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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
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)
405 EAGLEVIEW BOULEVARD 19341
EXTON, PENNSYLVANIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-458-7300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
-------------------- ------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.002
----------------
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. [X]
The approximate aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $151,031,390 as of March 1,
1998, based upon the closing sale price per share of the Common Stock as
quoted on The Nasdaq Stock Market. This amount excludes 3,831,151 shares of
Common Stock held by directors, officers and stockholders with representatives
on the board of directors whose ownership exceeds ten percent of the Common
Stock outstanding at March 1, 1998. 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
March 1, 1998 was 11,478,310.
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 1998 Annual Meeting of Stockholders to be held on May 21, 1998
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, 1997
TABLE OF CONTENTS
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PAGE
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<C> <S> <C>
PART I
Item 1. Business 1
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Market for the Registrant's Common Equity and Related
Item 5. Stockholder Matters 16
Item 6. Selected Financial Data 18
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations 19
Item 8. Financial Statements and Supplementary Data 21
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure 22
PART III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management 22
Item 13. Certain Relationships and Related Transactions 22
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
Item 14. 8-K 23
Index to Financial Statements and Schedules F-1
</TABLE>
The statements contained in this Annual Report on Form 10-K or incorporated
herein by reference that are not historical facts or statements of current
condition are forward-looking statements. Such forward-looking statements may
be identified by, among other things, the use of forward-looking terminology
such as "believes," "expects," "estimates," "plans," "continues," "may,"
"will," "should," "anticipates," or "intends" or the negative thereof or other
variations of such terminology, or by discussions of strategy or intentions.
These forward-looking statements, such as statements regarding present or
anticipated scientific progress, development of potential pharmaceutical
products, future revenues, capital expenditures, research and development
expenditures, future financings and collaborations, personnel, and
manufacturing requirements and capabilities, involve predictions, and are
subject to risks and uncertainties. The Company's actual results, performances
or achievements could differ materially from the results expressed in, or
implied by, these forward-looking statements. Factors contributing to such
risks and uncertainties that might affect the Company's actual results,
performance or achievements include, but are not limited to, those discussed
in "Important Factors Regarding Forward-Looking Statements" attached hereto as
Exhibit 99. Given these risks and uncertainties, current or prospective
investors are cautioned not to place undue reliance on any such forward-
looking statements. Furthermore, the Company disclaims any obligation or
intent to update any such forward-looking statements to reflect future events
or developments.
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.
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
ViroPharma was incorporated in Delaware in September 1994 and commenced
operations in December 1994. The Company's executive offices and research
facility are located at 405 Eagleview Boulevard, Exton, PA 19341. The Company
is a development stage pharmaceutical company engaged in the discovery and
development of new antiviral medicines. The Company has focused its current
drug development and discovery activities on a number of ribonucleic acid
("RNA") virus diseases, including viral meningitis, viral syndrome ("summer
flu"), hand-foot-and-mouth disease, the common cold in asthmatics, respiratory
syncytial virus ("RSV") pneumonia, influenza and hepatitis C.
ViroPharma's most advanced product candidate, pleconaril, is currently being
developed for the treatment of various RNA virus diseases. Preclinical studies
have demonstrated that pleconaril is a potent, broad-spectrum, orally-active
inhibitor of several RNA viruses. In April 1996, ViroPharma completed a Phase
II challenge study in viral syndrome with pleconaril, in which all evaluated
disease measures were significantly reduced in treated subjects. In June 1997,
ViroPharma completed a Phase II clinical trial for viral meningitis which
demonstrated that pleconaril significantly reduced disease duration, the
trial's primary endpoint. Adverse events observed in pleconaril and placebo-
treated patients in the clinical trials conducted by the Company to date have
been similar in nature and frequency.
ViroPharma commenced two additional Phase II/III clinical trials for viral
meningitis in June 1997, one in adolescents/adults and one in pediatric
patients, and a Phase II clinical trial for viral syndrome in June 1997. The
Company also initiated a Phase II clinical trial with pleconaril for hand-
foot-and-mouth disease in March 1997 and a Phase II clinical trial for the
common cold in patients with asthma in September 1997. The Company has
additional compounds in research and preclinical stages of development for the
treatment of RSV pneumonia, influenza and hepatitis C.
ViroPharma believes its drug discovery and development technologies and its
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.
DISEASES CAUSED BY 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, 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.
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. The Company has currently focused its discovery research on
diseases caused by RNA viruses.
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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 Rabies
Dengue fever Hantavirus pulmonary syndrome Rhinovirus common cold
Diarrhea diseases Hemorrhagic conjunctivitis RSV Pneumonia
Ebola fever Hemorrhagic fevers Rubella
Encephalitis Hepatitis C, A, D and E Tick fevers
Viral syndrome Influenza Viral pharyngitis
Enterovirus hand-foot-and-mouth Measles Yellow fever
Myocarditis
</TABLE>
The Company has focused its current drug development and discovery activities
on the italicized diseases.
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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 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 attractive target for the therapeutic intervention in disease
caused by RNA viruses. For RNA viruses to cause disease, they must replicate.
Inhibiting RNA virus replication can prevent, limit or stop disease. In
addition to thwarting disease, the direct inhibition of viral RNA uncoating
and replication should 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 is focused on RNA virology and RNA antiviral drug discovery and
development. While the RNA uncoating and replication process is common among
all RNA viruses, the detailed molecular and biochemical mechanisms involved
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 to design compounds to
inhibit these processes. They have also succeeded in discovering essential
virus enzyme activities that are critical to RNA replication. 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.
2
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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, viral
syndrome, hand-foot-and-mouth disease, the common cold in asthmatics, RSV
pneumonia, influenza, and hepatitis C. 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 II clinical trial completed June 1997;
Phase II/III trials in adolescents/adults and pediatric patients
commenced in June 1997
Viral Syndrome Pleconaril (oral) Phase II challenge study completed April 1996;
Phase II clinical trial in natural infections commenced June
1997
Hand-Foot-and-Mouth
Disease Pleconaril (oral) Phase II clinical trial commenced March 1997
Common Cold Pleconaril (oral) Phase II clinical trial in asthmatics commenced in September
1997
Pleconaril (intranasal) Preclinical studies completed December 1997
RSV Pneumonia VP 14637 series Preclinical safety and pharmacokinetics studies
Influenza VP 14221 series Chemical optimization
Hepatitis C VP 31593 series Chemical optimization
</TABLE>
(1) For a discussion of preclinical testing and the phases of human clinical
trials, see "--Government Regulation."
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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. Enteroviruses cause viral
meningitis, viral syndrome, hand-foot-and-mouth disease, 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
currently developing pleconaril for several indications, including viral
meningitis, viral syndrome, hand-foot-and-mouth disease and the common cold in
asthmatics.
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. The Company is
also developing oral solid and intranasal formulations of pleconaril.
The Company is continuing a compassionate use, open-label protocol to
provide pleconaril to patients with chronic enterovirus meningoencephalitis
with immune deficiency, enterovirus myocarditis, neonatal enterovirus disease,
acute poliomyelitis and enterovirus infections after bone marrow
transplantation. 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 lead to congestive heart failure. As of March 1, 1998
the Company has treated 17 patients under this protocol.
3
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The Company has entered into an agreement with Sanofi S.A. ("Sanofi") 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 in the United
States and Canada. Pleconaril was discovered at Sanofi by scientists now with
ViroPharma. See "--Strategic Relationships--Sanofi S.A." and "--Patents."
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 infected before age
one year. There is currently no antiviral pharmaceutical for viral meningitis.
In 1997, the Company completed an evaluation of data resulting from a 39
patient, international multi-center, double blind, placebo controlled Phase II
trial with the oral liquid formulation of pleconaril for the treatment of
viral meningitis. The results of the evaluation of the data for the endpoints
in which statistical significance was demonstrated are depicted in the graph
below for both the placebo-treated (light bars) and pleconaril-treated (dark
bars) groups. The data indicate that pleconaril treatment resulted in a
statistically significant shortening of disease duration (58% reduction), the
primary endpoint of the study. This primary endpoint evaluates the time
required for disease severity (as measured by a multidimensional score,
comprised of headache, nausea/vomiting, photophobia, stiff neck, fever and
myalgia) to be reduced to a predetermined level indicating wellness.
Statistical significance also was observed in the secondary endpoints of the
time to complete absence of headache (64% reduction), duration of analgesic
use (54% reduction), and total analgesic use (48% reduction). Clinically
meaningful trends were observed in two additional secondary endpoints, while
no adverse trends were observed in the three remaining secondary endpoints. In
June 1997, the Company initiated two additional Phase II/III clinical trials
with pleconaril for viral meningitis, one in adolescent/adults and one in
pediatric patients. There can be no assurance that these trials 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.
[GRAPH APPEARS HERE]
[The following is required for the EDGAR filing and will not appear in the
printed report: This histogram-format graph contains four two-column sets along
the horizontal axis. The left column of each set, depicted in light gray,
represents disease measure data for study subjects from the "Placebo"-treated
group; the right column of each set, depicted in dark gray, represents disease
measure data for study subjects from the "Pleconaril"-treated group. Below the
column sets are the following four captions: "Disease Duration", "Time to
Absence of Headache", "Duration of Analgesic "Use", and "Analgesic Medication
Score". Below each of the four captions, in parentheses, are p value numbers
indicating the statistical relevance of the indicated disease measure
reductions. The vertical axis for the first three disease measures is indicated
as "Study Days" and ranges from 0 to 20. The vertical axis for the fourth
disease measure, "Analgesic Medication Score", is indicated as "Medication
Units" and ranges from 0 to 120. The values for the "Disease Duration" columns
are 9.5 days and 4.0 days for the Placebo and Pleconaril groups, respectively,
with a p value of 0.008. The values for the "Time to Absence of Headache"
columns are 18.3 days and 6.5 days for the Placebo and Pleconaril groups,
respectively, with a p value of 0.008. The values for the "Duration of Analgesic
Use" columns are 11.5 days and 5.3 days for the Placebo and Pleconaril groups,
respectively, with a p value of 0.026. The values for the "Analgesic Medication
Score" columns are 97 and 51 for the Placebo and Pleconaril groups,
respectively, with a p value of 0.043.]
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/1/ This primary endpoint evaluates the time required for disease severity (as
measured by a multidimensional score, comprised of headache, nausea/vomiting,
photophobia, stiff neck, fever and myalgia) to be reduced to a predetermined
level indicating wellness.
4
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Viral Syndrome
Viral Syndrome is an upper respiratory illness caused by enteroviruses and
characterized initially by respiratory and systemic symptoms, followed by a
general influenza-like syndrome. The clinical illness can persist for several
weeks and often results in a physician visit. There is currently no antiviral
pharmaceutical for the treatment of viral syndrome.
In April 1996, ViroPharma completed a Phase II challenge study in viral
syndrome with pleconaril, in which all evaluated disease measures were
significantly reduced in treated subjects. In June 1997, the Company initiated
a Phase II multicenter, placebo-controlled, dose-ranging clinical efficacy
trial for the viral syndrome indication. 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
afflicting all age groups, but predominantly affecting 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 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.
Common Cold
Rhinoviruses are the leading cause of the common cold, with the accompanying
symptoms of sneezing, nasal obstruction, nasal discharge, headache and general
malaise. 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
rhinovirus common cold.
The Company's rhinovirus clinical development plan for pleconaril initially
involves treating patients with asthma and upper respiratory tract rhinovirus
infections. The Company initiated a clinical trial of the oral liquid
formulation of pleconaril in the treatment of rhinovirus infections in
moderate to severe asthmatics in September 1997. Also, the Company, in
collaboration with Minnesota Manufacturing and Mining Company, has completed
certain preclinical studies for an additional formulation of pleconaril for
use in an intranasal aerosol delivery system. There can be no assurance that
the Company will successfully complete its clinical trial for the common cold
in asthmatics or will initiate clinical studies for the intranasal
formulation. 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.
RSV Pneumonia
RSV is the major pediatric viral respiratory tract pathogen, causing
pneumonia and bronchiolitis in infants and young children. 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 RSV morbidity and mortality. RSV is
also implicated as a significant cause of hospitalization due to pneumonia in
previously healthy adults and of mortality in the elderly.
5
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The Company has developed a high throughput drug screening assay for RSV
replication. Company scientists have discovered several inhibitory compounds
with high potency and selectivity in profiling evaluations. The Company has
chemically optimized these compounds and has initiated preclinical safety and
pharmacokinetic studies with lead compounds in this series. There can be no
assurance that such studies will be successfully completed, will be completed
in a timely manner, or will lead to the clinical evaluation of a compound in
this or any other compound series. The Company has filed a patent application
related to RSV inhibitor compounds with the United States Patent and Trademark
Office ("PTO"). No assurance can be given that any patent related to RSV
inhibitor compounds will issue. 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.
Influenza
Influenza virus is a major cause of human illness. This disease is
characterized by the sudden onset of 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. 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 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. In
addition, ViroPharma has filed two patent applications with the PTO and two
applications in certain foreign jurisdictions related to its active influenza
virus compounds, and is preparing additional patent applications for influenza
virus compounds. The PTO has granted a patent on one of these applications.
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 any additional 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
Hepatitis C virus ("HCV"), first identified in 1989, is recognized as a
major cause of chronic hepatitis worldwide. Approximately 85% 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.
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, 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. ("BI"). The Company has also
developed assays for additional HCV molecular targets and has filed two patent
applications with the PTO, and two patent applications in certain foreign
jurisdictions, related to the HCV inhibitor compound series. The PTO has
granted a patent on one of these applications. The Company anticipates that it
will file additional patent applications within the next year. No assurance
can be given that any additional patents will issue. See
6
<PAGE>
"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."
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 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, a
development agreement with an international pharmaceutical manufacturing
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 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 in the United States and
Canada. 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 either $1,200,000 or $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, 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."
Sanofi has the option to co-develop the drug. If Sanofi chooses to co-
develop, Sanofi has agreed to share all development costs and to make 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. In addition, if Sanofi does not choose to co-
develop and foreign regulatory authorities require significant additional
studies of pleconaril for use in the European Union, the Company will be
required to conduct such studies at its own expense. The Company expects
Sanofi to make its decision regarding co-development in 1998.
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. In addition,
Sanofi has the right to terminate the agreement in the event that there is a
change of control that would materially and adversely affect the development,
manufacturing and marketing of the products under the agreement. The term
automatically renews for successive five year terms unless six months' prior
written notice of termination is given by either
7
<PAGE>
party. The Company and Sanofi amended their agreement as of February 21, 1997
to permit the Company to seek third party suppliers of pleconaril bulk drug
supply. The Company also 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 August 1996, the Company entered into a Collaborative Research Agreement
with BI for one hepatitis C target identified by ViroPharma. 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 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 1997, ViroPharma
achieved two scientific milestones under this agreement, for which it received
milestone payments in the aggregate of $1,500,000 from BI. In addition, BI 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. Unless renewed
by the parties, the agreement will expire in August 1998.
In October 1997, the Company received $1,000,000 from BI as an advance on a
future milestone in connection with the agreement. Such amount will be
creditable against a milestone, if achieved, or if the milestone is not
achieved would become due and payable two years after the termination of the
Agreement. The advance bears interest at 8.5% and is evidenced by a
convertible promissory note. If amounts due under the note are not paid as
described in the note, BI may convert the then outstanding principal balance
and accrued interest thereon into shares of the Company's Common Stock based
on the last sale price of such Common Stock on the date immediately prior to
the date on which the Company is notified of BI's intention to convert the
promissory note.
Other Collaborative Agreements
The Company is a party to collaborative drug discovery agreements with
various pharmaceutical and technology companies. Generally, under these
agreements, the collaborators make available enabling technologies and
compounds from their chemical libraries, and the Company 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.
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
The Company 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 received one issued U.S. patent covering compounds active
8
<PAGE>
against HCV and one issued U.S. patent for compounds active against influenza.
The Company currently has five pending patent applications covering technology
for identifying inhibitors of RNA viruses, compounds active against influenza
viruses, compounds active against HCV, and compounds active against related RNA
viruses such as RSV and bovine diarrheal virus diseases. The Company also has
filed a patent application for technology for identifying inhibitors of RNA
viruses, two patent applications covering compounds active against HCV, two
patent applications covering compounds active against influenza viruses and a
patent application covering compounds active against bovine diarrheal virus in
certain foreign jurisdictions. The Company has also obtained a license from
Sanofi, which grants the Company exclusive rights for use in enterovirus and
rhinovirus applications 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 any additional patents will issue from any of the Company's patent
applications or, should any 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 review of the product by
the Food and Drug Administration ("FDA"). This law also establishes a period of
time, following approval of a New Drug Application ("NDA"), 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 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 the Company or its consultants or research
collaborators
9
<PAGE>
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. In
April 1997, the Company entered into a Development Agreement with SELOC France
(formerly SICOR S.A.) and SELOC AG, which at the time were related companies
and subsidiaries of Schwarz Pharma AG, for the manufacture of pleconaril bulk
drug substance and the development of a process for commercial-scale
production of pleconaril ("Development Agreement"). In January 1998, SELOC
France was purchased by PCAS SA ("PCAS"), a fine chemical specialty company
located in France. SELOC France continues to do business as a wholly-owned
subsidiary of PCAS. The Company and SELOC France currently are negotiating the
terms of an Addendum to the Development Agreement (the "SELOC Addendum") for
the manufacture of validation batches of bulk drug substance and the
preparation of certain documentation that will be required in connection with
the Company's NDA for pleconaril.
The Company also is currently negotiating with several contractors for the
commercial manufacture of oral liquid and solid formulations of pleconaril
drug product. The Company has used an oral liquid formulation of pleconaril in
its recent clinical trials. In the event that the Company is unable to
negotiate successfully agreements with suppliers for the oral liquid and solid
formulations of pleconaril, there may be a delay in product development or
commercialization. If there are delays in the production of stability batches
for the oral solid formulation of pleconaril, the Company may be delayed in
obtaining FDA approval for the oral solid formulation until the oral solid
formulation has demonstrated chemical stability for the requisite period.
Moreover, if the Company is unable to demonstrate to the FDA's satisfaction
that the oral solid formulation of pleconaril is bioequivalent to the oral
liquid formulation used in its clinical trials, the Company may be delayed in
obtaining FDA approval for the oral solid formulation until such
bioequivalence is demonstrated.
The Company anticipates that its current supply of pleconaril drug
substance, together with the bulk drug substance that the Company will receive
under the SELOC Addendum, will be sufficient to complete its formulation
development activities and its ongoing clinical trials for viral meningitis,
viral syndrome, hand-foot-and-mouth disease and the common cold in asthmatics.
The Company believes that it will be able to obtain additional drug substance
from SELOC France and, if necessary, other manufacturers for the production of
pleconaril drug product on terms acceptable to the Company. In the event that
the Company does not enter into the SELOC Addendum, or that SELOC France is
unable to satisfy the Company's requirements and the Company is required to
find an additional or alternative source of supply, there may be additional
cost and delay in product development or commercialization.
10
<PAGE>
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. For the preparation of other compounds, the Company intends to
contract with third-party manufacturers for preclinical research, manufacture
of drug substances for clinical development and manufacture of drug products
for commercial sale. 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."
MARKETING
Under its agreement with Sanofi, the Company has the exclusive right to
market and sell pleconaril for all enterovirus and rhinovirus indications in
the United States and Canada. If the Company elects to market pleconaril
jointly with a third party, the Company must first offer that joint marketing
opportunity to Sanofi. The Company is currently conducting market research on
the multiple disease indications for which pleconaril is being developed. The
Company intends to establish its marketing strategy based upon the results of
this market research coupled with information gained through its clinical
trials. The Company may elect to seek a marketing or sales partner for certain
disease indications, establish its own sales force or pursue both
alternatives. To continue to develop its marketing strategy, the Company is
currently building its marketing staff. The Company does not currently have a
sales staff. The success and commercialization of the Company's other
potential products will be dependent, in part, upon the ability of the Company
to enter into additional collaborative agreements for other potential
products. There can be no assurance that the Company will be successful in
developing a sales force, entering into collaborative arrangements,
penetrating the markets for any proposed products or achieving market
acceptance of its products. 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 Investigational New Drug
application ("IND") which must be made effective 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
11
<PAGE>
factors, difficulty in obtaining sufficient patient populations, clinicians or
support. Moreover, the submission of applications for approval may require
additional time to complete manufacturing stability studies. 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. Foreign manufacturing establishments
distributing drugs in the United States also must comply with GMP requirements
and list their products with the FDA. All such establishments 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, unless such
promotion complies with the recently enacted provisions of the Food & Drug
Modernization Act of 1997. 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. Adverse experiences
with the product must be reported to the FDA. 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. 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
standards. The FDA periodically inspects drug manufacturing facilities to
ensure compliance with applicable GMP requirements. Failure to comply subjects
the manufacturer to possible FDA regulatory 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.
Products marketed outside the United States which are manufactured in the
United States may be subject to certain FDA requirements for obtaining
approval before export, 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-
12
<PAGE>
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 in 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. There are currently available antiviral therapeutics which address
certain of the disease indications for which the Company is developing
therapeutics. For example, amantadine and rimantadine are available for
prophylaxes and early treatment of influenza; ribavirin is available for
treatment, and respigam for prophylaxes, of RSV infections in high-risk
patients; and interferon alone and in combination with ribavirin is available
for treatment of hepatitis C infections. The Company believes, however, that
there is a need for new agents with superior therapeutic efficacy to treat
these viral diseases. In addition to the approved products, other companies
are developing therapies to treat these viral diseases, including compounds in
clinical development for influenza; and for prophylactic treatment of
respiratory syncytial virus in high-risk patients. The Company's 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 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 the Company. 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 March 1, 1998, the Company had 59 full-time employees, including 15
persons with Ph.D. or M.D. degrees. Forty-one of the Company's employees are
engaged in research and development activities at the Company's laboratory
facility in Exton, 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.
ITEM 2. PROPERTIES
The Company's principal facility consists of approximately 48,400 square
feet of leased laboratory and office space in Exton, Pennsylvania. The
Company's lease for such facility expires in 2008 and has two five year
renewal options. The Company also has the right under the lease, under certain
circumstances, to expand the facility to 86,500 square feet and to purchase
the facility at a purchase price based on a pre-determined formula.
ITEM 3. LEGAL PROCEEDINGS
None.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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
---- --- --------
<C> <C> <S>
Claude H. Nash 55 Chief Executive Officer, President and Chairman
of the Board of Directors
Mark A. McKinlay, Ph.D. 46 Vice President, Research & Development
Marc S. Collett, Ph.D. 46 Vice President, Discovery Research
Johanna A. Griffin, Ph.D. 53 Vice President, Business Development
Guy D. Diana, Ph.D. 62 Vice President, Chemistry Research
Jon M. Rogers, M.D. 46 Vice President, Clinical Research
Vincent J. Milano 34 Vice President, Chief Financial Officer and
Treasurer
Thomas F. Doyle 37 Vice President, General Counsel and Secretary
Michael Kelly 33 Executive Director, Marketing
</TABLE>
Claude H. Nash, 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 Corporation, a
pharmaceutical company. 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, a division of Sterling Winthrop Incorporated, a
pharmaceutical company. Dr. McKinlay received his Ph.D. from Renssalear
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, a
biotechnology company. Prior to joining PathoGenesis Corporation, Dr. Collett
served as Director, Virology & Antibody Engineering and Director, Biochemical
Virology at MedImmune, Inc., a biotechnology company, 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., a pharmaceutical company. Dr. Griffin
received her Ph.D. from the University of Alabama at Birmingham.
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 Incorporated, a pharmaceutical company, for 33 years, most
recently as a Senior Fellow in Medicinal Chemistry, where he 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, a pharmaceutical
14
<PAGE>
company. From August 1989 through February 1995, Dr. Rogers served in various
positions at Sterling Winthrop Incorporated, a pharmaceutical company, the
latest being Senior Director of Clinical Research. Dr. Rogers received his
M.D. from the University of Cincinnati College of Medicine.
Vincent J. Milano has served as Vice President, Chief Financial Officer
since November 1997, as Vice President, Finance & Administration of the
Company since February 1997, as Treasurer since July 1996, and as Executive
Director, Finance & Administration from April 1996 until February 1997. From
1985 until he joined the Company, Mr. Milano was with KPMG Peat Marwick LLP,
independent certified public accountants, where he was Senior Manager since
1991. Mr. Milano is a Certified Public Accountant. Mr. Milano received his
B.S. in accounting from Rider College.
Thomas F. Doyle has served as Vice President, General Counsel since November
1997, 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. 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.
Michael Kelly has served as Executive Director, Marketing since joining the
Company in April 1997. From 1991 until he joined the Company, Mr. Kelly held
various positions at TAP Pharmaceuticals, a pharmaceutical company, the latest
being Manager of Hospital Account Executives within the Mid-Atlantic Region.
Mr. Kelly received his B.S. in Marketing from the Trenton State College and
his M.B.A. from Rider College.
15
<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 since the
fourth quarter of 1996.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Fourth Quarter, 1996 (commencing November 19, 1996)...... $ 8.75 $ 7.00
First Quarter, 1997...................................... $ 13.75 $ 9.00
Second Quarter, 1997..................................... $ 18.75 $9.688
Third Quarter, 1997...................................... $22.625 $14.00
Fourth Quarter, 1997..................................... $ 22.75 $16.00
January 1, 1998 through February 28, 1998................ $ 19.75 $16.50
</TABLE>
HOLDERS AND DIVIDENDS
There were approximately 56 record holders of the Company's Common Stock as
of March 1, 1998. 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 June 1997, Oak Investment Partners VI Limited Partnership and Oak VI
Affiliates Fund, Limited Partnership, of which Ann H. Lamont, a director of
the Company, is a principal, collectively exercised warrants to purchase
22,435 shares of Common Stock; Sevin Rosen Fund IV, L.P. exercised warrants to
purchase 22,437 shares of Common Stock; Technology Leaders II L.P. and
Technology Leaders II Offshore C.V. collectively exercised warrants to
purchase 22,436 shares of Common Stock; and Claude Nash exercised warrants to
purchase 4,487 shares of Common Stock. The foregoing warrants were exercised
on a cashless basis and were otherwise exercisable on a cash basis for 81,597
shares of Common Stock in the aggregate. No underwriter or placement agent was
involved in any of these transactions. The issuance of Common Stock upon
exercise of the warrants was made in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
In October 1997, the Company received $1,000,000 from BI as an advance on a
future milestone in connection with their agreement. Such amount will be
creditable against a milestone, if achieved, or if such milestone is not
achieved will become due and payable two years after the termination of the
agreement. The advance bears interest at 8.5% and is evidenced by a
convertible promissory note. If amounts due under the note are not paid as
described in the note, BI may convert the then outstanding principal balance
and accrued interest thereon into shares of the Company's Common Stock based
on the last sale price of such Common Stock on the date immediately prior to
the date on which the Company is notified of BI's intention to convert the
promissory note. No underwriter or placement agent was involved in the
issuance of the promissory note to BI. The issuance of the convertible
promissory note was made in reliance on Section 4(2) of the Securities Act.
In July 1997 the Company entered into agreements with each of Dr. Frank
Baldino, Jr. and Mr. Robert J. Glaser, and in November 1997 the Company
entered into an agreement with Mr. David J. Williams. Pursuant to such
agreements, Dr. Baldino, Mr. Glaser and Mr. Williams were granted options to
purchase 13,334, 20,000 and 20,000 shares of the Company's Common Stock,
respectively, at an exercise price equal to the fair market value of the
Common Stock on the date of grant. In December 1997 the Company also granted
options to purchase 2,000 shares of Common Stock in the aggregate at an
exercise price equal to the fair market value of the Common Stock on the date
of grant to two non-affiliated consultants to the Company pursuant to
Consulting Agreements with each of such consultants. The options were granted
in reliance on Section 4(2) of the Securities Act.
16
<PAGE>
USE OF PROCEEDS
The Company completed its initial public offering in November 1996. The
following table sets forth the Company's reasonable estimate of the amount of
net proceeds to the Company from such offering used for the categories
indicated below through December 31, 1997:
<TABLE>
-----------------------------------------------------------------
<S> <C>
Purchase and installation of machinery and equipment $1,152,000
-----------------------------------------------------------------
Repayment of indebtedness 55,000
-----------------------------------------------------------------
Working Capital 3,307,000
-----------------------------------------------------------------
Clinical Development 4,655,000
-----------------------------------------------------------------
Research & Development 4,124,000
-----------------------------------------------------------------
</TABLE>
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the caption "Balance Sheet
Data" as of December 31, 1994, 1995, 1996 and 1997, 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,
1996 and 1997 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 YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
License fee and
milestones revenue...... $ 0 $ 0 $ 1,000,000 $1,500,000
Grant revenue............ $ 0 90,813 436,081 0
--------- ------------ ------------ -------------
Total revenues........... $ 0 90,813 1,436,081 $1,500,000
--------- ------------ ------------ -------------
Operating expenses:
Research and
development............. 75,779 2,930,106 6,694,703 10,928,976
General and
administrative.......... 243,318 1,091,299 1,421,524 3,341,081
--------- ------------ ------------ -------------
Total operating
expenses................ 319,097 4,021,405 8,116,227 14,270,057
Interest income, net..... 0 75,730 285,142 1,320,174
--------- ------------ ------------ -------------
Net loss $(319,097) $ (3,854,862) $(6,395,004) $(11,449,883)
========= ============ ============ =============
Pro forma net loss per
share: (1)
Basic.................. $ (1.25) $ (1.01) $ (1.13)
Diluted................ (1.15) (.97) (1.13)
Shares used in computing
pro forma net loss per
share: (1)
Basic.................. 3,078,123 6,353,551 10,092,590
Diluted................ 3,348,769 6,624,197 10,092,590
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments $ 22,870 $4,713,426 $22,547,679 $43,368,462
Working capital (deficit) (243,172) 3,270,375 20,001,703 37,209,028
Total assets 24,870 4,873,845 23,452,879 46,275,480
Loan payable-noncurrent 0 0 0 416,667
Long-term capital leases 0 0 104,571 53,186
Mandatorily redeemable
convertible preferred
stock 60,000 7,416,604 0 0
Total stockholders'
equity (deficit)........ (303,172) (4,089,758) 20,605,161 39,150,871
</TABLE>
- --------
(1) See Note 2 of Notes to Financial Statements.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion contains forward-looking statements that are not statements
of historical facts or statements of current condition. Such forward-looking
statements may be identified by, among other things, the use of forward-
looking terminology such as "expects," "estimates," "may," "will," or "should"
or the negative thereof or other variations of such terminology, or by
discussions of strategy or intentions. These forward-looking statements, such
as statements regarding present or anticipated scientific progress,
development of potential pharmaceutical products, future revenues, capital
expenditures, research and development expenditures, collaborations and future
financings involve predictions, and are subject to risks and uncertainties.
The Company's actual results, performances or achievements could differ
materially from the results expressed in, or implied by, these forward-looking
statements. Factors contributing to such risks and uncertainties that might
affect the Company's actual results, performance or achievements include, but
are not limited to, those discussed in "Important Factors Regarding Forward-
Looking Statements" attached hereto as Exhibit 99. Given these risks and
uncertainties, current or prospective investors are cautioned not to place
undue reliance on any such forward-looking statements. Furthermore, the
Company disclaims any obligation or intent to update any such forward-looking
statements to reflect future events or developments.
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 two-year period. The Company has not been profitable
since inception and has incurred a cumulative net loss of $22,018,846 through
December 31, 1997. 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, primarily due to expected increases in the Company's
research and development expenses, further clinical trials, manufacture of
bulk drug substance and clinical development of the Company's most advanced
drug candidate, pleconaril, and milestone payments that may be payable under
the terms of the Company's Agreement with Sanofi, S.A. in respect of
pleconaril. Also, the Company expects to incur expenses related to its pre-
market approval marketing and market research activities for pleconaril, its
development of a marketing and sales staff 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.
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 primarily for research and
development activities and the supporting general and administrative expenses.
Through December 31, 1997, the Company has used approximately $16.3 million in
operating activities. The Company invests its cash in short-term investments.
Through December 31, 1997, the Company has used approximately $41.5 million in
investing activities, including $39.2 million in short-term investments and
$2.3 million in equipment purchases and new construction. Through December 31,
1997, the Company has financed its operations primarily through public
offerings of Common Stock, private placements of redeemable preferred stock, a
bank loan, equipment lease lines and a milestone advance totaling
approximately $62.0 million. At December 31, 1997, the Company had cash and
cash equivalents and short-term investments aggregating approximately $43.4
million.
The Company leases its corporate and research and development facilities
under an operating lease expiring in 2008. The Company moved to its current
location in March 1998. The annual rent at the new location will be
approximately $400,000 higher than historical amounts. The Company also has
the right to expand the facility and, under certain circumstances, to purchase
the new facility at a purchase price based on a predetermined
19
<PAGE>
formula. 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 March 1, 1998, outstanding
borrowings under these three arrangements are approximately $700,000. The
Company is currently negotiating with a bank for a second term loan for $1
million to finance new equipment expected to be purchased in 1998. There can
be no assurance that the Company will successfully consummate this loan
transaction.
The Company is required to make a payment to Sanofi, S.A. of either $1.2
million or $2 million upon the earlier of the occurrence of a future
milestone, as defined in the Company's agreement with Sanofi, or December
1998. The actual amount of the payment is dependent upon whether or not Sanofi
elects to co-develop pleconaril. If Sanofi elects to co-develop pleconaril,
the payment will be $2 million. If Sanofi decides not to co-develop
pleconaril, the payment would be $1.2 million. If Sanofi chooses to co-
develop, Sanofi has agreed to share in all development costs. In March 1998,
the Company paid Sanofi $1.2 million. The Company will pay Sanofi an
additional $800,000 if Sanofi elects to co-develop pleconaril. The Company
expects Sanofi to make its decision regarding co-development in 1998. In
connection with the Sanofi agreement, the Company is also required to make
certain additional payments, including royalties, as defined, should agreed-
upon future milestones be attained. The milestone events contemplate
regulatory submissions of new drug applications and regulatory approvals in
various jurisdictions. The amount of such additional milestone payments to be
paid by the Company to Sanofi, if any, also are based on Sanofi's decision
regarding the co-development of pleconaril. There can be no assurance that any
such milestones will be attained.
The Company and SELOC France currently are negotiating the terms of an
Addendum to the Development Agreement for the manufacture of validation
batches of bulk drug substance and the preparation of certain documentation
that will be required in connection with the Company's NDA for pleconaril. The
Company estimates that between $1.8 million to $2.0 million may be payable
under the Addendum. There is no assurance that the Company will enter into the
Addendum. On October 9, 1997, the Company received $1,000,000 from BI as an
advance on a future milestone in connection with a Collaborative Research
Agreement (the "Agreement"). Such amount will be creditable against a
milestone, if achieved, or would become due and payable two years after
termination of the Agreement. The advance bears interest at 8.5% and is
evidenced by a convertible promissory note. If amounts due under the note are
not paid as described in the note, BI may convert the then outstanding
principal balance and accrued interest thereon into shares of the Company's
Common Stock based on the last sale price of such Common Stock on the date
immediately prior to the date on which the Company is notified of BI's
intention to convert the promissory note.
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, primarily due to expected increases in the Company's research and
development expenses, further clinical trials, manufacture of bulk drug
substance and clinical development of the Company's most advanced drug
candidate, pleconaril, and milestone payments that may be payable under the
terms of the Company's Agreement with Sanofi, S.A. in respect of pleconaril.
Also, the Company expects to incur expenses related to its pre-approval
marketing and market research activities for pleconaril, its development of a
marketing and sales staff 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, for the
development and required testing of the Company's other product candidates,
and to develop its marketing and sales staffs. To obtain this financing, the
Company expects 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.
20
<PAGE>
RESULTS OF OPERATIONS
Years ended December 31, 1997 and 1996
The Company earned and received two milestone payments aggregating
$1,500,000 in 1997 from BI. The Company received a non-refundable technology
access fee of $1,000,000 from BI and earned $436,081 of grant revenue for the
year ended December 31, 1996. Net interest income increased to $1,320,174 for
the year ended December 31, 1997 from $285,142 for the year ended December 31,
1996, principally due to larger invested balances provided by the proceeds of
the Company's two public offerings in November 1996 and in July 1997.
Research and development expenses increased to $10,928,976 for the year
ended December 31, 1997 from $6,694,703 for the year ended December 31, 1996.
The increase was principally due to the cost of multiple clinical trials
related to pleconaril, and the advancement of drug candidates for the
Company's RSV pneumonia, influenza, and hepatitis C programs.
General and administrative expenses increased to $3,341,081 for the year
ended December 31, 1997 from $1,421,524 for the year ended December 31, 1996.
The increase was principally due to increased salary expenses, costs of being
a public company for a full fiscal year, facilities costs, and increased costs
associated with the pursuit of corporate collaborations.
The net loss increased to $11,449,883 for the year ended December 31, 1997
from $6,395,004 for the year ended December 31, 1996.
Years ended December 31, 1996 and 1995
The Company received a non-refundable technology access fee of $1,000,000
from BI 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.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Comprehensive Income"
(SFAS 130), was issued in June 1997. SFAS 130 becomes effective for the
Company's fiscal year 1998 and requires reclassification of earlier financial
statements for comparative purposes. SFAS 130 requires that all items defined
as comprehensive income, including changes in the amounts of certain items and
gains and losses on certain securities, be shown in a financial statement.
SFAS 130 does not require a specific format for the financial statements in
which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in that statement. The
Company believes the adoption of SFAS 130 will not have a material effect on
the financial statements.
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.
21
<PAGE>
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 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
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
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
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
22
<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.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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 Master Lease Agreement dated September 13, 1995 between the
Company and Comdisco, Inc. (1) (Exhibit 10.4)
10.3 Master Equipment Lease No. 053-0005 dated December 1, 1995 between
the Company and Phoenix Leasing Incorporated. (1) (Exhibit 10.5)
10.4+ Agreement dated December 22, 1995 between the Company and Sanofi.
(1) (Exhibit 10.6)
10.5+ Collaborative Research Agreement dated as of July 23, 1996 between
the Company and Boehringer Ingelheim Pharmaceuticals, Inc. (1)
(Exhibit 10.7)
10.6 Form of Employment Agreement. (1) (Exhibit 10.8)
10.7 Form of Indemnification Agreement. (1) (Exhibit 10.9)
10.8 Form of Employee Stock Purchase Agreement. (1) (Exhibit 10.10)
10.9 Restricted Stock Purchase Agreement dated as of January 17, 1996,
by and between the Company and Frank Baldino, Jr. (1) (Exhibit
10.11)
10.10 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)
10.11 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)
10.12 Warrant Agreement dated as of September 13, 1995 between the
Company and Comdisco, Inc. (1) (Exhibit 10.15)
10.13 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)
10.14 Form of Amendment to Employee Stock Purchase Agreement. (1)
(Exhibit 10.17)
10.15 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)
10.16 Development Agreement dated as of April 16, 1997, by and among
SELOC AG, SICOR, S.A. and the Company. (2) (Exhibit 10.19)
10.17 First Amendment to Agreement dated as of February 21, 1997 by and
between Sanofi and the Company. (2) (Exhibit 10.20)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.18 Promissory Note of Jon M. Rogers and Traci J. Rogers, dated as of
June 12, 1997. (2) (Exhibit 10.21)
10.19 Lease, dated July 21, 1997, between the Company and The Hankin
Group. (2) (Exhibit 10.23)
10.20 Purchase Option Agreement, dated July 21, 1997, between the
Company and The Hankin Group. (2) (Exhibit 10.24)
10.21 Escrow Agreement, dated July 21, 1997, among the Company, The
Hankin Group and Manito Abstract Company, Inc. (2) (Exhibit
10.25)
10.22 Work Letter to Lease between the Company and The Hankin Group. (2)
(Exhibit 10.26)
10.23 Consulting Agreement dated July 31, 1997 between the Company and
Frank Baldino, Jr. (2) (Exhibit 10.27)
10.24 Consulting Agreement dated July 31, 1997 between the Company and
Robert J. Glaser. (3) (Exhibit 10.28)
10.25 Promissory Note of Vincent J. Milano and Christie A. Milano, dated
August 20, 1997. (3) (Exhibit 10.29)
10.26* Consulting Agreement dated November 13, 1997 between the Company
and David J. Williams.
11* Statement of Computation of Pro Forma Loss Per Share.
23* Consent of KPMG Peat Marwick LLP.
24* Power of Attorney (included on signature page).
27* Financial Data Schedule.
99* Important Factors Regarding Forward-Looking Statements.
</TABLE>
- --------
* 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.
(2) Filed as an Exhibit to Registration Statement on Form S-1 (File No. 333-
30005), as amended, initially filed on June 25, 1997.
(3) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended
September 30, 1997.
COPIES OF THE EXHIBITS ARE AVAILABLE TO STOCKHOLDERS FROM THOMAS F. DOYLE,
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, VIROPHARMA INCORPORATED, 405
EAGLEVIEW BOULEVARD, EXTON, PENNSYLVANIA 19341. 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, 1997.
24
<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
/s/ Vincent J. Milano
-------------------------------------
Vincent J. Milano
Vice President, Chief Financial
Officer and Treasurer
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:
NAME CAPACITY DATE
/s/ Claude H. Nash President, Chief March 23,
- ------------------------------------- Executive Officer and 1998
CLAUDE H. NASH Chairman of the Board
(Principal Executive
Officer)
/s/ Vincent J. Milano Vice President, Chief March 23,
- ------------------------------------- Financial Officer and 1998
VINCENT J. MILANO Treasurer (Principal
Financial and
Accounting Officer)
/s/ Claude H. Nash Director March 23,
- ------------------------------------- 1998
CLAUDE H. NASH
/s/ Frank Baldino, Jr., Ph.D. Director March 23,
- ------------------------------------- 1998
FRANK BALDINO, JR., PH.D.
/s/ Robert J. Glaser Director March 23,
- ------------------------------------- 1998
ROBERT J. GLASER
/s/ Ann H. Lamont Director March 23,
- ------------------------------------- 1998
ANN H. LAMONT
/s/David J. Williams Director March 23,
- ------------------------------------- 1998
DAVID J. WILLIAMS
25
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets at December 31, 1996 and 1997.............................. F-3
Statements of Operations for the years ended December 31, 1995, 1996 and
1997, and the period December 5, 1994 (Inception) to December 31, 1997... 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, 1996, and 1997..................................................... F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997, and the period December 5, 1994 (Inception) to December 31, 1997... 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, 1996 and 1997, and the
related statements of operations, stockholders' equity (deficit) and cash
flows for each of the years in the three-year period ended December 31, 1997
and for the period December 5, 1994 (Inception) to December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ViroPharma Incorporated (A
Development Stage Company) as of December 31, 1996 and 1997, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1997 and for the period December 5, 1994 (Inception)
to December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Princeton, New Jersey
February 20, 1998
F-2
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $10,810,310 $ 4,204,330
Short-term investments............................. 11,737,369 39,164,132
Notes receivable from officers--current............ -- 33,691
Other current assets............................... 197,171 461,631
----------- -----------
Total current assets............................. 22,744,850 43,863,784
Equipment and leasehold improvements, net............ 672,029 1,084,720
Construction in progress............................. -- 860,975
Restricted investment................................ -- 300,000
Notes receivable from officers--noncurrent........... -- 84,102
Other assets......................................... 36,000 81,899
----------- -----------
Total assets..................................... $23,452,879 $46,275,480
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 356,171 $ 919,970
Loan payable--current.............................. -- 100,000
Obligation under capital lease--current............ 52,950 61,487
Deferred revenue................................... -- 1,000,000
Accrued expenses and other current liabilities..... 2,334,026 4,573,299
----------- -----------
Total current liabilities........................ 2,743,147 6,654,756
Loan payable--noncurrent............................. -- 416,667
Obligation under capital lease--noncurrent........... 104,571 53,186
----------- -----------
2,847,718 7,124,609
----------- -----------
Stockholder's equity:
Preferred stock, par value $.001 per share.
Authorized 5,000,000 shares In 1996 and 1997; none
issued and outstanding............................ -- --
Common stock, par value $.002 per share. Authorized
27,000,000 shares in 1996 and 1997; issued and
outstanding 9,076,861 at December 31, 1996 and
11,464,106 at December 31, 1997 18,154 22,928
Additional paid-in capital......................... 31,758,996 61,322,384
Deferred compensation.............................. (661,337) (451,721)
Unrealized gains on available for sale securities.. 58,311 276,126
Deficit accumulated during the development stage... (10,568,963) (22,018,846)
----------- -----------
Total stockholders' equity..................... 20,605,161 39,150,871
Commitments
Total liabilities and stockholders' equity....... $23,452,879 $46,275,480
=========== ===========
</TABLE>
- --------
See accompanying notes to financial statements.
F-3
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND THE PERIOD DECEMBER 5,
1994 (INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERIOD
DECEMBER 5,
1994
(INCEPTION)
YEAR ENDED DECEMBER 31, TO
-------------------------------------- DECEMBER 31,
1995 1996 1997 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
License fee and
milestones revenue... $ -- $ 1,000,000 $ 1,500,000 $ 2,500,000
Grant revenue......... 90,813 436,081 -- 526,894
----------- ----------- ------------ ------------
Total revenues...... 90,813 1,436,081 1,500,000 3,026,894
----------- ----------- ------------ ------------
Operating expenses
incurred in the
development stage:
Research and
development.......... 2,930,106 6,694,703 10,928,976 20,629,564
General and
administrative....... 1,091,299 1,421,524 3,341,081 6,097,222
----------- ----------- ------------ ------------
Total operating
expenses........... 4,021,405 8,116,227 14,270,057 26,726,786
----------- ----------- ------------ ------------
Loss from
operations......... (3,930,592) (6,680,146) (12,770,057) (23,699,892)
Interest income, net.... 75,730 285,142 1,320,174 1,681,046
----------- ----------- ------------ ------------
Net loss............ $(3,854,862) $(6,395,004) $(11,449,883) $(22,018,846)
=========== =========== ============ ============
Accretion of redemption
value attributable to
mandatorily redeemable
convertible preferred
stock 19,104 1,597,341 -- 1,616,445
----------- ----------- ------------ ------------
Net loss allocable to
common shareholders.... $(3,873,966) $(7,992,345) $(11,449,883) $(23,635,291)
=========== =========== ============ ============
Pro forma net loss per
share:
Basic................. $ (1.25) $ (1.01) $ (1.13)
=========== =========== ============
Diluted............... $ (1.15) $ (.97) $ (1.13)
=========== =========== ============
Shares used in computing
pro forma net loss per
share:
Basic................. 3,078,123 6,353,551 10,092,590
=========== =========== ============
Diluted............... 3,348,769 6,624,197 10,092,590
=========== =========== ============
</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, 1996 AND 1997
<TABLE>
<CAPTION>
UNREALIZED DEFICIT
COMMON STOCK NOTES GAINS ON ACCUMULATED
------------------ ADDITIONAL RECEIVABLE AVAILABLE DURING THE TOTAL
NUMBER OF PAID-IN ON COMMON DEFERRED FOR SALE DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK COMPENSATION SECURITIES STAGE EQUITY (DEFICIT)
---------- ------- ----------- ---------- ------------ ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 5,
1994
(Inception) -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock to founders 828,750 1,657 79,593 (1,625) (79,625) -- -- --
Amortization of
deferred compensation -- -- -- -- 15,925 -- -- 15,925
Net loss for period... -- -- -- -- -- -- (319,097) (319,097)
---------- ------- ----------- ------- --------- -------- ------------ -----------
Balance, December 31,
1994.................. 828,750 1,657 79,593 (1,625) (63,700) -- (319,097) (303,172)
Proceeds from notes
receivable........... -- -- -- 1,625 -- -- -- 1,625
Issuance costs of
Series A and B
preferred stock -- -- (46,912) -- -- -- -- (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) -- -- -- -- (19,104)
Value attributed to
issuance of warrants -- -- 90,000 -- -- -- -- 90,000
Net loss.............. -- -- -- -- -- -- (3,854,862) (3,854,862)
---------- ------- ----------- ------- --------- -------- ------------ -----------
Balance, December 31,
1995.................. 828,750 1,657 103,577 -- (47,775) 26,742 (4,173,959) (4,089,758)
Deferred compensation
resulting from grant
of options -- -- 753,461 -- (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) -- -- -- -- (27,100)
Exercise of common
stock grant and
options.............. 72,420 145 6,955 -- -- -- -- 7,100
Value attributed to
issuance of warrants -- -- 19,920 -- -- -- -- 19,920
Accretion of
redemption value
attributable to
mandatorily
redeemable
convertible preferred
stock -- -- (1,597,341) -- -- -- -- (1,597,341)
Conversion of
preferred stock to
common stock 5,588,191 11,177 16,253,022 -- -- -- -- 16,264,199
Issuance of common
stock, net of
issuance costs 2,587,500 5,175 16,246,502 -- -- -- -- 16,251,677
Net loss.............. -- -- -- -- -- -- (6,395,004) (6,395,004)
---------- ------- ----------- ------- --------- -------- ------------ -----------
Balance, December 31,
1996.................. 9,076,861 18,154 31,758,996 -- (661,337) 58,311 (10,568,963) 20,605,161
Amortization of
deferred
compensation......... -- -- -- -- 209,616 -- -- 209,616
Unrealized gains on
available for sale
securities........... -- -- -- -- -- 217,815 -- 217,815
Exercise of common
stock options........ 15,450 31 7,070 -- -- -- -- 7,101
Value attributed to
issuance of
warrants............. -- -- 15,936 -- -- -- -- 15,936
Issuance of common
stock, net of
issuance costs....... 2,300,000 4,600 29,510,475 -- -- -- -- 29,515,075
Cashless exercise of
warrants............. 71,795 143 (143) -- -- -- -- --
Consulting expense
related to option
grants............... -- -- 30,050 -- -- -- -- 30,050
Net loss.............. -- -- -- -- -- -- (11,449,883) (11,449,883)
---------- ------- ----------- ------- --------- -------- ------------ -----------
Balance, December 31,
1997.................. 11,464,106 $22,928 $61,322,384 -- $(451,721) $276,126 $(22,018,846) $39,150,871
========== ======= =========== ======= ========= ======== ============ ===========
</TABLE>
- -------
See accompanying notes to financial statements.
F-5
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND THE PERIOD DECEMBER 5,
1994 (INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERIOD
DECEMBER 5,
1994
YEAR ENDED DECEMBER 31, (INCEPTION) TO
--------------------------------------- DECEMBER 31,
1995 1996 1997 1997
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(3,854,862) $ (6,395,004) $(11,449,883) $(22,018,846)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Non-cash
compensation
expense............. 15,925 139,899 209,616 381,365
Non-cash warrant
value............... 90,000 19,920 15,936 125,856
Non-cash consulting
expense............. -- -- 30,050 30,050
Depreciation and
amortization
expense............. -- 58,022 288,278 346,300
Changes in assets
and liabilities:
Other current
assets............. (101,948) (93,223) (264,460) (461,631)
Notes receivable
from officers...... -- -- (117,793) (117,793)
Other assets........ (56,471) 20,471 (45,899) (81,899)
Accounts payable.... 308,353 45,611 563,799 919,970
Accrued expenses
and other current
liabilities 1,095,604 1,135,087 2,239,273 4,573,299
----------- ------------ ------------ ------------
Net cash used in
operating
activities....... (2,503,399) (5,069,217) (8,531,083) (16,303,329)
----------- ------------ ------------ ------------
Cash flows from
investing activities:
Purchase of
equipment............ -- (730,052) (700,969) (1,431,021)
Construction in
progress............. -- -- (860,975) (860,975)
Purchase of short-
term investments..... (11,018,731) (15,335,938) (61,108,260) (87,462,929)
Sales of short-term
investments.......... 4,363,754 -- 5,316,660 9,680,414
Maturities of short-
term investments..... 2,305,337 8,006,520 28,282,652 38,594,509
----------- ------------ ------------ ------------
Net cash used in
investing
activities....... (4,349,640) (8,059,470) (29,070,892) (41,480,002)
----------- ------------ ------------ ------------
Cash flows from
financing activities:
Net proceeds from
issuance of
preferred stock...... 6,648,088 7,223,155 -- 13,931,243
Net proceeds from
issuance of common
stock................ -- 16,258,777 29,522,176 45.780.953
Proceeds from
deferred revenue..... -- -- 1,000,000 1,000,000
Proceeds from loan
payable.............. -- -- 600,000 600,000
Payment of loan
payable.............. -- -- (83,333) (83,333)
Proceeds received on
notes receivable..... 1,625 -- -- 1,625
Proceeds from notes
payable.............. 517,500 12,500 -- 692,500
Payment of notes
payable.............. -- (50,000) -- (50,000)
Obligation under
capital lease........ -- 157,521 (42,848) 114,673
----------- ------------ ------------ ------------
Net cash provided
by financing
activities....... 7,167,213 23,601,953 30,995,995 61,987,661
----------- ------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents........... 314,174 10,473,266 (6,605,980) 4,204,330
Cash and cash
equivalents at
beginning of period... 22,870 337,044 10,810,310 --
----------- ------------ ------------ ------------
Cash and cash
equivalents at end of
period................ $ 337,044 $ 10,810,310 $ 4,204,330 $ 4,204,330
=========== ============ ============ ============
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
Deferred
compensation......... -- $ 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 $ 217,815 $ 276,126
</TABLE>
- --------
See accompanying notes to financial statements.
F-6
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND BUSINESS ACTIVITIES
ViroPharma Incorporated (a development stage Company) (the "Company")
commenced operations on December 5, 1994. The Company is a development stage
pharmaceutical company engaged in the discovery and development of new
antiviral medicines.
The Company is devoting substantially all of its efforts towards conducting
drug discovery and development, raising capital, conducting clinical trials,
pursuing regulatory approval for products under development, 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 $22,018,846 through December 31, 1997. 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, 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 $11,047,013 and $11,074,310, respectively, at December 31, 1996,
and none at December 31, 1997.
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 a separate component of stockholders' equity.
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, 1997.
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.
F-7
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
2. BASIS OF ACCOUNTING AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
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.
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 when earned, 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.
F-8
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
2. BASIS OF ACCOUNTING AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
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.
Pro forma net loss per share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128") in 1997. SFAS 128 simplifies the calculation
of earnings per share ("EPS") by replacing primary and fully diluted EPS with
basic and diluted EPS, respectively. Basic EPS is calculated by dividing
income (loss) by only the weighted average common shares outstanding. Diluted
EPS would also include the effect of dilution to earnings of potentially
dilutive securities, including convertible securities, stock options and
warrants. The adoption of SFAS 128 had no effect on the Company.
Pro forma net loss per share is computed by dividing the net loss by the
weighted average number of shares of common stock outstanding plus the effect
of certain adjustments described below.
Pursuant to Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 98 ("SAB 98") issued in February 1998 and SEC staff policy, all
common stock issued during the periods prior to the Company's initial public
offering ("IPO") for nominal consideration are to be included in the
calculation of pro-forma basic net loss per share as if they were outstanding
for all periods through that of the IPO. Common stock and potential common
stock issued during the periods prior to the IPO for nominal consideration
have been included in the calculation of pro forma diluted net loss per share,
even though anti-dilutive, as if outstanding for all periods through that of
the IPO. The calculation of shares used in computing pro-forma basic and
diluted net loss per share also includes all series of mandatorily redeemable
convertible preferred stock. Prior year per share data has been restated to
reflect the guidance of SFAS 128 and SAB 98. Options and warrants outstanding
aggregating 315,168 shares, 457,458 shares and 776,686 shares as of December
31, 1995, 1996 and 1997, respectively, have been excluded from the calculation
of EPS because they are anti-dilutive. The difference between basic and
diluted pro forma net loss per share is attributed to potential common stock
issued for nominal consideration for 270,646 shares in both 1995 and 1996
(none in 1997). 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.
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, 1996 and 1997, all of the short-term
investments were deemed as "available for sale" investments.
F-9
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
3. SHORT-TERM INVESTMENTS, CONT.
The following summarizes the "available for sale" investments at December
31, 1996 and 1997:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Obligations of the U.S.
Government 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
=========== ======== ======= ===========
Obligations of the U.S.
Government and agencies
of the U.S.............. 17,275,719 133,962 11,179 17,398,502
Commercial paper......... 21,612,287 159,196 5,853 21,765,630
----------- -------- ------- -----------
December 31, 1997...... $38,888,006 $293,158 $17,032 $39,164,132
=========== ======== ======= ===========
</TABLE>
4. EQUIPMENT, LEASEHOLD IMPROVEMENTS AND CONSTRUCTION IN PROGRESS
Equipment, leasehold improvements and construction in progress consist of
the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Computers and equipment.............................. $603,265 $1,283,391
Leasehold improvements............................... 126,786 147,629
-------- ----------
730,051 1,431,020
Less accumulated depreciation and amortization....... 58,022 346,300
-------- ----------
$672,029 $1,084,720
Construction in Progress............................. -- 860,975
======== ==========
</TABLE>
Included in equipment and leasehold improvements at December 31, 1996 and
1997 is approximately $215,000 of assets held under capital lease.
5. NOTES RECEIVABLE FROM OFFICERS
During 1997, the Company loaned approximately $135,000 to two officers of
the Company to defray relocation expenses incurred by them in connection with
their employment by the Company. Each loan is evidenced by a promissory note,
bears interest at the lowest Federal Applicable Rate and comes due in full on
the date of such officer's resignation from the Company or in monthly
installments beginning on the date of termination of such officer's employment
with the Company (other than by resignation), and extending over a period of
between 18 months and 192 months thereafter, depending upon when the
termination of employment occurs. On each anniversary of the date of the
respective loans, 25% of the original principal amount of the loans will be
forgiven by the Company so long as the applicable officer is in the Company's
employ.
F-10
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
License and milestone fees payable................. $1,200,000 $2,000,000
Clinical development and research.................. 827,175 2,106,650
Payroll and payroll taxes payable.................. 30,329 282,525
Other current liabilities.......................... 276,522 184,124
---------- ----------
$2,334,026 $4,573,299
========== ==========
</TABLE>
7. LOAN PAYABLE
In February 1997, the Company entered into a $600,000 loan agreement with a
bank of which $516,667 is outstanding at December 31, 1997. 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.
8. 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, pleconaril. 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. In addition, the Company will
be required to make a milestone payment of either $1,200,000 or $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 actual amount of the payment
is dependent upon whether or not Sanofi elects to co-develop pleconaril. If
Sanofi chooses to co-develop, Sanofi has agreed to share in all development
costs. The Company determined that an obligation was probable and recorded
$1,200,000, its best estimate, in 1996. In 1997, the Company determined that
it was probable that the obligation would be $2,000,000 and recorded the
additional milestone amount. To date, Sanofi has not officially informed the
Company of its decision with regards to the co-development of pleconaril.
(Note 14)
In connection with the Sanofi agreement, the Company is also required to
make certain additional payments, including royalties, as defined, should
agreed-upon future milestones be attained. These future milestone events
contemplate regulatory submissions of new drug applications and regulatory
approvals in various jurisdictions. The amount of such additional milestone
payments to be paid by the Company to Sanofi, if any, also are based on
Sanofi's decision regarding the co-development of pleconaril that is discussed
in the preceding paragraph. At the present time, there can be no assurance
that any 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
F-11
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
8. LICENSE AND RESEARCH AGREEMENTS, CONT.
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. The Company
earned $1,500,000 in 1997 for achieving two milestones.
In October 1997, the Company received a $1,000,000 payment as an advance on
a future milestone in connection with the BI agreement. Such amount will be
creditable against a milestone, if achieved, or would become due and payable
two years after the termination of the Agreement. The advance bears interest
at 8.5% and is evidenced by a convertible promissory note. If amounts due
under the note are not paid as described in the note, BI may convert the then
outstanding principal balance and accrued interest thereon into shares of the
Company's common stock based on the last sale price of such common stock on
the date immediately prior to the date on which the Company is notified of
BI's intention to convert the promissory note.
In 1996, the Company recognized approximately $340,000 of grant revenue from
a not-for-profit entity for which a former director of the Company serves as
an officer.
9. COMMON STOCK AND COMMON STOCK OPTIONS
On July 23, 1997, the Company completed a follow-on public offering of
common stock. The Company sold 2,300,000 shares (including 300,000 shares
exercised by the underwriters for the overallotment). Net proceeds
approximated $29,515,000.
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 exercised by the underwriters for the overallotment). Net proceeds
approximated $16,250,000.
Upon inception of the Company in December 1994, certain members of
management and a co-founder/director purchased 828,750 shares of common stock.
Management purchased 663,000 of these shares which vest annually over a four-
year period. The Company has the right to repurchase any unvested shares at
the original price paid for such shares should the employee leave the Company
before such shares are fully vested. A co-founder/director purchased 165,750
shares. The difference between the deemed fair value and the price paid
($.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 1995, 1996, and 1997. 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.
F-12
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
9. COMMON STOCK AND COMMON STOCK OPTIONS, CONT.
Stock option activity from December 5, 1994 (Inception) to December 31, 1997
is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
PRICE PER SHARE CONTRACTUAL PRICE
SHARE OPTIONS LIFE (YEARS) PER SHARE
------------ ------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, December 5, 1994
(Inception)..................... $ -- --
Granted......................... .10 150,960
Exercised....................... -- --
Canceled........................ -- --
Balance, December 31, 1994....... .10 150,960
Granted......................... .20 12,750
Exercised....................... -- --
Canceled........................ -- --
Balance, December 31, 1995....... .10-.20 163,710
Granted......................... .20-5.25 293,493
Exercised....................... .10 (21,420)
Canceled........................ -- --
Balance, December 31, 1996....... .10-5.25 435,783
Granted......................... 8.75-22.50 335,233
Exercised....................... .10-.8.75 (15,450)
Canceled........................ 2.16-8.75 (555)
-------
Balance, December 31, 1997....... .10-22.50 755,011
=======
Options outstanding as of
December 31, 1997:.............. .10-.20 266,740 7.54 $ .15
.45 36,873 8.42 .45
2.16 93,004 8.51 2.16
5.25 23,460 8.84 5.25
8.75 229,500 9.00 8.75
9.875-14.75 42,950 9.27 11.40
15.125-22.50 62,484 9.71 17.64
-------
Balance, December 31, 1997....... 755,011 8.46 5.28
=======
Options exercisable as of
December 31, 1997............... .10-.20 119,656 $ .13
.45 9,218 .45
2.16 21,295 2.16
5.25 5,865 5.25
14.75 500 14.75
17.50-22.50 2,000 19.44
-------
Options exercisable at December
31, 1997........................ $ .10-22.50 158,534 $ .90
=======
</TABLE>
At December 31, 1997, there were 407,564 shares available for grant under
the Plan. In January 1998, the Company granted 203,700 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, and $193,691 for the
year ended December 31, 1997.
The per share weighted-average fair value of stock options granted during
1995, 1996 and 1997 was $.14, $4.45, and $8.66 per share, respectively, on the
date of grant. Such fair values were determined using the Black-
F-13
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
9. COMMON STOCK AND COMMON STOCK OPTIONS, CONT.
Scholes option-pricing model and are based on the following weighted-average
assumptions: an expected dividend yield of 0% and a risk-free interest rate of
7.5%, for 1995, 1996 and 1997, volatility of 50% for 1995 and 1996 and 68% for
1997 and an expected option life of ten years for 1995, 1996 and 1997.
The Company applies APB Opinion No. 25 in accounting for its stock option
plan. Had the Company determined compensation cost for options granted 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 1997
----------- ----------- ------------
<S> <C> <C> <C>
Net loss:
As reported.................... $(3,854,862) $(6,395,004) $(11,449,883)
Pro forma under SFAS No 123.... $(3,855,318) $(6,524,213) $(12,308,195)
=========== =========== ============
Pro forma net loss per share:
Basic:
As reported.................... $(1.25) $(1.01) $(1.13)
Pro forma under SFAS No. 123... $(1.25) $(1.03) $(1.22)
====== ====== ======
Diluted:
As reported.................... $(1.15) $(.97) $(1.13)
Pro forma under SFAS No. 123... $(1.15) $(.98) $(1.22)
====== ===== ======
</TABLE>
Pro forma net loss reflects only options granted in 1995, 1996 and 1997.
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 No. 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.
10. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Through 1996, the Company completed the sale of its Series A (675,000
shares), Series B (7,060,000 shares) and Series C (3,222,222 shares)
mandatorily redeemable convertible preferred stock (the Preferred Stock) at
per share prices of $.50, $1.00 and $2.25, respectively. Aggregate net
proceeds from these transactions totaled approximately $14,573,000.
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 IPO.
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. In June
1997, holders of the aforementioned warrants exercisable for shares of the
Company's common stock exercised such warrants on a cashless basis for an
aggregate of 71,795 shares of common stock that were otherwise exercisable on
a cash basis for 81,597 shares of common stock.
F-14
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
10. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, CONT.
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.
11. INCOME TAXES
At December 31, 1997, the Company had available for Federal and state income
tax purposes net operating loss carryforwards of approximately $4,014,000 and
$2,700,000, respectively. Such carryforwards, which expire between 2012 and
2000, 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.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1996 and 1997 are shown below. At December 31, 1997, a
valuation allowance of $8,655,823 has been recognized to offset the deferred
tax assets as realization of such assets is uncertain. The change in the
valuation allowance for 1996 and 1997 was an increase of $2,545,044 and
$4,502,933, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 758,592 $1,562,687
Capitalized research and development costs...... 2,848,527 6,213,699
Expenses not currently deductible............... 533,333 880,000
Capitalized start up costs...................... 37,918 24,917
---------- ----------
Total gross deferred tax assets............... 4,178,370 8,681,303
Deferred tax liability:
Employee compensation........................... 25,480 25,480
---------- ----------
Net deferred tax assets....................... 4,152,890 8,655,823
Valuation allowance............................... (4,152,890) (8,655,823)
---------- ----------
Total deferred tax assets..................... -- --
========== ==========
</TABLE>
12. 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, 1996, or
1997. The Company adopted a new 401(k) plan on January 1, 1998.
13. COMMITMENTS
On July 21, 1997, the Company entered into a lease for laboratory and office
space commencing after the current lease expires in March 1998. The term of
the new lease is ten years with two five-year renewal options.
F-15
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
13. COMMITMENTS, CONT.
Under the lease terms, the Company contributed $834,760 in 1997 to the cost of
the laboratory construction, which is included in construction in progress.
The Company also has the right, under certain circumstances, to purchase the
new facility at a purchase price based on a pre-determined formula.
In September 1995, the Company entered into a lease arrangement for the
financing of certain lab equipment, leasehold improvements, computers and
office equipment. The repayment terms range from three to four years. 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.
In December 1995, the Company entered into a capital lease arrangement for
the financing of certain equipment. The repayment terms of this arrangement
are for four years from the date of funding. The equipment financed under this
arrangement aggregated $111,000, which the Company is obligated to purchase at
the end of the lease term for $22,000.
The Company's future minimum lease payments under the aforementioned leases
for years, including the operating lease for the new facility, subsequent to
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------ ---------- --------
<S> <C> <C>
1998............................................ $ 720,682 $ 72,425
1999............................................ 733,838 53,978
2000............................................ 653,503 2,870
2001............................................ 647,592 --
2002 and thereafter............................. 647,592 --
---------- --------
Total minimum lease payments................. $3,403,207 $129,273
========== ========
Amounts representing interest.................... $(14,600)
--------
Present value of net minimum lease payments...... $114,673
Current portion.................................. $ 61,487
--------
Long term portion................................ $ 53,186
========
</TABLE>
Rent expense for the years ended December 31, 1995, 1996, and 1997
aggregated $271,000, $335,000, and $394,000, respectively.
14. SUBSEQUENT EVENTS (UNAUDITED)
In March 1998, the Company paid Sanofi $1.2 million. The Company will pay
Sanofi an additional $800,000 if Sanofi elects to co-develop pleconaril. The
Company expects Sanofi to make its decision on co-development in 1998.
F-16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
Consulting Agreement dated November 13, 1997 between the Company and
10.26 David J. Williams.
11 Statement of Computation of Pro Forma Loss Per Share.
23 Consent of KPMG Peat Marwick LLP.
24 Power of Attorney (included on signature page).
27 Financial Data Schedule.
99 Important Factors Regarding Forward-Looking Statements.
</TABLE>
<PAGE>
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is made as of this 13th day of
November 1997 by and between ViroPharma Incorporated (the "Company") and David
J. Williams (the "Consultant").
W I T N E S E T H:
-----------------
WHEREAS, the Company desires to engage Consultant to provide services to the
Company in accordance with the terms and conditions set forth herein; and
WHEREAS, Consultant desires to provide services to the Company upon the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of these premises and the mutual promises
made herein and the mutual benefits to be derived herefrom, Consultant and the
Company, intending to be legally bound, hereby agree as follows:
1. ENGAGEMENT. Upon the terms and subject to the conditions set forth in
----------
this Agreement, the Company hereby agrees to engage Consultant, as an
independent contractor, to make himself reasonably available to provide the
Company with advice and consultation in the areas of product development,
operations, marketing and strategic alliances (the "Services") to and on
behalf of the Company and Consultant hereby agrees to render such Services to
and on behalf of the Company; provided that in no event shall Consultant be
obligated to devote more than ten (10) hours in any calendar quarter to the
Services.
2. COMPENSATION. In full consideration of the provision of the Services and
------------
the obligations undertaken pursuant to this Agreement, the Company agrees to
pay Consultant $1,250 each calendar quarter and to grant Consultant options to
purchase 20,000 shares of the Company's Common Stock, par value $.002 per
share, such options to have an exercise price of $21.00 per share and to vest
in equal increments over a three year period, all as more fully set forth in
the Non-Qualified Stock Option Agreement attached hereto as Exhibit A.
3. TERM. This Agreement shall commence on the date hereof and shall continue
----
for a three (3) year period, unless sooner terminated by the Company upon
thirty (30) days advance written notice to Consultant.
4. CONFIDENTIAL INFORMATION.
------------------------
(a) Without the prior written consent of the Company, Consultant shall not
disclose or use any Confidential Information (as defined below) of the Company
for Consultant's direct or indirect benefit or the direct or indirect benefit
of any third party, and Consultant shall maintain, both during and after
Consultant's engagement, the confidentiality of all Confidential Information
of the Company. In general, "Confidential Information" all information and
other materials of the Company that have not been made available by the
Company to the general public, except as specifically excluded in Section 4(b)
below. Failure to mark any of the Confidential Information as confidential or
proprietary shall not affect its status as Confidential Information under the
terms of this Agreement.
(b) The restrictions set forth in this Section 4 shall not apply to
Confidential Information that: (i) at the time of disclosure by the Company to
Consultant is in, or after disclosure by the Company to Consultant becomes
part of, the public domain, through no improper act on the part of Consultant;
(ii) was in Consultant's possession at the time of disclosure by the Company;
(iii) is independently developed by Consultant; or (iv) Consultant receives
from a third party.
5. REPRESENTATIONS. Consultant hereby represents that Consultant is not
---------------
subject to any other agreement that Consultant will violate by signing this
Agreement.
<PAGE>
6. RELATIONSHIP BETWEEN PARTIES. Consultant will be retained by the Company
----------------------------
strictly for the purposes and to the extent set forth in this Agreement and
his relationship to the Company shall be that of an independent contractor.
Consultant shall not be considered under the provisions of this Agreement or
otherwise as an employee of the Company. Consultant shall be responsible for
the timely payment of his or her own self-employment and income taxes and the
Company shall not deduct or withhold from any monies payable to Consultant
hereunder any amount on account of any tax or employee benefit. Nothing
contained in this Agreement shall create or imply the creation of a
partnership between the Company and Consultant and neither party shall have
any authority (actual or apparent) to bind the other.
7. GOVERNING LAW. This Agreement shall be construed and enforced in
-------------
accordance with the laws of the Commonwealth of Pennsylvania, without regard
to the conflict of law principles of Pennsylvania or any other jurisdiction.
8. MISCELLANEOUS. This Agreement and the Exhibit attached hereto (which is
-------------
incorporated herein by reference) contains the entire agreement and
understanding of the parties relating to the subject matter hereof and merges
and supersedes all prior discussions, agreements and understandings of every
nature between them. This Agreement may not be changed or modified, except by
an agreement in writing signed by both of the parties hereto. This Agreement
may be executed in any number of counterparts, and each such counterpart shall
be deemed to be an original instrument, but all such counterparts together
shall constitute but one agreement.
9. INDEMNIFICATION. If Consultant is a party or is threatened to be made a
---------------
party to an action or proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he is or was a consultant to the
Company or any predecessor of the Company or served any other enterprise as a
director, officer or employee at the request on the Company or any predecessor
of the Company, then the Company shall indemnify Consultant to the full extent
of (and subject to the limitation set forth in) of Title 8, Section 145 of the
Delaware General Corporation Law (the Delaware Indemnification Law"), as
though Consultant was an "agent" of the Company for purposes of the Delaware
Indemnification Law. This Section 9 shall survive the termination of this
Agreement for the duration of the statute of limitations that might apply to a
claim asserted by reason of the fact that Consultant was a consultant to the
Company or any predecessor of the Company or served any other enterprise as a
director, officer or employee at the request on the Company or any predecessor
of the Company.
IN WITNESS WHEREOF, the parties have caused this Consulting Agreement to be
executed the day and year first above written.
VIROPHARMA INCORPORATED
By: /s/ Claude H. Nash
--------------------------------------
Its: President and Chief Executive Officer
-------------------------------------
CONSULTANT
/s/ David J. Williams
------------------------------------------
David J. Williams
<PAGE>
Exhibit 11
Statement re: Computation of Pro Forma Net Loss Per Share
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996 1997
<S> <C> <C> <C>
Net loss $(3,854,862) $(6,395,004) $(11,469,883)
=========== =========== ============
Weighted average common
shares outstanding 828,750 2,053,114 10,092,590
Assumed conversion of Series
A, B and C mandatorily
redeemable convertible
preferred stock using the
if-converted method 2,249,373 4,300,437 --
----------- ----------- ------------
Shares used in computing
pro forma basic net loss
per share 3,078,123 6,353,551 10,092,590
Shares assumed to be
outstanding related to
stock options and
warrants granted for
nominal consideration 270,646 270,646 --
----------- ----------- ------------
Shares used in computing
pro forma diluted net
loss per share 3,348,769 6,624,197 10,092,590
=========== =========== ============
Pro forma net loss per
share:
Basic $ (1.25) $ (1.01) $ (1.13)
=========== =========== ============
Diluted $ (1.15) $ (.97) $ (1.13)
=========== =========== ============
</TABLE>
<PAGE>
The Stockholders and Board of Directors
ViroPharma Incorporated:
We consent to incorporation by reference in the registration statement (No.
333-34129) on Form S-8 of VIroPharma Incorporated (A Development Stage Company)
of our report dated February 20, 1998 relating to the balance sheets of
ViroPharma Incorporated (A Development Stage Company) as of December 31, 1996
and 1997, and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1997, and for the period December 5, 1994 (Inception) to December
31, 1997, which report appears in the December 31, 1997, Annual Report on Form
10-K of ViroPharma Incorporated (A Development Stage Company).
KPMG Peat Marwick LLP
Princeton, New Jersey
March 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 4,204,330 10,810,310
<SECURITIES> 39,164,132 11,737,369
<RECEIVABLES> 33,691 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 43,863,784 22,744,850
<PP&E> 1,431,020 730,051
<DEPRECIATION> 346,300 58,022
<TOTAL-ASSETS> 46,275,480 23,452,879
<CURRENT-LIABILITIES> 6,654,756 2,743,147
<BONDS> 0 0
0 0
0 0
<COMMON> 22,928 18,154
<OTHER-SE> 39,127,943 20,587,007
<TOTAL-LIABILITY-AND-EQUITY> 46,275,480 23,452,879
<SALES> 0 0
<TOTAL-REVENUES> 1,500,000 1,436,081
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 14,270,057 8,116,227
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 64,492 21,977
<INCOME-PRETAX> (11,449,883) (6,395,004)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (11,449,883) (6,395,004)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,449,883) (6,395,004)
<EPS-PRIMARY> (1.13) (1.01)
<EPS-DILUTED> (1.13) (0.97)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
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<PAGE>
EXHIBIT 99
VIROPHARMA INCORPORATED
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The following factors, among others, could cause the Company's actual
results, performances or achievements to differ materially from the results
expressed in, or implied by, forward-looking statements made in this Annual
Report on Form 10-K or presented elsewhere by management from time to time,
such as statements regarding present or anticipated scientific progress,
development of potential pharmaceutical products, future revenues, capital
expenditures, research and development expenditures, future financings and
collaborations, personnel, manufacturing requirements and capabilities, and
other statements regarding matters that are not historical facts or statements
of current condition.
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, 1997, the Company had an
accumulated deficit of $22,018,846. Such losses have resulted principally from
costs incurred in research, development, 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 two 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 Unites 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
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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.
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 drug candidates. 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 drug candidates 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 CCANDIDATE
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. Enrollment may be impacted by the
acute nature and the seasonality of certain of the Company's disease
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targets and the impossibility of anticipating the geographic locations of
disease outbreaks. 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.
While the Company designs and manages its preclinical studies and clinical
trials, the Company engages contract research organizations to perform certain
aspects of such preclinical studies and clinical trials. As a result, the
Company depends on such contract research organizations to assist in the
completion of its studies and trials.
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
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Company's research and development expenses increase due to further clinical
trials, manufacture of drug substance and preclinical development of
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. As the Company builds its marketing
and sales staffs, its fixed commitments for employee salaries are likely to
increase substantially. The Company's cash requirements may vary materially and
could be significantly higher than those now planned 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.
The Company will need to raise substantial additional capital to fund its
future operations. The Company's currently available cash is not expected to be
sufficient to complete all clinical studies and other development and required
testing for pleconaril or any other of the Company's product candidates, or to
develop fully the Company's marketing and sales staffs. The Company expects to
seek such additional funding through public or private financing or
collaborative, licensing and other arrangements with corporate partners. 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.
ABSENCE OF MARKETING AND SALES CAPABILITY
The Company is currently conducting market research on the multiple disease
indications for which pleconaril is being developed. The Company intends to
establish its marketing strategy based upon the results of this market research
coupled with information gained through its clinical trials. The Company may
elect to seek a marketing partner for certain disease indications, establish
its own sales force or pursue both alternatives. To continue to develop its
marketing strategy, the Company is currently building its marketing staff. The
Company does not currently have a sales staff. Significant additional
expenditures, management resources and time will be required to develop a
marketing and sales capability, and there can be no assurance that the Company
will be successful either in developing a sales force, entering into
commercialization arrangements, penetrating the markets for any proposed
products it may develop or achieving market acceptance of its products. 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.
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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. In February 1997, the Company amended its agreement with
Sanofi to permit the Company to engage a third party to manufacture bulk drug
substance. In April 1997, the Company entered into a Development Agreement with
SELOC France (formerly SICOR S.A.) and SELOC AG (collectively "SELOC"), which
then were related companies and subsidiaries of Schwarz Pharma AG, for the
manufacture of pleconaril bulk drug substance and the development of a process
for commercial-scale production of pleconaril. The Company and SELOC France
currently are negotiating the terms of an Addendum to that agreement (the
"SELOC Addendum") for the manufacture of validation batches of bulk drug
substance and the preparation of certain documentation that will be required in
connection with the Company's NDA for pleconaril. The Company anticipates that
its current supply of pleconaril drug substance, together with the bulk drug
substance that the Company will receive under the SELOC Addendum, will be
sufficient to complete its formulation development activities and its ongoing
clinical trials for viral meningitis, viral syndrome, hand-foot-and-mouth
disease and rhinovirus in asthmatics. The Company believes that it will be able
to obtain additional drug substance from SELOC France and, if necessary, other
manufacturers for the production of pleconaril drug product on terms acceptable
to the Company. In the event that the Company does not enter into the SELOC
Addendum, or that SELOC France is unable to satisfy the Company's requirements
and the Company is required to find an additional or alternative source of
supply, there may be additional cost and delay in product development or
commercialization. The Company also is evaluating alternatives for the
commercial manufacture of drug substance and drug product. FDA pre-approval
inspection is required for all commercial manufacturing sites.
The Company also is currently negotiating with several contractors for the
commercial manufacture of oral liquid and solid formulations of pleconaril drug
product. The Company has used an oral liquid formulation of pleconaril in its
recent clinical trials, and thus must demonstrate that the oral solid
formulation is bioequivalent to the oral liquid formulation. It must also
demonstrate the chemical stability of the oral solid formulation. Any delays in
the Company's ability to demonstrate such bioequivalency and chemical stability
will delay the commercialization of the oral solid formulation of pleconaril.
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 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.
Under the terms of the SELOC Addendum, SELOC France will be obligated to
provide batches of
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bulk drug substance at various times during 1998. If these deliveries are
delayed, or if such bulk drug substance is not shown to be equivalent, the
Company's ability to seek FDA or other regulatory approval could be delayed
until additional clinical trials are completed.
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, that
the oral solid formulations of pleconaril will be equivalent to the oral
formulation used in the Company's clinical trials or that the products supplied
to the Company will meet the Company's specifications or delivery, cost and
other requirements.
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. 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. Other collaborations may place responsibility on partners
for marketing, sales and distribution support for product commercialization.
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 of its drug candidates, the proprietary
processes for producing such compositions, as well as the uses of its drug
candidates. The Company has two issued U.S. patents and five patent
applications pending with the U.S. Patent and Trademark Office ("PTO"). The
Company has licensed from Sanofi S.A. the exclusive U.S. and Canadian rights to
antiviral agents for use in enterovirus and rhinovirus indications, which are
the subject of two issued U.S. patents and two related Canadian patent
applications owned by Sanofi S.A. The Company will be dependent on Sanofi S.A.
to prosecute such patent applications and may be
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dependent on Sanofi S.A. to protect such patent rights. The Company also has
filed five 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 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.
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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 than the Company. In
addition, many of the Company's competitors have significantly greater
experience than the Company in conducting drug discovery, conducting
preclinical testing and human clinical trials of new pharmaceutical products,
obtaining FDA and other regulatory approvals of products, manufacturing and
marketing. 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.
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 it is the first company to use these technologies
in combination to develop antiviral pharmaceutical products.
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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.
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 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.
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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 six million dollars per occurrence and six 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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