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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-21699
VIROPHARMA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
DELAWARE 94-2347624
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
76 GREAT VALLEY PARKWAY 19355
MALVERN, PENNSYLVANIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-651-0200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which
None registered:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.002
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $39,513,251 as of February 28, 1997, based upon
the closing sale price per share of the Common Stock, as quoted on The Nasdaq
Stock Market. This amounts excludes 6,067,729 shares of Common Stock held by
directors, officers and stockholders with representatives on the board of
directors whose ownership exceeded five percent of the Common Stock outstanding
at February 28, 1997. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
registrant, or that such person is controlled by or under common control with
the registrant.
The number of shares of the registrant's Common Stock outstanding as of
February 28, 1997 was 9,077,116.
DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement (the "Proxy Statement") for the
registrant's 1997 Annual Meeting of Stockholders to be held on May 28, 1997 are
incorporated by reference in Part III of this Annual Report on Form 10-K.
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DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement (the "Proxy Statement") for the
registrant's 1997 Annual Meeting of Stockholders to be held on May 28, 1997 are
incorporated by reference in Part III of this Annual Report on Form 10-K.
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VIROPHARMA INCORPORATED
FORM 10-K ANNUAL REPORT
For Fiscal Year Ended December 31, 1996
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business ....................................................... 1
Item 2. Properties ..................................................... 18
Item 3. Legal Proceedings .............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders ............ 18
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters ................................. 21
Item 6. Selected Financial Data......................................... 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 23
Item 8. Financial Statements and Supplementary Data .................... 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ...................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant ............. 25
Item 11. Executive Compensation ......................................... 25
Item 12. Security Ownership of Certain Beneficial
Owners and Management ....................................... 25
Item 13. Certain Relationships and Related Transactions ................. 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ......................................... 26
Index to Financial Statements and Schedules ............................... F-1
</TABLE>
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in forward-looking statements. Factors
that might cause or contribute to such differences include, but are not limited
to, those discussed in "Important Factors Regarding Forward-Looking Statements"
attached hereto as Exhibit 99.
Unless the context indicates otherwise, the terms "ViroPharma" and
Company refer to ViroPharma Incorporated. "ViroPharma" is a trademark and
service mark of the Company. The Company has filed applications to register the
trademark and service mark in the United States and Canada. All other brand
names or trademarks appearing in this Annual Report on Form 10-K are the
property of their respective owners.
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PART I
BUSINESS
Overview
ViroPharma is engaged in the discovery and development of proprietary
antiviral pharmaceuticals for the treatment of diseases caused by RNA viruses.
The Company has focused its current drug development and discovery activities
on a number of RNA virus diseases including viral meningitis, hand-foot-and-
mouth disease, "summer flu," the common cold, influenza, hepatitis C and viral
pneumonia. Each year, the majority of the world's population is afflicted by
at least one of these diseases, for which antiviral therapies are currently
either inadequate or unavailable. The Company's most advanced compound,
pleconaril, is currently being developed for the treatment of four of these
diseases. ViroPharma has completed a Phase IIa clinical trial which
demonstrated that all disease measures were significantly reduced for the
pleconaril treated group in "summer flu." The Company is conducting a Phase
IIb clinical trial with pleconaril for viral meningitis, has initiated a Phase
II clinical trial for hand-foot-and-mouth disease and anticipates initiating a
Phase II clinical trial for the common cold in patents with asthma and an
additional Phase II clinical trial for "summer flu" in late 1997. The Company
has additional compounds in research and preclinical stages of development for
treatment of influenza, hepatitis C and viral pneumonia. ViroPharma believes
its drug discovery and development technologies and expertise have potential
applicability to a broad range of diseases caused by RNA viruses.
RNA viruses are responsible for the majority of human viral diseases,
causing illnesses ranging from acute and chronic ailments to fatal infections.
RNA viruses continue to emerge, spreading from rural and developing regions of
the world to urbanized centers. Despite efforts by the scientific and medical
communities to develop vaccines and pharmaceuticals to prevent and treat
certain of these diseases, medicines are currently inadequate or are not
available for the majority of RNA virus diseases. The Company believes the
significance and prevalence of RNA virus diseases, and the limited
availability and effectiveness of current antiviral therapeutics, has created
a compelling need for antiviral pharmaceuticals to treat these diseases.
Diseases Caused By RNA Viruses
Viruses are intracellular parasites that require a living host cell
within which to reproduce. They are composed of genetic material enclosed in a
protective protein coat. The genetic material of a virus, which may be in the
form of either deoxyribonucleic acid ("DNA") or ribonucleic acid ("RNA"), is
unique and characteristic of that virus and provides the blueprint for virus
reproduction.
There are three fundamental classes of viruses: DNA viruses, retroviruses
and RNA viruses. DNA viruses store their genetic material as DNA and replicate
their DNA in a manner similar to human cells. Retroviruses and RNA viruses
store their genetic material as RNA. Retroviruses reproduce by first
converting their RNA into DNA in infected cells, then converting this DNA back
into RNA. RNA viruses, on the other hand, have the unique ability to directly
reproduce their RNA to create new RNA virus offspring through a process known
as RNA replication. This ability to directly replicate RNA distinguishes RNA
viruses from DNA viruses, retroviruses and human cells.
Infection by viruses, and their ensuing replication, can lead to disease.
Viral epidemics, pandemics, acute outbreaks and chronic diseases continue to
cause an enormous amount of human suffering and death. DNA viruses cause
diseases such as herpes, hepatitis B and papillomas (warts). The retrovirus
HIV (human immunodeficiency virus) causes AIDS. RNA viruses, however, are
responsible for the majority of human viral diseases, causing a multitude of
illnesses ranging from acute and chronic ailments to fatal infections.
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The following is a list of selected diseases caused by RNA viruses:
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RNA Virus Diseases
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Bronchiolitis Enterovirus meningitis Myocarditis
Dengue fever Hantavirus pulmonary Pneumonia
Diarrhea diseases syndrome Rabies
Ebola fever Hemorrhagic conjunctivitis Rhinovirus common cold
Encephalitis Hemorrhagic fevers Rubella
Enterovirus "summer flu" Hepatitis C, A, D and E Tick fevers
Enterovirus Influenza Yellow fever
hand-foot-and-mouth Measles
The Company has focused its current drug development and discovery activities
on the italicized diseases.
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</TABLE>
[Please note that the italicized diseases are: Enterovirus "summer flu,"
Hepatitis C, Influenza, Enterovirus meningitis, Pneumonia and Rhinovirus common
cold. The language in these brackets is for purposes of the EDGAR filing only
and will not appear in the printed copy of this report.]
The medical community has attempted to address several of these diseases
with vaccines, which are prophylactic in nature and intended to prevent
disease, and antiviral pharmaceuticals, which are therapeutic in nature and
intended to treat disease. For most RNA virus diseases, however, medicines are
either inadequate or simply not available.
Vaccines are designed to prevent disease by eliciting a protective
antiviral immune response in vaccinated individuals. This response involves
the production by the body of specific antibodies and white blood cells, both
of which attempt to destroy the virus and virus-infected cells. Vaccines do
not exist for most RNA virus diseases. Of those that are available, most are
unable to effectively control disease for one or more reasons. Many viruses
constantly and rapidly change their outer surface, thereby rendering existing
vaccines obsolete. Moreover, many individuals at greatest risk for serious
disease, including the young, the elderly and the immunocompromised, fail to
respond to vaccines. Finally, existing vaccines are not readily available to
certain susceptible populations and, even when available, are often not widely
used.
Antiviral pharmaceuticals to treat RNA virus diseases are limited. While
there are, in some cases, medicines available to reduce disease symptoms,
there are few drugs to effectively treat the underlying disease. Of these,
amantadine and the related drug rimantadine are used for influenza, ribavirin
has been used for viral pneumonia due to respiratory syncytial virus ("RS
virus"), and interferon alfa ("IFN") is currently used to treat hepatitis due
to hepatitis C virus ("HCV"). Additionally, immunoglobulin products are
occasionally used for treatment of some RNA virus diseases.
Based on the significance and prevalence of disease associated with RNA
virus infections and the limited means to prevent or treat these diseases, the
Company believes that there is a significant market opportunity for the
development of effective therapeutics for RNA virus diseases. Moreover, the
continued emergence of RNA virus diseases and the recent spread of RNA viruses
from rural and developing regions of the world to urbanized centers
underscores the compelling need for new antiviral pharmaceuticals.
Treating RNA Virus Diseases
The RNA Virus Replication Process
Essential to the discovery and development of antiviral pharmaceuticals
is the ability to analyze the virus in a laboratory setting and to dissect the
molecular and biochemical events critical to virus replication. The
manipulation of RNA viruses and, in particular, the virus's RNA genome,
requires special techniques and skills. Historically, technical limitations
have hampered investigation of RNA virus replication. Consequently, the
scientific community's understanding of the molecular events of RNA virus
replication is incomplete. However, significant recent
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advancements in biological and molecular technologies related to the
manipulation of RNA and RNA viruses have enabled the Company to pursue the
discovery and development of effective treatments for RNA virus diseases.
The Company believes that the process of viral RNA uncoating and
replication represents an extremely attractive target for the therapeutic
intervention in disease caused by RNA viruses. For RNA viruses to cause
disease, they must replicate. This process of RNA replication is depicted in
the following diagram.
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RNA Virus Replication
[The following is required for the EDGAR filing and will not appear in the
printed report: This diagram depicts schematically the life cycle of a generic
RNA virus. The diagram is centered with a light gray oval figure representing
a generic cell. Overlaid on this oval figure are six arrows, numbers 1 through
6, traversing the oval figure from the upper left to the lower right.
Preceding the first arrow numbered "1" and outside the oval figure is a single
virus particle depicted schematically as a 10-sided icosahedral shape. Beyond
arrow 1, just inside the oval figure and in front of arrow "2" is an identical
10-sided icosahedral shaped virus. Beyond arrow 2 and in front of arrow "3" is
a vertical single helical ribbon depicting viral RNA, at the bottom of which
are several small solid circular shapes depicting proteins attached to the
helical ribbon. Beyond arrow 3 and in front of arrow "4" is a vertical double
helical ribbon depicting two intertwined strands of viral RNA, at the bottom
of which are several small solid circular shapes depicting proteins attached
to the double helical ribbon. Beyond arrow 4 and in front of arrow "5" is a
vertical single helical ribbon depicting viral RNA, at the bottom of which is
a partially assembled 10-sided shape into which the ribbon appears to be
entering and at the top of which are several small solid circular shapes
depicting proteins attached to the helical ribbon. Beyond arrow 5 and in front
of arrow "6" near to, but within, the lower right border of the oval cell
figure are several identical and intact 10-sided icosahedral shaped viruses.
Beyond arrow "6" are numerous identical 10-sided icosahedral shaped viruses
emanating from the lower right portion of the oval cell figure and also
outside the oval cell figure in the lower right portion of the diagram.]
WHEN AN RNA VIRUS ENTERS A CELL (1), ITS RNA IS RELEASED FROM THE VIRUS'S
COAT (2), ALLOWING THE UNIQUE MULTI-STEP PROCESS OF RNA REPLICATION TO
PROCEED (3-4), AFTER WHICH NEW RNA VIRUS OFFSPRING ARE CREATED (5) AND
SUBSEQUENTLY RELEASED FROM THE INFECTED CELL (6). EACH RNA VIRUS OFFSPRING THAT
INFECTS A NEW CELL REPEATS THIS REPLICATION PROCESS.
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Inhibiting RNA virus replication can prevent, limit or stop disease. In
addition to thwarting disease, the direct inhibition of viral RNA uncoating
and replication will reduce the possibility for generation of drug-resistant
virus offspring and decrease virus transmission from infected individuals to
healthy persons. RNA replication is a complicated process involving several
viral proteins that must act together in a coordinated fashion. Due to the
nature of this process, changes or mutations in these proteins are not readily
tolerated. Consequently, viral proteins required for RNA replication are not
only specific to the virus, they are among the least variable proteins of the
virus. This is in contrast to the highly variable viral surface proteins
generally involved in immune responses to virus infections. This invariability
of the viral proteins responsible for viral RNA replication represents an
important attribute in their selection as molecular targets for antiviral drug
discovery and development.
The ViroPharma Approach
ViroPharma, based on its number of experienced RNA virologists and its
exclusive focus on RNA virology, believes that it is a leader in RNA virology
and RNA antiviral drug discovery and development. As a result of its focus on,
and expertise in, RNA virus replication, unique molecular target selection and
assay development technologies, and its development and possession of
proprietary chemical inhibitors and its specialized chemical library, the
Company believes that it is well-positioned to develop effective antiviral
pharmaceuticals for RNA virus diseases.
While the RNA replication process is common among all RNA viruses, the
detailed molecular and biochemical mechanisms of RNA replication are currently
not fully understood. However, the Company has used its experience in RNA
virology, RNA virus uncoating and RNA replication, along with recent advances
in biological, molecular and informatics technologies, to gain an
understanding of several aspects of the RNA virus uncoating and replication
process. Company scientists have elucidated fundamental processes involved in
virus uncoating and used this knowledge
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to design compounds to inhibit these processes. They have also succeeded in
discovering new virus enzyme activities that are essential to RNA replication,
which are the subject of a U.S. patent application filed by the Company.
Company scientists have further characterized several RNA virus replication
activities and used the resulting information to develop novel drug screening
assays. The Company's assays are optimized for high sensitivity and
specificity and are validated for reproducibility. These assays are automated
using state-of-the-art robotics technologies to facilitate the high throughput
screening of large chemical libraries. Using its novel assays, the Company has
discovered proprietary small molecule compounds that inhibit the targeted
virus-specific activities. Once active compounds are identified, the Company
advances such compounds to clinical drug candidates through a process of
chemical optimization. This process involves the rapid generation of an
expanded chemical analog series based on the initial active compounds and
utilizes an array of technologies including computer-assisted pharmacophore
modeling and drug design techniques, two-dimensional and three-dimensional
structure and substructure chemical database searches and conventional
medicinal chemistry, combinatorial chemistry and automated high capacity
chemical synthetic methods. The Company then evaluates analog series in
various biochemical and biological assays that assess compound selectivity,
potency, safety and bioavailability. Importantly, the Company chemically
optimizes active compounds for these four key parameters in parallel, not
sequentially. The Company believes that its combination of chemical and
biological technologies and parallel compound optimization process allows it
to accelerate drug discovery and development. The generation of large numbers
of specific chemical analogs by the Company also enables it to rapidly expand
its valuable chemical library that is biased toward inhibitors of enzymes and
activities essential to RNA replication. The Company believes that this
library provides a significant advantage in its efforts to discover inhibitors
for additional RNA virus diseases. The Company believes that the technologies
used by the Company have never been applied to develop an approved
pharmaceutical product.
Strategy
The Company's objective is to become the leading discoverer, developer
and marketer of proprietary antiviral pharmaceuticals for RNA virus diseases.
The Company seeks to achieve this objective through the implementation of the
following strategies:
. Focus on RNA Virus Diseases. RNA viruses cause the majority of
human viral diseases, yet few effective antiviral drugs are
available to address these diseases. Based on the significance and
prevalence of disease associated with RNA viruses and the limited
means to effectively prevent or treat these diseases, the Company
believes there is a significant market opportunity for the
development of effective therapeutics for RNA virus diseases. The
Company has focused its resources to capitalize on this market
opportunity.
. Broadly Apply Technological Expertise in RNA Virology. The Company
has leading expertise in RNA antiviral drug discovery, focusing on
RNA replication and involving the selection of specific molecular
targets and the development of novel drug screening assays,
proprietary chemical inhibitors and a specialized chemical library.
Since RNA replication is unique to RNA viruses, yet common to all
RNA viruses, this process provides a broadly applicable platform
for drug discovery. The Company intends to continue to expand and
apply its expertise in RNA virology, RNA replication, chemical
synthesis methodologies and antiviral drug design.
. Conduct Parallel Drug Discovery Assessments. The key parameters in
the drug discovery process are selectivity, potency, safety and
bioavailability. The Company accelerates and enhances the
efficiency of its drug discovery programs by simultaneously
optimizing chemical compounds for each of these parameters during
the drug discovery process.
. Pursue Indications for Rapid Demonstration of Efficacy. In order to
expedite drug development, the Company initially targets disease
indications based upon the likelihood for rapid demonstration of
efficacy in clinical trials. The Company then pursues follow-on
clinical development for expanded disease indications.
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. Pursue Strategic Relationships by Leveraging RNA Virology
Expertise. The Company leverages its leadership position in RNA
virus antiviral drug discovery and development through strategic
relationships with pharmaceutical companies, specialized technology
companies and academic institutions. With these relationships, the
Company enhances its drug discovery capabilities and in-licensing
opportunities and facilitates the commercialization of its
potential products.
Product Development and Research
The Company has focused its current drug discovery and development
activities on a number of RNA virus diseases including viral meningitis, hand-
foot-and-mouth disease, "summer flu," the common cold, influenza, hepatitis C
and viral pneumonia. The Company has drug candidates in various stages of
research and development for each of these RNA virus diseases. The following
chart sets forth the target disease indications and the status of the
Company's lead product candidates:
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Disease Indication Product Candidate Development Status(1)
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Viral Meningitis Pleconaril (oral) Phase IIb clinical trial
commenced June 1996
Hand-Foot-and-Mouth Disease Pleconaril (oral) Phase II clinical trial
commenced March 1997
"Summer Flu" Pleconaril (oral) Phase IIa clinical trial
completed April 1996;
Phase IIb clinical trial
anticipated late 1997
Common Cold Pleconaril (oral) Phase II clinical trial
in asthmatics anticipated
in late 1997
Pleconaril Preclinical; IND
(intranasal) anticipated late 1997
Influenza VP 14221 series Preclinical safety and
pharmacokinetics studies
Hepatitis C VP 31593 series Chemical optimization
Viral Pneumonia VP 36676 series Chemical optimization
_______________
(1) For a discussion of preclinical testing and the phases of human clinical
trials, see "-- Government Regulation."
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</TABLE>
The Company's most advanced product candidate, pleconaril, based on
preclinical studies, is a potent, broad spectrum, orally active inhibitor of
enteroviruses and rhinoviruses. Enteroviruses and rhinoviruses are closely
related members of a large, very prevalent group of RNA viruses that are
responsible for widespread human disease. According to the Centers for Disease
Control (the "CDC"), there are 10 to 15 million enterovirus infections every
year in the United States. Enteroviruses cause viral meningitis, hand-foot-
and-mouth disease, "summer flu," myocarditis, pericarditis, encephalitis,
herpangina, otitis media and perinatal enteroviral disease. Rhinoviruses are
responsible for up to 50% of all acute respiratory illnesses and are the
leading cause of the common cold.
The Company is developing pleconaril for four indications: viral
meningitis, hand-foot-and-mouth disease, "summer flu" and the common cold.
While antibiotics are commonly prescribed by physicians to patients with these
diseases, they are ineffective at treating these virus infections.
Prescription and over-the-counter cough and cold remedies, analgesics and
antipyretics are also used to reduce symptoms of hand-foot-and-mouth disease,
"summer flu"
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and the common cold, but do not treat the underlying diseases. Currently,
there are no antiviral therapies available for any of the diseases caused by
enteroviruses or rhinoviruses. Pleconaril is not expected to be commercially
available for at least three years, if at all.
ViroPharma scientists have demonstrated that pleconaril inhibits
enterovirus and rhinovirus replication by a novel, virus-specific mode of
action. The compound binds to a specific site inside the coat protein of the
virus, thereby preventing the release of the viral RNA inside the cell and
blocking the initiation of the RNA replication process. In preclinical studies
conducted by the Company, pleconaril was shown to effectively inhibit the cell
culture replication of 96% of the rhinoviruses and enteroviruses isolated from
332 human patients. The patient population from which these viruses were
isolated exhibited the complete range of diseases caused by these viruses,
including a number of fatal infections. Moreover, orally administered
pleconaril protected mice from lethal infection by enteroviruses in three
distinct animal model systems and was effective even when therapy was
initiated after infection in these models. Based on these results, the Company
believes that pleconaril will be effective against a broad spectrum of
rhinoviruses and enteroviruses. There can be no assurance that pleconaril will
be clinically efficacious against diseases caused by these viruses. See
"Important Factors Regarding Forward-Looking Statements--Uncertainty Regarding
Clinical Trials" attached in Exhibit 99 to this Annual Report on Form 10-K.
In Phase I single ascending dose studies with a capsule formulation of
pleconaril, plasma concentrations of drug increased proportionally to the oral
dose administered up to the highest dose tested (1000 mg). Maximum drug plasma
levels 20 times that required to inhibit the replication of the majority of
the clinical virus isolates referred to above were achieved with a single 200
mg dose. In Phase I multidose studies conducted by the Company, doses up to
400 mg administered three times per day for seven consecutive days were well-
tolerated by all subjects in the study. No serious adverse events attributable
to the drug were observed in the 50 subjects who received pleconaril during
the course of these Phase I studies. There can be no assurance that
unacceptable toxicities or side effects will not occur during development or
that any product will be effective or safe when administered to patients. The
Company has developed an oral liquid formulation of pleconaril, which the
Company has demonstrated is bioequivalent to the capsule formulation used in
Phase I studies. The liquid formulation is self-preserving, stable and
contains only GRAS (Generally Regarded As Safe) ingredients. This formulation
provides considerable flexibility in dosing and is being used in clinical
trials for the viral meningitis and hand-foot-and-mouth disease indications
and will be used in clinical trials for the "summer flu" and common cold
disease indications. The Company is also developing an intranasal formulation
of pleconaril for use in the common cold indication. Currently, the Company is
exploring delivery systems for its intranasal formulation.
The Company has initiated a compassionate use, open-label protocol to
provide pleconaril to patients with chronic enterovirus meningoencephalitis
and acute enterovirus myocarditis. Patients with chronic meningoencephalitis
are unable to develop an antibody response to enterovirus central nervous
system infections and suffer progressive neurological deterioration which can
lead to seizures, paralysis and death. Acute enteroviral myocarditis is an
infection of the heart muscle which may eventuate in congestive heart failure.
The Company believes that there are less than 500 patients infected with these
viruses worldwide.
The Company has entered into an agreement with Sanofi S.A. under which it
has received exclusive rights to develop and market all products relating to
pleconaril, and related compounds for use in enterovirus and rhinovirus
disease indications in the United States and Canada, as well as a right of
first refusal in respect of any other indications. Pleconaril was discovered
at Sanofi by scientists now with ViroPharma. See "--Strategic Relationships--
Sanofi S.A." and "--Patents." Pleconaril has been approved as a generic name
for the Company's compound VP 63843 by the United States Names Council (USAN)
and is awaiting final approval from the World Health Organization ("WHO").
Viral Meningitis
Infection of the central nervous system by enteroviruses can cause
meningitis, which is characterized by a severe headache, stiffness of the neck
or back, fever, nausea and malaise. The disease is typically severe and
requires emergency medical care. The disease occasionally progresses to
serious neurologic sequelae, particularly among infants
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infected before age one year. There is currently no antiviral pharmaceutical
for viral meningitis.
In order to establish the incidence and clinical course of enteroviral
meningitis and assess potential clinical endpoints for future drug efficacy
studies, the Company conducted an Adult Viral Meningitis Observational Study
at three medical centers (the University of Colorado, the University of
Pennsylvania and the University of Virginia) during the 1995 summer
enterovirus season. The results of this study demonstrated the severity and
duration of the illness. Adults presenting at emergency rooms complaining of
severe headaches were confirmed to be enterovirus-infected by detection of
viral RNA in their cerebrospinal fluid. Approximately 80% of these
enterovirus-infected patients required hospitalization, with an average stay
of four days. Patients were unable to resume full normal activities for an
average of 16 days. All subjects received some form of analgesic (70% received
a narcotic) for an average of seven days to manage their severe headache pain.
From this study, the Company estimates that 500,000 Americans contract
enteroviral meningitis annually.
Based on the results of two Phase I studies and the Phase IIa Enterovirus
Challenge Study described below, the Company is currently evaluating the oral
liquid formulation of pleconaril in an international multi-center, double
blind, placebo controlled Phase IIb trial for treatment of viral meningitis.
The Company initiated this study at sites in the United States in June 1996
and in Australia and South Africa in November 1996. There can be no assurance
that this trial will be successfully completed or completed in a timely
manner. See "Important Factors Regarding Forward-Looking Statements--Absence
of Products; Product Development Risks," "--Dependence on Most Advanced Drug
Candidate" and "--Uncertainty Regarding Clinical Trials" attached in Exhibit
99 to this Annual Report on Form 10-K.
Hand-Foot-and-Mouth Disease
Hand-foot-and-mouth disease is a highly communicable enterovirus syndrome
affecting all age groups, but predominantly children and adolescents.
Following initial symptoms of fever, malaise and respiratory or abdominal
complaints, painful ulcerative lesions develop in the mouth and on the palms
and soles of the hands and feet. Affected individuals may have substantial
difficulty drinking and eating, which may necessitate hospitalization. The
Company initiated a placebo controlled exploratory safety and efficacy trial
in children with hand-foot-and-mouth disease in South Africa in March 1997.
There can be no assurance that this trial will be successfully completed or
completed in a timely manner. See "Important Factors Regarding Forward-Looking
Statements--Absence of Products; Product Development Risks," "--Dependence on
Most Advanced Drug Candidate" and "--Uncertainty Regarding Clinical Trials"
attached in Exhibit 99 to this Annual Report on Form 10-K.
"Summer flu" (Enterovirus respiratory disease)
"Summer flu", or enterovirus respiratory disease, is an upper respiratory
illness caused by enteroviruses and characterized initially by a sore throat
and cough, followed by a general influenza-like syndrome. While this disease
occurs throughout the year, it is most prevalent in the summer. The clinical
illness can persist for several weeks and typically results in a physician
visit. According to the CDC, there are an estimated 10 to 15 million cases of
enterovirus infection each year in the United States, many of which result in
"summer flu." There is currently no antiviral pharmaceutical for the
treatment of "summer flu."
During the spring of 1996, the Company conducted a Phase IIa Enterovirus
Challenge Study with pleconaril. In this double blind, placebo controlled
"summer flu" disease model, the oral capsule formulation of pleconaril
demonstrated that all disease measures were significantly reduced for the
pleconaril treated group in "summer flu." Eight hours after the randomized
administration of either placebo or pleconaril, 33 volunteers were infected
with the enterovirus coxsackievirus A21. Subjects were then administered
either placebo or a 200 mg dose of pleconaril twice daily for seven days.
Placebo-treated subjects developed notable cold symptoms, while pleconaril-
treated volunteers showed pronounced and clinically significant reductions in
disease measures, including symptoms and virus load. Assessment of clinical
disease by five measures (subject and physician rating of disease symptoms,
nasal mucus production, fever and virus load in nasal secretions) showed, in
all cases, a significant reduction in the pleconaril-treated group. Depicted
in the graph below are the results of these disease measures for both the
placebo-treated (light bars) and pleconaril-treated (dark bars) subjects.
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- - --------------------------------------------------------------------------------
Phase IIa Study - Disease Measure
[The following is required for the EDGAR filing and will not appear in the
printed report: This histogram-format graph contains five two-column sets
along the horizontal axis. The left column of each set, depicted in light
gray, represents disease measure data for test subjects from the
"Placebo"-treated group, the right column of each set depicted in dark gray,
represents disease measure data for test subjects from the
"Pleconaril"-treated group. Below the column sets are the following five
captions: "Subject Rating", "Physician Rating", "Mucus Weight", "Fever" and
"Virus Load". The vertical axis is indicated at "% of Subjects Exceeding
Disease Measure Threshold" and ranges from 0% to 100%. These Disease Measure
Thresholds are defined in the legend to the graph as follows: "Subject Rating
Greater than or Equal to 5 (Scale: 0-10), Physician Rating Greater than or
Equal to 10 (Scale: 0-33), Mucus Weight Greater than or Equal to 10g (Range:
0-54g), Fever Greater than or Equal to 100 degrees F (Range: normal - 102.3
degrees F), Virus Load Greater than or Equal to 4 log/10/ (Range: 0-6.3
log/10/)." The values for the "Subject Rating" columns are 67% and 13% for the
Placebo and Pleconaril groups, respectively. The values for the "Physician
Rating" columns are 53% and 0% for the Placebo and Pleconaril groups,
respectively. The values for the "Mucus Weight" columns are 67% and 0% for the
Placebo and Pleconaril groups, respectively. The values for the "Fever"
columns are 40% and 7% for the Placebo and Pleconaril groups, respectively.
The values for the "Virus Load" columns are 93% and 13% for the Placebo and
Pleconaril groups, respectively.]
- - --------------------------------------------------------------------------------
The Company anticipates advancing the pleconaril oral liquid formulation
into a Phase IIb multicenter, placebo controlled, dose ranging clinical
efficacy trial for the "summer flu" indication in late 1997. There can be no
assurance that this trial will be initiated, successfully completed or
completed in a timely manner. See "Important Factors Regarding Forward-Looking
Statements--Absence of Products; Product Development Risks," "--Dependence on
Most Advanced Drug Candidate" and "--Uncertainty Regarding Clinical Trials"
attached in Exhibit 99 to this Annual Report on Form 10-K.
Common Cold
Rhinoviruses are the leading cause of the common cold. Many people
experience two or three colds per year with the accompanying symptoms of
sneezing, nasal obstruction, nasal discharge, headache and general malaise.
The median duration of illness is seven days, with symptoms persisting for two
weeks in approximately 25% of persons. Complications associated with
rhinovirus infections include otitis media, pneumonia and asthmatic
exacerbations resulting in serious respiratory distress. Although there are
cold remedies, analgesics and antipyretics that may reduce cold symptoms,
there is no antiviral pharmaceutical to treat the common cold.
The Company's clinical development plan for the oral and intranasal
formulations of pleconaril contemplates initially treating patients with
asthma and upper respiratory tract rhinovirus infections. These individuals
often develop a concurrent lower respiratory tract rhinovirus infection, which
can lead to pronounced lower airway dysfunction lasting for weeks to months.
Treatment of this patient population provides an opportunity for both
prophylactic and therapeutic dosing. Should the product be approved for use in
this patient population, the Company would expect to expand clinical
development to include the general population.
The Company plans to select a manufacturer for the intranasal formulation
of pleconaril in 1997. The Company anticipates filing an Investigational New
Drug ("IND") application for the intranasal formulation of pleconaril for the
common cold indication in late 1997. There can be no assurance that these
activities will be initiated, successfully completed or completed in a timely
manner. See "Important Factors Regarding Forward-Looking Statements--Absence
of Products; Product Development Risks, "--Dependence on Most Advanced Drug
Candidate" and "--Uncertainty Regarding Clinical Trials" attached in Exhibit
99 to this Annual Report on Form 10-K.
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<PAGE>
Influenza
Influenza virus is a major cause of human illness. In the United States,
approximately 10% to 20% of the population is infected with the influenza
virus each year. This disease is characterized by the sudden onset of
headache, chills and a dry cough, which is rapidly followed by fever,
significant myalgias and malaise. Fever and upper respiratory tract symptoms
generally last for three to five days, while the cough and weakness persist
for an additional one to two weeks. Influenza can also be fatal. According to
the WHO, approximately 10,000 to 40,000 deaths occur each year in the United
States as a result of influenza. The very young, elderly and
immunocompromised, and those with medical conditions such as cardiovascular
disease, pulmonary disease and pregnancy, are at greatest risk for serious or
fatal complications associated with influenza virus infections. The National
Science and Technology Council currently estimates that the direct medical
costs due to influenza in the United States are $5 billion per year.
Immunization for influenza has demonstrated only limited success in
controlling the disease. Due to the highly variable nature of the influenza
virus surface proteins, vaccines used one year are ineffective and obsolete
the next. New vaccines with components predicted to be important in the next
year's influenza season must be developed, manufactured and administered each
year. Even when forecasts result in vaccines with components closely matching
that year's actual circulating influenza virus strain, the immunity induced by
these vaccines is incomplete and short-lived. Reinfection with the same virus
strain or a variant strain can occur and result in disease in previously
immunized individuals. Finally, compliance with national immunization
campaigns has generally been insufficient to prevent epidemics.
The Company's principal molecular target in its influenza virus program
is the viral RNA transcriptase complex, which is required by the virus for RNA
replication. The Company has developed a quantitative high throughput drug
screening assay that simultaneously measures several essential virus-encoded
replication activities. Using this assay, ViroPharma scientists have
discovered several specific inhibitors of influenza virus replication. The
Company has applied its chemical optimization process to establish structure-
activity relationships for these inhibitors with respect to potency and
selectivity. The Company's preclinical acute safety studies conducted to date
indicate that several of its lead compounds, currently designated the VP 14221
Series, are well tolerated and are orally bioavailable. In addition,
ViroPharma has filed two patent applications with the PTO and one application
in certain foreign jurisdictions related to its active influenza virus
compounds and is preparing additional patent applications for influenza virus
compounds. There can be no assurance that clinical trials for this compound
series will be initiated or, if initiated, will lead to a determination that
the compound is safe and efficacious. No assurance can be given that such
patents will issue. See "Important Factors Regarding Forward-Looking
Statements--Absence of Products; Product Developments Risks," "--Uncertainty
Regarding Clinical Trials" and "--Uncertain Ability to Protect Patents and
Proprietary Technology and Information" attached in Exhibit 99 to this Annual
Report on Form 10-K and "--Patents."
Hepatitis C
HCV, first identified in 1989, is recognized as a major cause of chronic
hepatitis worldwide. According to the CDC, there are currently approximately
3.5 million HCV infected individuals in the United States, with 150,000 new
cases identified each year. The WHO estimates that an additional 10 million
individuals are infected with HCV in Europe and a total of 100 million people
are infected worldwide. Populations in some geographic areas, such as Japan,
Spain, Hungary, Saudi Arabia, Southern Italy and Egypt, have particularly high
rates of infection. One study of Egyptian blood donors has shown an infection
rate of 19.2%. Approximately 80% of HCV infected persons will develop chronic
hepatitis, of which 20% will progress to liver cirrhosis. Chronic HCV
infection can also lead to the development of hepatocellular carcinoma and
liver failure.
There is currently no vaccine for HCV. HCV is an immunologically diverse
virus, with many naturally occurring variants in circulation. Such diversity,
in combination with HCV's ability to change its surface proteins, may
represent the mechanism by which the virus escapes attack by the immune system
and establishes persistent infections.
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<PAGE>
IFN is currently the only approved drug in the United States for
treatment of hepatitis due to HCV. While IFN treatment has been reported to
improve serum liver enzyme response in 20% to 40% of patients, the remainder
do not respond to IFN treatment. For patients who do respond, a sustained
improvement of liver function reportedly is seen in only 10% to 20% of
patients; the majority of patients relapse upon cessation of IFN treatment.
Thus, while IFN represents the first treatment for chronic hepatitis C, its
effectiveness is limited and its cure rate is low. Nevertheless, the Company
estimates the current market for IFN use in the treatment of hepatitis C to be
over $1 billion worldwide.
The Company focuses on key enzyme targets involved in the HCV RNA
replication process. Company scientists have discovered several key enzyme
activities associated with particular HCV proteins. These activities have been
characterized and used to establish validated high throughput assays. The HCV
RNA helicase activity represents one such target. As a result of screening
compounds in the HCV RNA helicase assay, the Company has identified several
active and selective compounds, currently designated the VP 31593 Series, and
has begun chemical optimization on such compounds. Based on its RNA helicase-
related technology, the Company has established a collaborative drug discovery
and development agreement with Boehringer Ingelheim Pharmaceuticals, Inc.
("Boehringer Ingelheim"). The Company is also developing assays for additional
HCV molecular targets. The Company has filed two patent applications related
to the HCV inhibitor compound series, has received a Notice of Allowance from
the PTO in respect of one of these applications and anticipates that it will
file additional patent applications within the next year. No assurance can be
given that such patents will issue. See "Important Factors Regarding Forward-
Looking Statements--Dependence on Corporate Collaborations; Potential Need for
Additional Collaborators," and "--Uncertain Ability to Protect Patents and
Proprietary Technology and Information," attached in Exhibit 99 to this Annual
Report on Form 10-K, "--Strategic Relationships--Boehringer Ingelheim
Pharmaceuticals, Inc." and "--Patents."
Viral Pneumonia
RS virus is the major pediatric viral respiratory tract pathogen, causing
pneumonia and bronchiolitis in infants and young children. During seasonal
epidemics, approximately 250,000 infants contract RS virus pneumonia, and up
to 35% are hospitalized. Of those hospitalized, mortality rates of up to 5%
have been reported. Children with underlying conditions such as prematurity,
congenital heart disease, bronchopulmonary dysplasia and various congenital or
acquired immunodeficiency syndromes are at greatest risk of serious RS virus
morbidity and mortality. RS virus is also implicated as a significant cause of
mortality in the elderly.
Vaccines are not currently available for prevention of RS virus disease.
Recently, the prophylactic use of an intravenous hyperimmune globulin infusion
was approved for RS virus disease in certain high risk infants. Ribavirin,
administered by aerosol to minimize the drug's adverse effects, is generally
reserved for only the most serious cases of RS virus pneumonia and
bronchiolitis. In both cases, drug administration can be difficult and
inconvenient in young patients.
The Company has developed a high throughput drug screening assay for RS
virus replication. Company scientists have discovered several inhibitory
compounds, currently designated the VP 36676 Series, with high potency and
selectivity in initial profiling evaluations. The Company has initiated
chemical optimization of these compounds. There can be no assurance that such
chemical optimization will be successfully completed or completed in a timely
manner. See "Important Factors Regarding Forward-Looking Statements--Absence
of Products; Product Development Risks," "--Dependence on Most Advanced Drug
Candidate" and "--Uncertainty Regarding Clinical Trials" attached in Exhibit
99 to this Annual Report on Form 10-K.
Other Potential RNA Virus Disease Targets
The Company believes that its drug discovery technologies and development
expertise are potentially applicable to a broad range of RNA virus diseases.
The Company also believes that certain RNA virus diseases represent immediate
extensions of the Company's current research and development programs. In
addition to viral meningitis, hand-foot-and-mouth disease, "summer-flu,"
chronic meningoencephalitis and myocarditis, enteroviruses cause a broad
range of diseases for which the Company's most advanced drug candidate,
pleconaril, may be effective. Of these, the
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<PAGE>
Company is currently considering exploratory clinical trials for pleconaril
for enterovirus neonatal sepsis. There can be no assurance that the Company
will pursue this indication or, if the Company does pursue this indication,
that the Company will be able to successfully demonstrate clinical efficacy .
See "Important Factors Regarding Forward-Looking Statements--Absence of
Products; Product Development Risks" and "--Uncertainty Regarding Clinical
Trials" attached in Exhibit 99 to this Annual Report on Form 10-K.
Similarly, the Company's lead anti-influenza compound series acts by a
virus-specific mechanism that may make it potentially applicable to a large
family of viruses called bunyaviruses. Bunyaviruses cause widespread disease
globally including encephalitis, hemorrhagic fevers and the recently
identified hantavirus pulmonary syndrome. In the midwestern United States
alone, there are approximately 300,000 infections of La Crosse encephalitis
virus annually resulting in approximately 900 deaths. In Asia and Eastern
Europe, a bunyavirus called hantavirus is responsible for Korean hemorrhagic
fever, a serious influenza-like illness in which approximately 33% of the
affected individuals develop hemorrhagic disease and 5% to 10% die. In 1993,
in the southwest United States, a new hantavirus emerged that causes
hantavirus pulmonary syndrome, a serious respiratory disease that is fatal in
approximately 50% of cases. This new virus has now been detected in more than
20 states in the United States and has recently appeared in Argentina, Brazil
and Canada.
Assays and inhibitor compounds derived from the Company's HCV program may
accelerate antiviral drug discovery for the related virus group called
flaviviruses. There are 38 flaviviruses associated with human disease,
including the dengue fever viruses, yellow fever virus and Japanese
encephalitis virus. Importantly, the epidemiology of these diseases is
changing. For example, with global urbanization, the incidence of dengue fever
has increased dramatically. Dengue fever viruses typically cause a severe
influenza-like illness and, in a more serious form, can cause a fatal
hemorrhagic disease. Prior to 1970, only nine countries reported outbreaks of
fatal dengue hemorrhagic fever. Presently, at least 38 countries have reported
incidences of this serious form of dengue fever virus disease. The WHO
estimates that there are 20 million cases of dengue fever each year, of which
500,000 require hospitalization.
There are currently no approved antiviral pharmaceuticals for any of the
diseases mentioned above.
Strategic Relationships
ViroPharma pursues strategic relationships by leveraging its RNA virology
expertise, while seeking to maintain independence and flexibility in the
development and commercialization of its products. The Company has entered
into several development and licensing agreements and research collaborations
and continues to seek opportunities to enhance its ability to discover,
develop and commercialize RNA antiviral drugs. There can be no assurance that
the Company will be able to enter into additional beneficial relationships or
maintain its current relationships.
Currently, the Company is a party to a licensing and co-marketing
agreement with one multinational pharmaceutical company, a drug discovery and
development agreement with another multinational pharmaceutical company and
several licensing and collaborative agreements with various pharmaceutical and
technology companies and academic institutions for certain biological and
chemical technologies. From time to time, the Company engages in discussions
regarding additional strategic relationships. Currently, the Company does not
have any understandings, agreements or commitments to enter into any
additional strategic relationships.
Sanofi S.A.
In December 1995, the Company entered into an agreement with Sanofi S.A.
("Sanofi") under which it received exclusive rights to develop and market all
products relating to pleconaril and related compounds for use in enterovirus
and rhinovirus disease indications in the United States and Canada, as well as
a right of first refusal in respect of any other indications. The Company's
rights include rights to use all of Sanofi's patents, know-how and trademarks
relating to pleconaril. The Company paid Sanofi a licensing fee of $1,000,000
in February 1996 and is obligated to make a milestone payment of up to
$2,000,000 upon the earlier of enrollment of the first patient in a Phase III
trial or December 22, 1998. In addition, the Company is required to make
milestone payments upon the achievement of certain other development
milestones and, until the expiration of the last patent on pleconaril or any
related drug,
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<PAGE>
royalty payments on any sales of products developed under the agreement in the
United States and Canada. Sanofi is required to pay the Company royalties on
sales in all other territories of the world during the term of the agreement
(as described below) and must reimburse certain of the milestone fees
previously paid by the Company upon submission of pleconaril for regulatory
approval in Japan. The Company believes that the royalty rates payable by both
the Company and Sanofi are comparable to the rates generally payable by other
companies under similar arrangements. See "--Patents."
Upon the completion of data analysis from the Company's Phase II trials,
Sanofi has the option to co-develop the drug in the European Union. If Sanofi
chooses to co-develop, Sanofi must make certain royalty payments to the
Company based on sales in the European Union. If Sanofi does not choose to co-
develop, it must make royalty payments to the Company based on such sales at a
higher royalty rate and will be required to reimburse a percentage of all
previously paid milestone fees and reduce future milestone fees by the same
percentage.
The Sanofi agreement terminates on the later of the expiration of the
last patent on pleconaril or any related drug in the United States or Canada
or ten years following the commencement of the Company's sale of the drug in
the United States or Canada, or earlier under certain circumstances. The term
automatically renews for successive five year terms unless six months' prior
written notice of termination is given by either party. Pursuant to the
agreement, the Company is required to purchase its entire supply of pleconaril
drug substance from Sanofi. The Company has the right to manufacture, or
contract with third parties to manufacture, any drug product derived from the
pleconaril drug substance. See "--Manufacturing."
Boehringer Ingelheim Pharmaceuticals, Inc.
In July 1996, the Company entered into a collaborative drug discovery and
development agreement with Boehringer Ingelheim for one hepatitis C target
identified by ViroPharma. Under this agreement, the Company granted to
Boehringer Ingelheim the exclusive worldwide rights to develop and
commercialize compounds discovered under the agreement. In return, Boehringer
Ingelheim paid a technology access fee of $1,000,000 to the Company and is
required to make research and milestone payments to the Company in connection
with the Company's transfer of HCV screening and assay technology and at
various stages in the development of compounds under this agreement. In
February 1997, ViroPharma achieved its first scientific milestone under this
agreement, for which it received a milestone payment from Boehringer
Ingelheim. In addition, Boehringer Ingelheim is required to make royalty
payments to the Company on sales of products developed and marketed under this
agreement beginning on the date a given product is first sold in a given
country and ending on the date that the last patent covering such product in
such country expires (or 12 years from the first sales in such country if a
patent is never issued for such product in such country). The amounts of
required royalty payments vary depending on which party originated the
compound for the product. The Company believes that the royalty rates payable
under this agreement are comparable to royalty rates generally payable by
other companies under similar agreements. The term of the agreement is two
years.
Other Collaborative Agreements
The Company is a party to collaborative drug discovery agreements with
various pharmaceutical and technology companies, including 3-Dimensional
Pharmaceuticals, Inc. and NPS Pharmaceuticals, Inc. Generally, under these
agreements, the collaborators make available enabling technologies and
compounds from their chemical libraries, and ViroPharma applies such
technology and compounds to RNA virus diseases using the Company's proprietary
RNA replication assays. If a successful drug is discovered, these agreements
typically provide for good faith negotiations to establish the terms and
conditions of a mutually acceptable collaboration agreement. Generally, any
such resulting collaborative agreement will base the economic benefits to the
parties upon the relative contribution by each party to a drug's discovery and
development.
The Company has established material transfer and licensing agreements
and research collaborations with academic institutions and their affiliates,
including the Academy of Sciences of the Czech Republic, Northwestern
University, Pennsylvania State University, Renssalear Polytechnic Institute,
the University of Florida and Washington
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University. Generally, these agreements provide for the licensing to the
Company of materials for either (i) an initial fee and certain other fees
payable by the Company, with no future commercial rights for the institution
or (ii) an initial fee payable by the Company and certain rights to negotiate
collaborative agreements for drug development and commercialization.
Patents
ViroPharma believes that patent protection and trade secret protection
are important to its business and that the Company's future will depend, in
part, on its ability to maintain its technology licenses, maintain trade
secret protection, obtain patents and operate without infringing the
proprietary rights of others both in the United States and abroad. The Company
currently has filed with the PTO a patent application for technology for
identifying inhibitors of RNA viruses, a patent application covering compounds
active against pestivirus infection and associated RNA virus diseases, two
patent applications covering compounds active against HCV and two patent
applications covering compounds active against influenza viruses. The Company
also has filed a patent application for technology for identifying inhibitors
of RNA viruses, two patent applications covering compounds active against HCV
and a patent application covering compounds active against influenza viruses
in certain foreign jurisdictions. The Company has also obtained a license from
Sanofi, which grants the Company exclusive rights under two issued United
States patents and two related Canadian patent applications to develop,
manufacture and market antiviral compounds in the United States and Canada.
Pleconaril, which is currently in clinical trials, is covered by one of the
licensed United States patents, which expires in 2012, and one of the licensed
Canadian patent applications. The Company will be dependent on Sanofi to
prosecute such patent applications and may be dependent on Sanofi to protect
such patent rights. As patent applications in the United States are maintained
in secrecy until patents issue and as publication of discoveries in the
scientific or patent literature often lag behind the actual discoveries, the
Company cannot be certain that it was the first to make the inventions covered
by each of its pending patent applications or that it was the first to file
patent applications for such inventions. Furthermore, the patent positions of
biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and, therefore, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted. There can be no assurance that patents will issue from
any of the Company's patent applications or, should patents issue, that the
Company will be provided with adequate protection against potentially
competitive products. Furthermore, there can be no assurance that should
patents issue, they will be of commercial value to the Company, or that
private parties, including competitors, will not successfully challenge the
Company's patents or circumvent the Company's patent position in the United
States or abroad. In the absence of adequate patent protection, the Company's
business may be adversely affected by competitors who develop comparable
technology or products. Moreover, pursuant to the terms of the Uruguay Round
Agreements Act, patents filed on or after June 8, 1995 have a term of twenty
years from the date of such filing, irrespective of the period of time it may
take for such patent to ultimately issue. This may shorten the period of
patent protection afforded to the Company's products as patent applications in
the biopharmaceutical sector often take considerable time to issue. Under the
Drug Price Competition and Patent Term Restoration Act of 1984, a patent which
claims a product, use or method of manufacture covering drugs and certain
other products may be extended for up to five years to compensate the patent
holder for a portion of the time required for the United Stated Food and Drug
Administration (the "FDA") review of the product. This law also establishes a
period of time, following New Drug Application ("NDA") approval, during which
the FDA may not accept or approve applications for certain similar or
identical drugs from other sponsors unless those sponsors provide their own
safety and effectiveness data. There can be no assurance that the Company will
be able to take advantage of either the patent term extension or marketing
exclusivity provisions of this law.
In order to protect the confidentiality of the Company's technology,
including trade secrets and know-how and other proprietary technical and
business information, the Company requires all of its employees, consultants,
advisors and collaborators to enter into confidentiality agreements that
prohibit the use or disclosure of information that is deemed confidential. The
agreements also oblige the Company's employees, consultants, advisors and
collaborators to assign to the Company ideas, developments, discoveries and
inventions made by such persons in connection with their work with the
Company. There can be no assurance that confidentiality will be maintained or
disclosure prevented by these agreements or that the Company's proprietary
information or intellectual property will be protected thereby or that
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others will not independently develop substantially equivalent proprietary
information or intellectual property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with those being developed by the Company. Therefore, the Company's drug
candidates may give rise to claims that they infringe the patents or
proprietary rights of other parties existing now and in the future.
Furthermore, to the extent that ViroPharma or its consultants or research
collaborators use intellectual property owned by others in work performed for
the Company, disputes may also arise as to the rights in such intellectual
property or in related or resulting know-how and inventions. An adverse claim
could subject the Company to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties. There
can be no assurance that any license required under any such patents or
proprietary rights would be made available on terms acceptable to the Company,
if at all. If the Company does not obtain such licenses, it may encounter
delays in product market introductions, or may find that the development,
manufacture or sale of products requiring such licenses may be precluded. In
addition, the Company could incur substantial costs in defending itself in
legal proceedings instituted before the PTO or in a suit brought against it by
a private party based on such patents or proprietary rights, or in suits by
the Company asserting its patent or proprietary rights against another party,
even if the outcome is not adverse to the Company. The Company has not
conducted any searches or made any independent investigations of the existence
of any patents or proprietary rights of other parties. See "Important Factors
Regarding Forward-Looking Statements--Uncertain Ability to Protect Patents and
Proprietary Technology and Information" attached in Exhibit 99 to this Annual
Report on Form 10-K.
Manufacturing
The Company does not currently have manufacturing capabilities, nor does
the Company intend to develop such capabilities for any products in the near
future. The Company believes that internal manufacturing capabilities will not
be necessary to successfully commercialize its products. Pleconaril drug
substance is prepared from readily available materials using well-established
synthetic processes. Technology involved in the production of pleconaril is
proprietary and covered by a patent licensed to the Company by Sanofi. The
Company has an agreement with Sanofi for the supply of pleconaril drug
substance for clinical trials. Sanofi is required to supply the Company's
needs at cost during drug development and at cost plus a reasonable mark-up
for any commercial sales in the United States and Canada. The Company is
obligated to purchase pleconaril drug substance exclusively from Sanofi. In
the event that Sanofi is unable to satisfy the Company's requirements and the
Company is required to find an additional or alternative source, there may be
additional cost and delay in product development or commercialization. The
Company anticipates that its current supply of pleconaril drug substance will
be sufficient to complete its ongoing clinical trials for viral meningitis and
hand-foot-and-mouth disease, and its planned clinical trial for "summer flu."
The Company may require additional quantities of pleconaril drug substance to
complete its planned clinical trial for the common cold. The Company believes
that it will be able to obtain drug substance from Sanofi and, if necessary,
other manufacturers for the production of pleconaril drug product on terms
acceptable to the Company. The Company intends to contract third party
manufacturers for the preparation of other compounds and drug substances and
products for preclinical research and commercial production. See "Important
Factors Regarding Forward-Looking Statements--Absence of Manufacturing
Capabilities" attached in Exhibit 99 to this Annual Report on Form 10-K and "-
-Strategic Relationships--Sanofi S.A." The Company is currently negotiating
with several contractors for the commercial manufacture of the liquid
formulation of pleconaril drug product. The Company has established quality
control guidelines, which require that third party manufacturers under
contract produce the drug product in accordance with the FDA's Good
Manufacturing Practices ("GMP") requirements. The Company maintains
confidentiality agreements with potential and existing manufacturers in order
to protect its proprietary rights related to pleconaril.
Marketing
ViroPharma does not currently have a sales and marketing organization.
Under its agreement with Sanofi, the Company has the right to market and sell
pleconaril for all enterovirus and rhinovirus indications in the United States
and Canada. Because patients with viral meningitis typically present in a
hospital emergency room setting, the Company is contemplating establishing a
focused sales force to service this concentrated, hospital-based market. There
can be no
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assurance that the Company will be successful in developing a sales force,
penetrating the markets for any proposed products or achieving market
acceptance of its products. The success and commercialization of the Company's
other potential products will be dependent, in part, upon the ability of the
Company to maintain its existing arrangement with Boehringer Ingelheim, which
governs marketing of the Company's proposed product for hepatitis C, and to
enter into additional collaborative agreements for other potential products.
The Company presently intends to co-market and co-promote products developed
for hand-foot-and-mouth disease, "summer flu" and the common cold indications
in the United States and Canada, if and when such products are approved by
regulatory agencies. There can be no assurance that any such marketing
arrangements will be available on terms acceptable to the Company, if at all,
that such third parties would perform adequately their obligations as
expected, or that any revenue would be derived from such arrangements. See
"Important Factors Regarding Forward-Looking Statements--Absence of Marketing
and Sales Capability" and "--No Assurance of Market Acceptance" attached in
Exhibit 99 to this Annual Report on Form 10-K and "-- Strategic
Relationships."
Government Regulation
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the Company's ongoing research and
product development activities and in the manufacturing and marketing of the
Company's drug candidates. All of the Company's products will require
regulatory approval by governmental agencies, principally the FDA, prior to
commercialization. In particular, therapeutic products for human use are
subject to rigorous preclinical and clinical testing and other approval
requirements by the FDA and similar health authorities in foreign countries.
Various federal statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, recordkeeping and marketing of such
products. The process of obtaining these approvals and the subsequent
compliance with appropriate statutes and regulations require the expenditure
of substantial resources. Any failure by the Company or its collaborators,
licensors or licensees to obtain, or any delay in obtaining, regulatory
approval could adversely affect the marketing of products then being developed
by the Company and its ability to receive product or royalty revenues.
The steps required before a new drug may be commercially distributed in
the United States include (i) conducting appropriate preclinical laboratory
and animal tests, (ii) submitting to the FDA an IND application which must be
approved before clinical trials may commence, (iii) conducting controlled
human clinical trials that establish the safety and efficacy of the drug
product, (iv) filing an NDA with the FDA and (v) obtaining FDA approval of the
NDA prior to any commercial sale or shipment of the drug. This process can
take a number of years and involve the expenditure of substantial resources.
The results of preclinical studies and initial clinical trials are not
necessarily predictive of the results from large-scale clinical trials, and
clinical trials may require substantial additional funds, delays or
modifications due to, among other factors, difficulty in obtaining sufficient
patient populations, clinicians or support. In addition to obtaining FDA
approval for each indication to be treated with each product, each domestic
drug manufacturing establishment must register with the FDA, list its drug
products with the FDA, comply with GMP requirements and be subject to
inspection by the FDA. Moreover, the submission of applications for approval
may require additional time to complete manufacturing stability studies.
Foreign manufacturing establishments distributing drugs in the United States
also must comply with GMP requirements and list their products with the FDA.
They are subject to periodic inspection by the FDA or by local authorities
under agreement with the FDA. See "Important Factors Regarding Forward-Looking
Statements--Government Regulation; No Assurance of Regulatory Approval"
attached in Exhibit 99 to this Annual Report on Form 10-K.
Upon approval in the United States, a drug may only be marketed for the
approved indications in the approved dosage forms and dosages. The FDA also
may require post-marketing testing and surveillance to monitor safety and
efficacy history of the approved product and continued compliance with
regulatory requirements. Adverse experiences with the product must be reported
to the FDA. Product approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if problems concerning safety or efficacy of
the product occur following approval.
The FDA also mandates that drugs be manufactured in conformity with GMP
regulations. In complying with the GMP regulations, manufacturers must
continue to expend time, money and effort in production, recordkeeping and
quality control to ensure that the product meets applicable specifications and
other requirements. The FDA periodically inspects drug manufacturing
facilities to ensure compliance with applicable GMP requirements. Failure to
comply
-15-
<PAGE>
subjects the manufacturer to possible FDA action, such as warning letters,
suspension of manufacturing, seizure of the product, voluntary recall of a
product or injunctive action. The Company currently relies on, and intends to
continue to rely on, third parties to manufacture compounds and products. Such
third parties will be required to comply with GMP requirements.
Even after FDA approval has been obtained, and often as a condition to
expedited approval, further studies, including post-marketing studies, may be
required. Results of post-marketing studies may limit or expand the further
marketing of the products. Further, if there are any modifications to the
drug, including changes in indication, manufacturing process, manufacturing
facility or labeling, an NDA supplement may be required to be submitted to the
FDA.
Products marketed outside the United States which are manufactured in the
United States may be subject to certain FDA regulations, as well as regulation
by the country in which the products are to be sold. If products are marketed
abroad, the Company will also be subject to foreign regulatory requirements
governing clinical trials and pharmaceutical sales, which may vary from
country to country. In connection with certain of its strategic relationships,
the Company's collaborators may be responsible for the foreign regulatory
approval process of the Company's drugs, although the Company may be legally
liable for noncompliance.
The Company is also subject to various federal, state and local laws,
rules, regulations and policies relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals 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 accurately predicted. Moreover, although the Company believes that
its safety procedures for handling and disposing of such materials comply with
current federal, state and local laws, rules, regulations and policies, the
risk of accidental injury or contamination from these materials cannot be
entirely eliminated.
Moreover, the Company anticipates that Congress, state legislatures and
the private sector will continue to review and assess controls on health care
spending. Any such proposed or actual changes could cause the Company or its
collaborators to limit or eliminate spending on development projects and may
otherwise impact the Company. Additionally, in both domestic and foreign
markets, sales of the Company's proposed products will depend, in part, upon
the availability of reimbursement from third-party payors, such as government
health administration authorities, managed care providers, private health
insurers and other organizations. Significant uncertainty often exists as to
the reimbursement status of newly approved health care products. In addition,
third-party payors are increasingly challenging the price and cost
effectiveness of medical products and services. There can be no assurance that
the Company's proposed products will be considered cost effective or that
adequate third-party reimbursement will be available to enable the Company to
maintain price levels sufficient to realize an appropriate return on its
investment in product research and development. See "Important Factors
Regarding Forward-Looking Statements--Uncertainty of Pharmaceutical Pricing
and Related Matters; Need for Reimbursement" attached in Exhibit 99 to this
Annual Report on Form 10-K.
Competition
The pharmaceutical and biopharmaceutical industries are intensely
competitive and are characterized by rapid technological progress. Certain
pharmaceutical and biopharmaceutical companies and academic and research
organizations currently engage in, or have engaged in, efforts related to the
discovery and development of new antiviral medicines. Significant levels of
research in chemistry and biotechnology occur in universities and other
nonprofit research institutions. These entities have become increasingly
active in seeking patent protection and licensing revenues for their research
results. They also compete with the Company in recruiting skilled scientific
talent. Many companies are developing therapies to treat viral diseases and,
in this regard, are in competition with the Company. The Company believes
that its ability to compete successfully 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
-16-
<PAGE>
its products, obtain required regulatory approvals and manufacture and
successfully market its products either alone or through outside parties.
Some of the Company's competitors have substantially greater financial,
research and development, manufacturing, marketing and human resources and
greater experience in drug discovery, development, clinical trial management,
FDA regulatory review, manufacturing and marketing than ViroPharma. Moreover,
the Company believes that the technologies used by the Company have never been
applied to develop an approved pharmaceutical product. See "Important Factors
Regarding Forward-Looking Statements--Competition" and "--Rapid Technological
Change and Uncertainty" attached in Exhibit 99 to this Annual Report on Form
10-K.
Human Resources
As of February 28, 1997, ViroPharma had 37 full-time employees, including
12 persons with Ph.D. or M.D. degrees. Twenty-nine of ViroPharma's employees
are engaged in research and development activities at the Company's laboratory
facility in Malvern, Pennsylvania. A significant number of the Company's
management and professional employees have had prior experience with
pharmaceutical, biotechnology or medical products companies. None of the
Company's employees is covered by collective bargaining agreements. The
Company believes that its relations with its employees are good. There can be
no assurance that the Company will be able to continue to attract and retain
qualified personnel, and the Company does not maintain "key man" life
insurance on any of its employees. See "Important Factors Regarding Forward-
Looking Statements--Dependence on Key Personnel" attached in Exhibit 99 to
this Annual Report on Form 10-K.
Scientific Advisory Board
The Company has assembled a Scientific Advisory Board consisting of
individuals with demonstrated expertise in particular fields who periodically
advise the Company on matters relating to long-term scientific planning,
research and development activities and technological matters. Several of the
advisors have had previous scientific working relationships with members of
the Company's management team.
The members of the Company's Scientific Advisory Board are as follows:
Hugh E. Black, D.V.M., Ph.D. is President of Hugh E. Black & Associates,
Inc. In 1994, Dr. Black retired from Schering-Plough Research Institute where
he served as Vice President, Drug Safety and Metabolism. Dr. Black received
his D.V.M. degree from the University of Toronto and his Ph.D. degree in
veterinary pathology from Ohio State University.
Gary L. Davis, M.D., is Professor of Medicine and the Director of the
Hepatobiliary Diseases Section of the Gastroenterology, Hepatology, and
Nutrition Division at the University of Florida College of Medicine in
Gainesville. Dr. Davis received his M.D. degree from the University of
Minnesota.
James B. Flanegan, Ph.D., is Professor of Molecular Genetics and
Microbiology at the University of Florida College of Medicine in Gainesville.
Dr. Flanegan received his Ph.D. degree in biochemistry from the University of
Michigan.
Frederick G. Hayden, M.D., is the S. Stuart Richardson Professor of
Clinical Virology in Internal Medicine and Professor of Internal Medicine and
Pathology at the University of Virginia School of Medicine in Charlottesville.
Dr. Hayden received his M.D. degree from Stanford University School of
Medicine.
Michael D. Hayre, D.V.M., is Director of the Laboratory Animal Research
Center, The Rockefeller University in New York. Dr. Hayre received his D.V.M.
degree from Tuskegee University.
Robert A. Lamb, Ph.D., Sc.D., is the John Evans Professor of Molecular
and Cell Biology at Northwestern University and a Howard Hughes Medical
Institute Investigator. Dr. Lamb received his Ph.D. in virology and Sc.D.
degree from the University of Cambridge, England.
-17-
<PAGE>
Charles M. Rice, Ph.D., is Professor in the Department of Molecular
Microbiology at Washington University School of Medicine in St. Louis,
Missouri. Dr. Rice received his Ph.D. degree in biochemistry from the
California Institute of Technology.
Michael G. Rossmann, Ph.D., is the Hanley Professor of Biological
Sciences at Purdue University in West Lafayette, Indiana. Dr. Rossmann
received his Ph.D. degree in chemical crystallography from the University of
Glasgow.
Harley A. Rotbart, M.D. is Professor in the Departments of Pediatrics and
Microbiology at the University of Colorado Health Science Center in Denver.
Dr. Rotbart received his M.D. degree from Cornell University Medical College.
Richard Whitley, M.D., is the Loeb Eminent Scholar and Professor of
Pediatrics, Microbiology and Medicine at University of Alabama at Birmingham.
Dr. Whitley received his M.D. degree from George Washington University School
of Medicine.
Members of the Scientific Advisory Board receive consulting fees for
their services. In addition, to date, the Company has granted an aggregate of
66,300 options to members of the Scientific Advisory Board, of which 2,550
have been exercised.
ITEM 2. PROPERTIES
The Company's principal facility consists of approximately 17,000 square
feet of leased laboratory and office space in Malvern, Pennsylvania. The
lease expires in October 1998. The Company believes its present facilities
will be adequate for operations through 1998. The Company is currently
negotiating with several third parties for laboratory and office space and
believes it can obtain adequate laboratory and office space on acceptable
terms in the Malvern area.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a written Consent of Holders of Preferred Stock and a written
Consent of Holders of Common Stock, each dated November 5, 1996, the
stockholders of the Company approved a .51 for 1 reverse stock split of the
Company's Common Stock, adopted the Company's Second Amended and Restated
Certificate of Incorporation, and confirmed the number of authorized shares of
Common Stock and the number of shares of Common Stock issuable under the
Company's 1995 Stock Option Plan. On a pre-split basis, the holders of
8,280,497 shares of Preferred Stock (out of a total of 10,957,222 shares) and
the holders of 1,625,000 shares of Common Stock (out of a total of 1,767,000
shares) approved the foregoing actions. The remaining stockholders of the
Company were notified of these actions as required by Section 228(d) of the
Delaware General Corporation Law.
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<PAGE>
Executive Officers of the Registrant
The executive officers of the Company and their respective ages and
positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Claude H. Nash, Ph.D....... 54 Chief Executive Officer, President and
Chairman of the Board of Directors
Mark A. McKinlay, Ph.D..... 45 Vice President, Research & Development
Marc S. Collett, Ph.D...... 45 Vice President, Discovery Research
Johanna A. Griffin, Ph.D... 52 Vice President, Business Development
Guy D. Diana, Ph.D......... 61 Vice President, Chemistry Research
Jon M. Rogers, M.D......... 45 Vice President, Clinical Research
Vincent J. Milano.......... 33 Vice President, Finance & Administration and Treasurer
Thomas F. Doyle............ 36 Executive Director, Counsel and Secretary
</TABLE>
Claude H. Nash, Ph.D., a co-founder of the Company, has served as
Chairman of the Board of Directors since February 1997, and as Chief Executive
Officer, President and director since the Company's commencement of operations
in December 1994. From 1983 until 1994, Dr. Nash served as Vice President,
Infectious Disease and Tumor Biology at Schering-Plough Research Institute,
where he was responsible for discovery research strategy and advancing new
compounds into clinical development. Dr. Nash received his Ph.D. from
Colorado State University.
Mark A. McKinlay, Ph.D., a co-founder of the Company, has served as Vice
President, Research & Development since the Company's commencement of
operations in December 1994, and served as Secretary from December 1994 until
February 1997. From 1989 through 1994, Dr. McKinlay served in several
positions, including Senior Director, at Sterling Winthrop Pharmaceuticals
Research Division, where he was responsible for developing strategy and
implementing plans for the development of several compounds. Dr. McKinlay
received his Ph.D. from Rensselear Polytechnic Institute.
Marc S. Collett, Ph.D., a co-founder of the Company, has served as Vice
President, Discovery Research of the Company since the Company's commencement
of operations in December 1994. From 1993 until he co-founded the Company, he
served as Senior Director, Viral Therapeutics at PathoGenesis Corporation,
where, among other things, he established an anti-viral discovery program.
Prior to joining PathoGenesis Corporation, Dr. Collett served as Director,
Virology & Antibody Engineering and Director, Biochemical Virology at
MedImmune, Inc., where he was employed from 1988 to 1993. Dr. Collett
received his Ph.D. from the University of Michigan.
Johanna A. Griffin, Ph.D., a co-founder of the Company, has served as
Vice President, Business Development since June 1995 and, from the Company's
commencement of operations in December 1994 until June 1995, served as
Executive Director, Business Development. From 1990 until she joined the
Company, Dr. Griffin served as Director of Molecular Biology at Boehringer
Ingelheim Pharmaceuticals, Inc. where she participated in the clinical
development of antiviral drugs and the promotion of international
pharmaceutical and biotechnology relationships. Dr. Griffin received her
Ph.D. from the University of Alabama at Birmingham.
-19-
<PAGE>
Guy D. Diana, Ph.D., a co-founder of the Company, has served as Vice
President, Chemistry Research since June 1995 and, from the Company's
commencement of operations in December 1994 until June 1995, as Executive
Director, Chemistry Research. Prior to joining ViroPharma, he worked at
Sterling Winthrop for 33 years, most recently as a Senior Fellow in Medicinal
Chemistry, where he participated in the design and synthesis of antiviral
agents and led the team that discovered pleconaril. Dr. Diana received his
Ph.D. from Rice University.
Jon M. Rogers, M.D., has served as Vice President, Clinical Research
since joining ViroPharma in June 1996. From February 1995 until he joined the
Company, Dr. Rogers was Vice President of Medical and Scientific Affairs for
the pharmaceuticals and diagnostics divisions of Boehringer Mannheim
Corporation, where his responsibilities included the development of
pharmaceuticals and diagnostics products. From August 1989 through February
1995, Dr. Rogers served in various positions at Sterling Winthrop, the latest
being Senior Director of Clinical Research. At Sterling Winthrop, Dr. Rogers
was responsible for the development of cardiovascular, central nervous system,
pulmonary and antithrombotic pharmaceutical products. Dr. Rogers received his
M.D. from the University of Cincinnati College of Medicine.
Vincent J. Milano has served as Vice President, Finance & Administration
of the Company since February 1997, as Treasurer since July 1996, and as
Executive Director, Finance & Administration from joining ViroPharma in April
1996 until February 1997. From 1985 until he joined the Company, Mr. Milano
was with KPMG Peat Marwick LLP, where he was Senior Manager since 1991. At
KPMG Peat Marwick LLP, Mr. Milano specialized in public offerings and other
Securities and Exchange Commission filings, strategic alliances and mergers
and acquisitions, principally for life sciences companies. Mr. Milano is a
Certified Public Accountant. Mr. Milano received his B.S. in accounting from
Rider College.
Thomas F. Doyle has served as Secretary since February 1997 and as
Executive Director, Counsel since joining the Company in November 1996. From
1990 until he joined the Company, Mr. Doyle was a corporate attorney with the
law firm of Pepper, Hamilton & Scheetz, where he specialized in intellectual
property, venture capital financing and strategic alliances for technology
based companies. Mr. Doyle received his J.D. from Temple University School of
Law. Prior to attending Temple University, Mr. Doyle was a Certified Public
Accountant. Mr. Doyle received his B.S. in accounting from Mt. St. Mary's
College.
-20-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
The Company's Common Stock is traded on the National Market segment of
The Nasdaq Stock Market under the symbol "VPHM." The Company commenced
trading on The Nasdaq Stock Market on November 19, 1996. The following table
sets forth the high and low sale prices as quoted on The Nasdaq Stock Market.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fourth Quarter, 1996 ........................ $ 8.75 $ 7.00
January 1, 1997 through February 28, 1997 ... $13.50 $9.375
</TABLE>
Holders and Dividends
There were approximately forty-two record-holders of the Company's Common
Stock as of February 28, 1997. The Company has not declared or paid cash
dividends on its Common Stock since its inception and does not intend to do so
in the foreseeable future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation" in Item 7 of this Annual Report
on Form 10-K.
Recent Sales of Unregistered Securities
In May 1996, the Company sold 3,222,222 shares of Series C Convertible
Preferred Stock for an aggregate of $7,249,999.50, or $2.25 per share, to
private investors and the executive officers of the Company. All such shares
of Series C Convertible Preferred Stock converted into an aggregate of
1,643,333 shares of Common Stock upon the closing of the Company's initial
public offering on November 22, 1996.
Options to purchase 21,420 shares of Common Stock were exercised during
1996. Pursuant to a right granted in December 1994, Dr. Frank Baldino, Jr., a
director of the Company, purchased 51,000 shares of Common Stock in January
1996.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the caption "Balance
Sheet Data" as of December 31, 1994, 1995 and 1996, and under the caption
"Statement of Operations Data" for the period from December 5, 1994
(inception) through December 31, 1994 and the years ended December 31, 1995
and December 31, 1996 are derived from financial statements of the Company
which have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The data set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Financial Statements and the Notes thereto and the other
financial information included elsewhere in this Report. The Company is
considered a "development stage company" as described in Note 1 of the
Company's Financial Statements.
<TABLE>
<CAPTION>
Period from
December 5,
1994
(inception)
through Year Ended Year Ended
December 31, December 31, December 31,
1994 1995 1996
------------ -------------- ------------
<S> <C> <C> <C>
Statement of Operations
Data:
License fee................. -- -- $ 1,000,000
Grant revenue............... $ -- $ 90,813 436,081
----------- ----------- -----------
Total revenues.............. -- 90,813 1,436,081
----------- ----------- -----------
Operating expenses:
Research and development.... 75,779 2,930,106 6,694,703
General and administrative.. 243,318 1,091,299 1,421,524
----------- ----------- -----------
Total operating expenses.... 319,097 4,021,405 8,116,227
Interest income, net........ -- 75,730 285,142
----------- ----------- -----------
Net loss.................... $ (319,097) $(3,854,862) $(6,395,004)
=========== =========== ===========
Pro forma net loss per
share(1)................... $ (.98) $ (.93)
Shares used in computing
pro forma net loss per
share(1)................... 3,931,743 6,839,674
<CAPTION>
December 31,
-------------------------------------------------
1994 1995 1996
------------ -------------- ------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
short-term investments..... $ 22,870 $ 4,713,426 $22,547,679
Working capital (deficit)... (243,172) 3,270,375 20,001,703
Total assets................ 24,870 4,873,845 23,452,879
Long-term capital leases.... -- -- 104,571
Mandatorily redeemable
convertible preferred
stock...................... 60,000 7,416,604 --
Total stockholders' equity
(deficit).................. (303,172) (4,089,758) 20,605,161
</TABLE>
- - ----------------
(1) See Note 2 of Notes to Financial Statements.
-22-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in forward-looking statements. Factors that might cause
or contribute to such differences include, but are not limited to, those
discussed in "Important Factors Regarding Forward-Looking Statements" attached
hereto as Exhibit 99.
Since inception, the Company has devoted substantially all of its
resources to its research and product development programs. ViroPharma has
generated no revenues from product sales and has been dependent upon funding
primarily from equity financing. The Company does not expect any revenues
from product sales for at least the next three year period. The Company has
not been profitable since inception and has incurred a cumulative net loss of
$10,568,963 through December 31, 1996. Losses have resulted principally from
costs incurred in research and development activities and general and
administrative expenses. The Company expects to incur additional operating
losses over at least the next several years. The Company expects such losses
to increase over historical levels as the Company's research and development
expenses increase due to further clinical trials and preclinical development
of the Company's most advanced drug candidate, pleconaril, and further
research and development related to other product candidates. The Company's
ability to achieve profitability is dependent on developing and obtaining
regulatory approvals for its product candidates, successfully commercializing
such product candidates, which may include entering into collaborative
agreements for product development and commercialization, and securing
contract manufacturing services.
Results of Operations
Years ended December 31, 1996 and 1995
The Company received a non-refundable technology access fee of $1,000,000
from Boehringer Ingelheim and earned $436,081 of grant revenue for the year
ended December 31, 1996. The Company earned $90,813 in grant revenues during
the year ended December 31, 1995. Net interest income increased to $285,142
for the year ended December 31, 1996 from $75,730 for the year ended December
31, 1995, principally due to larger invested balances provided by the proceeds
of the Company's initial public offering.
Research and development expenses increased to $6,694,703 for the year
ended December 31, 1996 from $2,930,106 for the year ended December 31, 1995.
The increase was principally due to clinical trials related to pleconaril, a
milestone payable to Sanofi and the advancement of drug candidates for the
Company's influenza, hepatitis C and viral pneumonia programs.
General and administrative expenses increased to $1,421,524 for the year
ended December 31, 1996 from $1,091,299 for the year ended December 31, 1995.
The increase was principally due to increased salary expenses and facilities
costs, as well as to increased costs associated with the pursuit of corporate
collaborations.
The net loss increased to $6,395,004 for the year ended December 31, 1996
from $3,854,862 for the year ended December 31, 1995.
Year ended December 31, 1995 and period ended December 31, 1994
The Company commenced operations on December 5, 1994. Therefore, the
period ended December 31, 1994 was 26 days long. Comparisons between such
period and the complete year 1995 may not be meaningful.
Grant revenue for the year ended December 31, 1995 was $90,813. The
Company earned no revenues for the period ended December 31, 1994. Interest
income aggregated $75,730 in 1995. There was no interest income in 1994.
-23-
<PAGE>
Research and development expenses increased to $2,930,106 for the year
ended December 31, 1995 from $75,779 for the period ended December 31, 1994.
The increase was due to 12 months of expenses being reflected in 1995, a
milestone payable to Sanofi, expenses related to the commencement of clinical
development of pleconaril and increased spending related to the Company's drug
discovery efforts.
General and administrative expenses increased to $1,091,299 for the year
ended December 31, 1995 from $243,318 for the period ended December 31, 1994.
The increase was due to 12 months of expenses being reflected in 1995, as well
as to increased salary costs, facilities costs and costs associated with the
pursuit of corporate collaborations.
Net loss for the year ended December 31, 1995 was $3,854,862. Net loss
for the period ended December 31, 1994 was $319,097.
Liquidity and Capital Resources
The Company commenced operations in December 1994. The Company is a
development stage company and to date has not generated revenues from product
sales. The cash flows used in operations are for research and development
activities and the supporting general and administrative expenses. Through
December 31, 1996, the Company has used approximately $7.8 million in
operating activities. The Company invests its cash in short-term investments.
Through December 31, 1996, the Company has used approximately $12.4 million in
investing activities, primarily for short-term investments. Through December
31, 1996, the Company has financed its operations primarily through an initial
public offering of Common Stock and private placements of redeemable
preferred stock and Common Stock totaling approximately $32.7 million. At
December 31, 1996, the Company had cash and cash equivalents and short-term
investments aggregating approximately $22.5 million.
The Company leases its corporate and research and development facilities
under an operating lease expiring in 1998. The Company is currently
negotiating with several third parties for laboratory and office space and
believes that it can secure adequate facilities on terms acceptable to the
Company after the current operating lease expires. The Company has financed
substantially all of its equipment under two master lease agreements and one
bank loan. The bank loan, which was consummated in February 1997, is for
$600,000, is payable in equal annual installments over 72 months and bears
interest at approximately 9%. The Company is required to repay amounts
outstanding under the two leases within periods ranging from 32 to 48 months.
As of February 28, 1997, outstanding borrowings under these arrangements are
approximately $1.7 million. The Company is required to make a milestone
payment to Sanofi of up to $2 million upon the earlier of a future milestone
event as defined in the agreement with Sanofi or December 1998. In addition,
the Company would also be required to make certain significant additional
payments, including royalties, as defined, should agreed-upon future
milestones be attained.
The Company has incurred losses from its operations since inception. The
Company expects to incur additional operating losses over at least the next
several years. The Company expects such losses to increase over historical
levels as the Company's research and development expenses increase due to
further clinical trials and preclinical development of the Company's most
advanced drug candidate, pleconaril, and further research and development
related to other product candidates. The Company will require additional
financing for operations and expansion of its facilities prior to achieving
positive cash flows from its commercial activities. The Company expects that
it will need additional financing to complete all clinical studies for
pleconaril and other development and required testing for any other of the
Company's product candidates. To obtain this financing, the Company may seek
to access the public or private equity markets or enter into additional
arrangements with corporate collaborators. To the extent the Company raises
additional capital by issuing equity securities, ownership dilution to
existing stockholders may result. There can be no assurance, however, that
additional financing will be available on acceptable terms from any source.
-24-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company required by this item are
attached to this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and regarding
compliance with Section 16 of the Securities Exchange Act of 1934 required by
this Item will be set forth in the Company's definitive Proxy Statement, to be
filed within 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K, and is incorporated by reference to the Company's Proxy
Statement.
The information concerning the Company's executive officers required by
this Item is incorporated by reference herein to the section of this Report in
Part I, Item 4 entitled "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, and is incorporated by
reference to the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, and is incorporated by
reference to the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, and is incorporated by
reference to the Company's Proxy Statement.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) Financial Statements. The Financial Statements listed in
--------------------
the accompanying Index to Financial Statements appearing on page F-1 are filed
as part of this annual report on Form 10-K.
(2) Financial Statement Schedules. All schedules are omitted
-----------------------------
because they are not applicable, or not required, or because the required
information is included in the Financial Statements or notes thereto.
(3) Exhibits. The following is a list of Exhibits filed as part
--------
of this annual report on Form 10-K. Where so indicated by footnote, Exhibits
which were previously filed are incorporated by reference. For Exhibits
incorporated by reference, the location of the Exhibit in the previous filing
is indicated in parentheses.
Exhibit No. Description
----------- -----------
3.1 Second Amended and Restated Certificate of Incorporation of
the Company.(1) (Exhibit 3.1)
3.2 By-Laws of the Company, as amended.(1) (Exhibit 3.2)
10.1++ 1995 Stock Option Plan.(1) (Exhibit 10.1)
10.2++ ViroPharma 401(k) Employee Savings Plan, effective July
1, 1995. (1) (Exhibit 10.2)
10.3 Lease dated September 19, 1995 between the Company and
Centocor Property Management Corp. (1) (Exhibit 10.3)
10.4 Master Lease Agreement dated September 13, 1995 between the
Company and Comdisco, Inc. (1) (Exhibit 10.4)
10.5 Master Equipment Lease No. 053-0005 dated December 1, 1995
between the Company and Phoenix Leasing Incorporated. (1)
(Exhibit 10.5)
10.6+ Agreement dated December 22, 1995 between the Company and
Sanofi. (1) (Exhibit 10.6)
10.7+ Collaborative Research Agreement dated as of July 23, 1996
between the Company and Boehringer Ingelheim
Pharmaceuticals, Inc. (1) (Exhibit 10.7)
10.8 Form of Employment Agreement. (1) (Exhibit 10.8)
10.9 Form of Indemnification Agreement. (1) (Exhibit 10.9)
10.10 Form of Employee Stock Purchase Agreement. (1)
(Exhibit 10.10)
-26-
<PAGE>
10.11 Restricted Stock Purchase Agreement dated as of January 17,
1996, by and between the Company and Frank Baldino, Jr. (1)
(Exhibit 10.11)
10.12 Series B Convertible Preferred Stock Purchase Agreement
dated as of June 16, 1995 among the Company and each of the
entities on the "Schedule of Purchasers" attached thereto
as Schedule A. (1) (Exhibit 10.12)
10.13 Series C Convertible Preferred Stock Purchase Agreement
dated as of May 30, 1996 among the Company and each of the
individuals and entities on the "Schedule of Purchasers"
attached thereto as Schedule A. (1) (Exhibit 10.13)
10.14 Form of Warrants to Purchase Series B Preferred Stock dated
March 3, 1995 and May 12, 1995. (1) (Exhibit 10.14)
10.15 Warrant Agreement dated as of September 13, 1995 between
the Company and Comdisco, Inc. (1) (Exhibit 10.15)
10.16 Amended and Restated Investors' Rights Agreement, dated as
of May 30, 1996, by and among the Company and the persons
identified on Schedule A, Schedule B and the Schedule of
Founders thereto. (1) (Exhibit 10.16)
10.17 Form of Amendment to Employee Stock Purchase Agreement. (1)
(Exhibit 10.17)
10.18 Amendment to Restricted Stock Purchase Agreement dated as
of January 17, 1996, among the Company and Frank Baldino,
Jr., dated as of January 17, 1996. (1) (Exhibit 10.18)
24* Power of Attorney (included on signature page).
27* Financial Data Schedule.
99* Important Factors Regarding Forward-Looking Statements.
_______________
* Filed herewith.
+ Portions of this exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to an application for confidential
treatment filed with the Commission pursuant to Rule 406 under the
Securities Act of 1933, as amended.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to Registration Statement on Form S-1 (File No. 333-
12407), as amended, initially filed on September 20, 1996.
Copies of the exhibits are available to stockholders from Thomas F.
Doyle, Executive Director, Counsel and Secretary, ViroPharma
Incorporated, 76 Great Valley Parkway, Malvern, Pennsylvania 19355. There
will be a fee to cover the Company's expenses in furnishing the exhibits.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company for the quarter ended
December 31, 1996.
-27-
<PAGE>
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.
VIROPHARMA INCORPORATED
By:/s/ Vincent J. Milano
---------------------------------------
Vincent J. Milano
Vice President, Finance and Administration
and Treasurer
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Claude H. Nash and Vincent J.
Milano as his or her attorney-in-fact, with the full power of substitution,
for him or her in any and all capacities, to sign any amendments to this
Report, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Capacity Date
- - ---- -------- ----
<S> <C> <C>
/s/Claude H. Nash President, Chief Executive March 7, 1997
- - ---------------------------- Officer and Chairman of the
Claude H. Nash Board (Principal Executive
Officer)
/s/Vincent J. Milano Vice President, Finance and March 7, 1997
- - ---------------------------- Administration (Principal
Vincent J. Milano Financial and Accounting
Officer)
/s/Claude H. Nash Director March 7, 1997
- - ----------------------------
Claude H. Nash
/s/Frank Baldino, Jr., Ph.D. Director March 7, 1997
- - ----------------------------
Frank Baldino, Jr., Ph.D.
/s/Steve Dow Director March 7, 1997
- - ----------------------------
Steve Dow
/s/Jon N. Gilbert Director March 7, 1997
- - ----------------------------
Jon N. Gilbert
/s/Ann H. Lamont Director March 7, 1997
- - ----------------------------
Ann H. Lamont
/s/Christopher Moller, Ph.D. Director March 7, 1997
- - ----------------------------
Christopher Moller, Ph.D.
/s/David I. Scheer Director March 7, 1997
- - ----------------------------
David I. Scheer
</TABLE>
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Financial Statements
December 31, 1995 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets at December 31, 1995 and 1996 F-3
Statements of Operations for the period December 5, 1994 (inception) to
December 31, 1994, the years ended December 31, 1995 and 1996 and the
period December 5, 1994 (inception) to December 31, 1996 F-4
Statements of Stockholders' Equity (Deficit) for the period December 5,
1994 (inception) to December 31, 1994 and the years ended December 31,
1995 and 1996 F-5
Statements of Cash Flows for the period December 5, 1994 (inception) to
December 31, 1994, the years ended December 31, 1995 and 1996 and the
period December 5, 1994 (inception) to December 31, 1996 F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Stockholders and Board of Directors
ViroPharma Incorporated:
We have audited the accompanying balance sheets of ViroPharma Incorporated (A
Development Stage Company) as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
period from December 5, 1994 (inception) to December 31, 1994 and the years
ended December 31, 1995 and 1996, and for the period December 5, 1994
(inception) 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 ViroPharma Incorporated (A
Development Stage Company) as of December 31, 1995 and 1996, and the results of
its operations and its cash flows for the period from December 5, 1994
(inception) to December 31, 1994 and the years ended December 31, 1995 and 1996,
and for the period December 5, 1994 (inception) to December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 28, 1997
F-2
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Balance Sheets
December 31, 1995 and 1996
<TABLE>
<CAPTION>
Assets 1995 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 337,044 10,810,310
Short-term investments 4,376,382 11,737,369
Other current assets 103,948 197,171
---------- ------------
Total current assets 4,817,374 22,744,850
Equipment and leasehold improvements, net - 672,029
Other assets 56,471 36,000
----------- ------------
Total assets $ 4,873,845 23,452,879
=========== ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable 310,560 356,171
Notes payable 37,500 -
Obligation under capital lease - current - 52,950
Accrued expenses and other current liabilities 1,198,939 2,334,026
----------- ------------
Total current liabilities 1,546,999 2,743,147
Obligation under capital lease - noncurrent - 104,571
----------- ------------
1,546,999 2,847,718
----------- ------------
Mandatorily redeemable convertible preferred stock, par value $.001 per share
(at redemption value which includes accretion of $19,104 at December 31,
1995); issuable in Series A, B and C. Authorized 10,315,000 shares in 1995
and none in 1996; issued and outstanding 7,735,000 shares in 1995 and none
in 1996; converted into 5,588,191 common shares upon consummation of
initial public offering in 1996 7,416,604 -
----------- ------------
Stockholders' equity (deficit):
Preferred stock, par value $.001 per share. Authorized 5,000,000 shares
in 1996; none outstanding - -
Common stock, par value $.002 per share. Authorized 12,790,000 shares in
1995 and 27,000,000 shares in 1996; issued and outstanding 828,750
shares at December 31, 1995 and 9,076,861 at December 31, 1996 1,657 18,154
Additional paid-in capital 103,577 31,758,996
Deferred compensation (47,775) (661,337)
Unrealized gains on available for sales securities 26,742 58,311
Deficit accumulated during the development stage (4,173,959) (10,568,963)
----------- ------------
Total stockholders' equity (deficit) (4,089,758) 20,605,161
Commitments. ----------- ------------
Total liabilities and stockholders' equity
(deficit) $ 4,873,845 23,452,879
=========== ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Statements of Operations
Period December 5, 1994 (inception) to December 31, 1994,
the years ended December 31, 1995 and 1996, and the period
December 5, 1994 (inception) to December 31, 1996
<TABLE>
<CAPTION>
Period
December 5, December 5,
1994 Year ended 1994
(inception) to December 31, (inception) to
December 31, -------------------- December 31,
1994 1995 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License fee $ - - 1,000,000 1,000,000
Grant revenue - 90,813 436,081 526,894
-------- --------- --------- -----------
Total revenues - 90,813 1,436,081 1,526,894
-------- --------- --------- -----------
Operating expenses incurred in the
development stage:
Research and development 75,779 2,930,106 6,694,703 9,700,588
General and administrative 243,318 1,091,299 1,421,524 2,756,141
-------- --------- --------- -----------
Total operating expenses 319,097 4,021,405 8,116,227 12,456,729
-------- --------- --------- -----------
Loss from operations (319,097) (3,930,592) (6,680,146) (10,929,835)
Interest income, net - 75,730 285,142 360,872
-------- --------- --------- -----------
Net loss $ (319,097) (3,854,862) (6,395,004) (10,568,963)
======== ========= ========= ===========
Accretion of redemption value attribut-
able to mandatorily redeemable
convertible preferred stock - 19,104 1,597,341 1,616,445
-------- --------- --------- -----------
Net loss allocable to common
shareholders $ (319,097) (3,873,966) (7,992,345) (12,185,408)
======== ========= ========= ===========
Pro forma net loss per share $ (.98) (.93)
========= =========
Shares used in computing pro forma
net loss per share 3,931,743 6,839,674
========= =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
Period December 5, 1994 (inception) to December 31, 1994
and the years ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
Common stock Notes
----------------------------- Additional receivable
Number paid-in on common
of shares Amount capital stock
--------- ------ ------- -----
<S> <C> <C> <C> <C>
Balance, December 5, 1994 (inception) - - - -
Issuance of common stock to founders 828,750 $ 1,657 79,593 (1,625)
Amortization of deferred compensation - - - -
Net loss for period - - - -
--------------- ---------- ----------------- --------
Balance, December 31, 1994 828,750 1,657 79,593 (1,625)
Proceeds from notes receivable - - - 1,625
Issuance costs of Series A and B preferred stock - - (46,912) -
Unrealized gains on available for sale securities - - - -
Amortization of deferred compensation - - - -
Accretion of redemption value attributable to mandatorily
redeemable convertible preferred stock - - (19,104) -
Value attributed to issuance of warrants - - 90,000 -
Net loss - - - -
--------------- ---------- ----------------- --------
Balance, December 31, 1995 828,750 1,657 103,577 -
Deferred compensation resulting from grant of options - - 753,461 -
Amortization of deferred compensation - - - -
Unrealized gains on available for sale securities - - - -
Issuance costs of Series C preferred stock - - (27,100) -
Exercise of common stock options 72,420 145 6,955 -
Value attributed to issuance of warrants - - 19,920 -
Accretion of redemption value attributable
to mandatorily redeemable convertible preferred stock - - (1,597,341) -
Conversion of preferred stock to common stock 5,588,191 11,177 16,253,022 -
Issuance of common stock, net of issuance costs 2,587,500 5,175 16,246,502 -
Net loss - - - -
--------------- ---------- ----------------- --------
Balance, December 31, 1996 9,076,861 $ 18,154 31,758,996 -
=============== ========== ================= ========
<CAPTION>
Unrealized Deficit
gains on accumulated Total
available during the stockholders'
Deferred for sale development equity
compensation securities stage (deficit)
------------ ---------- ----- -------
Balance, December 5, 1994 (inception) - - - -
Issuance of common stock to founders (79,625) - - -
Amortization of deferred compensation 15,925 - - 15,925
Net loss for period - - (319,097) (319,097)
------------ ---------- ----------- -----------
Balance, December 31, 1994 (63,700) - (319,097) (303,172)
Proceeds from notes receivable - - - 1,625
Issuance costs of Series A and B preferred stock - - - (46,912)
Unrealized gains on available for sale securities - 26,742 - 26,742
Amortization of deferred compensation 15,925 - - 15,925
Accretion of redemption value attributable to mandatorily
redeemable convertible preferred stock - - - (19,104)
Value attributed to issuance of warrants - - - 90,000
Net loss - - (3,854,862) (3,854,862)
------------ ---------- ---------- -----------
Balance, December 31, 1995 (47,775) 26,742 (4,173,959) (4,089,758)
Deferred compensation resulting from grant of options (753,461) - - -
Amortization of deferred compensation 139,899 - - 139,899
Unrealized gains on available for sale securities - 31,569 - 31,569
Issuance costs of Series C preferred stock - - - (27,100)
Exercise of common stock options - - - 7,100
Value attributed to issuance of warrants - - - 19,920
Accretion of redemption value attributable
to mandatorily redeemable convertible preferred stock - - - (1,597,341)
Conversion of preferred stock to common stock - - - 16,264,199
Issuance of common stock, net of issuance costs - - - 16,251,677
Net loss - - (6,395,004) (6,395,004)
------------ ---------- ---------- -----------
Balance, December 31, 1996 (661,337) 58,311 (10,568,963) 20,605,161
============ ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Statements of Cash Flows
Period December 5, 1994 (inception) to December 31, 1994,
the years ended December 31, 1995 and 1996, and the period
December 5, 1994 (inception) to December 31, 1996
<TABLE>
<CAPTION>
Period
December 5, December 5,
1994 Year ended 1994
(inception) to December 31, (inception) to
December 31, -------------------- December 31,
1994 1995 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (319,097) (3,854,862) (6,395,004) (10,568,963)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash compensation expense 15,925 15,925 139,899 171,749
Non-cash warrant value - 90,000 19,920 109,920
Depreciation and amortization expense - - 58,022 58,022
Changes in assets and liabilities:
Other current assets (2,000) (101,948) (93,223) (197,171)
Other assets - (56,471) 20,471 (36,000)
Accounts payable 2,207 308,353 45,611 356,171
Accrued expenses and other current liabilities 103,335 1,095,604 1,135,087 2,334,026
-------- ----------- ----------- -----------
Net cash used in operating activities (199,630) (2,503,399) (5,069,217) (7,772,246)
-------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of equipment - - (730,052) (730,052)
Purchase of short-term investments - (11,018,731) (15,335,938) (26,354,669)
Sales of short-term investments - 4,363,754 - 4,363,754
Maturities of short-term investments - 2,305,337 8,006,520 10,311,857
-------- ----------- ----------- -----------
Net cash used in investing activities - (4,349,640) (8,059,470) (12,409,110)
-------- ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock 60,000 6,648,088 7,223,155 13,931,243
Net proceeds from issuance of common stock - - 16,258,777 16,258,777
Proceeds received on notes receivable - 1,625 - 1,625
Proceeds from notes payable 162,500 517,500 12,500 692,500
Payment of notes payable - - (50,000) (50,000)
Obligation under capital lease - - 157,521 157,521
-------- ----------- ----------- -----------
Net cash provided by financing activities 222,500 7,167,213 23,601,953 30,991,666
-------- ----------- ----------- -----------
Net increase in cash and cash equivalents 22,870 314,174 10,473,266 10,810,310
Cash and cash equivalents at beginning of period - 22,870 337,044 -
-------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 22,870 337,044 10,810,310 10,810,310
======== =========== =========== ===========
Supplemental disclosure of noncash transactions:
Conversion of Note Payable to Series A and
Series B Preferred Stock $ - 642,500 - 642,500
Conversion of mandatorily redeemable convertible
preferred stock to common shares - - 16,264,199 16,264,199
Notes issued for 828,750 common shares 1,625 - - 1,625
Deferred compensation 79,625 - 753,461 833,086
Accretion of redemption value attributable to
mandatorily redeemable convertible preferred stock - 19,104 1,597,341 1,616,445
Unrealized gains on available for sale securities - 26,742 31,569 58,311
======== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
December 31, 1995 and 1996
(1) Organization and Business Activities
ViroPharma Incorporated (a development stage Company) (the "Company")
was incorporated in Delaware on December 5, 1994. The Company is a
development stage biopharmaceutical company committed to the discovery,
development, and commercialization of novel small molecule drugs to
treat infections caused by RNA viruses. The accompanying financial
statements include the results of operations of the Company from
December 5, 1994 (inception) to December 31, 1996.
The Company is devoting substantially all of its efforts towards
conducting drug discovery and development, raising capital, conducting
clinical trials and pursuing regulatory approval for products under
development, and recruiting personnel and building infrastructure. In
the course of such activities, the company has sustained operating
losses and expects such losses to continue for the foreseeable future.
The Company has not generated any significant revenues or product sales
and has not achieved profitable operations or positive cash flow from
operations. The Company's deficit accumulated during the development
stage aggregated $10,568,963 through December 31, 1996. There is no
assurance that profitable operations, if ever achieved, could be
sustained on a continuing basis.
The Company plans to continue to finance its operations with a
combination of stock issuances, private placements and follow-on public
offerings, license payments, payments from strategic research and
development arrangements and, in the longer term, revenues from product
sales. There are no assurances, however, that the Company will be
successful in obtaining an adequate level of financing needed for the
long-term development and commercialization of its planned products.
(2) Basis of Accounting and Summary of Significant Accounting Policies
Cash and cash equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less when purchased to be
cash equivalents. All cash and cash equivalents are held in
United States (U.S.) financial institutions, including
commercial paper of U.S. companies, with a cost and fair value
of $248,659 at December 31, 1995 and a cost and fair value of
$11,047,013 and $11,074,310, respectively, at December 31, 1996.
Short-term investments
Short-term investments consist primarily of debt securities
backed by the U.S. government. The Company's entire short-term
investment portfolio is currently classified as available for
sale and is stated at fair value as determined by quoted market
values. Changes in the net unrealized holding gains and losses
are included as
F-7
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements, Continued
(2) Basis of Accounting and Summary of Significant Accounting Policies,
cont.
a separate component of stockholders' equity (deficit). For
purposes of determining gross realized gains and losses, the
cost of short-term investments sold is based upon specific
identification. The Company has not experienced any significant
realized gains or losses on its investments through December 31,
1996.
Concentration of credit risk
The Company invests its excess cash and short-term investments
in accordance with a policy objective that seeks to ensure both
liquidity and safety of principal. The policy limits investments
to certain types of instruments issued by the U.S. government
and institutions with strong investment grade credit ratings and
places restrictions in their terms and concentrations by type
and issuer.
Equipment and leasehold improvements
Equipment and leasehold improvements are recorded at cost.
Depreciation and amortization is computed on a straight-line
basis over the useful lives of the assets or the lease term,
whichever is shorter, ranging from two to seven years.
The Company leases certain of its equipment and facilities under
operating leases. Operating lease payments are charged to
operations over the related period that such leased equipment is
utilized in service.
Assets and liabilities related to capital leases are recorded at
the present value of the future minimum rental payments using
interest rates appropriate at the inception of the lease.
Capital lease amortization is included with depreciation and
amortization expense.
Expenditures for repairs and maintenance are expensed as
incurred.
Patent costs
Patent application and maintenance costs are expensed as
incurred.
Research and development
Research and product development costs are expensed as incurred.
Licensed technology
Costs incurred in obtaining the license rights to technology in
the research and development stage are expensed as incurred and
in accordance with the specific contractual terms of such
license agreements.
F-8
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements, Continued
(2) Basis of Accounting and Summary of Significant Accounting Policies,
cont.
Accounting for income taxes
Deferred income tax assets and liabilities are determined based
on differences between the financial statement reporting and tax
bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred
income tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits which are not expected to be
realized. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the period
that such tax rate changes are enacted.
Revenue recognition - collaborative research, contract and
license agreements
Collaborative research revenue from cost-reimbursement and grant
agreements are recorded as the related expenses are incurred, up
to the contractual limits. Contract and licensing revenue is
recognized when milestones are met and the Company's specific
performance obligations have been satisfied in accordance with
the terms of the respective agreements. Cash received that is
related to future performance under such contracts is deferred
and recognized as revenue when earned.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Reverse Stock Split
On November 5, 1996, the Company effected a reverse stock split
of its common stock on a .51-for-1 basis. All common share and
pro forma per share amounts in the accompanying financial
statements have been retroactively adjusted to reflect the
reverse stock split for all periods presented. Preferred stock
amounts have not been retroactively adjusted to reflect the
reverse stock split.
Stock-based compensation
The Company accounts for its stock option plan in accordance
with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. As such, compensation cost is measured
on the date of grant as the excess of the current market price
of the underlying stock over the exercise price. Such
compensation amounts are amortized over the respective vesting
periods of the option grant. On January 1, 1996, the Company
adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation", which permits entities to provide
pro forma net income (loss) and pro forma earnings (loss) per
share disclosures for employee stock option grants made in 1995
and in future years as if the fair-value based method defined in
SFAS No. 123 had been applied. The Company has elected to
continue to apply the accounting provisions of APB Opinion No 25
and provide the pro forma disclosure requirements of SFAS No.
123.
F-9
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements, Continued
(2) Basis of Accounting and Summary of Significant Accounting Policies,
cont.
Pro forma net loss per share
For periods subsequent to the Company's Initial Public Offering
(IPO), net loss per share is calculated by dividing the net loss
by the weighted average number of common shares outstanding for
the respective periods adjusted for the dilutive effect, if any,
of common stock equivalents which consist of stock options and
warrants using the treasury stock method. Common stock
equivalents that are anti-dilutive are excluded from net loss
per share calculations subsequent to the IPO.
For periods prior to the Company's IPO, all common and common
equivalent shares from stock options and warrants and
convertible preferred stock issued during the twelve-month
period prior to the IPO at prices below the IPO price are
presumed to have been issued in contemplation of the IPO and
have been included in the calculation of pro-forma net loss per
share as if they were outstanding for all periods presented
(using the treasury stock method and an IPO price of $7.00 per
share). The calculation of shares used in computing pro-forma
net loss per share prior to the Company's IPO also included all
series of mandatorily redeemable convertible preferred stock,
assuming conversion into shares of common stock (using the
if-converted method) from their respective original dates of
issuance. In the computation of pro forma net loss per share,
accretion of the redemption value attributable to mandatorily
redeemable convertible preferred stock is not included as an
increase to net loss.
The following table sets forth the calculation of total number
of shares used in the computation of pro forma net loss per
share at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Weighted average common shares outstanding 828,750 2,053,114
Incremental shares assumed to be outstanding
related to common stock, stock options and
warrants granted and convertible preferred
stock based on the treasury stock method 853,620 486,123
Convertible preferred stock (if-converted method) 2,249,373 4,300,437
--------- ---------
Weighted average common and common
equivalent shares used in computation of
pro forma net loss per share 3,931,743 6,839,674
========= =========
</TABLE>
(3) Short-Term Investments
Short-term investments consist of fixed income securities with original
maturities of greater than three months but less than one year including
U.S. treasury instruments of agencies of the U.S. Government and
high-grade commercial paper. At December 31, 1995 and 1996, all of the
short-term investments were deemed as "available for sale" investments.
F-10
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements, Continued
(3) Short-Term Investments, cont.
The following summarizes the "available for sale" investments at
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized Fair
Cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Obligations of the U.S. Govern-
ment and agencies of the U.S.:
December 31, 1995 $ 4,349,640 26,742 - 4,376,382
=========== ====== ======== ===========
Obligations of the U.S. Govern-
ment and agencies of the U.S 5,383,095 7,877 6,160 5,384,812
Commercial paper 6,295,963 56,594 - 6,352,557
----------- ------ -------- -----------
December 31, 1996 $ 11,679,058 64,471 6,160 11,737,369
=========== ====== ======== ===========
</TABLE>
(4) Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following at
December 31, 1996:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Computer and equipment $ 603,265
Leasehold improvements 126,786
-------
730,051
Less accumulated depreciation
and amortization 58,022
-------
$ 672,029
=======
</TABLE>
Included in equipment and leasehold improvements at December 31, 1996 is
approximately $215,000 of assets held under capital lease.
(5) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following
at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
License fee payable $ 1,036,000 1,333,332
Clinical development and research - 827,175
Payroll and payroll taxes payable 72,986 30,329
Other current liabilities 89,953 143,190
--------- ---------
$ 1,198,939 2,334,026
========= =========
</TABLE>
F-11
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) License and Research Agreements
In December 1995, the Company entered into a license agreement with
Sanofi S.A. (Sanofi) for its most advanced drug candidate. Under the
Sanofi agreement, the Company was required to pay a license fee of
$1,000,000. This amount was charged to operations in 1995 and paid in
February 1996. In addition, the Company is required to make a milestone
payment of up to $2,000,000 upon the earlier of the occurrence of a
future milestone event, as defined, or three years from the date of the
agreement. The $2,000,000 milestone payment is being charged to
operations on a pro-rata monthly basis commencing in December 1995 over
eighteen months, the expected timeframe in which the milestone is
anticipated to be achieved.
In connection with the Sanofi agreement, the Company is also required to
make certain significant additional payments, including royalties, as
defined, should agreed-upon future milestones be attained. At the
present time, there can be no assurance that such milestones will be
attained.
The Company has entered into various licensing, research and other
agreements. Under these agreements, the Company is working in
collaboration with various other parties. Should any discoveries be made
under such arrangements, the Company would be required to negotiate the
licensing of the technology for the development of the respective
discoveries. There are no significant funding commitments under any
other agreement other than Sanofi.
In July 1996, the Company entered into a collaborative drug discovery
and development agreement with Boehringer Ingelheim Pharmaceuticals Inc.
(BI) for one hepatitis C target identified by the Company. Under this
agreement, the Company granted to BI the exclusive worldwide rights to
develop and commercialize compounds discovered under the agreement. In
return, BI paid a non-refundable technology access fee of $1,000,000 to
the Company and is required to make certain research and milestone
payments, as defined, to the Company in connection with the Company's
transfer of HCV screening and assay technology and at various stages in
the development of compounds under the agreement. In addition, BI is
required to make royalty payments to the Company on sales of products
developed and marketed under this agreement.
In February 1997, the Company received a $750,000 milestone payment
related to the BI agreement. Such amount will be recognized as revenue
in 1997 pursuant to the specific terms of the agreement.
The Company recognized approximately $340,000 of grant revenue from a
not-for-profit entity for which a director of the Company serves as an
officer.
(7) Common Stock and Common Stock Options
On November 22, 1996, the Company completed its Initial Public
Offering (IPO) of common stock. The Company sold 2,587,500 shares
(including 337,500 shares excised by the underwriters for the
overallotment). Net proceeds approximated $16,250,000.
F-12
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Common Stock and Common Stock Options, cont.
Upon inception of the Company in December 1994, certain members of
management and a co-founder/director purchased 828,750 shares of common
stock. Management purchased 663,000 of these shares which vest annually
over a four-year period. The Company has the right to repurchase any
unvested shares at the original price paid for such shares should the
employee leave the Company before such shares are fully vested. A
co-founder/director purchased 165,750 shares. The difference between the
deemed fair value and the price paid ($.002) per share, for the
aforementioned common stock at inception in December 1994 was $79,625,
which amount was recorded as deferred compensation. Compensation expense
related to these shares of common stock aggregated $15,925 in each of
1994, 1995 and 1996. Pursuant to a right granted in December 1994, a
director purchased in January 1996, 51,000 shares of common stock at
$.10 per share, pursuant to a restricted stock purchase agreement.
The Company has adopted the 1995 Stock Option Plan (the "Plan") to
provide eligible individuals with an opportunity to acquire or increase
an equity interest in the Company and to encourage such individuals to
continue in the employment of the Company. Prior to the adoption of the
Plan, stock options granted in 1994 and 1995 were non-qualified stock
options. Stock options are granted at the deemed fair market value of
the stock on the day immediately preceding the date of grant. Stock
options are exercisable for a period not to exceed ten years from the
date of grant. Vesting of the stock options occurs, generally 25% per
year, over four years. There are 1,200,000 shares reserved under the
Plan.
Stock option activity from December 5, 1994 (inception) to December 31,
1996 is as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
average average
Exercise remaining exercise
price per Share contractual price
share options life per share
----- ------- ---- ---------
<S> <C> <C> <C> <C>
Balance, December 5, 1994
(date of inception) - - -
Granted $ .10 150,349 $ .10
Exercised - - -
Cancelled - - -
-------
Balance, December 31, 1994 .10 150,349 10.0 .10
Granted .20 12,750 .20
Exercised - - -
Cancelled - - -
-------
Balance, December 31, 1995 .10-.20 163,099 8.7 .11
Granted .20-.45 174,775 .25
2.16 95,869 2.16
5.25 23,460 5.25
Exercised .10 (21,420) -
Cancelled - - -
-------
Balance, December 31, 1996 .10-5.25 435,783 8.75 .90
=======
Shares exercisable at
December 31, 1996 .10-.20 24,608 .13
=======
</TABLE>
F-13
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Common Stock and Common Stock Options, cont.
At December 31, 1996, there were 742,797 shares available for grant
under the Plan. In January 1997, the Company granted 229,800 options to
its employees. Such options were granted at exercise prices equal to the
fair market value at the grant date.
During 1996, various executive officers and certain employees of the
Company were granted options to acquire 270,644 shares of common stock
at exercise prices ranging from $.20 to $2.16 per share. The exercise
price of the options was equal to the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
However, for financial statement purposes, the difference between a
deemed value in the range of $2.35 to $5.25 per share and the respective
exercise prices at the grant dates has been recorded as deferred
compensation ($753,461) and is being amortized over the four-year
vesting period. Compensation expense for the aforementioned options
aggregated $123,974 for the year ended December 31, 1996.
The per share weighted-average fair value of stock options granted
during 1995 and 1996 ranged from $.14 to $4.45 per share, respectively,
on the date of grant. Such fair values were determined using the
Black-Scholes option-pricing model and are based on the following
weighted-average assumptions: an expected dividend yield of 0%, a
risk-free interest rate of 7.5%, volatility of 50% and an expected
option life of ten years.
The Company applies APB Opinion No. 25 in accounting for its stock
option plan. Had the Company determined compensation cost for options
granted during 1995 and 1996 based on the fair value at the grant date
under SFAS No. 123, the Company's net loss and pro forma net loss per
share would have been increased to the pro forma amounts under SFAS No.
123 indicated below:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net loss:
As reported $ (3,854,862) (6,395,004)
Pro forma under SFAS No 123 (3,855,318) (6,524,213)
========= =========
Pro forma net loss per share:
As reported (.98) (.93)
Pro forma under SFAS No. 123 (.98) (.95)
========= =========
</TABLE>
Pro forma net loss reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is incurred under SFAS
123 over the respective vesting period of such options, and options
granted by the Company prior to January 1, 1995 are not reflected in the
pro forma net loss figures above.
F-14
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Mandatorily Redeemable Convertible Preferred Stock
The Company completed the sale of its Series A (675,000 shares) and
Series B (7,060,000 shares) mandatorily redeemable convertible preferred
stock (the Preferred Stock) at per share prices of $.50 and $1.00,
respectively. Aggregate net proceeds from these transactions totaled
approximately $7,350,000, which included a $162,500 promissory note with
an investor was converted into Series A Preferred Stock in June 1995.
On May 31, 1996, the Company sold 3,222,222 shares of Series C
mandatorily redeemable convertible preferred stock at a per share price
of $2.25 for aggregate net proceeds of approximately $7,223,000.
On November 22, 1996, all mandatorily redeemable convertible preferred
stock was converted into 5,588,191 shares of common stock on a .51 for 1
basis in connection with completion of the Company's Initial Public
Offering.
The Company also secured $480,000 in bridge financing loans in March and
May 1995, which amounts were converted to Series B preferred stock in
June 1995.
In 1995, in connection with the bridge financing, the Company issued
159,994 warrants to Series B investors to purchase Series B preferred
stock at the fair value of the Series B preferred stock at the date of
issuance ($1.00 per share). The deemed fair value of such warrants at
their issuance date aggregated $90,000, which amount was charged to
operations in 1995.
The difference between the deemed fair market value of the Preferred
Stock and the liquidation amount was accreted on a pro-rata basis in the
accompanying financial statements through the consummation of the
Company's IPO in November 1996, at which point all shares of Preferred
Stock were converted into 5,588,191 common shares. All rights with
respect to the Preferred Stock ceased upon consummation of the IPO.
(9) Income Taxes
At December 31, 1996, the Company had available for Federal and state
income tax purposes net operating loss carryforwards of approximately
$1,731,000. Such carryforwards, which expire between 2011 and 1999,
respectively, are available to reduce future Federal and state taxable
income, if any.
Based on "change in ownership" provisions of the Tax Reform Act of 1986,
net operating loss and research and development credit carryforwards may
be subject to annual limitations that could reduce the Company's ability
to utilize these carryforwards in the future.
F-15
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Income Taxes, cont.
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1995 and 1996 are shown below. At
December 31, 1996, a valuation allowance of $4,152,890 has been
recognized to offset the deferred tax assets as realization of such
assets is uncertain. The change in the valuation allowance for 1995 and
1996 was an increase of $1,480,287 and $2,545,044 respectively.
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 549,171 758,592
Capitalized research and
development costs 1,033,238 2,848,527
Expenses not currently deductible - 533,333
Capitalized start-up costs 50,917 37,918
----------- -----------
Total gross deferred tax assets 1,633,326 4,178,370
Deferred tax liability:
Employee compensation 25,480 25,480
----------- -----------
Net deferred tax assets 1,607,846 4,152,890
Valuation allowance (1,607,846) (4,152,890)
--------- ----------
Total deferred tax assets $ - -
========= ==========
</TABLE>
(10) 401(k) Profit Sharing Plan
In 1995, the Company adopted a 401(k) Profit Sharing Plan (the "401(k)
Plan") available to all employees meeting certain eligibility criteria.
The 401(k) Plan permits participants to contribute up to 15% of their
compensation not to exceed the limits established by the Internal
Revenue Code. All contributions made by participants vest immediately in
the participant's account. The Company did not contribute to the 401(k)
Plan in 1995 or 1996.
(11) Commitments
In September 1995, the Company entered into a lease arrangement for the
financing of certain lab equipment, leasehold improvements, computers
and office equipment. The terms range from three to four years.
The lease line expired in September 1996. In connection with this
arrangement, 63,750 warrants to purchase Series B preferred stock were
originally granted to the lessor at the original Series B issuance price
of $1.00 per share. The deemed fair value of such warrants at their
issuance date aggregated $63,750, which amount is being amortized to
operations over the term of the lease arrangement. The number of
warrants and the related exercise price were adjusted based on a formula
to reflect the increase in per share price of the Series C Preferred
Stock over Series B Preferred Stock and the .51 for 1 reverse stock
split to 21,675 warrants to purchase common stock at an exercise price
of $2.94 per share.
F-16
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements, Continued
(11) Commitments, cont.
In October 1995, the Company entered into an operating lease agreement
for its present corporate facilities. The lease term is for two years
with a one year renewal option, subject to lessor consent. The option
was exercised in February 1997 extending the term of the lease to
October 1998.
In December 1995, the Company entered into a capital lease arrangement
for the financing of certain equipment. The terms of this arrangement
are for four years from the date of funding. The maximum amount that can
be financed under this arrangement is $620,000, which includes $120,000
of used equipment which the Company is obligated to purchase at the end
of the lease term for $24,000.
The Company's future minimum lease payments under the aforementioned
leases for years subsequent to December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year ending Operating Capital
December 31, leases leases
------------ ------ ------
<S> <C> <C>
1997 $ 378,337 69,545
1998 330,121 69,545
1999 152,827 51,302
2000 45,747 2,373
2001 and thereafter - -
------- -------
Total minimum lease payments $ 907,032 192,765
=======
Amounts representing interest (35,244)
-------
Present value of net minimum lease
payments 157,521
Current portion 52,950
-------
Long-term portion $ 104,571
=======
</TABLE>
Rent expense for the period from December 5, 1994 (date of inception) to
December 31, 1994 and the years ended December 31, 1995 and 1996
aggregated $20,000, $271,000 and $335,000, respectively.
(12) Subsequent Events (unaudited)
In February 1997, the Company entered into a $600,000 loan agreement
with a bank. The term of the loan is six years, with principal and
interest due monthly. The interest rate is approximately 9% and is
secured by certain equipment and a $300,000 certificate of deposit.
F-17
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
24 Power of Attorney (included on signature page).
27 Financial Data Schedule.
99 Important Factors Regarding Forward-Looking Statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 337,044 10,810,310
<SECURITIES> 4,376,382 11,737,369
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,817,374 22,744,850
<PP&E> 0 672,029
<DEPRECIATION> 0 58,022
<TOTAL-ASSETS> 4,873,845 23,452,879
<CURRENT-LIABILITIES> 1,546,999 2,743,147
<BONDS> 0 0
7,416,604 0
0 0
<COMMON> 1,657 18,154
<OTHER-SE> (4,091,415) 20,587,007
<TOTAL-LIABILITY-AND-EQUITY> 4,873,845 23,452,879
<SALES> 0 0
<TOTAL-REVENUES> 90,813 1,436,081
<CGS> 0 0
<TOTAL-COSTS> 4,021,405 8,116,227
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (3,854,862) (6,395,004)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,930,592) (6,680,146)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,854,862) (6,395,004)
<EPS-PRIMARY> (.98) (.93)
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
Exhibit 99
ViroPharma Incorporated
Important Factors Regarding Forward-Looking Statements
The following factors, among others, could cause actual results to differ
significantly from those contained in forward-looking statements made in this
report and presented elsewhere by management from time to time.
Early Stage of Development; Continuing Operating Losses; Uncertainty of Future
Profitability
ViroPharma Incorporated (the "Company") is a development stage company
which currently has no sources of operating revenues and has incurred net
operating losses since its inception in 1994. At December 31, 1996, the
Company had an accumulated deficit of $10,568,963. Such losses have resulted
principally from costs incurred in research, development and clinical trials
and general and administrative costs associated with the Company's operations.
The Company expects that operating losses will continue at increasing levels
for at least the next several years as its research, product development,
clinical testing and marketing activities expand. Such losses will continue
unless and until such time as product approvals are obtained and product sales
generate sufficient revenue to offset expenses. The Company's ability to
achieve profitability will depend, in part, on its ability to successfully
develop, clinically test and obtain regulatory approvals for its drug
candidates, as well as its ability to manufacture and market any approved
products either by itself or in collaboration with others. There can be no
assurance that the Company will successfully complete its product development
efforts in a timely manner, if at all, that it will receive any regulatory
approvals required for the clinical development, commercial manufacture or
marketing of its proposed products or that product sales based on such
regulatory approvals will be profitable to the Company. Accordingly, the
extent of future losses and the time required to achieve profitability is
highly uncertain. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of this Annual Report on Form
10-K.
Absence of Products; Product Development Risks
The Company has not completed the development of any products. Some of
the Company's drug candidates are currently undergoing clinical trials while
others are in research or preclinical development. The Company's drug
candidates, other than pleconaril, are not expected to be commercially
available for at least several years, if at all, and pleconaril is not
expected to be commercially available for at least three years, if at all.
The Company has not begun to market or generate revenues from the
commercialization of any products. The majority of the Company's drug
candidates will require significant additional research and development and
laboratory testing prior to submission of any regulatory application, and all
of its drug candidates will require significant clinical testing and
regulatory approval prior to commercialization. There can be no assurance
that the Company will be permitted by regulatory authorities to conduct
additional clinical testing of the Company's compounds or that, if permitted,
such additional clinical testing will prove that such drugs are safe and
efficacious to the extent necessary to permit the Company to obtain marketing
approvals for them from regulatory authorities. There can be no assurance
that the results of preclinical studies and completed clinical trials will be
indicative of results obtained in future clinical trials. Adverse or
inconclusive clinical trial results concerning any of the Company's drug
candidates could result in increased costs and significantly delay the filing
for marketing approval for such drug candidates with the United States Food
and Drug Administration (the "FDA") or result in a filing for a narrower
indication. In such event, further studies would be required with respect to
other indications to support any filing of a supplemental application covering
such indications. There can be no assurance that the Company's research and
development, preclinical testing or clinical trials will be successfully
completed, that regulatory approvals will be obtained or will be as broad as
sought, that the Company's products will be capable of being produced in
commercial quantities at reasonable costs or that any products, if introduced,
will achieve market acceptance. Any problems or delays relating to research
and development, regulatory approval and manufacturing, and the failure to
address such problems or delays, could have a material adverse effect on the
Company. See"Business--Product Development and Research" in Item 1 of this
Annual Report on Form 10-K.
1
<PAGE>
The Company's drug candidates and future product development efforts are
subject to the risks of failure inherent in the development of pharmaceutical
products. These risks include the possibilities that any or all of the
Company's drug candidates will be found to be ineffective, unsafe, toxic or
otherwise fail to either meet applicable regulatory standards or receive
necessary regulatory approvals or clearances. There can be no assurance that
unacceptable toxicities or side effects will not occur at any dose level at
any time in the course of toxicological studies or human clinical trials of
the Company's drugs. The appearance of any such unacceptable toxicities or
side effects in toxicology studies or human clinical trials could cause the
Company or regulatory authorities to interrupt, limit, delay or abort the
development of any of the Company's drugs and could ultimately prevent their
approval for any of the targeted indications. Even after receiving approval,
products may later exhibit adverse effects that prevent their widespread use
and necessitate their withdrawal from the market. There can be no assurance
that any products under development by the Company will be safe when
administered to patients. Furthermore, there is a risk that the Company's
drug candidates, even if safe and effective, will be difficult to develop into
commercially viable products, difficult to manufacture on a large scale or
uneconomical to market and that proprietary rights of third parties may
preclude the Company from marketing such drug candidates. Moreover, the
Company's competitors may succeed in developing technologies or products that
are more effective or cost effective than those of the Company. Rapid
technological changes or developments by others may result in the Company's
drug candidates becoming obsolete or noncompetitive. See "Business--
Competition" in Item 1 of this Annual Report on Form 10-K, and "--Competition"
and"--Rapid Technological Change and Uncertainty" in this Exhibit 99 to
Annual Report on Form 10-K.
Dependence on Most Advanced Drug Candidate
The Company's research and development resources are primarily dedicated
to its most advanced drug candidate, pleconaril. Significant delays in the
Company's clinical trials of pleconaril, unfavorable results in such trials,
failure to obtain regulatory approval for the commercialization of pleconaril
or any related product or failure to achieve market acceptance of pleconaril
or any related product could have a material adverse effect upon the Company.
There can be no assurance that pleconaril will be successfully developed.
Although the Company is currently seeking to develop other drug candidates and
expand the number of drug candidates it has under development, there can be no
assurance that it will be successful in such development or expansion.
Furthermore, the Company will require additional funding to complete all
clinical studies and other required testing for pleconaril or any other of the
Company's product development candidates. See "--Government Regulation; No
Assurance of Regulatory Approval" and "--Uncertain Ability to Meet Capital
Needs" in this Exhibit 99 to Annual Report on Form 10-K.
Uncertainty Regarding Clinical Trials
The results of preclinical studies and initial clinical trials of the
Company's product candidates are not necessarily predictive of the results
from large-scale clinical trials. The Company must demonstrate through
preclinical studies and clinical trials that its product candidates are safe
and effective for use in each target indication before the Company can obtain
regulatory approvals for the commercial sale of those products. These studies
and trials may be very costly and time-consuming.
The rate of completion of clinical trials is dependent upon, among other
factors, the rate of enrollment of patients. Because some of the Company's
drug candidates are targeted at diseases which are more prevalent in certain
seasons, failure to accrue an adequate number of clinical patients during the
appropriate season could cause significant delays and increased costs. Such
delays and increased costs could have a material adverse effect on the
Company's drug development program. Furthermore, there can be no assurance
that if the Company's clinical trials are completed, the Company will be able
to submit a New Drug Application (an "NDA") as scheduled or that any such
application will be approved by the FDA in a timely manner, if at all. The
cost to the Company of conducting human clinical trials for any potential
product can vary dramatically based on a number of factors, including the
order and timing of clinical indications pursued and the extent of development
and financial support, if any, from corporate collaborators. The Company may
have difficulty obtaining sufficient patient populations, clinicians or
support to conduct its clinical trials as planned and may have to expend
substantial additional funds to obtain access to such resources, or delay or
modify its plans significantly.
2
<PAGE>
Government Regulation; No Assurance of Regulatory Approval
The production and marketing of products under development by the
Company, as well as its ongoing research and development activities, are and
will be subject to regulation by governmental agencies, including the FDA in
the United States and similar regulatory authorities in other countries. Any
potential therapeutic product developed by the Company will be subject to
rigorous preclinical and clinical testing and approval pursuant to regulations
administered by the FDA, comparable agencies in other countries and, to a
lesser extent, by state regulatory authorities. The approval process for the
Company's drug candidates will involve significant time and expenditures.
There can be no assurance that the Company will be able to successfully
complete the clinical development of, and file its NDA for, pleconaril or any
other drug candidate. See "Business-Government Regulation" in Item 1 of this
Annual Report on Form 10-K.
Rigorous preclinical and clinical testing and the regulatory approval
process can take many years and require the expenditure of substantial
resources. There can be no assurance that the FDA or other regulatory
authority approval for any product candidates developed by the Company will be
granted on a timely basis or at all. Any delay in obtaining, or any failure
to obtain, such approvals would materially and adversely affect the marketing
of the Company's drug candidates and the Company's business, financial
position and results of operations. In addition, legislation may be enacted,
or regulations promulgated, in the future which might adversely affect the
Company's ability to develop, manufacture or market its drug candidates. If
regulatory approval of a drug is obtained, such approval may be conditioned
upon certain limitations and restrictions on the drug's use. Any FDA
approvals that may be granted will be subject to continual review, and later
discovery of previously unknown problems may result in withdrawal of products
from marketing. Failure of the Company to comply with applicable regulatory
requirements can, among other things, result in warning letters, fines,
withdrawal of regulatory approvals, product recalls, seizure of products,
operating restrictions, injunctions or criminal prosecution. See "Business--
Government Regulation" in Item 1 of this Annual Report on Form 10-K.
Uncertain Ability to Meet Capital Needs
The Company will require substantial additional funds for its research,
preclinical and clinical testing, operating expenses, regulatory applications,
manufacturing, marketing and sales programs. The Company has incurred losses
from its operations since inception. The Company expects to incur additional
operating losses over at least the next several years. The Company expects
such losses to increase over historical levels as the Company's research and
development expenses increase due to further clinical trials and preclinical
development of the Company's most advanced drug candidate, pleconaril, and
further research and development related to other product candidates.
Moreover, the Company's capital requirements will depend on numerous factors,
including the progress of its research and development programs, the progress
of preclinical and clinical testing, the time and cost involved in obtaining
regulatory approvals, the cost of filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights, competing
technological and market developments, changes and developments in the
Company's existing collaborative, licensing and other relationships, the terms
of any new collaborative, licensing and other arrangements that the Company
may establish and the development of commercialization activities and
arrangements. The Company's fixed commitments, including salaries and fees for
current employees and consultants, rent, payments under license agreements and
other contractual commitments, are substantial and are likely to increase as
additional agreements are entered into and additional personnel are retained.
The Company's cash requirements may vary materially and could significantly
increase because of results of research and development and drug candidate
testing, relationships with strategic partners, changes in the focus and
direction of the Company's research and development programs, competitive and
technological advances, the FDA and foreign regulatory requirements and other
factors. See "Business--Strategic Relationships" and "Business--Patents" in
Item 1 of this Annual Report on Form 10-K, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" in Item 7 of this Annual Report on Form 10-K and the Notes
to Financial Statements in this Annual Report on Form 10-K.
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The Company will need to raise substantial additional capital to fund its
future operations. The proceeds from the Company's initial public offering in
November 1996 and proceeds from the collaborative drug discovery and
development agreement with Boehringer Ingelheim, available cash and interest
income are not expected to be sufficient to complete all clinical studies and
other required testing for pleconaril or any other of the Company's product
candidates. The Company will likely seek such additional funding through
public or private financing or collaborative, licensing and other arrangements
with corporate partners. If additional funds are raised by issuing equity
securities, further dilution to existing stockholders will result, and future
investors may be granted rights superior to those of existing stockholders.
There can be no assurance, however, that additional financing will be
available when needed or, if available, will be available on acceptable terms.
Insufficient funds may prevent the Company from executing its business plan or
may require the Company to delay, scale back or eliminate certain of its
research and product development programs or license to third parties rights
to develop or commercialize products or technologies that the Company would
otherwise seek to develop or commercialize itself.
Dependence on Corporate Collaborations; Need for Additional Collaborators
The Company's strategy for the research, development and
commercialization of its drug candidates may require the Company to enter into
various arrangements with corporate and academic collaborators, licensors,
licensees and others, and the Company may, therefore, be dependent upon the
subsequent success of these third parties in performing their
responsibilities. The Company has obtained, and intends to obtain in the
future, licensed rights to certain proprietary technologies and compounds from
other entities, individuals and research institutions, to which it will be
obligated to pay license fees and, if it develops products based upon the
licensed technology, to also make milestone payments and pay royalties. There
can be no assurance that the Company will be able to enter into collaborative,
license or other arrangements that the Company deems necessary or appropriate
to develop and commercialize its drug candidates, or that any or all of the
contemplated benefits from such collaborative, license or other arrangements
will be realized. Certain of the collaborative, license or other arrangements
that the Company may enter into in the future may place responsibility on the
Company's collaborative partners for preclinical testing and human clinical
trials and for the preparation and submission of applications for regulatory
approval for potential pharmaceutical or other products. Should any
collaborative partner fail to develop or successfully commercialize any drug
candidate to which it has rights, the Company's business may be materially
adversely affected. Moreover, these arrangements may require the Company to
transfer certain material rights to such corporate partners, licensees and
others. In the event that the Company decides to license or sublicense
certain of its commercial rights, there can be no assurance that such
arrangements will not result in reduced product revenue to the Company. There
can be no assurance that any revenues or profits will be derived from the
Company's collaborative and other arrangements, that any of the Company's
current strategic arrangements will continue or that the Company will enter
into any future collaborations. Furthermore, there can be no assurance that
current or future collaborators will not pursue alternative technologies or
drug candidates either on their own or in collaboration with others, including
the Company's competitors, as a means for developing treatments for the
diseases sought to be addressed by the Company's programs. See "Business--
Strategic Relationships" in Item 1 of this Annual Report on Form 10-K.
Uncertain Ability to Protect Patents and Proprietary Technology and
Information
Because of the substantial length of time and expense associated with
bringing new products through development and regulatory approval to the
market place, the pharmaceutical industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products
and processes. The Company's ability to compete effectively depends, in part,
on its ability to protect its proprietary technology, both in the United
States and abroad. The Company intends to file applications as appropriate
for patents covering the composition of matter or uses of its drug candidates
or its proprietary processes. The Company has six patent applications pending
with the U.S. Patent and Trademark Office ("PTO"), and the Company has
licensed the exclusive rights to antiviral agents which are the subject of two
issued U.S. patents and two related Canadian patent applications. The Company
will be dependent on the licensor to prosecute such patent applications and
may be dependent on the licensor to protect such patent rights. The Company
also has filed four patent applications in certain foreign jurisdictions on
inventions developed by the Company. There can be no assurance that the PTO
or such foreign jurisdictions will grant the Company's pending
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patent applications or that the Company will obtain any patents on its
proprietary products for which it subsequently applies. No assurance can be
given that any patents issued to, or licensed by, the Company will not be
challenged, invalidated or circumvented by other parties, or that the rights
granted thereunder will provide any competitive advantage. Furthermore, there
can be no assurance that others will not independently develop similar
products, duplicate any of the Company's products or, if patents are issued to
the Company, design around the patented products developed by the Company.
The Company also relies on trade secrets, know-how and continuing
technological advancements to support its competitive position. Although the
Company has entered into confidentiality and invention rights agreements with
its employees, consultants, advisors and collaborators, no assurance can be
given that such agreements will be honored or that the Company will be able to
effectively protect its rights to its unpatented trade secrets and know-how.
Moreover, 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 trade secrets and know-how. In addition, many of
the Company's scientific and management personnel have been recruited from
other pharmaceutical companies where they were conducting research in areas
similar to those being pursued by the Company. As a result, the Company and
these individuals could be subject to allegations of trade secret violations
and similar claims.
In addition, to facilitate development of its proprietary technology
base, the Company may be required to obtain licenses to patents or other
proprietary rights from other parties, and such requirements could
substantially delay the Company's drug development or commercialization.
There can be no assurance that the patents of other parties will not have a
material adverse effect on the ability of the Company to do business or that
any licenses required under any patents or proprietary rights of other parties
would be made available on acceptable terms, if at all. If the Company does
not obtain any such required licenses, it could encounter delays in
introducing products to market or may be unable to develop, manufacture or
sell products requiring such licenses. The Company has not conducted any
searches or made any independent investigations of the existence of any
patents or proprietary rights of other parties.
The Company may, from time to time, collaborate with, and support
research conducted by, universities and governmental research organizations.
There can be no assurance that the Company will have, or be able to acquire,
exclusive rights to the inventions or technical information derived from such
collaborations or that disputes will not arise as to rights in related
research programs conducted by the Company or such collaborators. See
"Business--Strategic Relationships" in Item 1 of this Annual Report on Form
10-K.
In addition, the Company could incur substantial costs in defending any
patent infringement suits or in asserting any patent rights, including those
licensed to the Company by third parties, and in defending suits against it or
its employees relating to ownership of or rights to intellectual property,
even if the outcome is not adverse to the Company. Such disputes could
substantially delay the Company's drug development or commercialization. The
PTO or a private party could institute an interference proceeding involving
the Company in connection with one or more of the Company's patents or patent
applications, and such proceedings could result in an adverse decision as to
priority of invention, in which case the Company would not be entitled to a
patent on the invention at issue in the interference proceeding. The PTO or a
private party could also institute reexamination proceedings involving the
Company in connection with one or more of the Company's patents, and such
proceedings could result in an adverse decision as to the validity or scope of
the patents. Opposition or revocation proceedings could be instituted in the
patent offices of foreign jurisdictions, which proceedings, if decided
adversely to the Company would prevent the Company from establishing a patent
position in such jurisdiction based on the opposed or revoked patent. See
"Business--Patents" in Item 1 of this Annual Report on Form 10-K.
Absence of Marketing and Sales Capability
For certain products under development, the Company intends to conduct
marketing activities through its own sales force. The Company has no
marketing and sales staff and has no experience with respect to marketing its
proposed products. Significant additional expenditures, management resources
and time will be required to develop a sales force, and there can be no
assurance that the Company will be successful either in developing a sales
force or penetrating the
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markets for any proposed products it may develop. The Company has entered,
and in the future may enter, into marketing, distribution, manufacturing,
development or other third party arrangements, which grant rights that may be
exclusive to certain products to corporate partners in return for royalties to
be received on sales, if any. There can be no assurance that the Company will
be able to enter into any additional arrangements, that any such arrangements
will be successful or that the Company will be able to obtain additional
capital to conduct such activities directly. See "Business--Marketing" in
Item 1 of this Annual Report on Form 10-K, and "Dependence on Corporate
Collaborations; Need for Additional Collaborators" in this Exhibit 99 to
Annual Report on Form 10-K.
Uncertainty of Pharmaceutical Pricing and Related Matters; Need for
Reimbursement
The future revenues and profitability of, and availability of capital
for, pharmaceutical companies such as the Company will be affected by the
continuing efforts of governmental and private third-party payors to contain
or reduce the costs of health care through various means. There have been,
and the Company expects there will continue to be, a number of federal, state
and foreign proposals to control the cost of drugs through governmental
regulation. It is uncertain what form any health care reform legislation may
take or what actions federal, state, foreign, and private payors may take in
response to the proposed reforms. The Company cannot predict when, if ever,
any suggested reforms will be implemented or the effect of any implemented
reform on the Company's business. Moreover, there can be no assurance that
any implemented reform will not have a material adverse effect on the
Company's business, financial position or results of operations.
The Company's ability to commercialize any products successfully will
depend, in part, on the extent to which reimbursement for the cost of such
products and related treatments will be available from government health
administration authorities, such as Medicare and Medicaid in the United
States, private health insurers and other organizations. Significant
uncertainty exists as to the reimbursement status of newly approved health
care products, particularly for indications for which there is no current
effective treatment or for which medical care typically is not sought, and
there can be no assurance that adequate third-party coverage will be available
to enable the Company to maintain price levels sufficient to realize an
appropriate return on its investment in product research and development. If
adequate coverage and reimbursement levels are not provided by government and
third-party payors for use of the Company's products, the market acceptance of
those products could be adversely affected.
Competition
There are many entities, both public and private, including well-known,
large pharmaceutical companies, chemical companies, biotechnology companies
and research institutions, engaged in developing pharmaceuticals for human
therapeutic applications similar to the applications targeted by the Company.
Many of these companies have substantially greater financial, research and
development, manufacturing, marketing and human resources experience than the
Company. In addition, many of the Company's competitors have significantly
greater experience than the Company in conducting preclinical testing and
human clinical trials of new pharmaceutical products and in obtaining FDA and
other regulatory approvals of products. Accordingly, certain of the Company's
competitors may succeed in obtaining regulatory approval for products more
rapidly or effectively than the Company. Such companies may succeed in
developing products that are more effective or less costly than any that may
be developed by the Company and also may prove to be more successful than the
Company in the manufacture and marketing of any such products. See "Business-
-Competition" in Item 1 of this Annual Report on Form 10-K.
Rapid Technological Change and Uncertainty
The Company is engaged in the pharmaceutical business, which is
characterized by extensive research efforts and rapid technological progress.
New developments in molecular biology, medicinal chemistry and other fields of
biology and chemistry are expected to continue at a rapid pace in both
industry and academia. There can be no assurance that research and
discoveries by others will not render some or all of the Company's programs or
drug candidates non-competitive or obsolete.
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The Company's proposed business strategy is based, in part, upon the
application of the Company's technology platform, which encompasses various
elements from the fields of biotechnology and chemistry, and the application
of these technologies to the discovery and development of pharmaceutical
products for the treatment of infectious human diseases. This strategy is
subject to the risks inherent in the development of new products using new and
emerging technologies and approaches. There are no approved drugs on the
market for the treatment of certain of the disease indications being targeted
by the Company, and the Company believes that the technologies being used by
the Company have never been applied to develop an approved pharmaceutical
product. There can be no assurance that unforeseen problems will not develop
with the Company's technologies or applications, that the Company will be able
to successfully address technological challenges it encounters in its research
and development programs or that commercially feasible products will
ultimately be developed by the Company. See "Business--Competition" in Item 1
of this Annual Report on Form 10-K, and "Competition" in this Exhibit 99 to
this Annual Report on Form 10-K.
No Assurance of Market Acceptance
There can be no assurance that the Company's drug candidates, if approved
by the FDA and other regulatory authorities, will achieve market acceptance.
The degree of market acceptance will depend upon a number of factors,
including the receipt and timing of regulatory approvals, the availability of
third-party reimbursement and the establishment and demonstration in the
medical community of the clinical safety, efficacy and cost-effectiveness of
the Company's drug candidates and their advantages over existing technologies
and therapeutics. There can be no assurance that the Company will be able to
manufacture and successfully market its drug candidates even if they perform
successfully in clinical applications. Furthermore, there can be no assurance
that physicians or the medical community in general will accept and utilize
any therapeutic products that may be developed by the Company.
Absence of Manufacturing Capabilities
The Company presently does not have the internal capability to
manufacture pharmaceutical products under the current Good Manufacturing
Practices ("GMP") prescribed by the FDA. The Company believes that it has
sufficient quantities of bulk drug substance to complete its clinical program
for the viral meningitis indication and hand-foot-and-mouth disease, and its
planned clinical trial for "summer flu." The Company may require additional
quantities of pleconaril drug substance to complete its planned clinical trial
for the common cold. The Company is working with Sanofi S.A. for the
manufacture of bulk drug substance and is also evaluating alternatives for the
manufacture of drug product. FDA pre-approval inspection is required for all
commercial manufacturing sites.
Any contract manufacturers that the Company may use must adhere to GMP
regulations enforced by the FDA through its facilities inspection program.
These facilities must pass a pre-approval plant inspection before the FDA will
issue a pre-market approval of the product. Moreover, while the Company does
not currently intend to manufacture any pharmaceutical products itself, it may
choose to do so in the future. The Company has no experience in the
manufacture of pharmaceutical products for clinical trials or commercial
purposes. Should the Company decide to manufacture products itself, the
Company would be subject to the regulatory requirements described above, would
be subject to risks regarding delays or difficulties encountered in
manufacturing any such pharmaceutical products and would require substantial
additional capital. In addition, there can be no assurance that the Company
will be able to manufacture any such products successfully and in a cost-
effective manner. See "Business--Manufacturing" and "Business--Government
Regulation" in Item 1 of this Annual Report on Form 10-K.
If the Company should encounter delays or difficulties with contract
manufacturers in producing, packaging or distributing its proposed products,
market introduction and subsequent sales of such products would be adversely
affected, and the Company may have to seek alternative sources of supply. In
the event that the Company is required to seek alternative sources of supply,
it may incur additional costs or delays in product commercialization. If the
Company changes the source or location of supply or modifies the manufacturing
process, regulatory authorities will require the Company to demonstrate that
the product produced by the new source or from the modified process is
equivalent to the product used in any clinical trials conducted by the
Company. If the product is not shown to be equivalent, the Company's ability
to seek FDA or other regulatory approval could be delayed until additional
clinical
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trials are completed. Furthermore, there can be no assurance that the Company
will be able to enter into alternative supply arrangements at commercially
acceptable rates, if at all. No assurance can be given that the manufacturers
utilized by the Company will be able to provide the Company with sufficient
quantities of its products or that the products supplied to the Company will
meet the Company's specifications or delivery and other requirements.
Dependence on Key Personnel
Because of the specialized scientific nature of the Company's business,
the Company is highly dependent upon its ability to attract and retain
qualified scientific, technical and managerial personnel. There is intense
competition for qualified personnel in the pharmaceutical field, and there can
be no assurance that the Company will be able to continue to attract and
retain qualified personnel necessary for the development of its business. The
loss of the services of existing personnel, as well as the failure to recruit
additional key scientific, technical and managerial personnel in a timely
manner would be detrimental to the Company's research and development programs
and to its business. Much of the know-how developed by the Company resides in
its scientific and technical personnel and is not readily transferable to
other personnel. The Company does not maintain "key man" life insurance on
any of its employees. Furthermore, the Company's anticipated growth and
expansion into areas and activities requiring additional expertise, such as
marketing, will require the addition of new management personnel. The failure
to attract and retain such personnel could adversely affect the Company's
business. See "Business--Human Resources" in Item 1 of this Annual Report on
Form 10-K.
Environmental Matters and Hazardous Materials
The Company's research and development processes involve the controlled
use of hazardous, infectious and radioactive materials. The Company is
subject to stringent federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain materials and wastes.
There can be no assurance that the Company will not be required to incur
significant costs to comply with environmental laws, rules, regulations and
policies or that the business, financial position or results of operations of
the Company will not be materially and adversely affected by current or future
environmental laws, rules, regulations and policies or by any releases or
discharges of materials which could be hazardous.
In its research activities, the Company utilizes radioactive and other
materials that could be hazardous to human health, safety or the environment.
These materials and various wastes resulting from their use are stored at the
Company's facility pending ultimate use and disposal. Although the Company
believes that its safety procedures for handling and disposing of such
materials comply with federal, state and local laws, rules regulations and
policies, the risk of accidental injury or contamination from these materials
cannot be entirely eliminated. In the event of such an accident, the Company
could be held liable for any resulting damages, and any such liability could
exceed the Company's resources. The Company does not maintain a separate
insurance policy for these types of risks.
Product Liability; Limited Insurance Coverage
The Company's business exposes it to potential product liability risks
which are inherent in the testing, manufacturing and marketing of human
therapeutic products. The Company maintains claims made insurance against
product liability and defense costs incurred in connection with clinical
testing in the amount of five million dollars per occurrence and five million
dollars in the aggregate. The Company does not currently have any insurance
coverage with regard to the commercial sale of products. There can be no
assurance that claims against the Company arising with respect to clinical
testing or sale of products will be successfully defended, that the insurance
carried by the Company, if any, will be sufficient or that the Company will be
able to obtain additional, or maintain its current level of, product liability
insurance on acceptable terms. In addition, there can be no assurance that
any collaborators and licensees of the Company will agree to indemnify the
Company from, be adequately insured against or have a sufficient net worth to
protect the Company from product liability claims. A successful claim against
the Company in excess of the Company's insurance coverage could have a
material adverse effect on the Company.
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