<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 33-90516
NEOPHARM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0327886
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
225 EAST DEERPATH
SUITE 250
LAKE FOREST, ILLINOIS 60045
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(847) 295-8678
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.0002145 PAR VALUE
---------------------------------
(Title of class)
WARRANTS TO PURCHASE SHARES OF COMMON STOCK, $.0002145 PAR VALUE
----------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of 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 Registrant's common stock held by
non-affiliates of the registrant, par value $.0002145 per share, (based on the
closing price of such shares on the American Stock Exchange on February 18,
1997) was $27,399,555. As of February 18, 1997 there were 8,130,268 shares of
Common Stock outstanding.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement (the "Proxy Statement") to be used
in connection with the Registrant's 1996 Annual Meeting of Stockholders, which
Proxy Statement will be filed under the Securities Exchange Act of 1934 within
120 days of the Registrant's fiscal year ended December 31, 1996, are
incorporated by reference to Part III of this Annual Report on Form 10-K.
FORM 10-K TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
----
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 8. Financial Statements and Supplemental Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 19
PART III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management 22
Item 13. Certain Relationships and Related Transactions 22
PART IV
Item 14. Exhibits and Financial Statement Schedules. 23
Signatures 25
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
THE COMPANY
NeoPharm is a pharmaceutical company engaged in the research and
development of drugs for the diagnosis and treatment of various forms of
cancer. Phase II clinical trials have been completed by various parties under
the sponsorship of the National Cancer Institute (the "NCI"), a unit of the
National Institutes of Health, with respect to the Company's two primary drugs,
BUdR (Broxuridine) and IUdR (Idoxuridine). In clinical trials involving brain
cancer patients, patients receiving BUdR together with radiation therapy
exhibited increased survival times as compared to patients receiving radiation
therapy alone. Preliminary results of additional studies indicate that BUdR and
IUdR may enhance the effectiveness of radiation therapy for other cancers,
including cervical and gynecological cancers, soft tissue sarcomas, and head
and neck cancers. BUdR and IUdR are also being used for diagnostic applications
as indicators of cancer cell proliferation activity. In December 1996, the
Company filed a new drug application ("NDA") with the United States Food and
Drug Administration ("FDA") for BUdR in a diagnostic application and for BUdR
as a radiation sensitizer in the treatment of brain cancer. The Company's NDA
relating to BUdR as a prognostic indicator in breast cancer has been accepted
for review by the FDA and the FDA requires additional information for that
portion of the NDA that covers use of BUdR as a radiation sensitizer in the
treatment of malignant gliomas (brain tumors) before that portion can be
accepted for review.
The Company's BUdR and IUdR products are the subject of a Cooperative
Research and Development Agreement ("CRADA") with the NCI. The CRADA provides
the Company with exclusive access to all clinical data compiled in BUdR and
IUdR studies conducted by various parties under the sponsorship of the NCI,
involving more than 6,000 patients for diagnostic applications and 1,500
patients for therapeutic applications. Under the CRADA, NCI has agreed to
provide the Company with exclusive access to all clinical data for the
compounds from clinical trials sponsored by the NCI.
The incorporation of BUdR and IUdR into the DNA of actively dividing
cancer cells weakens the DNA molecules in the cancerous cells, and renders them
more sensitive to the lethal effects of radiation. These drugs, when coupled
with radiation therapy, may therefore be a more effective treatment for certain
forms of cancer than radiation therapy alone. In addition to their therapeutic
applications, BUdR and IUdR administered in smaller doses have been used for
diagnostic applications as indicators of cellular proliferation activity.
Following the administration of BUdR and IUdR, biopsies of the tumor are taken
and treated with specific monoclonal antibodies to highlight the presence of
BUdR or IUdR in the cells, and the actively dividing cells can then be
identified and counted. Clinical trials involving diagnostic use of BUdR and
IUdR have indicated that this cell tumor behavior information provided by BUdR
and IUdR can assist the oncologist in selecting appropriate therapeutic
regimens and enable better monitoring of the effectiveness of the chosen
therapy.
The Company also has developed proprietary liposome products (spheres of
subcellular size composed primarily of phospholipids, certain of which are the
primary components of living cell membranes). By encapsulating certain
chemotherapeutic drugs in liposomes, the toxic side effects associated with the
drug can be reduced and the dose increased, thereby potentially increasing the
effectiveness of therapy through both increased drug action against cancer
cells and reduced side effects. Unlike other liposome-encapsulated
chemotherapeutic drugs, the Company believes its liposomes overcome the effects
of MDR (multiple drug resistance), which is a common phenomenon in
approximately 300,000 cancer patients each year. The Company has conducted one
Phase II efficacy study of its liposome-encapsulated doxorubicin ("LED")
product involving approximately 20 patients with breast cancer, in which 45% of
the patients showed either a partial (minimum 50% shrinkage of the tumor) or
complete (100% shrinkage of the tumor)
3
<PAGE> 4
response, as compared to a reported 22% partial or complete response observed
with free doxorubicin in other studies. The study also demonstrated a
significant reduction in side effects. In addition, the Company has developed a
synthetically derived lipid source for making its liposomes, and plans to
initiate Phase I/II clinical trials using the synthetically derived formulation
in 1997.
The Company has developed relationships with established pharmaceutical
manufacturers for production of BUdR and IUdR as well as its liposome products.
The Company's primary market in the United States consists of approximately
3,500 oncologists, most of whom are affiliated with major cancer treatment
centers. The Company believes it will be able to address this market with a
direct sales force of relatively modest size. The Company intends to enter into
collaborative arrangements with other companies to market its products
elsewhere in the world. To date, the Company has been engaged primarily in
research and development of its proposed products. The Company currently has no
marketing or sales staff and, to date, has conducted its activities through
consultants and at university research facilities. The Company will need to
hire additional personnel and gain access to marketing and sales resources in
order to continue the development and commercialization of its products.
NeoPharm, Inc. was incorporated in Delaware under the name OncoMed, Inc.
in June 1990, and changed its name to NeoPharm, Inc. in March 1995. The
Company's principal offices are located at 225 East Deerpath, Suite 250, Lake
Forest, Illinois 60045, and its telephone number is (847) 295-8678.
NEOPHARM PRODUCTS
The Company has two primary areas of product focus, its BUdR and IUdR
products and its proprietary liposome products. The Company is developing BUdR
and IUdR for use as radiation sensitizers to improve the effectiveness of
radiation therapy for certain types of cancers and as diagnostic agents in
cancer therapy. The Company is also developing liposome encapsulated
chemotherapeutic agents, including liposome encapsulated doxorubicin and
liposome encapsulated vincristine. The Company has also acquired rights to
liposome encapsulated taxol and liposome encapsulated antisense
oligodeoxynucleotides.
All of the products currently being developed by the Company will require
approval by the FDA before they can be sold commercially in the United States.
This approval process is rigorous and time consuming. Before FDA approval is
granted, the products must be shown to be effective in preclinical studies
involving animal models and must be shown to have acceptable levels of
toxicity. The products are then subjected to controlled clinical trials
involving hundreds of patients in order to prove safety and efficacy. These
clinical trials are typically divided into Phase I and II trials in which the
safety and appropriate therapeutic dose are determined, followed by Phase III
trials, in which the efficacy is confirmed in larger numbers of patients. BUdR
and IUdR, which the Company is focusing on for development of its initial
products, have been shown to be safe and effective in Phase I and Phase II
clinical trials. BUdR and IUdR are currently undergoing Phase III clinical
trials. In December 1996, the Company filed an NDA with the FDA for BUdR in a
diagnostic application and for BUdR as a radiation sensitizer in the treatment
of brain cancer. The Company's NDA as it relates to BUdR as a prognostic
indication in the treatment of breast cancer was accepted for review by the
FDA, however, the FDA will require additional information for that portion of
the NDA that dealt with use of BUdR as a radiation sensitizer in the treatment
of brain tumors before that portion of the NDA can be accepted. See "Government
Regulation" below.
4
<PAGE> 5
The table below sets forth the Company's principal products under
development, the primary indications for these products and the development
status for each product.
NEOPHARM PRODUCT SUMMARY
<TABLE>
<CAPTION>
PRODUCT CANCER INDICATION CLINICAL STATUS
--------------------- -------------------- ---------------
<S> <C> <C>
BUDR/IUDR THERAPEUTIC
PRODUCTS
BUdR Malignant gliomas NDA Submitted
(brain cancer)
IUdR Soft tissue sarcoma Phase II
IUdR Renal and Pancreatic Phase II
cancers
BUdR Gynecological Phase I/II
malignancies
BUDR/IUDR DIAGNOSTIC
PRODUCTS
BUdR Diagnostic NDA Submitted
IUdR Diagnostic Phase III
LIPOSOME PRODUCTS
LED Breast Phase I/II
LED Kaposi's Sarcoma Preclinical
LED Hematological Preclinical
LEVCR Hematological, Colon Preclinical
LET Breast, Ovary Preclinical
LE-AON Lung, Breast, Colon, Preclinical
Gastrointestinal
</TABLE>
There can be no assurance that any of the Company's products will receive
necessary regulatory approvals, be successfully commercialized and achieve
market acceptance, or that any products commercialized by the Company will not
be rendered obsolete by other developments in the field of cancer treatment.
BUDR AND IUDR PRODUCTS
The first commercial products for the Company are expected to be BUdR and
IUdR. Under the sponsorship of the National Cancer Institute ("NCI"), a unit of
the National Institutes of Health, these compounds have been evaluated as
agents for improving the effectiveness of cancer therapy in academic and
clinical studies for nearly 30 years, and the first IND application for BUdR
and IUdR was filed with the FDA in 1964. During the course of clinical
evaluation of these compounds, approximately 7,500 patients have been studied
under NCI-approved and sponsored clinical protocols. Recent advancements in
radiation therapy and cancer diagnostic techniques have increased the potential
utility of BUdR and IUdR as therapeutic and diagnostic agents in cancer
therapy. As a result of these advancements, in the early 1990s the NCI
determined that BUdR and IUdR should be made available on a commercial basis.
NCI chose NeoPharm as its development partner to bring these products to
market. As a result, a Cooperative Research and Development Agreement ("CRADA")
has been signed between NeoPharm and NCI. Under the terms of the CRADA,
NeoPharm has exclusive rights to the data generated with BUdR and IUdR by NCI
for certain indications contained in the CRADA including tumors metastatic to
the brain, astrocytomas, gastrointestinal cancers, colon cancer, pancreatic
cancer, lung cancer, soft tissue sarcomas, head and neck cancer and leukemia.
The CRADA provides that the Company may sponsor and help support clinical
studies, pay for the cost of producing BUdR and IUdR used in clinical trials
and, to the extent supported by clinical results, file appropriate NDAs with
the FDA. The original term of the CRADA extended through May 1, 1997. By
mutual agreement, the CRADA was extended through September 13, 1998, although
the agreement may be terminated by either party without cause upon 60 days
notice; provided that in the event of such termination all clinical trials and
protocols that have been scheduled, initiated, or otherwise
5
<PAGE> 6
included under the CRADA prior to the notification of termination shall be
completed unless otherwise mutually agreed. All provisions of the CRADA shall
continue in effect for such clinical trials and protocols. Although BUdR and
IUdR are not covered by patents or patent applications, the Company believes
that its exclusive access to the clinical data collected by NCI and its
investigators and its other rights under the CRADA represent a significant
competitive advantage for the Company in the development and eventual
commercialization of BUdR and IUdR. There can be no assurance that the CRADA
will remain in effect or that the collaboration provided for in the CRADA will
be successfully completed. See "Collaborative Relationships, Licenses and
Commercialization Strategy" below.
LIPOSOME PRODUCTS
Liposomes are spheres of subcellular size composed primarily of
phospholipids, certain of which are the primary components of living cell
membranes, and can be made to contain and deliver drugs. This membrane
encapsulation feature of liposomes enables the entrapped drug to be circulated
in the bloodstream in higher concentrations for longer periods of time than the
free drug. When certain drugs, including chemotherapeutic agents, are
administered in conjunction with liposomes, they have been shown to produce
fewer and less severe local and systemic side effects. Although liposomes have
been investigated and used for many years as drug delivery systems, the
difficulty in producing liposomes on a large scale, as well as the limited
shelf life of many liposomes, have limited their use in clinical settings.
Unlike other liposomes-encapsulated chemotherapeutic drugs, the Company
believes its liposomes overcome the effects of MDR (multiple drug resistance),
which occurs in many chemotherapeutic regimens. In addition, these liposomes
are easy to prepare at the clinical site. The Company's formulation is based on
a lipid, cardiolipin, that is found in cardiac tissue. In addition, the Company
has developed a synthetically derived cardiolipin, which it believes will
provide a reliable lipid source for making the Company's liposomes to be used
in upcoming clinical trials.
COLLABORATIVE RELATIONSHIPS, LICENSES AND COMMERCIALIZATION STRATEGY
The Company has entered into a CRADA with the NCI and has licensed certain
technology relating to its liposome products from Georgetown. Dr. Aquilur
Rahman, the Company's Chief Scientific Officer, is an Adjunct Professor of
Radiology at Georgetown. The principal terms of the NCI CRADA and the license
and sponsored research agreements with Georgetown are summarized below.
NCI CRADA. The Company has entered into a CRADA with the National Cancer
Institute giving the Company the exclusive right to develop and commercialize
BUdR and IUdR for use as diagnostic and therapeutic agents in the treatment of
cancer. Under the CRADA, the Company is responsible for the co-development with
the NCI of clinical trials and for obtaining regulatory approvals for BUdR and
IUdR. NCI will provide NeoPharm with exclusive access to all clinical data for
the compounds from clinical trials sponsored by NCI during the term of the
CRADA pursuant to the CRADA Research Plan. NeoPharm has the right to use all
such data for the purpose of obtaining regulatory approval for the compounds.
NeoPharm is responsible for the preparation and submission of NDAs for the
compounds and for supplying the BUdR and IUdR to be used in clinical trials.
NCI has agreed, during the term of the CRADA, to refrain from assisting any
other party in the development and commercialization of BUdR and IUdR; however,
either the Company or the NCI may independently initiate clinical trials
involving BUdR or IUdR that are not part of the research plan or clinical trial
program under the CRADA. BUdR and IUdR are currently not the subject of any
patent or patent application; however, in the event any NCI personnel develop
any patentable inventions within the scope of the CRADA, NCI will offer
NeoPharm a first option to a license to such inventions on industry standard
terms. The original term of the CRADA extended through May 1, 1997. The
agreement was subsequently extended until September 13, 1998, although the
agreement may be terminated by either party upon 60 days' notice; provided that
in the event of such termination all clinical trials and protocols that have
been scheduled, initiated,
6
<PAGE> 7
or otherwise included under the CRADA prior to the notification of
termination shall be completed unless otherwise mutually agreed. All provisions
of the CRADA shall continue in effect for such clinical trials and protocols.
In addition, should NeoPharm fail to prepare and submit an NDA to the FDA
within 18 months from the time the data are known to demonstrate reproducible
results that would be sufficient to support an NDA, the NCI may terminate the
CRADA but only if the Company fails to exercise reasonable diligence in pursuit
of an NDA. The Company's preclinical and clinical research and development
activities under the CRADA are conducted pursuant to guidelines established by
a Steering Committee of three voting members from the NCI and three voting
members from the Company. In the event the Steering Committee cannot reach
agreement on an issue related to the CRADA, then the matter will be submitted
to Dr. John Kapoor (or another individual designated by the Company) and the
Director of the Division of Cancer Treatment at the NCI. If the matter cannot
then be resolved, the Director of the NCI shall propose a resolution in
writing. If NeoPharm elects not to accept the proposed resolution, either party
may terminate the CRADA or make a new proposal for resolution of the matter.
The Company has assumed responsibility for satisfying the supply requirements
of BUdR and IUdR for conducting clinical trials. The Company provides $120,000
per year for reasonable and necessary expenses incurred by the NCI in carrying
out its responsibilities under the CRADA. Any excess funds not used by the NCI
for incurred expenses will be refunded to the Company at the termination of the
agreement. The Company is further obliged under the CRADA to provide sufficient
staff to meet its obligations under the CRADA. Pursuant to the CRADA, the NCI
will refrain from assisting any other party other than the Company in
commercializing BUdR/IUdR during the term of the CRADA. The Company may license
any drug developed under the CRADA not made solely by NeoPharm's employees for
which a patent or patent application is filed. The terms of the license for
such jointly developed drugs will, according to the CRADA, reflect relative
contributions of the parties to the invention, the risks incurred by the
Company, and the costs of subsequent research and development needed to bring
the invention to the marketplace. If NeoPharm does not accept the NIH proposals
on the license terms, the NIH will be free to license such inventions to third
parties.
Georgetown University. The Company previously entered into license and
sponsored research agreements with Georgetown University relating to LED,
LEVCR, LET and LE-AON. Under the agreements with Georgetown, and in return for
the sponsorship of supportive research, the Company has exclusive licenses to
manufacture and sell LED, LEVCR, LET and LE-AON. The Company will also be
obligated to pay Georgetown royalties on commercial sales of the liposome
products. In addition, the Company will be obligated to make certain advance
royalty payments to Georgetown, which payments will be credited against future
royalties payable under the Company's agreements with Georgetown. The licenses
are generally not terminable by Georgetown, except in the event of a default by
the Company. Any such default and resulting termination of the licenses would
be materially adverse to the Company's liposome program, could require
curtailment or termination of such program and could therefore have a material
adverse effect on the Company's business, financial condition and results of
operations.
MARKETING AND SALES
The treatment of cancer is a highly specialized activity in which the
treating oncologists tend to be concentrated in major medical centers. The
Company's marketing strategy is designed to enable the Company to operate with
a relatively small direct sales force in the United States. As products receive
regulatory approval, the Company plans to develop a sales force of modest size
to service the over 3,500 practicing oncologists in the United States. The
Company intends to seek collaborative agreements with other companies to market
the products elsewhere in the world.
The marketing and sale of the Company's BUdR and IUdR will be subject to
certain requirements imposed pursuant to the CRADA. These include requirements
that the products not be sold at prices that may be deemed to be excessive.
7
<PAGE> 8
MANUFACTURING
The Company does not intend to acquire or establish its own dedicated
manufacturing facilities for the foreseeable future. Rather, the Company's
manufacturing strategy will be to develop manufacturing relationships with
established pharmaceutical manufacturers for production of BUdR and IUdR as
well as its liposomal products.
There are a number of FDA approved suppliers of raw materials used in the
Company's products in existence. There are also a number of facilities with FDA
Good Manufacturing Practice approval for contract manufacturing of the
Company's proposed products. The Company has a source for the manufacture of
BUdR and IUdR and is in the process of arranging for sources for the
manufacture of certain of its planned liposomal products. The Company believes
that, in the event of the termination of its existing sources for product
supplies and manufacture, the Company will be able to enter into agreements
with other suppliers and/or manufacturers on similar terms. There can be no
assurance that there will be manufacturing capacity available to the Company at
the time the Company is ready to manufacture its products.
PATENTS AND PROPRIETARY RIGHTS
It will be the Company's policy to, where possible, file patent
applications to protect technology, inventions and improvements that are
important to the development of its business. Under its agreements with
Georgetown University, the Company has licensed rights to three United States
patents and two pending United States patent applications relating to its
liposome products under development. BUdR and IUdR are, however, not currently
the subject of patents or patent applications, and the Company does not expect
to obtain patent protection for its BUdR and IUdR products. The Company's
principal advantage with respect to the development and planned
commercialization of BUdR and IUdR is its exclusive access under the CRADA to
NCI's clinical data regarding the compounds.
The patent position of participants in the pharmaceutical field generally
is highly uncertain, involves complex legal and factual questions, and has
recently been the subject of much litigation. There can be no assurance that
any patent applications relating to the Company's potential products or
processes will result in patents being issued, or that the resulting patents,
if any, will provide protection against competitors who successfully challenge
the Company's patents, obtain patents that may have an adverse effect on the
Company's ability to conduct business, or are able to circumvent the Company's
patent position. It is possible that other parties have conducted or are
conducting research and could make discoveries of compounds or processes that
would precede any discoveries made by the Company, which could prevent the
Company from obtaining patent protection for these discoveries. Finally, there
can be no assurance that others will not independently develop pharmaceutical
products similar to or obsoleting those that the Company is planning to
develop, or duplicate any of the Company's products.
The Company's competitive position is also dependent upon unpatented trade
secrets. In an effort to protect its trade secrets, the Company has a policy of
requiring its employees, Scientific Advisory Board members, consultants and
advisors to execute proprietary information and invention assignment agreements
upon commencement of employment or consulting relationships with the Company.
These agreements provide that all confidential information of the Company
developed or made known to the individual during the course of their
relationship with the Company must be kept confidential, except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets or other
proprietary information in the event of unauthorized use or disclosure of
confidential information. Invention assignment agreements executed by
Scientific Advisory Board members, consultants and advisors may conflict with,
or be subject to, the rights of third parties with whom such individuals have
employment or consulting relationships. In addition, there can be no assurance
that others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's
8
<PAGE> 9
trade secrets, that such trade secrets will not be disclosed or that the
Company can effectively protect its rights to unpatented trade secrets.
The Company may be required to obtain licenses to patents or proprietary
rights of others. No assurance can be given that any licenses required under
any such patents or proprietary rights would be made available on terms
acceptable to the Company, or at all. If the Company does not obtain such
licenses, it could encounter delays in product market introductions while it
attempts to design around such patents, or could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed.
Litigation may be necessary to defend against or assert such claims of
infringement, to enforce patents issued to the Company, to protect trade
secrets or know-how owned by the Company, or to determine the scope and
validity of the proprietary rights of others. In addition, interference
proceedings declared by the United States Patent and Trademark Office may be
necessary to determine the priority of inventions with respect to patent
applications of the Company or its licensors. Litigation or interference
proceedings could result in substantial costs to and diversion of effort by,
and may have a material adverse impact on, the Company. In addition, there can
be no assurance that these efforts by the Company will be successful.
GOVERNMENT REGULATION
Introduction. Regulation by governmental authorities in the United States
and foreign countries is a significant factor in the development, manufacture
and marketing of the Company's proposed products and in its ongoing research
and product development activities. The nature and extent to which such
regulation will apply to the Company will vary depending on the nature of any
products which may be developed by the Company. It is anticipated that all of
the Company's products will require regulatory approval by governmental
agencies prior to commercialization. In particular, human therapeutic and some
diagnostic products are subject to rigorous preclinical and clinical testing
and other approval procedures of the FDA and similar regulatory authorities in
foreign countries. Various Federal statutes and regulations also govern or
influence testing, manufacturing, safety, labeling, storage and record-keeping
related to such products and their marketing. The process of obtaining these
approvals and the subsequent compliance with appropriate Federal statutes and
regulations require the expenditure of substantial time and financial
resources. Any failure by the Company or its collaborators to obtain, or any
delay in obtaining, regulatory approval could adversely affect the marketing of
any products developed by the Company, its ability to receive product revenues
and its liquidity and capital resources.
FDA Approval Process. Prior to commencement of clinical studies involving
human beings, preclinical testing of new pharmaceutical products is generally
conducted on animals in the laboratory to evaluate the potential efficacy and
the safety of the product. The results of these studies are submitted to the
FDA as a part of an investigational new drug ("IND") application, which must
become effective before clinical testing in humans can begin. Typically,
clinical evaluation involves a time consuming and costly three-phase process.
In Phase I, clinical trials are conducted with a small number of subjects to
determine the early safety profile, the pattern of drug distribution and
metabolism. In Phase II, clinical trials are conducted with groups of patients
afflicted with a specific disease in order to determine preliminary efficacy,
optimal dosages and expanded evidence of safety. In Phase III, large-scale,
multi-center, comparative trials are conducted with patients afflicted with a
target disease in order to provide enough data to demonstrate the efficacy and
safety required by 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 upon the data which have been
accumulated to that point and its assessment of the risk/benefit ratio to the
patient.
The results of the preclinical and clinical testing on a nonbiologic drug
and certain diagnostic drugs are submitted to the FDA in the form of a new drug
application ("NDA") for approval to commence commercial sales. In responding to
an
9
<PAGE> 10
NDA, the FDA may grant marketing approval, request additional information or
deny the application if the FDA determines that the application does not
satisfy its regulatory approval criteria. There can be no assurance that
approvals will be granted on a timely basis, if at all. Similar procedures are
in place in countries outside the United States.
In 1988, the FDA issued "fast-track" regulations intended to accelerate
the approval process for the development, evaluation and marketing of new
therapeutic and diagnostic products used to treat life-threatening and severely
debilitating illnesses, especially those for which no satisfactory alternative
therapies exist. "Fast-track" designation affords the Company early interaction
with the FDA in terms of protocol design and permits, although it does not
require the FDA to grant approval after completion of Phase II clinical trials
(although the FDA may require subsequent Phase III clinical trials or even
post-approval Phase IV efficacy studies). The Company believes that a number of
its product candidates may fall under these regulations, but there can be no
assurance that any of the Company's products will receive this or other similar
regulatory treatment.
In late 1992, legislation imposing FDA user fees on drug manufacturers was
enacted. Such fees will be required for each commercial marketing drug
application submitted by the Company for FDA approval, and annual product and
establishment fees will also be imposed upon approval. The revenues raised from
these fees are earmarked specifically to increase the resources of the FDA, and
by doing so, to increase the speed with which the FDA reviews and approves drug
marketing applications. Currently, the user fee for an NDA is approximately
$250,000, and the statute provides for periodic fee increases. The statute
currently provides small companies (defined as companies with less than 500
employees that are not marketing a prescription drug product) with a reduction
in the initial application fee and contains limited provisions for fee waivers.
During 1996, the Company was granted a waiver of the user fee required with the
filing of the NDA for BUdR.
Waxman-Hatch Act. The Drug Price Competition and Patent Restoration Act
of 1984, also known as the Waxman-Hatch Act, contains provisions pertaining to
marketing exclusivity from generic competition for most non-biological drugs
and patent restoration for most pharmaceutical products. These patent
provisions will not be applicable to BUdR and IUdR because such compounds are
not patented. A five-year marketing exclusivity period is provided for new
chemical entities, and a three-year marketing exclusivity period is provided
for approved drugs for which new clinical investigations are essential to the
receipt of FDA approval to market the product. For purposes of the Waxman-Hatch
Act, a new chemical entity is defined as a drug product that contains an active
moiety not previously approved by the FDA for marketing. Accordingly, the
Company believes that BUdR and IUdR would qualify as new chemical entities
under the Waxman-Hatch Act. If the Company were to obtain FDA approval to
market BUdR or IUdR, for a period of five years after such approval, no company
could copy the approved product and obtain approval of a competitive version.
The five year exclusivity period would not prevent a competitive product from
being marketed based upon new preclinical and clinical studies conducted by the
competitor. In the event that the Company receives approval of NDAs for BUdR
and IUdR, there can, however, be no assurance that the Company would receive
any or all of the benefits provided by the Waxman-Hatch Act as currently in
effect.
Orphan Drug Act. Under the Orphan Drug Act, the FDA may designate drug
products as orphan drugs if there is no reasonable expectation of recovery of
the costs of research and development from sales in the United States or if
such drugs are intended to treat a rare disease or condition, which is defined
as a disease or condition that affects less than 200,000 persons in the United
States. If certain conditions are met, designation as an orphan drug confers
upon the sponsor marketing exclusivity for seven years following FDA approval
of the product, meaning that the FDA cannot approve another version of the
"same" product for the same use during such seven year period. The market
exclusivity provision does not, however, prevent the FDA from approving a
different orphan drug for the same use or the same orphan drug for a different
use. Although the Company received letters from the FDA stating that BUdR
qualifies for orphan drug designation as a radiation sensitizer in the
10
<PAGE> 11
treatment of primary brain tumors and that IUdR qualifies for orphan drug
designation as a radiation sensitizer in the treatment of soft-tissue sarcomas,
there is no assurance that any of the Company's products will ultimately
receive orphan drug designation or approval, or that the benefits currently
provided by such designations or approvals will not hereafter be amended or
eliminated. The Orphan Drug Act has been controversial, and many legislative
proposals have from time to time been introduced in Congress to modify various
aspects of the Orphan Drug Act, particularly the market exclusivity provisions.
There can be no assurance that new legislation will not be introduced in the
future that may adversely impact the availability or attractiveness of orphan
drug status for any of the Company's products.
Other Regulations. The Company is also subject to various Federal, state
and local laws, regulations and recommendations relating to safe working
conditions, laboratory manufacturing practices and the use and disposal of
hazardous or potentially hazardous substances, including radioactive compounds
and infectious disease agents, used in connection with the Company's research
work. The extent of government regulation which might result from future
legislation or administrative action cannot be predicted accurately. The
Company has not made and does not anticipate making material capital
expenditures with respect to the protection of the environment.
COMPETITION
Competition in the discovery and development of methods for treating
cancer is intense. Numerous pharmaceutical, biotechnology and medical companies
and academic and research institutions in the United States and elsewhere are
engaged in the discovery, development, marketing and sale of products for the
treatment of cancer. These include surgical approaches, new pharmaceutical
products and new biologically derived products. The Company expects to
encounter significant competition for the principal pharmaceutical products it
plans to develop. Companies that complete clinical trials, obtain regulatory
approvals and commence commercial sales of their products before their
competitors may achieve a significant competitive advantage. A number of
pharmaceutical companies are developing new products for the treatment of the
same diseases being targeted by the Company. In some instances, the Company's
competitors already have products in clinical trials. In addition, certain
pharmaceutical companies are currently marketing drugs for the treatment of the
same diseases being targeted by the Company, and may also be developing new
drugs to address these disorders.
Because BUdR and IUdR are not covered by patents or patent applications,
the Company's exclusive access to the clinical data collected by NCI and its
investigators and its other rights under the CRADA represent the principal
competitive advantage for the Company in the development and eventual
commercialization of BUdR and IUdR. The NCI may publish summary data from the
clinical trials under the CRADA in its annual reports, which do not include
individual patient data. Furthermore, the collaborative nature of the Company's
relationship with the NCI is of significant importance for conduct of clinical
trials and to assist the Company in gaining acceptance of its products among
oncologists. During 1996, the Company received notice that BUdR has been
designated an orphan drug by the FDA for use in the treatment of malignant
gliomas. The Company also was notified that IUdR has received orphan drug
status for the treatment of soft-tissue sarcoma. Upon approval by the FDA the
Company will receive seven years of marketing exclusivity.
The Company believes that its competitive success will be based on its
ability to create and maintain scientifically advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other protection for its products, obtain required regulatory approvals, obtain
orphan drug status for certain products and manufacture and successfully market
its products either independently or through outside parties. Many of the
Company's competitors have substantially greater financial, clinical testing,
regulatory compliance, manufacturing, marketing, human and other resources. In
addition, the Company will
11
<PAGE> 12
continue to seek licenses with respect to key technologies related to its
fields of interest and may face competition with respect to such efforts.
HUMAN RESOURCES
As of February 18, 1997, the Company had one full time employee, and two
part-time employees, all of whom are officers. The Company currently has
consulting agreements with 8 consultants, holding either Ph.D. or M.D. degrees.
None of the Company's consultants are represented by a collective bargaining
arrangement, and the Company believes its relationship with its consultants is
satisfactory. The Company intends to continue to retain consultants and to add
personnel in as the business strategy is implemented.
SCIENTIFIC ADVISORY BOARD
The Company has assembled a six-member Scientific Advisory Board. The
members of the Scientific Advisory Board together provide expertise in areas of
scientific and medical interest to the Company. The Company has entered into
agreements with the Scientific Advisors providing that all inventions made by
the Advisors when working for the Company will belong to the Company; however,
most of the members of the Company's Scientific Advisory Board are employed on
a full-time basis by academic or research institutions. The members of the
Scientific Advisory Board are permitted to share information among themselves
regarding the projects that they are working on with the Company. The Company
granted options to acquire an aggregate of 25,000 shares its Common Stock to
members of the Scientific Advisory Board, and pays a retainer to compensate its
Scientific Advisory Board members.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K under the caption "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as oral statements that may be made by the Company or
officers, directors or employees of the Company acting on the Company's behalf,
that are not historical fact constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause the actual results of the Company to be
materially different from the historical results or from any results expressed
or implied by such forward-looking statements. Such factors include, among
others, the following:
Uncertainty of Product Development. Substantially all of the Company's
resources have been, and for the foreseeable future will continue to be,
dedicated to the Company's research and development programs and the
development of potential products. There can be no assurance that the
Company's research will lead to the discovery of any products or that the
Company will be successful in acquiring rights to products or in developing
products that could be licensed to others.
Regulatory and Technology Uncertainty. The Company is engaged in the
biopharmaceuticals field, which is characterized by extensive research and
rapid technological change. There can be no assurance that research and
discoveries by others will not render some or all of the Company's programs or
products non-competitive or obsolete. In addition, the Company's business
strategy is based, in part, upon the application of emerging technologies to
the discovery and development of biopharmaceutical products. The Company's
potential products are subject to the risks of failure inherent in the
development of therapeutic agents based on new technologies.
Future Capital Needs. The Company will require substantial additional
funding in order to continue its research and product development programs. No
assurance can be given that additional funds will be available when needed or
on terms acceptable to the Company. Insufficient funds could require the
Company to delay, scale back or eliminate one or more of its research and
development programs or to
12
<PAGE> 13
license third parties to commercialize products or technologies that the
Company would otherwise seek to develop without relinquishing its rights
thereto.
History of Losses. The Company has incurred significant operating losses
since its inception. The Company currently has no product revenue, and there
can be no assurance that it will be able to earn such revenue or that its
operations will become profitable, even if it is able to commercialize any
products.
Dependence on Others. The Company's strategy for research, development
and commercialization of its products is to rely, in part, on various
arrangements with academic collaborators, licensors, licensees and others and,
therefore, is dependent upon the success of these outside parties in the
performance of their duties. There can be no assurance that the Company will
be able to negotiate acceptable collaborative arrangements, that arrangements
or other collaborations will be completed or will be successful or that any
revenues or profits will be derived from such arrangements.
No Manufacturing, Marketing or Sales. The Company has no experience in
manufacturing, marketing or product sales and has not invested in
manufacturing, marketing or product sales resources. If the Company is unable
to manufacture or contract for a sufficient supply of its potential therapeutic
agents on acceptable terms, the Company's product development, clinical
investigation activities and regulatory approval applications may be delayed.
Uncertain Ability to Protect Patents and Proprietary Information. Because
of the substantial length of time and expense associated with bringing new
products through development and regulatory approval to the marketplace, the
pharmaceutical industry places considerable importance on patent and trade
secret protection for new technologies, products and processes. BUdR and IUdR
are, however, not currently the subject of patents or patent applications, and
the Company does not expect to obtain patent protection for its BUdR and IUdR
products. The lack of patent protection could have a material adverse effect
on the Company's operations. The Company has obtained licenses to three United
States patents and two United States patent applications. These patents and
patent applications relate primarily to the Company's proposed liposome
products. No assurance can be given that any patents under pending
applications or any future patent applications will be issued. Furthermore,
there can be no assurance that the scope of any patent protection will exclude
competitors or provide competitive advantages to the Company, that any of the
Company's patents that may be issued will be held valid if subsequently
challenged or that others, including competitors or current or former employers
of the Company's employees, advisors and consultants, will not claim rights in
or ownership to the patents and other proprietary rights held by the Company.
In addition, there can be no assurance that others will not independently,
develop substantially equivalent proprietary information or otherwise obtain
access to the Company's know-how or that others may not be issued patents that
may require licensing and the payment of significant fees or royalties by the
Company for the pursuit of its proposed business. The Company also relies on
trade secrets, know-how and technological advantage to maintain its competitive
position. Although the Company uses confidentiality agreements and employee
proprietary information and invention assignment agreements to protect its
trade secrets and other unpatented know-how, these agreements may be breached
by the party thereto or may otherwise be of limited effectiveness or
enforceability.
Substantial Competition and Technological Change. Many companies engage
in developing pharmaceutical and bio-pharmaceutical products for human
therapeutic applications. Many of these companies have substantially greater
capital, research and development and human resources and experience than the
Company and represent significant long-term competition for the Company. In
addition, many of these competitors have a significantly greater experience
than the Company in undertaking the development of new pharmaceutical products
and in obtaining regulatory approval. Other companies may succeed in developing
products that are more effective or less costly than any that may be developed
by the Company and may also prove to be more successful than the Company in
production and marketing.
13
<PAGE> 14
Dependence on Qualified Personnel. The Company's success is highly
dependent upon its ability to attract and retain qualified scientific and
technical personnel. The loss of key personnel would be detrimental to the
Company and there can be no assurance that these employees will remain with the
Company.
Uncertain Availability of Health Care Reimbursement. The Company may be
materially adversely affected by the continuing efforts of government and third
party payers to contain or reduce the cost of health care through various
means.
ITEM 2. PROPERTIES
The Company's administrative offices are located in 4470 square feet of
leased office space in Lake Forest, Illinois. This leased space is provided to
the Company as a part of a consulting agreement with EJ Financial.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation or other legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
From January 25, 1996 until December 2, 1996 the Common Stock was quoted
on The NASDAQ Stock Market's Small Cap Issues under the trading symbol NPRM.
Beginning on December 2, 1996, and continuing through the date of this report,
the Common Stock has been traded on the American Stock Exchange ("AMEX") under
the symbol NEO.
On August 15, 1996, the Company effected a two-for-one stock split.
Information on the trading prices of the Company's Common Stock has been
restated to reflect this stock split.
<TABLE>
<CAPTION>
High Low
---------------------
1996 (January 25 - December 31)
<S> <C> <C>
First Quarter 5 15/16 2 1/4
Second Quarter 8 1/2 5 3/4
Third Quarter 7 3/4 5 3/4
Fourth Quarter 10 1/2 6
</TABLE>
As of February 18, 1997, there were 24 holders of record of the Common
Stock, and the Company estimates that as of such date there were more than 400
beneficial holders of the Common Stock. The Company has never paid a cash
dividend on its Common Stock and has no present intention of paying cash
dividends in the foreseeable future. Any determination in the future to pay
dividends will depend on the Company's financial condition, capital
requirements, results of operations, contractual limitations and other factors
deemed relevant by the Board of Directors.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
JUNE 15,1990
YEAR ENDED DECEMBER 31, (INCEPTION) TO
-------------------------------- DECEMBER 31,
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses:
Research and
development 366,845 232,736 813,761 1,068,683 1,099,631 4,062,839
General and
administrative 151,415 174,598 107,286 244,901 956,924 1,776,366
------------ ------------ ----------- ----------- ----------- -----------
Loss from operations (518,260) (407,334) (921,047) (1,313,584) (2,056,555) (5,839,205)
Interest income $ -- $ -- $ -- $ -- $ 238,275 $ 238,275
Interest expense (49,702) (85,089) (162,620) (356,043) (47,365) (735,606)
------------ ------------ ----------- ----------- ----------- -----------
Interest income
(expense) - net (49,702) (85,089) (162,620) (356,043) 190,910 (497,331)
Net loss $ (567,962) $ (492,423) $(1,083,667) $(1,669,627) $(1,865,645) $(6,336,536)
============ ============ =========== =========== =========== ===========
DECEMBER 31,
---------------
1992 1993 1994 1995 1996
------------ --------------- --------------- --------------- ----------------
Balance Sheet Data:
Cash $ 318 $ 3,514 $ 9,205 $ 671 $ 4,479,041
Working capital
(deficit) (337,035) (768,423) (2,137,037) (4,553,057) 4,013,010
Total assets 14,895 13,175 112,988 495,891 4,492,208
Line of credit with
bank -- -- 656,452 2,007,652 --
Loan payable to
principal
stockholder 998,300 1,312,568 1,500,000 1,500,000 --
Deficit accumulated
during the
development stage (1,225,174) (1,717,597) (2,801,264) (4,470,891) (1,865,645)
Total stockholders'
equity (deficit) (1,160,932) (1,628,355) (2,691,773) (4,361,392) (1,865,645)
</TABLE>
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since the Company's inception in June 1990, NeoPharm has devoted its
resources primarily to fund research and product development programs. The
Company has been unprofitable since inception, has had no revenues from the
sale of products or other sources, and does not expect revenues in the near
future. The Company expects to continue to incur losses as it expands its
research and development activities and sponsorship of clinical trials. As of
December 31, 1996, the Company's accumulated deficit was $1.9 million. During
1996, the Company converted $4.5 million of accumulated deficit to Additional
Paid In Capital as part of an initial public offering in January of 1996.
RESULTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
The Company had no operating revenues during the three fiscal years ended
December 31, 1996. Interest income for 1996 totaled $238,275. The Company
completed its initial public offering in January 1996. Cash in excess of funds
needed to retire debt, pay for issuance costs or pay outstanding payables was
invested in short term investments.
The Company incurred research and development expenses of approximately
$1,100,000 in 1996, as compared to $1,069,000 in 1995 and $814,000 in 1994. The
increase in 1995 research and development expenses is primarily due to
acceleration of gathering and analyzing clinical data and preparation of a new
drug application ("NDA") relating to BUdR. These same expenses were incurred
during 1996 resulting in only a slight increase over the 1995 level. 1996,
1995 and 1994 expenses include payments made by the Company to Georgetown and
the NCI pursuant to the Company's license and sponsored research agreements
with Georgetown and its CRADA with the NCI. The Company expects research and
development spending to increase over the next several years. See "Item 1-
Business - Collaborative Relationships, Licenses and Commercialization
Strategy."
General and administrative expenses increased to approximately $957,000 in
1996 from approximately $245,000 in 1995. Prior to 1996, the Company did not
have any compensation expense nor did it need to incur the costs related to
operating as a public company. Following the initial public offering, the
Company began compensating personnel and retaining professional service firms
to assist with general corporate activities and reporting requirements.
General and administrative expenses for 1995 compared to 1994 increased
approximately $138,000, primarily due to professional fees on general corporate
matters and consulting fees due to EJ Financial Enterprises, Inc. ("EJ
Financial"), a health care consulting and investment company, accrued during
1995. From its inception through June 30, 1994, the Company accrued management
services charges to EJ Financial of $25,000 per year. These charges were not
paid, but were instead treated as contributions to capital by the John N.
Kapoor Trust, the sole beneficiary of which is Dr. John Kapoor, the sole
stockholder of EJ Financial and the chairman of the Company. Effective July 1,
1994, EJ Financial increased its management services charge to $125,000 per
year plus expenses incurred. The increased charges, which the Company believes
are reasonable and reflect the cost of the services provided, reflect the
increased need for EJ Financial's services in connection with the Company's
operation. The management services agreement with EJ Financial expires in 1997.
As a result of these factors, the Company expects general and administrative
expenses to increase in the future. See "Item 13-Certain Relationships and
Related Transactions" and Note 7 of Notes to the Financial Statements.
Interest expense decreased to approximately $47,000 in 1996 from $356,000
in 1995 as a result of the initial public offering completed in January of that
same year. Proceeds from the offering were used to retire both the debt owed
to the
17
<PAGE> 18
principal shareholder and the line of credit provided by Harris Bank and
Trust N.A. The principal stockholder converted the principal of and accrued
interest on the loan into shares of Common Stock and Warrants at the initial
public offering price. Interest expense totaled approximately $356,000 in 1995
and $163,000 in 1994, increasing due to additional borrowings. The proceeds of
borrowings were used to fund the Company's operations during the period from
1994 to 1996. See "Item 13-Certain Relationships and Related Transactions" and
Note 3 of Notes to the Financial Statements.
Inception to December 31, 1996
The Company was taxed as an S corporation from inception through October
11, 1995 when the S Corporation status was voluntarily terminated. Because the
Company was taxed as an S Corporation, all of its net losses from inception
through October 11, 1995 were passed through to its stockholders. Accordingly,
the Company did not accumulate operating loss carryforwards prior to October
11, 1995. The deficit accumulated while under S Corporation status was
reclassified to Additional Paid-In Capital in 1995. The Company has commenced
accruing net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company has approximately $4.5 million dollars
in cash and net working capital of approximately $4.0 million. Up until the
initial public offering in January of 1996, the Company funded operations
through borrowings from its principal stockholder and through a bank line of
credit, which was guaranteed by the Company's principal stockholder. At
December 31, 1995, the Company had an outstanding principal balance of
approximately $3.5 million under its debt financing arrangements. Of this
amount, $1.5 million consisted of borrowings from the Company's principal
stockholder and the remainder consisted of borrowings under the Company's bank
line of credit. Borrowings from the stockholder loan bore interest at a rate
equal to the lesser of 10% or the prime rate of Northern Trust Bank. Principal
payments not paid when due were subject to additional interest at the rate of
15%. Approximately $193,000 of additional interest was accrued through December
31, 1995. Borrowings under the bank line of credit accrued interest at the
prime rate of Harris Bank & Trust N.A. As noted above, the Company retired
both of these debts in January of 1996.
The Company's assets at December 31, 1996 increased to approximately
$4,492,000 from $496,000 at December 31, 1995, principally due to initial
public offering.
The Company's liabilities at December 31, 1996 decreased to approximately
$466,000 from $4,554,000 at December 31, 1995. This decrease is due to the
retirement of the loan payable to the principal stockholder and retirement of
the bank line of credit.
The Company expects its cash requirements to increase significantly in
future periods. In May 1995, the Company agreed to fund ongoing research at
Georgetown through April 1996 for approximately $258,000. In addition, under
the CRADA the Company is committed to pay NCI clinical trial costs of $120,000
per year as well as the cost to supply the BUdR and IUdR to be used in clinical
trials. The Company may incur additional costs in supporting its agreements
with NCI, as well as the continuation of its own research and development
efforts. In the future, the Company will require funds for building a sales and
marketing organization and development of distribution channels.
Based on its currently planned research and product development programs,
the Company anticipates that the remaining net proceeds (approximately $4.5
million at December 31, 1996) of the initial public offering and interest
income earned thereon will be adequate to satisfy its capital and operational
requirements at least through 1997. The net proceeds from the initial public
offering were $8,585,438, including exercise of the Underwriters'
over-allotment option. The Company's cash
18
<PAGE> 19
requirements may vary materially from those now planned because of results of
research and development, results of clinical testing, relationships with
possible strategic partners, changes in the focus and direction of the Company's
research and development programs, competitive and technological advances, the
FDA regulatory process and other factors.
In late 1996, the Company filed an NDA with the FDA for BUdR in a
diagnostic application in breast cancer and for BUdR in the treatment of brain
cancer. The NDA was accepted by the FDA with respect to use of BUdR in breast
cancer, but additional data will be required for acceptance of the second
indicated use of BUdR in the treatment of brain cancer. The Company intends to
file additional NDA's during 1997 and 1998. See "Item - 1 Business -- NeoPharm
Products -- NeoPharm Product Summary." All of the products currently being
developed by the Company will require approval by the FDA before they can be
sold commercially in the United States. The results of the preclinical and
clinical testing on a nonbiologic drug and certain diagnostic drugs are
submitted to the FDA in the form of an NDA for approval to commence commercial
sales. In responding to an NDA, the FDA may grant marketing approval, request
additional information or deny the application if the FDA determines that the
application does not satisfy its regulatory approval criteria.
The Company may seek to satisfy its future funding requirements through
public or private offerings of securities, with collaborative or other
arrangements with corporate partners or from other sources. Additional
financing may not be available when needed or on terms acceptable to the
Company. If adequate financing is not available, the Company may be required to
delay, scale back or eliminate certain of its research and development
programs, to relinquish rights to certain of its technologies, therapeutic and
diagnostic agents, product candidates or products, or to license third parties
to commercialize products or technologies that the Company would otherwise seek
to develop itself.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements and Supplementary Data are incorporated herein by
reference to the Company's Financial Statements included as Exhibit 1. The
information is contained as follows:
Page
<TABLE>
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants 27
Balance Sheets 28
Statements of Operations 29
Statements of Stockholders' Equity (Deficit) 30
Statements of Cash Flows 32
Notes to Financial Statements 34
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
19
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
POSITION
NAME AGE POSITION HELD SINCE
- --------------------------------- --- --------------------------------------- ----------
<S> <C> <C> <C>
John N. Kapoor, Ph.D.(2) 53 Director, Chairman of the Board 1990
Aquilur Rahman, Ph.D.(1) 54 Director, Chief Scientific Officer 1990
Anatoly Dritschilo, M.D.(2) 52 Director 1990
William C. Govier, M.D., Ph.D.(1) 60 President, Chief Executive Officer, and 1993
Director
Erick E. Hanson 50 Director 1997
Mahendra G. Shah, Ph.D. 52 Vice President, Corporate and Business 1991
Development
David E. Riggs 45 Chief Financial Officer 1995
</TABLE>
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
All directors hold office until the next annual meeting of the
stockholders and until their successors are duly elected. Officers are
appointed to serve, subject to the discretion of the Board of Directors, until
their successors are appointed.
John N. Kapoor, Ph.D., Chairman of the Board of Directors, has been a
director of the Company since July 1990. Prior to forming the Company, Dr.
Kapoor formed EJ Financial Enterprises, Inc., a health care consulting and
investment company, in March 1990, of which Dr. Kapoor is currently President.
Dr. Kapoor is presently Chairman and Chief Executive Officer of Option Care,
Inc., an outpatient and home infusion health care company; Chairman of Unimed
Pharmaceuticals, Inc., a developer and marketer of pharmaceuticals for cancer,
endocrine disorders and infectious diseases; and Chairman of Akorn, Inc., a
manufacturer, distributor, and marketer of generic ophthalmic products. Dr.
Kapoor received his Ph.D. in medicinal chemistry from the State University of
New York in 1970 and a B.S. in pharmacy from Bombay University in India.
Aquilur Rahman, Ph.D., joined the Company as Chief Scientific Officer and
as a member of the Board of Directors in July 1990. Dr. Rahman joined the
Company on a full time basis in March 1996. Dr. Rahman is currently adjunct
professor of radiology and was an adjunct professor of pathology and
pharmacology at Georgetown University until March 1996. Dr. Rahman has more
than 15 years of research experience in developing methods of chemotherapy
treatment for cancer. Dr. Rahman received his Masters of Science in
Biochemistry from the University of Dacca (Bangladesh) in 1964 and his Ph.D. in
Pharmaceutics from the University of Strathclyde (Glasgow, U.K.) in 1972.
Anatoly Dritschilo, M.D., joined the Company as a Member of the Board of
Directors in July 1990. Since August 1979, Dr. Dritschilo has been Chairman of
the Department of Radiation Medicine and Medical Director of the Georgetown
University Medical Center in Washington, D.C. Dr. Dritschilo received his B.S.
in Chemical Engineering from the University of Pennsylvania, his M.S. in
Engineering in 1969 from Newark College of Engineering, and his M.D. in 1973
from the College of Medicine of New Jersey.
William C. Govier, M.D., Ph.D., joined the Company in December 1993 as its
President, Chief Executive Officer, and a member of the Board of Directors. Dr.
Govier was a founder of Aegis Technology, Inc., a developer of pharmaceuticals
for pulmonary disease therapy, and has been its President since June 1990.
Prior to that
20
<PAGE> 21
time, Dr. Govier was Executive Vice President and Director of
Research and Medical Affairs at Medco Research, Inc., a developer of drugs
aimed at treating heart diseases. Dr. Govier received a B.A. in Chemistry and
Biology in 1957 from Kalamazoo College, an M.D. in 1961 from McGill University
in Montreal, Quebec, Canada, and a Ph.D. in Pharmacology in 1965 from the
University of Mississippi. From 1963 to 1968 he was a faculty member at the
University of Mississippi, University of Texas Southwestern Medical School and
Oxford University in England. From 1968 to 1970 Dr. Govier was associated with
the Experimental Therapeutics Branch of the National Heart Institute, National
Institutes of Health. Since that time, he has held management positions with
major pharmaceutical companies, including Executive Director of Biological
Research with CIBA-Geigy; Director of Pharmaceutical Research and Director of
Medical Research with Lederle Laboratories, Division of American Cyanamid; and
Director, Pharmaceuticals Research and Development Division of E.I. DuPont de
Nemours & Co.
Erick E. Hanson, joined the Company as a Director in April 1997. Since
April 1995, Mr. Hanson has been associated with OptionCare, Inc., a provider of
home healthcare services where he currently holds the positions of Director,
President and Chief Executive Office. Prior to joining OptionCare, Inc. Mr.
Hanson held a variety of positions with Caremark, Inc., including from
1991-1995, Vice President Sales and Marketing. Mr. Hanson served as President
and Chief Operating Officer of Clinical Partners, Inc. in Boston, MA, from
1989-1991 and prior to 1989 was associated with Blue Cross and Blue Shield of
Indiana for over twenty years. Mr. Hanson presently serves on the Board of
Directors for Candell Medical Centers.
Mahendra G. Shah, Ph.D., has served as Vice President of Corporate and
Business Development since October 1991. Dr. Shah is also a Vice President of
EJ Financial Enterprises, Inc., a position he has held since October 1991.
Prior to joining the Company, Dr. Shah was the Senior Director of New Business
Development with Fujisawa USA from January 1987 to October 1991. Dr. Shah
received his M.S. in 1978 and Ph.D. in 1984 in Industrial Pharmacy from St.
John's University and an M.S. in 1969 and a B.S. in 1967 in Pharmaceutical
Chemistry from Gujarat University in India.
David E. Riggs has served as Chief Financial Officer and Secretary since
November 1995. Mr. Riggs is also Senior Vice President, Chief Financial
Officer, Secretary and Treasurer of Unimed Pharmaceutical, Inc., a developer
and marketer of pharmaceuticals for cancer, endocrine disorders and infectious
diseases, a position he has held since May 1992. Prior to joining Unimed, Mr.
Riggs was Chief Financial Officer of VideoCart, Inc., a micro-marketing media
company, from April 1990 to August 1991. Prior to working for VideoCart, Mr.
Riggs held various positions from April 1986 until April 1990 with Fujisawa
USA, serving finally as Treasurer. Mr. Riggs received a B.S. in accounting from
the University of Illinois in 1979 and an M.B.A. from DePaul University in
1984. Mr. Riggs is a Certified Public Accountant.
21
<PAGE> 22
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item as to executive compensation is
hereby incorporated by reference from the information appearing under the
captions "Executive Compensation", "Compensation of Directors", "Election of
Directors - Compensation Committee Interlocks and Insider Participation", and
"Compensation Committee Report" in the Company's definitive Proxy Statement
which is to be filed with the Securities and Exchange Commission (the
"commission") within 120 days of the Company's fiscal year ended December 31,
1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item as to the ownership of management
and others of securities of the Company is hereby incorporated by reference
from the information appearing under the caption "Security Ownership" in the
Company's definitive Proxy Statement which is to be filed with the Commission
within 120 days of the Company's fiscal year ended December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item as to certain business relationships
and transactions with management and other related parties of the Company is
hereby incorporated by reference from the information appearing under the
caption "Certain Relationships and Related Transactions" in the Company's
definitive Proxy Statement which is to be filed with the Commission within 120
days of the Company's fiscal year ended December 31, 1996.
22
<PAGE> 23
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
3.1 Certificate of Incorporation, as amended filed with the Commission as
Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No.
33-90516), is incorporated by reference.
3.2 Bylaws of the Registrant, as amended filed with the Commission as Exhibit
3.2 to the Company's Registration Statement on Form S-1 (File No. 33-
90516), is incorporated by reference.
4.1 Specimen Common Stock Certificate filed with the Commission as Exhibit
4.1 to the Company's Registration Statement on Form S-1 (File No. 33-
90516), is incorporated by reference.
4.2 Specimen Warrant Certificate filed with the Commission as Exhibit 4.2 to
the Company's Registration Statement on Form S-1 (File No. 33-90516), is
incorporated by reference.
4.3 Form of Representative's Warrant Agreement between the Registrant and the
Representative, including form of Representative's Warrant filed with the
Commission as Exhibit 4.3 to the Company's Registration Statement on Form
S-1 (File No. 33-90516), is incorporated by reference.
4.4 Form of Warrant Agreement between the Registrant, the Representative and
Harris Trust and Savings Bank, including form of Warrant filed with the
Commission as Exhibit 4.4 to the Company's Registration Statement on Form
S-1 (File No. 33-90516), is incorporated by reference.
10.1 1995 Stock Option Plan, with forms of Incentive and Nonstatutory Stock
Option Agreements filed with the Commission as Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No. 33-90516), is
incorporated by reference.
10.2 1995 Director Option Plan, with form of Director Stock Option Agreement
filed with the Commission as Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (File No. 33-90516), is incorporated by reference.
10.3 Form of Director and Officer Indemnification Agreement. filed with the
Commission as Exhibit 10.3to the Company's Registration Statement on Form
S-1 (File No. 33-90516), is incorporated by reference.
10.4 Cooperative Research and Development Agreement between the Company and
the National Cancer Institute dated September 13, 1993 filed with the
Commission as Exhibit 10.4 to the Company's Registration Statement on Form
S-1 (File No. 33-90516), is incorporated by reference.
10.5 License Agreement between the Company and Georgetown University dated
July, 1990 filed with the Commission as Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (File No. 33-90516), is incorporated by
reference.
10.6 License Agreement between the Company and Georgetown University dated
April 18, 1994 filed with the Commission as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File No. 33-90516), is incorporated by
reference.
10.7 Loan Repayment Note, dated June 18, 1990, by and between the Company and
the John N. Kapoor Trust filed with the Commission as Exhibit 10.7 to
23
<PAGE> 24
the Company's Registration Statement on Form S-1 (File No. 33-90516), is
incorporated by reference.
10.8 Consulting Agreement, dated July 1, 1994, by and between the Company and
EJ Financial Services, Inc. filed with the Commission as Exhibit 10.8 to
the Company's Registration Statement on Form S-1 (File No. 33-90516), is
incorporated by reference.
10.9 Stock Repurchase Agreement, dated November 17, 1994, between the Company
and William C. Govier filed with the Commission as Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (File No. 33-90516), is
incorporated by reference.
10.10 Harris Bank and Trust Company Loan Agreement dated March 16, 1995, as
amended on October 5, 1995. filed with the Commission as Exhibit 10.10 to
the Company's Registration Statement on Form S-1 (File No. 33-90516), is
incorporated by reference.
10.11 Option Agreement, dated as of August 13, 1996, between the Company and
John N. Kapoor and Anatoly Dritschilo.
11.1 Calculation of Earnings Per Share.
- ------------
(b) Financial Statements
(1) Financial Statements
The financial statements filed as part of this Registration Statement are
listed in the Index to Financial Statements of the Company on Page F-1.
24
<PAGE> 25
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, ON THE 25TH DAY OF
APRIL, 1996.
NEOPHARM, INC.
By: /s/ WILLIAM C. GOVIER
William C. Govier,
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------- ------------------------- --------------
<S> <C> <C>
/s/ JOHN N. KAPOOR Director, Chairman of the March 21, 1997
John N. Kapoor Board
/s/ AQUILUR RAHMAN Director, Chief March 21, 1997
Aquilur Rahman Scientific Officer
/s/ ANATOLY DRITSCHILO Director March 21, 1997
Anatoly Dritschilo
/s/ WILLIAM C. GOVIER Director, President, and March 21, 1997
William C. Govier Chief Executive Officer
(Principal Executive
Officer)
/s/ ERICK E. HANSON Director March 21, 1997
Erick E. Hanson
/s/ DAVID E. RIGGS Chief Financial Officer March 21, 1997
David E. Riggs (Principal Financial
Officer and Principal
Accounting Officer)
</TABLE>
25
<PAGE> 26
INDEX TO FINANCIAL STATEMENTS
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants 27
Balance Sheets 28
Statements of Operations 29
Statements of Stockholders' Equity (Deficit) 30
Statements of Cash Flows 32
Notes to Financial Statements 34
</TABLE>
26
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stockholders of NeoPharm, Inc.:
We have audited the accompanying balance sheets of NeoPharm, Inc. (a
Delaware corporation in the development stage) as of December 31, 1995 and
1996, and the related statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1996 and for the period from inception (June 15, 1990) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NeoPharm, Inc. as of
December 31, 1995 and 1996, and the results of its operations and cash flows
for each of the three years in the period ended December 31, 1996 and for the
period from inception (June 15, 1990) to December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 13, 1997
27
<PAGE> 28
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and Cash Equivalents $671 $4,479,041
----------- -----------
Equipment and Furniture:
Equipment 18,745 27,007
Furniture 10,587 12,988
Less accumulated depreciation (20,548) (26,828)
----------- -----------
Total equipment and furniture, net 8,784 13,167
----------- -----------
Deferred offering costs 486,436 --
----------- -----------
Total assets $495,891 $4,492,208
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities:
Interest payable to principal
stockholder $545,379 $--
Obligations under research agreements 34,447 80,000
Due to related parties 337,740 43,239
Accounts payable 432,065 232,792
Accrued compensation -- 110,000
Current portion of loan payable to
principal stockholder 1,196,445 --
Line of credit with bank 2,007,652 --
----------- -----------
Total current liabilities 4,553,728 466,031
----------- -----------
Long-term obligations:
Loan payable to principal stockholder,
net of current portion 303,555 --
----------- -----------
Commitments and contingencies -- --
Stockholders' equity (deficit):
Common stock, $.0002145 par value;
15,000,000 shares authorized:
4,700,000 and 8,130,268 shares issued
and outstanding as of December 31,
1995 and 1996, respectively 1,008 1,744
Additional paid-in capital 108,491 5,890,078
Deficit accumulated during the
development stage (4,470,891) (1,865,645)
----------- -----------
Total stockholders' equity (deficit) (4,361,392) 4,026,177
----------- -----------
Total liabilities and stockholders'
equity (deficit) $495,891 $4,492,208
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
28
<PAGE> 29
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(JUNE 15, 1990)
FOR THE YEARS ENDED THROUGH
DECEMBER 31, DECEMBER 31,
------------
1994 1995 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ --
Expenses:
Research and development 813,761 1,068,683 1,099,631 4,062,839
General and administrative 107,286 244,901 956,924 1,776,366
------------ ------------ ------------ ------------
Total Expenses 921,047 1,313,584 2,056,555 5,839,205
Loss from Operations (921,047) (1,313,584) (2,056,555) (5,839,205)
Interest income -- -- 238,275 238,275
Interest expense (162,620) (356,043) (47,365) (735,606)
------------ ------------ ------------ ------------
Interest income(expense) - net (162,620) (356,043) 190,910 (497,331)
Net loss $(1,083,667) $(1,669,627) $(1,865,645) $(6,336,536)
============ ============ ============ ============
Net loss per share $(.32) $(.36) $(.24)
============ ============ ============
Weighted average shares used in
computing net loss per share 3,438,740 4,698,446 7,803,412
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
29
<PAGE> 30
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990)
THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED TOTAL
----------------- ADDITIONAL DURING STOCKHOLDERS'
PAR PAID-IN DEVELOPMENT EQUITY
SHARES VALUE CAPITAL STAGE (DEFICIT)
--------- ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at inception, June 15,
1990 -- $-- $-- $-- $--
Initial issuance of stock for
cash on June 21, 1990
($.0002145 per share) 3,263,888 700 -- -- 700
Services contributed to Company
by related party -- -- 13,542 -- 13,542
Net loss -- -- -- (188,441) (188,441)
----------- -------------
Balance at December 31, 1990 3,263,888 700 13,542 (188,441) (174,199)
--------- ------ ----------- ----------- -------------
Services contributed to Company
by related party -- -- 25,000 -- 25,000
Net loss -- -- -- (468,771) (468,771)
----------- -------------
Balance at December 31, 1991 3,263,888 700 38,542 (657,212) (617,970)
--------- ------ ----------- ----------- -------------
Services contributed to Company
by related party -- -- 25,000 -- 25,000
Net loss -- -- -- (567,962) (567,962)
----------- -------------
Balance at December 31, 1992 3,263,888 700 63,542 (1,225,174) (1,160,932)
--------- ------ ----------- ----------- -------------
Services contributed to Company
by related party -- -- 25,000 -- 25,000
Net loss -- -- -- (492,423) (492,423)
----------- -------------
Balance at December 31, 1993 3,263,888 700 88,542 (1,717,597) (1,628,355)
--------- ------ ----------- ----------- -------------
Issuance of stock pursuant to
exercise of stock options 1,398,810 300 7,449 -- 7,749
Services contributed to Company
by related party -- -- 12,500 -- 12,500
Net loss -- -- -- (1,083,667) (1,083,667)
----------- -------------
Balance at December 31, 1994 4,662,698 1,000 108,491 (2,801,264) (2,691,773)
--------- ------ ----------- ----------- -------------
Issuance of stock pursuant to
exercise of options,
January 1995 ($.0002145
per share) 37,302 8 -- -- 8
Net loss -- -- -- (1,669,627) (1,669,627)
Reclassification of the
deficit accumulated as
the result of the termination
of the Company's S Corporation
status -- -- (4,470,891) 4,470,891 --
----------- -----------
Balance at December 31, 1995 4,700,000 1,008 (4,362,400) -- (4,361,392)
--------- ------ ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
30
<PAGE> 31
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990)
THROUGH DECEMBER 31, 1996
(CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED TOTAL
----------------- ADDITIONAL DURING STOCKHOLDERS'
PAR PAID-IN DEVELOPMENT EQUITY
SHARES VALUE CAPITAL STAGE (DEFICIT)
--------- ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 4,700,000 1,008 (4,362,400) -- (4,361,392)
--------- ------ ----------- ----------- -------------
Conversion of interest and
loan payable to principal
stockholder into common
stock ($3.525 per share) 574,008 123 2,023,262 -- 2,023,385
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Issuance of stock pursuant to the
Company's public offering net
of costs incurred 2,772,260 595 7,896,521 -- 7,897,116
Issuance of stock pursuant to
exercise of stock options 84,000 18 259,304 -- 259,322
Net Loss -- -- -- (1,865,645) (1,865,645)
Issuance of options to non-employees -- -- 73,391 -- 73,391
Balance at December 31, 1996 8,130,268 $1,744 $5,890,078 $(1,865,645) $4,026,177
========= ====== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
31
<PAGE> 32
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
FOR THE YEARS ENDED (JUNE 15,1990)
DECEMBER 31, THROUGH
------------ DECEMBER 31,
1994 1995 1996 1996
------------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash flows used in operating
activities:
Net loss $(1,083,667) $(1,669,627) $(1,865,645) $(6,336,536)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization 6,774 6,892 6,279 38,627
Gain on disposal of equipment
and furniture -- -- -- (408)
Services contributed (non-cash)
by related party 12,500 -- -- 101,042
Interest payable to principal
shareholder converted to stock -- -- 523,385 523,385
Compensation expense from non-employee
stock options -- -- 73,391 73,391
Changes in assets and liabilities:
(Increase) decrease in other
assets 50 -- -- (11,100)
Increase (decrease) in accounts
payable and accrued liabilities 319,347 701,322 (883,600) 466,031
------------------- ------------ ------------ --------------
Net cash used in operating
activities (744,996) (961,413) (2,146,190) (5,145,568)
------------------- ------------ ------------ --------------
Cash flows used in investing
activities:
Purchase of equipment and
furniture (12,256) (583) (10,663) (41,097)
Proceeds from disposal of
equipment and furniture -- -- -- 810
------------------- ------------ ------------ --------------
Net cash used in investing
activities (12,256) (583) (10,663) (40,287)
------------------- ------------ ------------ --------------
Cash flows from financing
activities:
Proceeds from loan payable to
principal stockholder 187,432 -- -- 1,500,000
Advance on line of credit 656,452 1,351,200 107,000 2,114,652
Reduction in line of credit -- -- (2,114,652) (2,114,652)
Costs incurred related to the
initial public offering (88,690) (397,746) (201,885) (688,321)
Proceeds from initial public offering -- -- 8,585,438 8,585,438
Proceeds from issuance of common
stock 7,749 8 259,322 267,779
------------------- ------------ ------------ --------------
Net cash provided by
financing activities 762,943 953,462 6,635,223 9,664,896
------------------- ------------ ------------ --------------
Net increase (decrease) in cash 5,691 (8,534) 4,478,370 4,479,041
Cash, beginning of period 3,514 9,205 671 --
------------------- ------------ ------------ --------------
Cash, end of period $9,205 $671 $4,479,041 $4,479,041
=================== ============ ============ ==============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
32
<PAGE> 33
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
(CONTINUED)
Supplemental disclosure of cash paid
for:
Interest $13,791 $113,846 $84,585 $212,222
Income taxes -- -- -- --
Supplemental disclosure of non-cash transactions:
The Company received management services from a related party of $12,500 in
1994 which were recorded as additional capital contributions.
In 1996, the Company converted the $1,500,000 loan and $523,385 of accrued
interest expense owed to the principal shareholder into 574,008 shares of
common stock and 143,502 warrants to purchase common stock. The loan and
accrued interest were converted at the initial public offering price
The accompanying notes are an integral part of these balance sheets.
33
<PAGE> 34
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND BUSINESS:
NeoPharm, Inc. (the "Company"), a Delaware corporation in the development
stage, was incorporated on June 15, 1990, under the name of OncoMed, Inc. In
March 1995, the Company changed its name to NeoPharm, Inc. The Company is
developing products to provide therapeutic and diagnostic benefits in the
treatment of various forms of cancer. The Company has two products which are
the subject of a Cooperative Research and Development Agreement ("CRADA") with
the National Cancer Institute ("NCI"), a unit of the National Institutes of
Health. The Company also has rights to products developed under license and
sponsored research agreements with Georgetown University ("Georgetown").
The Company is in the development stage which requires substantial capital
for research, product development and market development activities. The
Company has not yet initiated marketing of a commercial product. The Company
has filed one New Drug Application ("NDA") with the United States Food and Drug
Administration ("FDA") for BUdR (Broxuridine) in a diagnostic application and
for BUdR in a the treatment of brain cancer. This and other proposed products
will require clinical testing, regulatory approval and substantial additional
investment prior to commercialization. The future success of the Company is
dependent on its ability to obtain additional working capital to develop,
manufacture and market its products and, ultimately, upon its ability to attain
future profitable operations. There can be no assurance that the Company will
be able to obtain necessary financing or regulatory approvals to be able to
successfully develop, manufacture and market its products, or attain successful
future operations. Accordingly, the predictability of the Company's future
success is uncertain.
The Company's rights to its products are subject to the terms of its
agreements with NCI and Georgetown. Termination of either, or both, of these
agreements would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, uncertainty exists
as to the Company's ability to protect its rights to patents and its
proprietary information. There can also be no assurance that research and
discoveries by others will not render some or all of the Company's programs or
products noncompetitive or obsolete. Nor can there be any assurance that
unforeseen problems will not develop with the Company's technologies or
applications, or that the Company will be able to address successfully
technological challenges it encounters in its research and development
programs. Although the Company plans to obtain product liability insurance, it
currently does not have any nor is there any assurance that it will be able to
attain or maintain such insurance on acceptable terms or with adequate coverage
against potential liabilities.
2. SIGNIFICANT ACCOUNTING POLICIES:
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. These costs
include, among other things, consulting fees and costs reimbursed to Georgetown
pursuant to the agreements as described in Note 6. Payments related to the
acquisition of technology rights, for which development work is in process, are
expensed and considered a component of research and development costs. The
Company also allocates indirect costs, consisting primarily of operational
costs for administering research and development activities, to research and
development expenses.
34
<PAGE> 35
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
EQUIPMENT AND FURNITURE
Equipment and furniture are recorded at cost and are depreciated using an
accelerated method over the estimated useful economic lives of the assets
involved. The estimated useful lives employed in computing depreciation are
five years for computer equipment and seven years for furniture. Maintenance
and repairs that do not extend the life of assets are charged to expense when
incurred.
DEFERRED OFFERING COSTS
Deferred offering costs represented incurred costs directly related to the
initial public offering and were offset against the proceeds of the stock
issued.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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 revenue and expense during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts in previously issued financial statements have been
reclassified to conform to 1996 classifications.
3. DEBT:
On June 18, 1990, the Company executed a loan agreement with Dr. John N.
Kapoor, a principal stockholder. The loan agreement allowed the Company to
borrow up to $1,500,000. Funds borrowed under the agreement incurred interest
at the lesser of 10% or the prime rate as determined by the Northern Trust
Bank. The Company had borrowed funds up to the maximum of $1,500,000 at
December 31, 1995.
Interest on borrowed funds accrued until the second anniversary of the
funding. Thereafter, principal and interest were to be repaid in 12 quarterly
installments. Any principal payment not paid within 5 days of the date when due
was subject to additional interest of 15% per annum.
From June 1990 through April 1994, the Company financed its operations by
borrowing under this loan agreement. No payments of interest or principal were
made during this period. In January of 1996, in accordance with the agreement
between the principal stockholder and the Company, with the completion of the
initial public offering, the principal stockholder converted the outstanding
loan balance, plus accrued interest through November 30, 1995, into shares of
the Company's common stock and common stock purchase warrants at a per share
conversion price equal to the offering price, $3.50 per share, $.10 per
warrant. The Company issued 574,008 shares and 143,502 warrants.
During 1995 and early 1996, the Company maintained a line of credit with
Harris Bank with maximum borrowings of $2,500,000. The line of credit was
personally guaranteed by the principal stockholder. In early 1996, the Company
paid all outstanding balances and closed the line of credit.
35
<PAGE> 36
4. STOCK OPTIONS
OPTION AGREEMENTS
The Company adopted a stock plan in 1990. The Company granted options
under the plan to purchase 1,460,978 shares. The options have an exercise price
of $.0002145 per share with the exception of options to purchase 248,676 shares
issued in December 1993, which have an exercise price of $.03217 per share.
Effective January 1995, this plan has been terminated. No additional grants
will be made under this plan.
On January 25, 1995, the board of directors approved the NeoPharm, Inc.
1995 Stock Option Plan (the "Plan"), which provides for the grant of up to
900,000 options to acquire the Company's common stock. The option prices shall
be not less than 85 percent of the fair market value of the stock as determined
by the Administrator pursuant to the Plan. The board also approved the
NeoPharm, Inc. 1995 Director Option Plan, which provides for the grant of up to
100,000 options to acquire the Company's common stock. The option prices shall
be the fair market value on the date of grant. Vesting under these plans range
from 0 to 4 years and all options expire after 10 years.
The Company accounts for the plans under APB Opinion No. 25, under which
no compensation cost has been recognized for stock option awards to employees.
Had compensation cost for such stock option awards under the plans been
determined consistent with FASB Statement No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C> <C>
Net Loss: As Reported (1,669,627) (1,865,645)
Pro Forma (1,840,545) (2,061,099)
Loss per Share: As Reported (.36) (.24)
Pro Forma (.39) (.26)
</TABLE>
Included in the grants described above are options to purchase 295,304
shares granted to non-employees. The Company accounts for these options using a
fair value method with the fair value of these options determined at the date
of grant. From inception through December 31, 1995, the Company deemed the fair
value of these options on the date of grant to be nominal, and no expense was
recorded. For the year ended December 31, 1996, the fair value was calculated
using the Black-Scholes pricing model as provided under FAS 123, and an expense
of $73,391 was recorded.
36
<PAGE> 37
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------
NUMBER OF EXERCISE PRICE
GRANT/EXERCISE DATE SHARES PER SHARE
------------------- ------ ---------
<S> <C> <C>
Grants:
June 18, 1990 932,540 $.0002145
September 20, 1990 6,216 .0002145
September 21, 1990 233,136 .0002145
October 19, 1990 6,216 .0002145
October 31, 1990 6,216 .0002145
October 19, 1992 9,326 .0002145
October 21, 1992 9,326 .0002145
November 20, 1992 9,326 .0002145
December 1, 1993 248,676 .03217
----------- --------
Balance at December 31, 1993 1,460,978 $.0002145-$.03217
----------- -----------------
Exercises:
November 17, 1994 - issued Jan. 1995. (1,398,810) $.0002145-$.03217
November 17, 1994 - issued Jan. 1995. (37,302) $.0002145
----------- ---------
Balance at December 31, 1994 24,866 $.03217
----------- -------
Grants:
February 15, 1995 308,000 $3.50
May 15, 1995 10,000 3.50
September 11, 1995 100,000 3.50
November 22, 1995 100,000 3.50
----------- ----
Balance at December 31, 1995 542,866 $.03217-$3.50
----------- -------------
Grants:
May 7, 1996 30,000 $6.00
August 13, 1996 260,000 $7.00
Exercises:
June, 1996 (19,000) $3.50
July 1996 (43,000) 3.50
August, 1996 (10,000) 3.50
September, 1996 (2,000) 3.50
December, 1996 (10,000) .03217
----------- ------
Balance at December 31, 1996 748,866 $.03217,3.50,6.00,7.00
=========== ======================
</TABLE>
Options eligible for exercise on December 31, 1993 included 1,212,302
options at an exercise price of $.0002145 and 248,676 options at an exercise
price of $.03217. Options eligible for exercise on December 31, 1994 included
24,866 options at an exercise price of $.03217. Options eligible for exercise
on December 31, 1995 included 24,866 options at an exercise price of $.03217
and 518,000 options at an exercise price of $3.50. Options eligible for
exercise on December 31, 1996 included 14,866 at an exercise price of $.03217
and 444,000 options at an exercise price of $3.50.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for the option grants in 1995 and 1996 respectively:
risk-free interest rates of 5.92 percent and 6.45 percent; expected dividend
yields of 0.00 percent; expected life of 5 years; expected volatility of 76.21
percent.
37
<PAGE> 38
5. FEDERAL INCOME TAXES:
From inception through October 11, 1995, the Company operated as an S
Corporation for income tax purposes. Losses incurred during this period are
reported on the stockholders' tax return, and are not available to the Company
as a net operating loss carryforward.
On October 11, 1995, the Company voluntarily terminated its S Corporation
election. Since that time, losses incurred represent net operating loss
carryforwards which can be used to offset future taxable income. Total net
operating loss carryforwards were approximately $191,000 and approximately
$2,057,000 as of December 31, 1995 and 1996, respectively. In accordance with
the provisions of Statement of Financial Accounting Standard No. 109, a 100%
valuation allowance has been established on the net operating loss tax asset
due to the uncertainty of its realization.
6. COMMITMENTS AND CONTINGENCIES:
LICENSE AND RESEARCH AGREEMENTS
From time to time the Company enters into license and research agreements
with third parties. At December 31, 1996, the Company has three agreements in
effect as described below.
NATIONAL CANCER INSTITUTE
The Company has entered into an agreement ("CRADA") with NCI. Pursuant to
the agreement, the Company has committed to commercialize certain products
received from NCI. The Company has agreed to provide product to support NCI
sponsored clinical trials and will use its best efforts to file a New Drug
Application ("NDA") with the Food and Drug Administration ("FDA"). NCI has
agreed to collaborate on the clinical development of the products and to
provide access to the data necessary to obtain pharmaceutical regulatory
approval.
During the years ended December 31, 1996, 1995 and 1994, the Company paid
and expensed approximately $0, $87,000 and $153,000, respectively, for product
used in clinical trials. During 1994, the Company paid approximately $162,000
for current and prior product used in clinical trials. The Company expensed, as
research and development costs, $117,000 in 1994. In addition, the Company is
committed to pay NCI $120,000 per year for reasonable and necessary expenses
incurred by NCI in carrying out NCI's responsibilities under the CRADA. During
1996, 1995 and 1994, the Company expensed, as research and development costs,
and paid $120,000 to NCI for these expenses. NCI is required to provide the
Company an accounting of the use of funds. Any amounts not expended at the end
of the agreement are refundable to the Company.
The CRADA will expire on September 13, 1998, if not earlier terminated. It
may be terminated by mutual consent of NCI and the Company. Either Party may
terminate if the other Party breaches a material term or condition and such
breach is not cured within a certain period of time. Also, either Party may
unilaterally terminate by giving 60 days notice. If unilaterally terminated by
either party, all provisions of the CRADA shall continue in full force and
effect during the completion of all clinical trials and clinical protocols
included under the CRADA prior to the date of notification of intent to
terminate. In such situation, the Company retains the rights to data from
clinical trials conducted prior to, or in progress, at the time of the
termination.
GEORGETOWN UNIVERSITY
The Company has entered into two license and research agreements with
Georgetown whereby the Company has obtained an exclusive worldwide license to
use certain technology. In exchange for the grant of these exclusive licenses,
the Company will pay Georgetown, beginning with the first commercial sale of a
product
38
<PAGE> 39
incorporating the licensed technologies, a royalty on net sales by the
Company of products incorporating any of such technologies. The royalty will be
payable for the life of the related patents.
During the years ended December 31, 1996, 1995 and 1994, the Company paid
and expensed approximately $204,000, $277,000 and $229,000, respectively,
pursuant to the license and research agreements.
OTHER
The Company has entered into consulting arrangements with members of its
Scientific Advisory Board who are also employed on a full-time basis by
academic or research institutions. Since inception through December 31, 1996,
members of the Scientific Advisory Board have been issued options (see Note 4)
to purchase an aggregate 43,313 shares of Company stock at the fair market
value at the date of grant which vest over the consulting period. Additionally,
the Scientific Advisory Board members have received aggregate payments of
approximately $64,000 since the inception of these consulting arrangements for
work performed and expenses incurred through December 31, 1996.
The Company is not a party to any litigation or other legal proceedings.
7. TRANSACTIONS WITH RELATED PARTIES
The Company receives management services from EJ Financial Enterprises,
Inc. ("EJ Financial"), a healthcare consulting and investment firm in which Dr.
Kapoor is the principal stockholder. From inception through June 30, 1994, EJ
Financial charged the Company $25,000 per year for services provided plus
actual expenses incurred. Through June 30, 1994, no payment for these services
was made, but rather was treated as additional capital contributions by Dr.
Kapoor in the accompanying statements of stockholders' equity (deficit).
Effective July 1, 1994, EJ Financial increased its charge for management
services provided to $125,000 per year plus actual expenses. The agreement,
which expires June 30, 1997, reflects an increased need for technical support
in the areas of research and development and operations. Charges to the Company
are based on actual time spent by EJ Financial personnel on the Company's
affairs. Management believes that the cost for management services allocated to
the Company represents the cost of the services provided and that they are
reasonable. From inception through December 31, 1996, the Company expensed
approximately $312,900 for management services and $189,400 as reimbursement of
actual expenses incurred by EJ Financial that directly related to the Company.
The Company's Chief Scientific Officer, Dr. Aquilur Rahman, was employed
on a full-time basis by Georgetown until joining the Company in March 1996. As
was previously mentioned, Georgetown and the Company are parties to license and
sponsored research agreements for product research and development (see Note
6). During 1996, 1995 and 1994, the Company expensed approximately $207,000,
$347,000 and $302,000 related to work performed and expenses incurred by
Georgetown. Since inception through December 31, 1996, the Company has expensed
approximately $1,749,000. Additionally, Dr. Rahman received options in June
1990 (See Note 4) to purchase 466,270 shares of Company stock at the fair
market value on the date of the grant of the options.
Prior to February 1996, the Company's President and Chief Executive
Officer ("CEO"), William C. Govier, was a consultant to the Company on clinical
trials and NDA filing matters, both as an individual and as a consultant with
Aegis Technology, Inc. ("Aegis"), an entity co-founded by Govier. As the
Company's President and CEO, Govier received options in December 1993, to
purchase 233,134 shares of Company stock at the fair market value on the date
of grant, which were fully exercised (See Note 4). His colleague and co-founder
of Aegis also received options in December 1993 (see Note 4) to purchase 15,542
shares of Company stock at the fair market value on the date of grant, of which
7,770 options were 100% vested and 7,772 options vest upon future performance
of services. The Company expensed approximately $601,500 since inception
through December 31, 1996, related to work performed and
39
<PAGE> 40
expenses incurred by Govier, his colleague and Aegis. During 1996, 1995 and
1994, the Company expensed approximately $159,500, $334,400 and $104,000.
Included as accrued expenses in the accompanying balance sheet is an
accrual for management services and expense reimbursement due to EJ Financial
of $206,366 at December 31, 1995. Also, included as accounts payable was an
accrual for consulting services and expenses due to Dr. Rahman of $69,205, and
due to Govier's colleague of $62,169 at December 31, 1995. These accruals were
paid in 1996.
8. STOCKHOLDERS' EQUITY
In January 1995, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock to 15,000,000 shares.
In October 1995, the Company amended its Certificate of Incorporation to
convert each 1.28681 shares of outstanding Common Stock into one share of
Common Stock and to restate the par value of the Common Stock from $0.000333
per share to $0.000429 per share. The reverse stock split has been reflected
retroactively in these financial statements for all periods presented.
In January 1996, the Company completed a public offering of newly issued
1,350,000 shares of common stock and 675,000 warrants for proceeds of
approximately $8,585,000 net of expenses. On March 8, 1996 the Company issued
36,130 shares of common stock and 18,565 warrants related to the underwriter's
over-allotment option for proceeds of approximately $267,000, net of expenses.
Each warrant can be converted into two shares of common stock at $4.90 per
share.
On August 14, 1996, the Company's Board of Directors declared a
two-for-one stock split of issued and outstanding Common Stock for stockholders
of record as of the close of business on August 26, 1996. Accordingly, all
numbers of common shares and per share data have been restated to reflect the
stock split. The par value of common stock has been adjusted from $0.000429
per share to $0.0002145 per share.
40
<PAGE> 1
EXHIBIT 10.11
FORM OF
STOCK OPTION AGREEMENT
AGREEMENT made as of the 13th day of August, 1996, by and between NeoPharm,
Inc., a Delaware corporation (the "Company")and
("Grantee");
--------------------------------
WITNESSETH:
WHEREAS, the Company desires to file a new drug application ("NDA") with
the United States Food and Drug Administration ("FDA") prior to December 31,
1996; and
WHEREAS, the Company believes that the services of Grantee will be
essential to the Company's ability to make a timely NDA FILING; and
WHEREAS, the Company desires to provide incentive stock grants to those
employees, directors and consultants, including the Grantee, whose assistance
is determined to be crucial to the Company's efforts to timely file the NDA;
and
WHEREAS, the parties desire to enter into an agreement pursuant to which
the Company will grant to the Grantee the right to purchase from the Company
shares of the Company's Common Stock (the "Option Shares"), but with the exact
number of Option Shares to be granted to be determined by the Company's Board
of Directors when and if the NDA is filed.
NOW, THEREFORE, in reliance upon the representations and warranties made
herein, and in consideration of the mutual agreements herein contained, the
parties hereby agree as follows:
ARTICLE ONE
OPTION
SECTION 1.01 Option Period. Subject to the terms and conditions of this
Agreement, the Company hereby grants to Grantee, subject to ARTICLE SEVEN, an
irrevocable option (the "Option") to purchase the Option Shares for a period
commencing upon the determination by the Company's Board of Directors of the
number, if any, of Option Shares to be granted and expiring ten (10) years
from the date of this Agreement (the "Option Period"). If Grantee elects to
exercise all or a portion of the Option, the Company hereby agrees to sell,
transfer, assign and deliver the Option Shares purchased to Grantee and
Grantee will purchase, accept,
<PAGE> 2
purchase and pay for such Option Shares upon the terms and
conditions provided herein.
SECTION 1.02 Purchase Price. The purchase price of the Option Shares
shall be $7.00 per Option Share (the "Purchase Price").
SECTION 1.03 Form of Purchase Price Payment. The Purchase Price shall be
payable in cash in the manner specified in Section 6.01(b).
SECTION 1.04 Exercise of Option. At any time during the Option Period,
Grantee may exercise all or a portion of the Option by giving written notice
thereof to the Company (the "Option Notice") specifying (i) the anticipated
date of the purchase of the Option Shares, which in no event shall be more
than ten (10) days after delivery of the Option Notice (the "Option Closing")
and (ii) whether the Purchase Price shall be made by certified check or wire
transfer of immediately available funds. Upon such exercise, the obligation of
Grantee to purchase the Option Shares and the Company to sell the Option
Shares shall be subject to the conditions set forth in Article Five.
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Grantee as follows:
SECTION 2.01 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware.
SECTION 2.02 Authorization. The Company has full corporate power and
authority to execute and deliver this Agreement and the execution and delivery
of this Agreement by the Company has been duly authorized by the Company's
Board of Directors. No other corporate proceeding on the part of the Company
is necessary to authorize the execution and delivery of this Agreement.
SECTION 2.03 No Violation. Neither the execution and delivery of this
Agreement by the Company nor, upon exercise of the Option, the sale of all or
any portion of the Option Shares, will (i) violate, conflict with or result in
any breach of any provision of the Certificate of Incorporation or Bylaws of
the Company, (ii) violate, conflict with or result in a violation or breach
of, or constitute a default (with or without due notice or lapse of time or
both) under, or permit the termination of, or require the consent of any other
Party to, or result in the acceleration of, or entitle any party to accelerate
any obligation or result in the loss of a benefit or give rise to the creation
of any lien, charge,
2
<PAGE> 3
security interest or encumbrance upon any of the properties or assets of the
Company under any of the terms, conditions or provisions of any material note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
material instrument or obligation to which the Company is a party or by which
it or any of its properties or assets may be bound or affected, or (iii)
violate any order, writ, judgment, injunction, decree, statute, rule or
regulation of any court or governmental authority applicable to the Company or
any of its properties or assets, excluding from the foregoing clauses (ii) and
(iii) violations, conflicts, breaches, defaults, terminations, failures to
obtain consents, accelerations, losses of benefits or liens, damages, security
interests or encumbrances created which in the aggregate would not impair the
ability of the Company, upon exercise of the Option, to sell the Option
Shares.
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES OF GRANTEE
Grantee hereby represents and warrants to the Company that:
SECTION 3.01 Authorization. Grantee has full power and authority to
execute and deliver this Agreement and to purchase the Option Shares.
SECTION 3.02 No Violation. Neither the execution and delivery of this
Agreement by Grantee nor, upon exercise of the Option, the purchase of all or
any portion of the Option Shares, will (i) violate, conflict with or result in
a violation or breach of, or constitute a default (with or without due notice
or lapse of time or both) under, or permit the termination of, or require the
consent of any other party to, or result in the acceleration of, or entitle
any party to accelerate any obligation or result in the loss of a benefit or
give rise to the creation of any lien, charge, security interest or
encumbrance upon any of the properties or assets of Grantee under any of the
terms, conditions or provisions of any material note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other material
instrument or obligation to which Grantee is a party or by which he or any of
his properties or assets may be bound or affected, or (ii) violate any order,
writ, judgment, injunction, decree, statute, rule or regulation of any court
or governmental authority applicable to Grantee or any of his properties or
assets, excluding from the foregoing clauses (i) and (ii) violations,
conflicts, breaches, defaults, terminations, failures to obtain consents,
accelerations, losses of benefits or liens, damages, security interests or
encumbrances created which in the aggregate would not impair the ability of
Grantee, upon exercise of the Option, to purchase and own the Option Shares.
3
<PAGE> 4
ARTICLE FOUR
COVENANTS
SECTION 4.01 Obligations upon Execution of Agreement.
The parties hereto agree that until termination of this Agreement,
neither the Company nor Grantee will enter into or become obligated under any
agreement, instrument or obligation which contains any provision which would
be violated upon the exercise of the Option or the purchase and sale of the
Option Shares or permit the violation with or default under any agreement,
instrument or obligation, or violate any order, statute, rule or regulation
which would otherwise impair its ability to perform its respective obligations
hereunder or to effect the purchase and sale of the Option Shares upon
exercise of the Option.
ARTICLE FIVE
OPTION CLOSING CONDITIONS
SECTION 5.01 Conditions to Obligations of Grantee. Upon the exercise of
all or any portion of the Option, the obligation of Grantee to purchase the
Option Shares shall be subject to the fulfillment by the Company, at or prior
to the Option Closing, of the following conditions:
(a) Any and all permits, consents, waivers, clearances, approvals and
authorizations of any governmental bodies which are necessary or advisable in
connection with the sale of the Option Shares shall have been obtained; and
(b) No injunction, restraining order or other ruling or order issued by
any court of competent jurisdiction or governmental authority preventing the
sale of the Option Shares shall be in effect and no proceeding brought by any
governmental authority shall be pending or threatened which seeks any
injunction, restraining order or other order which would prohibit consummation
of the sale of the Option Shares.
SECTION 5.02 Conditions to the Obligations of the Company. Upon exercise
of the Option, the obligation of the Company to sell the Option Shares shall
be subject to the fulfillment, at or prior to the Option Closing, of the
following conditions:
(a) Any and all permits, consents, waivers, clearances, approvals and
authorizations of any foreign or domestic governmental bodies which are
necessary or advisable in connection with the purchase of the Option Shares
shall have been received; and
4
<PAGE> 5
(b) No injunction, restraining order or other ruling or order issued by
any court of competent jurisdiction or domestic or foreign governmental
authority or other legal restraint or prohibition preventing the purchase of
the Option Shares shall be in effect and no proceeding brought by any foreign
or domestic governmental authority shall be pending or threatened which seeks
any injunction, restraining order or other order which would prohibit
consummation of the purchase of the Option Shares.
ARTICLE SIX
OPTION CLOSING
SECTION 6.01 Option Closing. The Option Closing shall take place at the
offices of the Company at 225 East Deerpath Road, Suite 250, Lake Forest,
Illinois at 10:00 a.m. (local time) within five business days following the
day on which the last of the conditions set forth in Article 5 is fulfilled or
waived or at such other time and place as the parties shall agree.
(a) At the Option Closing, the Company shall deliver or cause to be
delivered to the Grantee certificate(s) evidencing the Option Shares to be
purchased which certificate(s) shall be properly endorsed for transfer or
accompanied by duly executed stock power, in either case executed in blank or
in favor of Grantee; and
(b) At the Option Closing, Grantee shall deliver or cause to be delivered
to the Company an amount equal to the Purchase Price by certified check or
wire transfer of immediately available funds to an account designated by the
Company in writing prior to the Option Closing.
ARTICLE SEVEN
TERMINATION
SECTION 7.01 Termination. This Agreement shall terminate on the earliest
of the following:
(a) the expiration of the Option Period;
(b) the final Option Closing; or
(c) December 31, 1996, in the event that the NDA has not been filed
with the FDA by that date.
SECTION 7.02 Procedure and Effect of Termination. If this Agreement is
terminated pursuant to Section 7.01(a) hereof:
5
<PAGE> 6
(a) Upon request therefor, each party will redeliver all documents, work
papers and other material of any other party relating to the transactions
contemplated hereby, whether obtained before or after the execution hereof, to
the party furnishing the same; and
(b) No party hereto shall have any liability or further obligation to any
other party to this Agreement resulting from the termination of this Agreement
except that the provisions of this Section 7.02 shall remain in full force and
effect.
ARTICLE EIGHT
MISCELLANEOUS
SECTION 8.01 Public Announcements. The Company and Grantee will consult
with each other and will mutually agree upon any press release or other public
statements with respect to the grant or exercise of the Option under this
Agreement and shall not issue any such press release or make any such public
statement prior to such consultation and agreement, except as may be required
by applicable law.
SECTION 8.02 Amendment. This Agreement may be amended only pursuant to a
written instrument signed by each of the parties.
SECTION 8.03 Waiver of Compliance. Any failure of the Company, on the one
hand, or the Grantee, on the other hand, to comply with any obligation,
covenant, agreement or condition contained herein may be waived in writing by
the Grantee or the Company, respectively, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement or condition
shall not operate as a waiver of, or estoppel with respect to, any other
failure.
SECTION 8.04 Expenses and Obligations. All costs and expenses incurred in
connection with the consummation of the transactions contemplated by this
Agreement by the Company shall be paid by the Company and all costs and
expenses incurred in connection with the consummation of the transactions
contemplated by this Agreement by Grantee shall be paid by Grantee.
SECTION 8.05 Parties in Interest. Except as provided in Section 8.11,
nothing in this Agreement, express or implied, is intended to confer upon any
third party any rights or remedies of any nature whatsoever under or by reason
of this Agreement.
SECTION 8.06 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given upon the earlier of delivery
thereof if by hand or upon receipt if sent by mail (registered or certified
mail, postage prepaid, return receipt
6
<PAGE> 7
requested) or on the second next business day after deposit if sent by a
recognized overnight delivery service or upon transmission if sent by telecopy
or facsimile transmission (with request of assurance of receipt in a manner
customary for communicating such type) if delivered to the Company at its
principal office or if to Grantee at such address as shall be provided to the
Company from time to time.
SECTION 8.07 Governing Law. This Agreement shall be governed by construed
and enforced in accordance with the laws of the State of Delaware.
SECTION 8.08 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
SECTION 8.9 Headings. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 8.10 Entire Agreement. This Agreement embodies the entire
agreement and understanding of the parties hereto in respect of the subject
matter contained herein. There are no agreements, representations, warranties
or covenants other than those expressly set forth or referred to herein. This
Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
SECTION 8.11 Assignment. This Agreement many not be assigned by Grantee,
whether by operation of law or otherwise, without the prior written consent of
the Company; provided, however, that in the event of the death or disability
of the Grantee while any Option Shares remain available under this Option,
Grantee's estate or personal representative shall succeed to all rights of the
Grantee hereunder and may exercise this Option to the same extent as the
Grantee would have as of the date of death or disability. This Agreement will
be binding upon and inure to the benefit of and be enforceable by the parties
and their respective successors, and permitted assigns.
7
<PAGE> 8
IN WITNESS WHEREOF, each of the parties hereto has duly executed and
acknowledged this Option Agreement on the date first above written.
NEOPHARM, INC.
By:
-------------------------
Title:
By:
-------------------------
Grantee
8
<PAGE> 1
EXHIBIT 11.1
NEOPHARM, INC.
CALCULATION OF EARNINGS PER SHARE
FOR DECEMBER 31, 1996
<TABLE>
<CAPTION>
12/31/94 12/31/95 12/31/96
------------ ------------ ------------
<S> <C> <C> <C>
Net loss for the period $(1,083,667) $(1,669,627) $(1,865,645)
Weighted average shares outstanding 3,438,740 4,698,446 7,803,412
============ ============ ============
Net loss per share ($0.32) ($0.36) ($0.24)
============ ============ ============
</TABLE>
41
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,479,041
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,479,041
<PP&E> 39,995
<DEPRECIATION> 26,828
<TOTAL-ASSETS> 4,492,208
<CURRENT-LIABILITIES> 466,031
<BONDS> 0
0
0
<COMMON> 1,744
<OTHER-SE> 4,024,433
<TOTAL-LIABILITY-AND-EQUITY> 4,492,208
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,056,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,365
<INCOME-PRETAX> (1,865,645)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,865,645)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,865,645)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> 0
</TABLE>
