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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, 1997
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
of 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 2, 1998 was approximately $41,640,856. 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 2, 1998 was 14,342,245.
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Documents Incorporated by Reference
Portions of the Registrant's 1997 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 13, 1998, to be filed on or about April
6, 1998, 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, pain
management and other medical fields alone or on behalf of funded partners.
The Company's lead product, DepoCyt(TM), cytarabine liposome injection,
("DepoCyt"), is a proprietary DepoFoam formulation of a generic, anti-cancer
drug also known as Cytarabine. DepoCyt is being developed in collaboration with
Chiron Corporation ("Chiron") in the United States, and with Pharmacia & Upjohn
S.p.A., an affiliate of Pharmacia & Upjohn, Inc. ("P&U"), outside the United
States. DepoCyt is being developed 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 from either solid tumors, leukemia
(a form of cancer involving white blood cells) or lymphomas (a form of cancer
involving tissues of the lymphatic system). Since April 1994, the Company has
been conducting clinical trials of DepoCyt for the treatment of NM from each of
these types of cancer. Data from a multicenter Phase III clinical trial in the
solid tumor arm comparing DepoCyt with the current standard therapy
(methotrexate) suggested that treatment with DepoCyt leads to higher complete
response rates and extended survival. These results were not statistically
significant. In addition, DepoCyt-treated patients showed a statistically
significant longer time to disease progression.
In April 1997 the Company completed the filing of a New Drug Application
("NDA") with the U.S. Food and Drug Administration ("FDA") for the treatment of
NM from solid tumors. In December 1997, the Oncologic Drugs Advisory Committee
("ODAC") to the FDA declined to recommend approval for NM arising from solid
tumors. In March 1998, DepoTech reached an agreement with the FDA to submit an
amendment to the NDA to provide data from a Phase IV clinical trial of NM from
solid tumors. In addition, the Company will submit interim data from a Phase III
study of NM from lymphomas. Submission of the amendment will approximately
double the number of patients treated with DepoCyt under review, and extend the
review time for an FDA decision by three months. The final decision regarding
the approval of new therapeutics resides with FDA officials subsequent to any
recommendation of ODAC.
In September 1997, the Company filed, on behalf of P&U, a New Drug Submission
with the Canadian Health Protection Branch for DepoCyt for the treatment of NM
from solid tumors. In January 1998, DepoTech's marketing partner, P&U, filed a
Marketing Authorization Application with the European Medicines Evaluation
Authority for the same indication.
Pivotal Phase III trials of DepoCyt for the treatment of lymphomas and
leukemia are continuing. Also, a Phase IV nonrandomized trial in solid tumor
patients is scheduled for completion in 1998. In addition, during 1997, the
Company and its U.S. corporate partner, Chiron, began a dose-finding clinical
trial in pediatric patients.
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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's development pipeline includes the
following product candidates 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)
DepoBupivacaine(TM), a DepoFoam formulation of the local anesthetic bupivacaine,
for the treatment of regional pain. Furthermore, the Company and Chiron are
assessing the feasibility of a DepoFoam formulation of a gene therapy product
for an undisclosed indication. DepoTech is also evaluating, in conjunction with
the Monsanto Company and Synthelabo, the feasibility of DepoFoam formulations of
several additional compounds.
For DepoMorphine, DepoTech has completed a Phase I safety and
pharmacokinetics study and is scaling up the manufacturing process for
commercial manufacturing. Patient enrollment in Phase II clinical studies
designed to assess the safety and efficacy of the drug is expected to conclude
in 1998. The Company 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. DepoTech has completed formulation studies of DepoBupivacaine
for use during or after a surgical procedure or trauma. In order to focus the
Company's resources on DepoCyt, DepoMorphine and partner-funded feasibility
programs, DepoTech will evaluate financing options before proceeding with
further development of DepoAmikacin and DepoBupivacaine.
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
("cGMPs") 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 pre-approval inspections ("PAI") from the FDA
for the manufacture of DepoCyt. The Company has been notified by the FDA's
District Office that they are recommending approval for commercial manufacturing
of DepoCyt. However, this does not imply FDA product approval of DepoCyt which
currently remains subject to FDA review as described above. The Company occupies
an 82,000 square foot facility housing its administrative, research and
development and future manufacturing activities.
Since March 1994, DepoTech and Chiron have collaborated in the development of
DepoCyt and performed preclinical and feasibility studies of DepoFoam
formulations of certain of Chiron's proprietary products. 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 original contractual
arrangement (the "Chiron 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 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 Chiron Agreement.
In June 1997, DepoTech and Chiron amended the Chiron Agreement and DepoTech
repurchased Canadian and European rights to DepoCyt from Chiron for up to $13.7
million, of which $2.0 million was expensed and paid to Chiron in December 1997.
The remaining $11.7 million is payable upon the earlier of U.S. or European
regulatory notification that the application to market or sell DepoCyt is
approvable or approved. If all applications for regulatory approval to sell
DepoCyt in the U.S. and European Union are permanently withdrawn, DepoTech will
be relieved of any obligation to pay the remaining $11.7 million.
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The Chiron Agreement also provides for the joint development of DepoFoam
formulations of certain compounds proprietary to Chiron ("Chiron Products"). 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 Products. The Chiron 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 Chiron 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, in any. 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 July 1997, the Company signed a Marketing and Distribution Agreement with
P&U. Under the contractual arrangement (the "P&U Agreement"), P&U has rights to
market and sell DepoCyt in countries outside the United States. P&U will be
responsible for submitting regulatory filings, and for labeling, packaging,
distributing, marketing and selling DepoCyt outside the U.S. The Company will
manufacture DepoCyt and receive a share of the net sales of this product from
P&U. DepoTech received an upfront payment of $2.0 million and may receive
milestone payments totaling up to $17.0 million. In addition, the Company
receives reimbursement for clinical trials expenses up to a certain amount.
In February 1998, the Company reduced its workforce aimed at lessening
operating expenses and focusing resources on DepoCyt, DepoMorphine and
partner-funded feasibility programs. The company reduced its staff by
approximately 25% to 124 employees.
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 under
the skin, within muscle tissue, into cerebrospinal fluid, within joints and
within the abdominal cavity. 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.
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 through the walls, by gradual erosion of the particles, and by
processes involving the rearrangement of lipid bilayers. The nature of drug
release may also be determined by the specific chemistry and size of each drug
molecule. 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 TECHNOLOGY
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 DepoFoam technology's key advantage over
traditional methods of drug delivery, including 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
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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, 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 not only to traditional drug delivery
techniques but also to 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 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 also 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 which can be delivered 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.
- Improve profit margins through proprietary reformulation. The Company
believes DepoFoam offers the potential 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, as
such, 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
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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. The Company has entered into collaborations with Chiron
and P&U 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. DepoTech intends to
manufacture DepoCyt for both Chiron and P&U, subject to regulatory
approval.
PRODUCT RESEARCH AND DEVELOPMENT PROGRAMS
The table below summarizes DepoTech's portfolio of products currently under
development and formulations undergoing feasibility testing.
<TABLE>
<CAPTION>
PRODUCT CORPORATE
(ACTIVE COMPOUND) INTENDED USE STATUS(1) PARTNER(2)
- ----------------------------- ------------------------ ------------------------- -------------
<S> <C> <C> <C>
DepoCyt (cytarabine) Neoplastic meningitis
Solid tumors NDA filed U.S./Phase IV Chiron
Solid tumors NDS filed Canada P&U
Solid tumors MAA filed Europe P&U
Leukemia/lymphoma Phase III Chiron (U.S.)
P&U (ex-U.S.)
Pediatric use Dose-finding Chiron
DepoMorphine (morphine) Acute post-surgical pain Phase II None
DepoAmikacin (amikacin) Bacterial infections Phase I completed None
DepoBupivacaine (bupivacaine) Regional pain Preclinical None
F0104 Undisclosed Feasibility Monsanto
F0701 Undisclosed Feasibility Synthelabo
F0303 Undisclosed Feasibility Chiron
</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" means a study to determine the appropriate dose in a 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 II" means human studies designed to
demonstrate preliminary efficacy of a compound and to select appropriate
dose(s) and patient populations for further studies. "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, the FDA has
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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.
(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
collaborations with Chiron and P&U, DepoTech will manufacture DepoCyt. In
addition, DepoTech will encapsulate Chiron's proprietary compounds in a
DepoFoam formulation.
DepoCyt
The Company's lead product, DepoCyt(TM), cytarabine liposome injection, is a
proprietary DepoFoam formulation of a generic, anti-cancer drug also known as
cytarabine. DepoCyt is being developed in collaboration with Chiron in the
United States, and with P&U outside the United States. In April 1997, the
Company completed the filing of an NDA initially for the treatment of NM from
solid tumors. In September 1997, on behalf of P&U, the Company filed a New Drug
Submission with the Canadian Health Protection Branch for DepoCyt for the
treatment of NM from solid tumors. In January 1998, DepoTech's marketing
partner, P&U, filed a Marketing Authorization Application with the European
Medicines Evaluation Authority for the same indication.
Background. NM is the spread of cancers to the soft tissue membrane of the
brain and spinal cord (known as the meninges) due to cancer from either solid
tumors, leukemia (a form of cancer involving white blood cells) or lymphomas (a
form of cancer involving tissues of the lympohatic system). Because of the
blood-brain barrier, drugs in the bloodstream do not penetrate well into the
cerebral spinal fluid ("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 a
dividing cell. Therefore, the 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 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 may
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 were to
receive DepoCyt and at least 20 patients were to receive standard therapy. A
total of 40 patients were to be treated for each subtype of the disease and a
minimum total of only 120 patients were required to complete all three arms of
the study. Enrollment of patients into the Phase III trial for NM 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 a
multicenter Phase III clinical trial in the solid tumor arm comparing DepoCyt
with the current standard therapy (methotrexate) suggested that treatment with
DepoCyt resulted in a higher complete response rate and extended survival when
compared to standard therapy. These results were not statistically significant.
In addition, DepoCyt-treated patients showed a statistically significant longer
time to disease progression.
In April 1997 , the Company completed the filing an NDA with the FDA for the
treatment of NM from solid tumors. In December 1997, ODAC declined to recommend
approval for NM from solid tumors. In March 1998, DepoTech reached an agreement
with the FDA to submit an amendment to the NDA to provide data from the Phase IV
clinical trial of NM from solid tumors. In addition, the Company will submit
interim data from the Phase III study of NM from lymphomas. Submission of the
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amendment will approximately double the number of patients treated with DepoCyt
under review, and extend the review time for an FDA decision by three months.
The final decision regarding the approval of new therapeutics resides with FDA
officials subsequent to any recommendation of ODAC.
In September 1997, the Company filed a New Drug Submission with the Canadian
Health Protection Branch for DepoCyt for the treatment of NM from solid tumors.
In January 1998, DepoTech's marketing partner, P&U, filed a Marketing
Authorization Application with the European Medicines Evaluation Authority for
the same indication.
Additional Territories and Indications. Pivotal Phase III trials of DepoCyt
for the treatment of lymphomas and leukemia are continuing. Also, a Phase IV
nonrandomized trial in solid tumor patients is scheduled for completion in 1998.
With P&U, DepoTech intends to start a dose confirmation study 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, began a multi-center pediatric dose
finding trial in 1997. 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 planning to explore additional indications for DepoCyt,
including its use in the treatment of other cancers including ovarian, lung and
breast cancer, and AIDS-related non-Hodgkin's lymphoma.
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 provides up to two days of pain relief
following surgery. DepoMorphine may replace repeated epidural or intravenous
administration of opiates or patient controlled analgesia.
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
December 1997, DepoTech completed a Phase I dose-escalation study that assessed
the safety and pharmacokinetics of single doses of DepoMorphine administered
epidurally to healthy volunteers. The study was conducted at a single site under
the leadership of members of the Department of Anesthesiology at Stanford
University Medical Center. This study identified the maximum tolerated dose of
DepoMorphine and indicated that the adverse event profile for the drug is
similar to that seen with epidurally administered free morphine. Patient
enrollment in a Phase II clinical study designed to assess the safety and
efficacy of the drug is expected to conclude in 1998.
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DepoAmikacin
Another product in the Company's development pipeline is DepoAmikacin
sustained-release encapsulated amikacin, a DepoFoam formulation of this 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 has conducted formulation optimization
and scale-up studies and defined Phase II clinical targets. In order to focus
resources on DepoCyt, DepoMorphine, and partner-funded feasibility programs, the
Company will evaluate financing options before proceeding with further
development of DepoAmikacin.
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
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 potentially 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 0.6 million
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 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, have
been completed. 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. 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.
DepoBupivacaine
DepoTech has completed formulation studies of DepoBupivacaine, a
sustained-release formulation of the widely used local anesthetic bupivacaine
for use during or after a surgical procedure or trauma. One dose of
DepoBupivacaine is expected to provide 24 hours of regional pain relief,
compared to two to six hours following conventional bupivacaine administration.
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.
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 improved drugs to manage
post-operative pain.
Background. 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 to
provide long-lasting pain relief of approximately 24 hours.
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
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relief. The Company believes that a long-lasting, safe DepoFoam formulation of a
local anesthetic, such as bupivacaine, could be useful for controlling
post-surgical and post-injury pain.
In order to focus resources on DepoCyt, DepoMorphine, and partner-funded
feasibility programs, the Company will evaluate financing options before
proceeding with further development of DepoBupivacaine.
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 on DepoFoam formulations of IGF-1 and
IL-2 have been completed. In addition, Chiron and the Company have completed
preclinical development on an additional DepoFoam formulation of IGF-1 for
undisclosed indications. No further work is planned for either compounds at this
time. 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.
New Product Feasibility Programs
DepoTech is also evaluating DepoFoam formulations of several additional
compounds including certain proprietary molecules of the Monsanto Company and
Synthelabo. 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.
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 sales and 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.
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 a collaboration 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 Chiron Products. DepoTech believes
that Chiron's pharmacological, clinical development and marketing resources in
these areas complement DepoTech's resources. See "--Product Research and
Development Programs."
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The Chiron 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 and the cost of clinical trials required in Europe were
funded by Chiron until June 1997. 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.
In June 1997, DepoTech and Chiron amended the Chiron Agreement, and DepoTech
repurchased rights to DepoCyt in Canada and Europe from Chiron for aggregate
cash payments of up to $13.7 million, of which $2.0 million was expensed and
paid to Chiron in December 1997. Chiron will retain exclusive marketing rights
to DepoCyt in the U.S. If prior to December 31, 1998, the FDA issues a letter or
other notification to DepoTech indicating that DepoCyt is approvable or
approved, the remaining balance of $11.7 million shall be payable no later than
December 31, 1998. If no FDA notification is received prior to December 31,
1998, the remaining amount shall be payable no later than six month from the
earlier of U.S. or European Union regulatory notification that the application
to market or sell DepoCyt is approvable or approved. If all applications for
regulatory approval to sell DepoCyt in the U.S. and European Union are
permanently withdrawn, DepoTech shall be relieved of any obligation to pay the
remaining $11.7 million.
The Chiron Agreement also provides for the joint development of DepoFoam
formulations of certain Chiron Products. 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 on DepoFoam formulations of
IGF-1 and IL-2 have been completed. In addition, Chiron and the Company have
completed preclinical development on an additional DepoFoam formulation of IGF-1
for undisclosed indications. No further work is planned for either compounds at
this time. 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 Chiron 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 Chiron 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. Further, 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. Finally, in 1997, the Company received a $1.0
million milestone payment from Chiron upon completing the filing of the NDA for
DepoCyt in the U.S. 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.
Pharmacia & Upjohn
In July 1997, the Company signed a Marketing and Distribution Agreement with
P&U. Under the contractual arrangement (the "P&U Agreement"), P&U has rights to
market and sell DepoCyt in countries outside the United States. P&U will be
responsible for submitting regulatory filings, and for labeling, packaging,
distributing, marketing and selling DepoCyt outside the U.S. The Company will
manufacture DepoCyt and receive a share of the net sales of this product from
P&U. DepoTech received an upfront payment of $2.0 million and may receive
milestone payments totaling up to $17.0 million. In addition, the Company
receives reimbursement for clinical trials expenses up to a certain amount.
Future milestone payments, if any, totaling up to the obligation to Chiron of
$11.7 million will be set aside in a restricted cash account for payment to
Chiron for the repurchase of DepoCyt rights. Both DepoTech and P&U have the
ability to terminate a portion or all of the marketing and distribution
agreement upon certain events and with advance notice.
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MANUFACTURING
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
pre-approval inspections from the FDA for the manufacture of DepoCyt. The
Company has been notified by the FDA's District Office that they are
recommending approval for commercial manufacturing of DepoCyt. However, this
does not imply FDA product approval of DepoCyt which currently remains subject
to FDA review. Further, the Company must undergo and pass a PAI for all
countries outside the U.S. in which applications to obtain marketing approval
have been filed. 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 occupies an 82,000 square foot facility housing
its administrative, research and development and future manufacturing
activities. 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 typically the active ingredient in the
product was previously approved. This is because the Company's products will be
intended for new
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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.
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. 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 and are generally designed to
provide substantial evidence of safety and effectiveness of a drug or biologic
required to obtain FDA approval.. A clinical trial may combine the elements of
more than one phase and typically two or more Phase III studies are required.
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.
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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 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 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 2, 1998, the Company owned or had
exclusive rights to 10 issued or allowed United States patents, 10 pending
United States patent applications, 45 issued foreign patents and 53 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
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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 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
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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
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 2, 1998, DepoTech had approximately 122 full-time employees,
including 103 in research, development and operations, and 19 in finance and
administration. Of these employees, 37 hold advanced degrees, of which 21 are
M.D.s, D.Pharm.s, or Ph.Ds. 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. In February 1998, the
Company reduced its workforce aimed at lessening operating expenses and focusing
resources on DepoCyt, DepoMorphine and partner-funded feasibility programs. The
company reduced its staff by approximately 25% to 124 employees. 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 three of the Company's DepoFoam formulations,
DepoCyt, DepoMorphine and DepoAmikacin, have been subject to any human clinical
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, DepoMorphine, DepoAmikacin 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.
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
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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.
In April 1997, the Company completed and NDA for DepoCyt for the treatment of
NM from solid tumors. As with all drugs subject to accelerated approval, the FDA
requested that the Company conduct a Phase IV clinical trial on DepoCyt which is
in process. In December 1997, ODAC declined to recommend approval of DepoCyt for
use in patients with NM from solid tumors. In March 1998, DepoTech reached an
agreement with the FDA to submit an amendment to the NDA to provide data from a
Phase IV clinical trial of NM from solid tumors. In addition, the Company will
submit interim data from a Phase III study of NM from lymphomas. Submission of
the amendment will approximately double the number of patients treated with
DepoCyt under review, and extend the review time for an FDA decision by three
months. The final decision regarding the approval of new therapeutics resides
with FDA officials subsequent to any recommendation of ODAC. The Company has
been notified by the FDA's District Office that they are recommending approval
for commercial manufacturing of DepoCyt. However, this does not imply FDA
product approval of DepoCyt which currently remains subject to FDA review as
described above.
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 from lymphomas and leukemia will be
positive and/or confirm earlier results or that the Phase IV, pediatric,
European and other clinical trials of DepoCyt will generate positive results.
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. 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.
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.
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.
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Limited Manufacturing Experience, Risk of Scale-Up. The Company has no
experience manufacturing products for commercial purposes. The Company's
manufacturing operations will need to meet ongoing commercial requirements for
all markets in which products have been approved. The Company has been notified
by the FDA's District Office that they are recommending approval for commercial
manufacturing of DepoCyt. However, this does not imply FDA product approval of
DepoCyt which currently remains subject to FDA review. The manufacturing
operations for DepoCyt will require the completion of a PAI inspectional
observations for all countries in which there are regulatory filings to market
DepoCyt. 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 and the P&U
Agreement.
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.
In June 1997, DepoTech reacquired rights to DepoCyt in Canada and Europe from
Chiron for aggregate cash payments of up to $13.7 million, of which $2.0 million
was expensed and paid to Chiron in December 1997. If prior to December 31, 1998,
the FDA issues a letter or other notification to DepoTech indicating that
DepoCyt is approvable or approved, the remaining balance of $11.7 million shall
be payable no later than December 31, 1998. If no FDA notification is received
prior to December 31, 1998, the remaining amount shall be payable no later than
six month from the earlier of U.S. or European Union regulatory notification
that the application to market or sell DepoCyt is approvable or approved. If all
applications for regulatory approval to sell DepoCyt in the U.S. and European
Union are permanently withdrawn, DepoTech shall be relieved of any obligation to
pay the remaining $11.7 million.
The Company leases its headquarters housing most of its administrative,
research and clinical and manufacturing activities. The minimum rental
commitment for this facility ranges from approximately $3.3 million to $3.7
million per year, over 18 years, with a future minimum rental commitment, based
upon pre-established annual rent increases.
The Company's additional 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
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 through 1998.
Uncertainty of Additional Funding. The Company anticipates that it will be
required to raise additional capital in the near-term in order to continue to
conduct its operations. Such capital may be raised through public or private
financings, as well as collaborative arrangements, borrowings and other
available sources. There can be no assurance that additional funding, if
necessary, will be available on favorable terms if at all. If adequate funds are
not available, the Company will be required to curtail operations significantly
or to obtain funds through entering into arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, potential products or potential markets that the Company
would not otherwise relinquish. The failure to receive additional funding would
have a material adverse effect on the Company.
History of Operating Losses; Uncertainty of Future Profitability. The Company
has incurred an accumulated deficit of $63.8 million through December 31, 1997.
The Company expects to continue to incur substantial losses over at least the
next two years as the Company's research and development efforts, 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.
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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 and P&U,
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 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 under the Chiron Agreement and P&U under
the P&U Agreement 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. Termination of a portion or all of the Chiron
Agreement and/or P&U Agreement 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, however, 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.
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, may 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 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 2,
1998, the Company owned or had exclusive rights to 10 issued or allowed United
States patents, 10 pending United States patent applications, 45 issued foreign
patents and 53 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
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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.
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, the status of submissions to the FDA or its international
equivalent, 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 Securities Act of 1933, as
amended, or through the exercise of outstanding registration rights, could have
an adverse effect on the price of the Company's Common Stock.
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.
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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.
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."
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.
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.
22
<PAGE> 23
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.
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. Pursuant to a bank credit facility, DepoTech may not, without the bank's
prior written consent, pay or declare dividends except for dividends payable
solely in the Company's Stock.
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 includes certain charter provisions which may
discourage certain types of transactions involving an actual or potential change
in control of the Company, including transactions in which shareholders might
otherwise receive a premium for their shares over the 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.
Item 2. PROPERTIES
The Company currently maintains its headquarters in leased facilities in San
Diego, California, that contain most of its 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
$2.5 million to $4.3 million per year over 18 years, based upon pre-established
annual rent increases. The Company's right of first refusal and right of first
offer to purchase land located adjacent to its headquarters has expired.
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.
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.
23
<PAGE> 24
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 1997 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 1997 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 1997 Annual Report to Shareholders, a copy of which is attached
hereto as Exhibit 13.1.
Item 7.(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements at December 31, 1997 and 1996, and for
each of the three years in the period ended December 31, 1997, and the Report of
Ernst & Young LLP, independent auditors, are included the Registrant's 1997
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.
(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 " Section 16(a) Beneficial Ownership Reporting Compliance,"
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 " Ownership of Securities," appearing in
the Proxy Statement, is incorporated herein by reference.
24
<PAGE> 25
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
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Financial Statements ............................................. *
Balance Sheets at December 31, 1997 and 1996 ..................... *
Statements of Operations for 1997, 1996 and 1995 ................. *
Statements of Cash Flows for 1997, 1996 and 1995 ................. *
Statements of Shareholders' Equity for 1997, 1996 and 1995 ....... *
Notes to Financial Statements .................................... *
Report of Ernst & Young LLP, Independent Auditors ................ *
</TABLE>
- ------------
* Incorporated herein by reference to the Registrant's 1997 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
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER
------
<S> <C> <C>
#3.2 Fourth Restated Articles of Incorporation of the Company --
#3.4 Amended and Restated Bylaws of the Company --
#4.1 Form of Certificate for Common Stock. --
#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.
#10.10 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.
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER
------
<S> <C> <C>
#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).
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
------ ----
<S> <C> <C>
#+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. --
#+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.
#10.59 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.
*10.65 Extension to Equipment Financing Agreement 10776 dated --
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
------ ----
<S> <C> <C>
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. --
+!10.68 David B. Thomas Employment Agreement dated June 30, 1997. --
(Exhibit 10.1)
+&10.69 The Company's 1995 Stock Option/Stock Issuance Plan as --
amended. (Exhibit 99.1)
++10.70 Amendment #2 to Collaboration Agreement, dated June 5, 1997 --
between DepoTech Corporation and Chiron Corporation. (Exhibit 2.1)
!!10.71 Marketing and Distribution Agreement between DepoTech --
Corporation and Pharmacia & Upjohn S.p.A. dated July 2, 1997 (with
confidential portions omitted). (Exhibit 10.1)
!!10.72 Stock Purchase Agreement between DepoTech Corporation and --
Ross Financial Corporation dated September 10, 1997. (Exhibit 10.2)
##+10.73 The Company's 1997 Supplemental Stock Option Plan --
(Exhibit 99.1)
10.74 Amendment #3 to Collaboration Agreement dated December 13,
1997 between DepoTech Corporation and Chiron Corporation
11.1 Computation of pro forma net loss per share. --
13.1 Portion of the 1997 Annual Report to Shareholders --
23.1 Consent of Ernst & Young LLP, Independent Auditors. --
24.1 Power of Attorney (see page 30).
27.1 Financial Data Schedule. --
</TABLE>
- ----------
+ Management contract or compensatory plan.
# 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.
28
<PAGE> 29
** Incorporated by reference to the same numbered exhibit (except as
otherwise indicated) to the Company's Annual Report or Form 10-K for the
year ended 12/31/96.
! Incorporated by reference to the same numbered exhibit (except as
otherwise indicated) to the Company's Report on Form 10Q for the quarter
ended June 30, 1997, filed on August 14, 1997.
++ Incorporated by reference to the same numbered exhibit (except as
otherwise indicated) to the Company's Current Report on Form 8-K filed
June 20, 1997.
& Incorporated by reference to the same numbered exhibit (except as
otherwise indicated) to the Company's Registration Statement on Form S-8
(No. 333-28531), filed on June 4, 1997.
!! Incorporated by reference to the same numbered exhibit (except as
otherwise indicated) to the Company's Report on Form 10Q for the quarter
ended September 30, 1997, filed on November 14, 1997.
## Incorporated by reference to the same numbered exhibit (excepted as
otherwise indicated) to the Company's Registration Statement on Form S-8
(No. 333-42459) filed on December 17, 1997.
Supplemental Information
Copies of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held May 13, 1998 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.
29
<PAGE> 30
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, 1998 By: /s/ Fred A. Middleton
-------------------------------------
Fred A. Middleton
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Fred A. Middleton 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Fred A. Middleton Chairman of the Board and Chief Executive March 31, 1998
- ---------------------------------- Officer
(Fred A. Middleton)
/s/ John P. Longenecker President and Chief Operating Officer March 31, 1998
- ---------------------------------- Officer and Director
(John P. Longenecker) (Principal Executive Officer)
/s/ Dana S. McGowan Vice President, Finance and Chief March 31, 1998
- ---------------------------------- Financial Officer
(Dana S. McGowan) (Principal Financial and
Accounting Officer)
/s/ Pieter J. Strijkert Director March 31, 1998
- ----------------------------------
(Pieter J. Strijkert)
/s/ Roger C. Davisson Director March 31, 1998
- ----------------------------------
(Roger C. Davisson)
/s/ George W. Dunbar, Jr. Director March 31, 1998
- ----------------------------------
(George W. Dunbar, Jr.)
/s/ Stephen B. Howell Director March 31, 1998
- ----------------------------------
(Stephen B. Howell)
</TABLE>
30
<PAGE> 31
<TABLE>
<S> <C> <C>
/s/ Peter Preuss Director March 31, 1998
- ----------------------------------
(Peter Preuss)
</TABLE>
31
<PAGE> 1
EXHIBIT 10.74
AMENDMENT #3
TO COLLABORATION AGREEMENT
This Amendment #3 to Collaboration Agreement (this "Amendment") is made and
entered into as of December 15, 1997, by and between DepoTech Corporation, a
California corporation ("DepoTech") and Chiron Corporation, a Delaware
corporation ("Chiron").
The Collaboration Agreement dated as of March 31, 1994, between Chiron and
DepoTech (the "Collaboration Agreement") was previously amended by Amendment #1
to Collaboration Agreement, dated as of April 1, 1997 ("Amendment #1") and
Amendment #2 to Collaboration Agreement, dated as of June 4, 1997 ("Amendment
#2).
The parties hereby agree to amend Section 3.B.(i) of Amendment #2 to read in
full as follows:
The entire $11,700,000 shall be payable upon the date of the earlier of the
following events (such earlier date referred to as the "Payment
Date"). If neither event occurs, payment shall be governed by
subsection (ii) or (iii) below.
If, prior to December 31, 1998, the FDA issues a letter of other
notification (each an "FDA Notification") indicating that
the NDA with respect to DTC 101 in the United States is
approvable or approved, the Payment Date shall be the date
of the first FDA Notification.
Notwithstanding subsection (aa) above, if, prior to December 28,
1997, at least two-thirds of the voting members of the
Oncologic Drugs Advisory Committee to the FDA ("ODAC") (i.e.
absent or abstaining members are excluded) vote to recommend
that the FDA approve such NDA for the indications submitted,
and, at the meeting at which such vote occurs, the ODAC does
not recommend any material adverse changes to the product
labeling from that submitted in connection with the NDA, the
Payment Date shall be the date of such ODAC meeting.
DepoTech shall, at its option, pay the entire amount in cash within
five(5) working days after the Payment Date, or deliver to Chiron
within five(5) working days after the Payment Date a promissory note
in the form attached hereto as Exhibit A, for the principal amount of
the unpaid balance. Such note shall be payable in full not later than
December 31, 1998, and shall bear interest from the Payment Date until
paid in full at a rate equal to the 12 month Treasury Bill rate on the
Payment Date plus 150 basis points, not to exceed the maximum rate
permitted by applicable law.
Except as set forth herein, the Collaboration Agreement, as previously amended
by Amendment #1 and Amendment #2, remains in full force and effect.
Executed by the parties as of the date first written above.
DEPOTECH CORPORATION CHIRON CORPORATION
By /s/ EDWARD L. ERICKSON By /s/ MAGNUS LUNDBERG
------------------------------ -----------------------------
(Edward L. Erickson), President (Magnus Lundberg), President
and Chief Executive Officer Chiron Therapeutics
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net loss ($21,408,330) ($16,775,605) ($ 8,020,547)
============ ============ ============
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 13,433,915 11,451,334 2,498,295
Adjustments to reflect certain
requirements of the SEC:
Conversion of preferred stock-
weighted average shares 5,994,416
------------ ------------ ------------
Shares used in computing net loss per share 13,433,915 11,451,334 8,492,711
============ ============ ============
Net loss per share ($ 1.59) ($ 1.46) ($ 0.94)
============ ============ ============
</TABLE>
<PAGE> 1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 two years. As of
December 31, 1997, the Company's accumulated deficit was approximately $63.8
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 "Risks and Uncertainties."
This report may contain, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in such forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed under "Risks and Uncertainties."
Results of Operations
The Company had total revenues of $6.9 million for the year ended December
31, 1997 compared to $4.4 million for 1996 and $6.8 million for 1995. Total
revenues were principally generated by the Company's collaborative agreements
with Chiron Corporation ("Chiron") and Pharmacia & Upjohn S.p.A., an affiliate
of Pharmacia & Upjohn, Inc. ("P&U"). Total revenues were primarily derived from
milestone payments earned and reimbursement of certain clinical trial and
manufacturing scale-up expenses for the Company's lead product, DepoCyt, under
the two collaboration agreements. In addition, Chiron reimbursed DepoTech for
100% of certain pre-clinical and feasibility studies performed on their behalf.
Further, DepoTech is reimbursed for conducting feasibility studies for various
pharmaceutical companies.
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. Included in total revenue for 1997 is a milestone payment
from Chiron of $1.0 million paid to DepoTech upon the filing of a New Drug
Application for DepoCyt. In July 1997, the Company entered into a Marketing and
Distribution Agreement with P&U for rights to market and sell DepoCyt in
countries outside the U.S. The Company received a cash payment of $2.0 million
upon signing of the 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 and the achievement of future milestones.
Research and development expenses increased to $20.1 million for the year
ended December 31, 1997, from $18.0 million in 1996 and $12.7 million in 1995.
Factors contributing to these increases include expanded efforts in clinical
trials, manufacturing scale-up, and preclinical development of potential
DepoFoam products. The Company is continuing Phase III clinical studies of
DepoCyt in neoplastic meningitis from leukemia and lymphomas, as well as a Phase
IV nonrandomized trial in solid tumor patients. In 1997, DepoTech began a
dose-finding study of DepoCyt in pediatric patients, and completed a Phase I
study of DepoMorphine sustained-release encapsulated morphine sulfate to treat
acute post-surgical pain. Manufacturing scale-up of DepoMorphine is underway.
The Company has completed a Phase I study of DepoAmikacin as well as certain
preclinical and feasibility studies with partner, Chiron. Further, the Company
is evaluating the feasibility of developing several early stage compounds
internally and for corporate partners. Research and development expenses are
expected to increase in 1998.
General and administrative expenses increased to $6.8 million during 1997
from $4.1 million in 1996 and $2.8 million in 1995. The increases were primarily
due to expansion in administrative staffing and higher facility cost and
business development expenses. Included in general and administrative expenses
for 1997 and 1996 are $1.5 million and $0.5 million, respectively, of pre-launch
expenses 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.
Chiron and DepoTech have been jointly developing DepoCyt in the U.S.,
Canada and Europe since March 1994.
9
<PAGE> 2
In June 1997, DepoTech reacquired rights to DepoCyt in Canada and Europe from
Chiron. Chiron will retain exclusive marketing rights to DepoCyt in the U.S.
Included in operating expenses for the year ended December 31, 1997 were
expenses of $2.0 million associated with the repurchase of DepoCyt which was
paid to Chiron in December 1997.
Interest income was $1.7 million for the year ended December 31, 1997
compared to $1.7 million in 1996 and $1.1 million in 1995. The increase from
1995 to 1996 was principally due to higher average cash investment balances and
increases in available market interest rates. Interest expense was $1.2 million
for the year ended December 31, 1997 compared to $0.8 million in 1996 and $0.4
million in 1995. The increases in interest expense were due to higher balances
outstanding for obligations under capital leases and a note payable.
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 $101.9 million through December 31, 1997, and through
capital equipment leases and notes payable. In October 1995, the Company
completed its initial public offering of common stock with net proceeds of $38.1
million. In January 1997, the Company completed the private placement of 1.5
million newly issued shares of common stock raising net proceeds of $18.9
million. In September 1997, the Company raised net proceeds of $14.6 million
through the sale of 1.0 million newly issued shares of DepoTech common stock to
a private investment company.
Chiron and DepoTech have been jointly developing DepoCyt in the U.S.,
Canada and Europe since March 1994. In June 1997, DepoTech reaquired rights to
DepoCyt in Canada and Europe from Chiron for aggregate cash payments of up to
$13.7 million, of which $2.0 million was paid to Chiron in December 1997. Chiron
will retain exclusive marketing rights to DepoCyt in the U.S. If prior to
December 31, 1998, the U.S. Food and Drug Administration ("FDA") issues a letter
or other notification to DepoTech indicating that DepoCyt is approvable or
approved, the remaining balance of $11.7 million shall be payable no later than
December 31, 1998. If no FDA notification is received prior to December 31,
1998, the remaining amount shall be payable no later than six months from the
earlier of U.S. or European Union regulatory notification that the application
to market or sell DepoCyt is approvable or approved. If all applications for
regulatory approval to sell DepoCyt in the U.S. and European Union are
permanently withdrawn, DepoTech shall be relieved of any obligation to pay the
remaining $11.7 million.
In July 1997, DepoTech entered into a Marketing and Distribution Agreement
with P&U for rights to market and sell DepoCyt in countries outside the U.S. P&U
will be responsible for submitting regulatory filings, labeling, packaging,
distribution, marketing and sales of DepoCyt in this territory. The Company will
manufacture DepoCyt and receive a share of the net sales of DepoCyt sold by P&U.
The Company received a cash payment of $2.0 million upon execution of the
agreement and may receive additional payments of up to $17.0 million upon
achievement of certain regulatory milestones. The agreement also provides for
P&U to reimburse the Company for certain clinical trial expenses and regulatory
fees incurred by the Company. Future milestone payments, if any, totaling up to
the obligation to Chiron of $11.7 million will be set aside in a restricted cash
account for payment to Chiron for the repurchase of DepoCyt rights.
Working capital increased to $22.1 million as of December 31, 1997 compared
to $14.9 million as of December 31, 1996. The increase in working capital in
1997 was primarily due to $33.5 million of net proceeds received from two
private placements and $8.0 million of proceeds from a note payable, which was
partially offset by net cash used to fund operations of $18.2 million, purchases
of property and equipment of $12.0 million, and debt repayments totalling $2.9
million. As of December 31, 1997, DepoTech had cash, cash equivalents and
short-term investments totaling $27.4 million. In May 1996, the Company signed a
bank credit facility for $9.0 million to finance future capital equipment
purchases, all of which was utilized through December 31, 1997. In October 1997,
DepoTech expanded the bank credit facility by $4.5 million, of which $1.2
million was utilized through December 31, 1997. The Company believes the impact
of inflation on its business activities has not been significant to date.
Through December 31, 1997, the Company has invested an aggregate of $31.9
million in leasehold improvements, and manufacturing, laboratory and office
equipment, of which $19.4 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. The Company leases its headquarters which house most of its
administrative, research and clinical and manufacturing activities. The minimum
rental commitment for this facility
10
<PAGE> 3
ranges from approximately $2.5 million to $4.3 million per year, over 18 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 for this manufacturing line total approximately $7.5
million through 1997. DepoTech intends to finance such expenditures through
existing bank credit facilities. Capital expenditures for 1998 are expected to
be lower than the prior year.
The Year 2000 Issue is the result of computer programs written in the past
that use two digits rather than four to define the applicable year. As a result,
these computer programs may not properly recognize calendar dates beginning in
the Year 2000. This problem may cause systems to fail or miscalculate causing
disruptions of operations, including a temporary inability to process
transactions or engage in similar normal business activities.
The Company believes that the total internal Year 2000 Issue costs will be
minimal and that the Year 2000 conversion requirements will be achieved through
routine upgrades to its software programs. The Company expects to complete these
upgrades by the end of 1998. These costs and the expected completion date are
based on management's best estimates and there can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated. The Company has also initiated communications with all of its
significant suppliers to determine the extent to which the Company's systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. There can be no assurance that the systems of other companies on which
the Company's systems rely will be timely converted and will not have an adverse
effect on the Company's systems.
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. DepoTech anticipates that its
existing available cash, cash equivalents and short-term investments, committed
future contract revenue, projected funding from equipment financing and interest
income will be adequate to satisfy its capital requirements and fund operating
losses through 1998. The development and commercialization of the Company's
potential 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's future capital requirements will depend on many factors, including,
without limitation, the time and costs involved in obtaining regulatory
approvals, continued scientific progress in its products and process development
programs and changes in existing collaborative programs. The Company anticipates
that it will be required to raise additional capital in the near-term in order
to continue to conduct its operations. Such capital may be raised through public
or private financings, as well as collaborative arrangements, borrowings and
other available sources. There can be no assurance that additional funding, if
necessary, will be available on favorable terms, if at all. If adequate funds
are not available, the Company will be required to curtail operations
significantly or to obtain funds through entering into arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, potential products or potential markets
that the Company would not otherwise relinquish. The failure to receive
additional funding would have a material adverse effect on the Company.
Risks and Uncertainties
EARLY STAGE COMPANY.
DepoTech's products are at an early stage of development, and, to date,
only three of the company's DepoFoam formulations have been subject to human
clinical 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, 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 anticipated. 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
11
<PAGE> 4
Company's products. Any failure of the Company to achieve technical
feasibility, demonstrate safety, achieve clinical efficacy, obtain regulatory
approval or, alone or together with its partners, successfully market products
would have a material adverse effect on the Company.
In April 1997, the Company completed a New Drug Application ("NDA") for
DepoCyt for the treatment of neoplastic meningitis ("NM") from solid tumors. As
with all drugs subject to accelerated approval, the FDA requested that the
Company conduct a Phase IV clinical trial on DepoCyt which is in process. In
December 1997, the Oncologic Drugs Advisory Committee to the FDA declined to
recommend approval of DepoCyt for use in patients with NM from solid tumors. In
March 1998, DepoTech reached an agreement with the FDA to submit an amendment to
the NDA to provide data from the Phase IV study of NM from solid tumors, and
interim data from a Phase III clinical trial of NM from lymphomas. Submission of
the amendment will approximately double the number of patients treated with
DepoCyt under review and extend the review time for a FDA decision by three
months. The final decision regarding marketing approval of new therapeutics
resides with FDA officials subsequent to any recommendation of the Committee.
There can be no assurance that the data from the DepoCyt Phase III or
Phase IV clinical trials will be sufficient to gain FDA approval for marketing
for any indication, that additional results from ongoing pivotal Phase III
trials will be consistent with earlier results or that the Phase IV and other
clinical trials of DepoCyt will generate positive results. Any of these
occurrences would have a material adverse effect on the Company.
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, and internationally. The clinical
testing and the regulatory 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's potential products on a timely basis,
if at all. The FDA or its international equivalent may refuse to approve a drug
or biological 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 additional information, if required, will not have a material
adverse effect on the Company. Also, the regulatory process can be modified by
legislatures, the FDA or international regulators in a manner that could have a
material adverse effect on the Company.
LIMITED MANUFACTURING EXPERIENCE; RISK OF SCALE-UP; RELIANCE ON
MANUFACTURING PROCESS.
The Company has no experience manufacturing products for commercial
purposes. The Company's manufacturing operations will need to meet ongoing
commercial requirements for all markets in which products have been approved.
The Company will also need to comply with current Good Manufacturing Practices
("cGMPs") and other regulations prescribed by various regulatory agencies in the
United States and other countries to achieve the required levels of production
of each of its products and to obtain and retain marketing approval, if any.
Failure by the Company to successfully scale-up its manufacturing processes or
to comply with cGMPs and other regulations would have a material adverse effect
on the Company, including the loss of manufacturing rights to DepoCyt under the
Chiron and P&U agreements. 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 is likely to be highly variable for different therapeutic agents.
Finally, the Company will need to successfully meet any manufacturing challenges
associated with the specific characteristics of the drug to be encapsulated.
FUTURE CAPITAL NEEDS.
The development and commercialization of the Company's potential 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's
future capital requirements will depend on many factors, including, without
limitation, the time and costs involved in obtaining regulatory approvals,
continued scientific progress in its products and process development programs
and changes in existing collaborative programs. The Company anticipates that it
will be required to raise additional capital in the near-term in order to
continue to conduct its operations. Such capital may be raised through public or
private financings, as well as collaborative arrangements, borrowings and other
available sources. There can be no
12
<PAGE> 5
assurance that additional funding will be available on favorable terms, if at
all. If adequate funds are not available, the Company will be required to
curtail operations significantly or to obtain funds through entering into
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, potential products or
potential markets that the Company would not otherwise relinquish. The failure
to receive additional funding would have a material adverse effect on the
Company.
DEPENDENCE UPON PARTNERS FOR DEVELOPMENT AND COMMERCIALIZATION.
The Company does not currently possess all of the resources necessary to
develop, complete the FDA approval process and commercialize all of its
potential therapeutic products. The Company hopes to enter into collaborative
arrangements with other companies to fund research, development and clinical
trials, to assist in obtaining regulatory approvals and to commercialize its
products in the United States and internationally. 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 or
controlled by third parties. While the Company has entered into preliminary
arrangements to test the feasibility of its delivery technology with certain
pharmaceuticals and has entered into more extensive collaborations with Chiron
and P&U, 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.
LIMITED SALES AND MARKETING CAPABILITY.
Commercialization of the Company's products is expected to be expensive and
time-consuming. To the extent the Company relies on its collaborators for sales,
marketing or other capabilities, the Company will be dependent on the efforts of
third parties and there can be no assurance that any of these collaborators will
successfully perform their duties in commercializing the Company's products.
PATENTS AND PROPRIETARY TECHNOLOGY.
DepoTech relies on a combination of technical leadership, patents, trade
secrets, copyright and trademark protection and nondisclosure agreements to
protect its proprietary rights. There can be no assurance that any patents
issued to the Company will provide significant protection or will not be
challenged or that the Company will be issued any additional patents. Even if
issued patents are enforceable, the Company anticipates that any attempts to
enforce its patents would be time consuming and costly. Additionally, the
coverage claimed in a patent application can be significantly reduced before the
patent is issued. Defense of any lawsuit or failure to obtain a license to
intellectual property rights of third parties required to commercialize the
Company's potential products would have a material adverse affect on the
Company. 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. 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. 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.
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, the status of
submissions to the FDA or its international equivalent, as well as variations in
the Company's results of operations, market conditions, analysts' estimates and
the stock market in general may cause the market price of the Company's common
stock to fluctuate significantly. Also, future sales of shares by existing
shareholders pursuant to Rule 144 of the Securities Act of 1933, as amended, or
through the exercise of outstanding registration rights, could have a material
adverse effect on the price of the Company's common stock.
13
<PAGE> 6
STATEMENTS OF OPERATIONS
DepoTech Corporation
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Contract revenue $ 3,877,701 $ 4,391,024 $ 5,825,784
Licensing/milestone payments 3,000,000 -- --
Marketing rights fee -- -- 1,000,000
- ----------------------------------------------------------------------------------------------------------------
Total revenues 6,877,701 4,391,024 6,825,784
Costs and expenses:
Research and development 20,058,158 17,951,636 12,699,247
General and administration 6,763,775 4,087,436 2,826,538
Repurchasing of marketing rights 2,000,000 -- --
- ----------------------------------------------------------------------------------------------------------------
Total costs and expenses 28,821,933 22,039,072 15,525,785
- ----------------------------------------------------------------------------------------------------------------
Loss from operations (21,944,232) (17,648,048) (8,700,001)
Interest income 1,722,434 1,659,852 1,084,244
Interest expense (1,186,532) (787,409) (404,790)
- ----------------------------------------------------------------------------------------------------------------
Net loss $(21,408,330) $(16,775,605) $ (8,020,547)
==============================================
Basic and diluted net loss per share $ (1.59) $ (1.46) $ (0.94)
==============================================
Shares used in computing basic and diluted net loss per share 13,433,915 11,451,334 8,492,711
==============================================
</TABLE>
See accompanying notes.
14
<PAGE> 7
Balance Sheets
DepoTech Corporation
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,194,153 $ 1,966,626
Short-term investments 21,166,402 16,231,471
Accounts receivable from collaborations 1,361,837 614,580
Other current assets 1,141,210 1,160,394
- ---------------------------------------------------------------------------------------------------------------
Total current assets 29,863,602 19,973,071
Property and equipment, net 26,948,328 16,851,574
Restricted cash 216,516 289,023
Deposits and other assets 641,240 494,737
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 57,669,686 $ 37,608,405
=================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,101,983 $ 1,633,756
Current portion of note payable 2,509,467 493,481
Current portion of obligations under capital leases 2,037,416 2,040,578
Other accrued liabilities 1,148,477 939,331
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 7,797,343 5,107,146
Deferred rent 2,313,133 1,377,623
Deferred revenue -- 54,839
Note payable, less current portion 6,901,982 1,709,813
Obligations under capital leases, less current portion 2,089,931 4,129,750
Other long-term liabilities 494,506 --
Commitments
Shareholders' equity
Common stock, no par value; 30,000,000 shares authorized; 14,237,216 and
11,543,816 shares issued and outstanding at
December 31, 1997 and 1996, respectively 101,970,346 67,797,617
Deferred compensation related to stock options, net (109,472) (161,960)
Unrealized gain (loss) on short-term investments 15,784 (10,886)
Accumulated deficit (63,803,867) (42,395,537)
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 38,072,791 25,229,234
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 57,669,686 $ 37,608,405
=================================
</TABLE>
See accompanying notes
15
<PAGE> 8
Statements of Cash Flows
DepoTech Corporation
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Operating activities
Net loss $(21,408,330) $(16,775,605) $ (8,020,547)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,959,210 1,512,151 837,168
Deferred revenue from collaboration -- -- (1,000,000)
Amortization of deferred compensation 52,488 52,488 47,990
Deferred rent 935,510 989,676 275,602
Deferred revenue (54,839) 54,839 --
Forgiveness of employee notes receivable -- 39,283 56,333
Changes in operating assets and liabilities:
Accounts receivable from collaborations (747,257) (214,580) (156,123)
Other current assets 19,184 (632,753) (494,873)
Deposits and other assets (158,947) (196,931) (115,614)
Accounts payable and other accrued liabilities 1,171,878 125,495 1,376,791
- ------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (18,231,103) (15,045,937) (7,193,273)
Investing activities
Purchases of short-term investments (32,496,584) (17,244,027) (38,410,705)
Proceeds from sale or maturities of short-term investments 27,588,323 33,573,121 11,171,032
Purchases of property and equipment (12,043,520) (6,395,815) (1,419,044)
Restricted cash 72,507 131,837 16,740
- ------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (16,879,274) 10,065,116 (28,641,977)
Financing activities
Repayment of capital lease obligations (2,042,980) (1,803,637) (831,262)
Repayment of note payable (834,015) -- --
Proceeds from note payable 8,042,170 2,203,294 --
Proceeds from issuance of common stock, net 34,172,729 663,879 38,163,652
Repayment of facilities payable -- -- (237,569)
Proceeds from bank borrowing -- -- 4,000,000
Repayment of bank borrowing -- -- (4,000,000)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 39,337,904 1,063,536 37,094,821
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,227,527 (3,917,285) 1,259,571
Cash and cash equivalents at the beginning of year 1,966,626 5,883,911 4,624,340
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of year 6,194,153 1,966,626 5,883,911
Short-term investments at the end of year 21,166,402 16,231,471 32,777,623
- ------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments
at the end of year $ 27,360,555 $ 18,198,097 $ 38,661,534
==================================================
Supplemental information
Property and equipment acquired through
capital leases and loans $ -- $ 3,337,461 $ 3,677,018
==================================================
Issuance of common stock in exchange for note payable $ -- $ -- $ 231,938
==================================================
Interest paid $ 1,186,532 $ 787,409 $ 404,790
==================================================
</TABLE>
See accompanying notes.
16
<PAGE> 9
Statements of Shareholders' Equity
DepoTech Corporation
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balance at
January 1, 1995 5,982,991 $ 26,560,830 1,531,263 $ 82,486
Issuance of
common stock, net -- -- 78,908 36,306
Exercise of warrants -- -- 242,468 308,654
Deferred compensation
related to issuance of
stock options -- -- -- 262,438
Amortization of
deferred compensation -- -- -- --
Accretion on convertible
preferred stock -- 1,832,394 -- --
Unrealized gain on
investments -- -- -- --
Issuance of common
stock upon initial
public offering, net -- -- 3,450,000 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 -- -- -- --
------------------------------------------------------------
Balance at
December 31, 1995 -- -- 11,285,630 67,133,738
Issuance of
common stock, net -- -- 258,186 663,879
Amortization of deferred
compensation -- -- -- --
Unrealized loss on
investments -- -- -- --
Net loss -- -- -- --
------------------------------------------------------------
Balance at
December 31, 1996 -- -- 11,543,816 67,797,617
Issuance of
common stock, net -- -- 2,693,400 34,172,729
Amortization of deferred
compensation -- -- -- --
Unrealized gain on
investments -- -- -- --
Net loss -- -- -- --
------------------------------------------------------------
Balance at
December 31, 1997 -- $ -- 14,237,216 $101,970,346
============================================================
</TABLE>
<TABLE>
<CAPTION>
Defered Unrealized
Compensation Gain Total
Related (Loss) on Accumulated Shareholders'
to Stock Options Investments Deficit Equity
<S> <C> <C> <C> <C>
Balance at
January 1, 1995 $ -- $ 26,928 $(15,766,991) $ 10,903,253
Issuance of
common stock, net -- -- -- 36,306
Exercise of warrants -- -- -- 308,654
Deferred compensation
related to issuance of
stock options (262,438) -- -- --
Amortization of
deferred compensation 47,990 -- -- 47,990
Accretion on convertible
preferred stock -- -- (1,832,394) --
Unrealized gain on
investments -- 179,244 -- 179,244
Issuance of common
stock upon initial
public offering, net -- -- -- 38,050,630
Conversion of
convertible preferred
stock upon initial
public offering -- -- -- --
Net loss -- -- (8,020,547) (8,020,547)
---------------------------------------------------------------
Balance at
December 31, 1995 (214,448) 206,172 (25,619,932) 41,505,530
Issuance of
common stock, net -- -- -- 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 (161,960) (10,886) (42,395,537) 25,229,234
Issuance of
common stock, net -- -- -- 34,172,729
Amortization of deferred
compensation 52,488 -- -- 52,488
Unrealized gain on
investments -- 26,670 -- 26,670
Net loss -- -- (21,408,330) (21,408,330)
---------------------------------------------------------------
Balance at
December 31, 1997 $ (109,472) $ 15,784 $(63,803,867) $ 38,072,791
===============================================================
</TABLE>
See accompanying notes.
17
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
DepoTech Corporation - December 31, 1997
Note 1 - Summary of Significant Accounting Policies
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
its DepoFoam drug delivery technology.
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
Statement of Financial Accounting Standards 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.
Realized gains and losses are included in interest income. The cost of
securities is based on the specific identification method.
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.
RESTRICTED CASH
Restricted cash consists of certificates of deposit maintained as
collateral for letters of credit securing certain lease agreements.
PATENT COSTS
Included in deposits and other assets are patent and trademark filing costs
totaling approximately $641,000 (net of accumulated amortization of
approximately $55,000) and $453,000 (net of accumulated amortization of
approximately $43,000) at December 31, 1997 and 1996, respectively, which are
amortized over the estimated economic life of the patents or trademarks.
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.
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.
STOCK OPTIONS
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 the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123") requires the use of option valuation models that were not developed for
use in valuing employee stock options. Under APB 25, when the exercise price of
the Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
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.
18
<PAGE> 11
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.
NET LOSS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), which replaced
the calculation of primary and fully diluted net loss per share with basic and
diluted net loss per share. Basic net loss per share is calculated using the
weighted average number of common shares outstanding. Diluted net loss per share
is calculated using the weighted average number of common shares outstanding
plus the dilutive effect of options and warrants, if any, using the treasury
stock method. All net loss per share amounts for all periods have been
presented, and where appropriate restated, to conform to the FAS 128
requirements and the recently effective Securities and Exchange Commission Staff
Accounting Bulletin No. 98.
Net loss per share information as presented on the Statements of Operations
has been presented as if the convertible preferred stock that converted upon the
Company's initial public offering had been converted from its original date of
issuance. Basic net loss per share, without an adjustment for the assumed
conversion of the convertible preferred stock, would have been $3.21 in 1995.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). This standard is effective for fiscal years beginning after December 15,
1997. FAS 130 requires that all components of comprehensive income, including
net income, be reported in the financial statements in the period in which they
are recognized. Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from non-owner
sources. Net income and other comprehensive income, including unrealized gains
and losses on investments, shall be reported, net of their related tax effect,
to arrive at comprehensive income. The Company intends to adopt FAS 130 in 1998.
Operating results of prior periods will not be restated since the Company's only
component of comprehensive income other than net income has been unrealized
gains and losses on investments, which were not significant.
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 DepoCyt 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, or 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 $1.0 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.
In June 1997, DepoTech reacquired rights to DepoCyt in Canada and Europe
from Chiron for aggregate cash payments of up to $13.7 million. Chiron will
retain exclusive marketing rights to DepoCyt in the United States. An initial
$2.0 million cash payment was paid by DepoTech to Chiron and expensed in 1997.
If, prior to December 31, 1998, the U.S. Food and Drug Administration ("FDA")
issues a letter or other notification to DepoTech indicating that DepoCyt is
approvable or approved, the remaining balance of $11.7 million shall be payable
no later than December 31, 1998. If no FDA notification is received prior to
December 31, 1998, the remaining amount shall be payable no later than six
months from the earlier of U.S. or European Union regulatory notification that
the application to market or sell DepoCyt is approvable or approved. If all
applications for regulatory approval to sell DepoCyt in the U.S. and European
Union are permanently withdrawn, DepoTech shall be relieved of any obligation to
pay the remaining $11.7 million. Therefore, such amount will be recorded upon
the receipt of the required notification.
19
<PAGE> 12
Reimbursable clinical and manufacturing scale up costs for DepoCyt incurred
by the Company totaled $1,662,000, $3,194,000 and $2,542,000 for the years ended
December 31, 1997, 1996, and 1995, 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. In April 1997,
the Company earned $1.0 million upon completing the filing of the New Drug
Application for DepoCyt.
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 1997, the Company had completed feasibility
studies on three Chiron Products. A fourth 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 particles 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.
Note 3 - Pharmacia & Upjohn Agreement
In July 1997, DepoTech entered into a Marketing and Distribution Agreement
with Pharmacia & Upjohn S.p.A ("P&U"), an affiliate of Pharmacia & Upjohn Inc.,
for rights to market and sell DepoCyt in countries outside the United States.
P&U will generally be responsible for submitting regulatory filings, labeling,
packaging, distribution, marketing and sales of DepoCyt in this territory. The
Company will manufacture DepoCyt and receive a share of the net sales of DepoCyt
sold by P&U. The Company received a cash payment of $2.0 million upon execution
of the agreement and may receive additional payments of up to $17.0 million upon
achievement of certain regulatory milestones. The agreement also provides for
reimbursement of certain clinical trial expenses and regulatory fees incurred by
the Company. Cumulative reimbursable costs for clinical trial costs incurred by
the Company under this agreement totaled $1,221,000 as of December 31, 1997.
Note 4 - Balance Sheet Details
SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale short-term investments:
<TABLE>
<CAPTION>
================================================================================
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
================================================================================
<S> <C> <C> <C> <C>
December 31, 1997
U.S. government
securities $ 13,640,812 $ 22,442 $ -- $ 13,663,254
Corporate
obligations 7,509,806 -- (6,658) 7,503,148
- --------------------------------------------------------------------------------
$ 21,150,618 $ 22,442 $ (6,658) $ 21,166,402
================================================================================
December 31, 1996
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
================================================================================
</TABLE>
The amortized cost and estimated fair value of short-term investments at
December 31, 1997, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
================================================================================
Estimated
Cost Fair Value
================================================================================
<S> <C> <C>
Due in one year or less $13,738,024 $13,759,317
Due after one year through three years 7,412,594 7,407,085
- --------------------------------------------------------------------------------
$21,150,618 $21,166,402
================================================================================
</TABLE>
20
<PAGE> 13
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
================================================================================
December 31,
1997 1996
================================================================================
<S> <C> <C>
Manufacturing, laboratory and
office equipment $ 15,630,844 $ 12,254,274
Leasehold improvements 4,085,399 2,041,001
Leasehold improvements and
manufacturing equipment under
construction 12,167,119 5,552,015
- --------------------------------------------------------------------------------
31,883,362 19,847,290
Less accumulated depreciation
and amortization (4,935,034) (2,995,716)
- --------------------------------------------------------------------------------
$ 26,948,328 $ 16,851,574
================================================================================
</TABLE>
OTHER ACCRUED LIABILITIES
Included in other accrued liabilities as of December 31, 1997 and 1996 are
$783,723 and $774,754, respectively, of employee compensation related expenses.
Note 5 - Commitments
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 to dates through August 1, 2015. Included in restricted cash and
deposits and other assets are $228,000 and $301,000 related to these agreements
at December 31, 1997 and 1996, respectively. Annual future minimum lease
payments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
================================================================================
Operating Capital
Leases Leases
================================================================================
<S> <C> <C>
1998 $ 3,297,221 $ 2,407,967
1999 3,378,035 1,627,461
2000 3,423,641 631,866
2001 3,551,623 --
2002 3,684,819 --
Thereafter 48,633,338 --
===========
Total $65,968,677 4,667,294
- --------------------------------------------------------------------------------
Less amount representing interest (539,947)
- --------------------------------------------------------------------------------
Present value of net minimum payments 4,127,347
Less current portion (2,037,416)
- --------------------------------------------------------------------------------
Amounts due after one year $ 2,089,931
================================================================================
</TABLE>
The Company subleased certain of its existing laboratory and administrative
facilities. Rental income from the sublease agreement over the next three 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 $8.5 million and $9.1 million at December 31, 1997 and 1996,
respectively. Accumulated amortization of assets acquired under these
arrangements is included in total depreciation and amortization.
Rent expense was approximately $4,074,000, $3,895,000 and $1,467,000 during
the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE PAYABLE
During June 1996, the Company established a credit line with a bank for
borrowing up to $9.0 million to finance certain capital equipment and leasehold
improvement expenditures. In October 1997, the Company expanded this credit line
by $4.5 million. Borrowings under the credit line, which total $9,411,449 and
$2,203,294 at December 31, 1997 and 1996, respectively, bear interest at a
floating rate equal to prime plus 0.5% (8.5% and 8.75% at December 31, 1997 and
December 31, 1996, respectively) on the outstanding balance. The credit line
expires on March 31, 2002 and all borrowings are secured by the capital
equipment financed. The terms of the Company's loan agreement contains a
covenant requiring the Company to maintain minimum liquidity equal to 1.67 times
the outstanding loan balance, except for during the draw down period, at which
time the Company shall maintain 1.67 times the commitment amount. At December
31, 1997, the Company was in compliance with the terms of the covenant. At
December 31, 1997, approximately $3,254,000 remains available for future
equipment acquisitions and leasehold improvements.
Annual future principal payments as of December 31, 1997 are as follows:
<TABLE>
================================================================================
<S> <C>
1998 $2,509,467
1999 2,561,366
2000 2,561,366
2001 1,727,351
2002 51,899
- --------------------------------------------------------------------------------
Total $9,411,449
================================================================================
</TABLE>
21
<PAGE> 14
Note 6 - Shareholders' Equity
PRIVATE PLACEMENTS
In January 1997, the Company completed the private placement of 1.5 million
newly issued shares of DepoTech common stock raising net proceeds of $18.9
million. In September 1997, the Company raised net proceeds of $14.6 million
through the private placement of 1.0 million newly issued shares of DepoTech
common stock.
STOCK PURCHASE WARRANTS
In connection with various stock purchase or lease financing transactions,
the Company has issued warrants to purchase shares of common stock of which
42,354, 22,400 and 453,335 shares remain outstanding as of December 31, 1997 at
prices of $2.75, $6.25 and $7.00 per share, respectively. The warrants are
generally exercisable through 2001.
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.
STOCK OPTION PLANS
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 2,750,000 shares of the Company's common stock. No options granted under the
Plan have a term in excess of ten years.
In October 1997, the Company authorized the 1997 Supplemental Stock Option
Plan. The Plan has authorized the grant of options to employees (other than
directors and officers) and consultants of the Company of up to 141,000 shares
of the Company's common stock. The options granted under the Plan are
non-qualified and no options may have a term in excess of ten years.
Pro forma information regarding net loss and net loss per share is required
by FAS 123, and has been determined as if the Company had 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 valuation model with the following weighted average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
6.3%, 6.1% and 6.5%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 56%, 58% and 73%; and a
weighted-average life of the option of four 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, 1997, 1996 and 1995 reflects
increases of approximately $807,000, $307,000 and $55,000, respectively. The pro
forma net loss per share (basic and diluted) for the years ended December 31,
1997, 1996 and 1995 was $1.65, $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 less then four years vesting.
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
=======================================================================================================================
<CAPTION>
1997 1996 1995
=======================================================================================================================
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding-
beginning
of year 1,295,863 $ 8.03 1,102,439 $ 2.02 917,314 $ .68
Granted 943,266 $14.65 467,744 $19.77 258,300 $6.54
Exercised (79,245) $15.11 (209,848) $ .68 (48,908) $ .75
Forfeited (57,356) $12.18 (64,472) $14.46 (24,267) $1.84
- -----------------------------------------------------------------------------------------------------------------------
Outstanding-
end of year 2,102,528 $11.22 1,295,863 $ 8.03 1,102,439 $2.02
=======================================================================================================================
Exercisable
at end of year 897,219 547,407 415,790
=======================================================================================================================
Weighted average
fair value of options
granted during year $7.60 $ 9.69 $2.50
=======================================================================================================================
</TABLE>
<PAGE> 15
The following table summarizes information about stock options outstanding
at December 31, 1997.
<TABLE>
<CAPTION>
==========================================================================================
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Options Outstanding Life Price Exercisable Price
==========================================================================================
<S> <C> <C> <C> <C> <C>
$0.10 to $4.00 655,889 6.0 years $ 1.16 530,134 $ .94
$7.00 to $13.625 247,975 8.9 years $11.72 61,490 $10.08
$14.00 to $19.625 1,135,714 9.1 years $16.20 278,219 $17.38
$23.50 to $25.125 62,950 8.3 years $24.34 27,376 $24.20
- ------------------------------------------------------------------------------------------
2,102,528 897,219
==========================================================================================
</TABLE>
The weighted average remaining contractual life of outstanding options is
8.1 years. At December 31, 1997, options for 227,236 shares were available for
future grant under the 1995 and 1997 stock option plans.
EMPLOYEE STOCK PURCHASE PLAN
In June 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 dates. The Company has
reserved 250,000 shares of common stock for issuance under the ESPP, of which
132,731 shares have been issued as of December 31, 1997.
Note 7 - Income Taxes
At December 31, 1997, the Company had federal and California tax net
operating loss carryforwards of approximately $59,117,000 and $31,804,000,
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 prior to 1997.
The federal tax loss carryforward will begin expiring in 2005 unless
previously utilized, and the California tax loss carryforward will begin to
expire in 1998. The Company also has federal and California research and
development tax credit carryforwards totaling $1,919,000 and $998,000,
respectively, which begins 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 $27,251,000, of which $9,629,000 is
related to 1997, has been recognized to offset the deferred tax assets as
realization of such assets is uncertain.
<TABLE>
<CAPTION>
================================================================================
December 31,
1997 1996
================================================================================
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 22,599,000 $ 14,416,000
Research and development
credit carryforwards 2,567,000 1,448,000
Capitalized research expenses 1,451,000 1,713,000
Other, net 1,920,000 558,000
- --------------------------------------------------------------------------------
Net deferred tax assets 28,537,000 18,135,000
Valuation allowance for
deferred tax assets (27,251,000) (17,622,000)
- --------------------------------------------------------------------------------
Total deferred tax assests 1,286,000 513,000
Deferred tax liabilities:
Depreciation (1,286,000) (513,000)
- --------------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
================================================================================
</TABLE>
Approximately $1,059,000 of the valuation allowance for deferred tax assets
relates to stock option deductions which, when recognized, will be allocated
directly to common stock.
Note 8 - 401(k) Retirement Savings Plan
In January 1993, the Company adopted a 401(k) Retirement Savings Plan (the
"Plan") covering substantially all employees who have completed certain service
requirements. Participants may contribute a portion of their compensation to
the Plan through payroll deductions. Company matching contributions, if any, are
determined by the Company at its sole discretion. There have been no Company
contributions under the Plan through December 31, 1997
22
<PAGE> 16
SELECTED FINANCIAL DATA
DepoTech Corporation
<TABLE>
<CAPTION>
Years Ended December 31,
(dollars, except share amounts)
Statement of Operations Data: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total revenues $ 6,877,701 $ 4,391,024 $ 6,825,784 $ 582,120 $ 69,500
Total expenses 28,821,933 22,039,072 15,525,785 9,307,676 4,058,419
Net loss (21,408,330) (16,775,605) (8,020,547) (8,561,487) (3,896,906)
Basic and diluted
net loss per share (1.59) (1.46) (0.94) (1.33) (0.84)
Shares used in computing
basic and diluted net
loss per share 13,433,915 11,451,334 8,492,711 6,441,003 4,657,157
Balance Sheet Data:
Cash, cash equivalents and
short-term investments $ 27,360,555 $ 18,198,097 $ 38,661,534 $ 9,983,046 $ 7,519,096
Total assets 57,669,686 37,608,405 48,977,573 15,346,654 10,107,087
Long-term liabilities 11,799,552 7,272,025 3,218,957 2,618,664 408,538
Shareholders' equity 38,072,791 25,229,234 41,505,530 10,903,253 8,702,521
</TABLE>
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, 1997 and 1996, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of DepoTech Corporation
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG, LLP
San Diego, California
February 6, 1998
23
<PAGE> 17
CORPORATE INFORMATION
DepoTech Corporation
Board of Directors
CHAIRMAN
Fred A. Middleton
General Partner, Sanderling Ventures
Chief Executive Officer, DepoTech Corporation
DIRECTORS
Roger C. Davisson
General Partner, Brentwood Associates
George W. Dunbar, Jr.
President and Chief Executive Officer, Metra Biosystems, Inc.
Stephen B. Howell, M.D.
Medical Director, DepoTech Corporation
Professor of Medicine, University of California San Diego
John P. Longenecker, Ph.D.
President and Chief Operating Officer, DepoTech Corporation
Peter Preuss
President, Preuss Foundation
Pieter J. Strijkert, Ph.D.
Chairman, IntroGene BV
Officers / Management
Fred A. Middleton
Chief Executive Officer
John P. Longenecker, Ph.D.
President and Chief Operating Officer
David B. Thomas
Senior Vice President,
Quality Assurance and Regulatory Affairs
Williams S. Ettouati, D.Pharm.
Vice President, Marketing and Business Development
Dana S. McGowan
Vice President, Finance
Chief Financial Officer, Treasurer and Assistant Secretary
Sheldon A. Schaffer, Ph.D.
Vice President, Pharmaceutical Development
Faye H. Russell, Esq.
Secretary
Thomas E. Swedberg
Senior Director, Human Resources
CORPORATE HEADQUARTERS
10450 Science Center Drive, San Diego, CA 92121
619.625.2424
www.depotech.com
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.
SEC FORM 10-K
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ON FORM 10-K IS AVAILABLE WITHOUT CHARGE BY CONTACTING
INVESTOR RELATIONS AT DEPOTECH CORPORATION.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre, 85 Challenger Road
Ridge?eld Park, NJ 07660
800.522.6645
INDEPENDENT AUDITORS
Ernst & Young LLP, San Diego, California
CORPORATE COUNSEL
Brobeck Phleger & Harrison LLP, San Diego, California
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders will be held at 9:00 am PST on Wednesday,
May 13, 1998, at DepoTech Corporation.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock 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
<S> <C> <C>
1996
1st Quarter $25 1/2 $18
2nd Quarter $29 1/2 $22 1/2
3rd Quarter $25 1/2 $14 1/2
4th Quarter $17 $22 1/4
1997
1st Quarter $20 1/8 $15 1/4
2nd Quarter $17 1/4 $12 1/4
3rd Quarter $15 1/4 $11 3/4
4th Quarter $15 3/8 $ 3 11/32
</TABLE>
At March 20, 1998, there were approximately 3,300 shareholders of record.
The Company has never declared or paid dividends on its Common Stock.
25
<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 February 6, 1998, included in the
1997 Annual Report to Shareholders of DepoTech Corporation.
We also consent to the incorporation by reference in (i) the Registration
Statement (Form S-8 No. 333-42459) pertaining to the 1997 Supplemental Stock
Option Plan; (ii) the Registration Statement (Form S-8 No. 333-28531)
pertaining to the 1995 Stock Option/Stock Issuance Plan, as amended; (iii) 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 (iv)
the Registration Statement (Form S-3 No. 333-16371) and related Prospectus, of
our report dated February 6, 1998, 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, 1997.
ERNST & YOUNG LLP
San Diego, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,194
<SECURITIES> 21,166
<RECEIVABLES> 1,362
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,864
<PP&E> 31,883
<DEPRECIATION> (4,935)
<TOTAL-ASSETS> 57,670
<CURRENT-LIABILITIES> 7,797
<BONDS> 0
0
0
<COMMON> 101,970
<OTHER-SE> (63,898)
<TOTAL-LIABILITY-AND-EQUITY> 57,670
<SALES> 0
<TOTAL-REVENUES> 6,878
<CGS> 0
<TOTAL-COSTS> 20,058
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,187
<INCOME-PRETAX> (21,408)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,408)
<EPS-PRIMARY> (1.59)
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,884
<SECURITIES> 32,778
<RECEIVABLES> 400
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,628
<PP&E> 10,114
<DEPRECIATION> (1,503)
<TOTAL-ASSETS> 48,978
<CURRENT-LIABILITIES> 4,253
<BONDS> 0
0
0
<COMMON> 67,134
<OTHER-SE> (25,628)
<TOTAL-LIABILITY-AND-EQUITY> 48,978
<SALES> 0
<TOTAL-REVENUES> 6,826
<CGS> 0
<TOTAL-COSTS> 12,699
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 405
<INCOME-PRETAX> (8,021)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
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</TABLE>
