Deferred Compensation
Pursuant to certain provisions of the SEC regulations, the Company recorded and
is amortizing over the related vesting periods deferred compensation
representing the difference between the exercise price of stock options granted
and the deemed fair value (for accounting purposes) of the Company's common
stock at the date of grant. Stock options generally vest over four to five
years. Shares included in the computation of deferred compensation include
option grants to employees and officers of the Company from July 1994 through
June 1995.
o Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The Company's 1995 Stock Option/Stock Issuance Plan has authorized the grant of
options to employees, directors and consultants of the Company for up to
2,000,000 shares of the Company's common stock. No options granted under the
Plan have a term in excess of ten years.
Pro forma information regarding net income and earnings per share is required
by FAS 123, and has been determined as if the Company has accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 6.5%
and 6.1%; dividend yields of 0%; volatility factors of the expected market
price of the Company's common stock of 73% and 58%; and a weighted-average life
of the option of 4 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net loss for the years ended December 31, 1996 and 1995 reflect increases
of approximately $307,000 and $55,000, respectively. The pro forma net loss
per share for the years ended December 31, 1996 and 1995 are ($1.49) and
($0.93) per share, respectively.
The results above are not likely to be representative of the effects of
applying FAS 123 on reported net income or loss for future years as these
amounts reflect the expense for only one or two years vesting.
24
<PAGE> 14
A summary of the Company's stock option activity, and related information for
the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 1,102,439 $ 2.02 917,314 $ .68 758,850 $ .31
Granted 467,744 19.77 258,300 6.54 389,650 1.32
Exercised (209,848) .68 (48,908) .75 (222,152) .31
Forfeited (64,472) 14.46 (24,267) 1.84 (9,034) .71
----------------------- ----------------------- --------------------
Outstanding-end of year 1,295,863 $ 8.03 1,102,439 $2.02 917,314 $ .68
======================= ======================= ====================
Exercisable at end of year 547,407 415,790 230,425
Weighted average fair value of
options granted during the year $ 9.69 $2.50
</TABLE>
A summary of the Company's stock options outstanding at December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ 0.10 to $ 4.00 749,017 6.9 years $ 1.13 463,960 $ 0.81
$ 7.00 to $12.00 84,633 8.6 years $ 8.30 27,718 $ 9.01
$15.25 to $19.625 394,963 9.5 years $18.30 47,389 $18.64
$23.50 to $25.125 67,250 9.3 years $24.32 8,340 $23.52
</TABLE>
The weighted-average remaining contractual life of those options is 7.9 years.
At December 31, 1996, options for 222,147 shares were available for future
grant.
o Employee Stock Purchase Plan
In October 1995, the Company adopted an Employee Stock Purchase Plan ("the
ESPP") whereby employees, at their option, can purchase shares of Company
common stock through payroll deductions at the lower of 85% of fair market
value on the ESPP offering date or on certain other predetermined exercise
dates. The Company has reserved 250,000 shares of common stock for issuance
under the ESPP, of which 48,338 shares have been issued as of December 31,
1996.
25
<PAGE> 15
NOTE 8 - INCOME TAXES
At December 31, 1996, the Company has federal and California tax net operating
loss carryforwards of approximately $39,874,000 and $7,667,000, respectively.
The difference between the federal and California tax loss carryforwards is
primarily attributable to the capitalization of research and development
expenses for California franchise tax purposes and the fifty-percent limitation
on California loss carryforwards.
The federal and California tax loss carryforwards will begin expiring in 2005
and 1997, respectively, unless previously utilized. The Company also has
federal and California research and development tax credit carryforwards
totaling $1,086,000 and $557,000, respectively, which will being expiring in
2005 unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss and credit carryforwards may be limited if a
cumulative change in ownership of more than 50% occurs within any three year
period.
Significant components of the Company's deferred tax assets and liabilities are
shown below. A valuation allowance of $17,622,000, of which $7,722,000 is
related to 1996, has been recognized to offset the deferred tax assets as
realization of such assets is uncertain.
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 14,416,000 $ 8,192,000
Research and development credit carryforwards 1,448,000 912,000
Capitalized research expenses 1,713,000 826,000
Other, net 558,000 272,000
------------ -----------
Net deferred tax assets 18,135,000 10,202,000
Valuation allowance for deferred tax assets (17,622,000) (9,900,000)
------------ -----------
Total deferred tax assets 513,000 302,000
Deferred tax liabilities:
Depreciation (513,000) (302,000)
------------ -----------
Net deferred tax assets $ - $ -
============= ===========
</TABLE>
Approximately $974,000 of the valuation allowance for deferred tax assets
relates to stock option deductions which, when recognized, will be allocated
directly to common stock.
NOTE 9 - SUBSEQUENT EVENT
On January 3, 1997, the Company completed the private placement of 1,500,000
newly issued shares of common stock at $13.50 per share raising net proceeds
totaling $19.1 million.
26
<PAGE> 16
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
The Board of Directors and Shareholders
DepoTech Corporation
We have audited the accompanying balance sheets of DepoTech Corporation as of
December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DepoTech Corporation at
December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Diego, California
January 29, 1997
27
<PAGE> 17
CORPORATE INFORMATION
DepoTech Corporation
BOARD OF DIRECTORS
o Chairman of the Board
Fred A. Middleton
General Partner
Sanderling Ventures
o Directors
Roger C. Davisson
General Partner
Brentwood Associates
Jean Deleage
Managing Partner
Burr, Egan, Deleage & Co.
George W. Dunbar, Jr.
President and Chief Executive Officer
Metra Biosystems, Inc.
Edward L. Erickson
President and Chief Executive Officer
DepoTech Corporation
Stephen B. Howell, M.D.
Professor of Medicine
University of California San Diego
Peter Preuss
President
Preuss Foundation
Pieter J. Strijkert, Ph.D.
Chairman
IntroGene BV
OFFICERS
Edward L. Erickson
President and Chief Executive Officer
John P. Longenecker, Ph.D.
Senior Vice President
Research, Development and Operations
David B. Thomas
Senior Vice President
Quality Assurance and Regulatory Affairs
Williams S. Ettouati, D.Pharm
Vice President, Marketing and Business Development
Sinil Kim, M.D.
Vice President, Advanced Technology
Chief Scientific Officer and Director Emeritus
Linda J. Paradiso, D.V.M.
Vice President, Clinical Development
Sheldon A. Schaffer, Ph.D.
Vice President, Pharmaceutical Development
Dana S. McGowan, C.P.A.
Senior Director, Finance and Administration
Chief Financial Officer, Treasurer and Assistant Secretary
Faye H. Russell, Esq.
Secretary
OTHER MANAGEMENT
Thomas E. Swedberg
Senior Director, Human Resources
CORPORATE INFORMATION
o Corporate Headquarters
10450 Science Center Drive
San Diego, California 92121
(619) 625-2424
o Shareholder Inquiries
General information regarding the Company can be obtained by contacting
Investor Relations at DepoTech. Inquiries relating to lost certificates should
be directed to the Transfer Agent.
o SEC Form 10-K
A copy of the Company's annual report to the Securities and Exchange Commission
on Form 10-K is available without charge by contacting Investor Relations at
DepoTech Corporation.
o Transfer Agent And Registrar
Chase Mellon Shareholder Services
400 South Hope Street, 4th Floor
Los Angeles, California 90071
(800) 522-6645
o Independent Auditors
Ernst & Young LLP
San Diego, California
o Corporate Counsel
Brobeck Phleger & Harrison LLP
San Diego, California
o Annual Meeting Of Shareholders
The annual meeting of shareholders will be held at 9:00 AM on Wednesday, May
14, 1997, at DepoTech Corporation.
o Price Range Of Common Stock
The Company's Common Stock began trading on September 29, 1995 and is listed on
the Nasdaq National Market under the symbol DEPO. High and low sales prices are
set forth below for the periods indicated:
<TABLE>
<CAPTION>
High Low
1995
- -------------------------------------------------------------
<S> <C> <C>
3rd Quarter $14.00 $12.75
4th Quarter $21.75 $12.50
1996
- -------------------------------------------------------------
1st Quarter $25.50 $18.00
2nd Quarter $29.50 $22.50
3rd Quarter $25.50 $14.50
4th Quarter $17.00 $12.75
</TABLE>
At March 20, 1997, there were approximately 1700 beneficial shareholders of
record. The Company has never declared or paid dividends on its Common Stock.
<PAGE> 18
<TABLE>
<CAPTION>
High Low
<S> <C>
1995
3rd Quarter $14.00 $12.75
4th Quarter $21.75 $12.50
1996
1st Quarter $25.50 $18.00
2nd Quarter $29.50 $22.50
3rd Quarter $25.50 $14.50
4th Quarter $17.00 $12.25
</TABLE>
28
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of DepoTech Corporation of our report dated January 29, 1997, included in the
1996 Annual Report to Shareholders of DepoTech Corporation.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-97488) pertaining to the 1995 Stock Option/Stock Issuance Plan
and the 1995 Employee Stock Purchase Plan and the Registration Statement (Form
S-3 No. 333-16371) and in the related Prospectus of our report dated January
29, 1997, with respect to the financial statements of DepoTech Corporation
incorporated by reference in this Annual Report (Form 10-K) for the year ended
December 31, 1996.
/s/ Ernst & Young LLP
---------------------------
ERNST & YOUNG LLP
San Diego, California
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,967
<SECURITIES> 16,231
<RECEIVABLES> 615
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,973
<PP&E> 19,847
<DEPRECIATION> (2,995)
<TOTAL-ASSETS> 37,608
<CURRENT-LIABILITIES> 5,107
<BONDS> 0
0
0
<COMMON> 67,798
<OTHER-SE> (42,396)
<TOTAL-LIABILITY-AND-EQUITY> 37,608
<SALES> 0
<TOTAL-REVENUES> 4,391
<CGS> 0
<TOTAL-COSTS> 17,952
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 787
<INCOME-PRETAX> (16,776)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,776)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,776)
<EPS-PRIMARY> (1.46)
<EPS-DILUTED> 0
</TABLE>
