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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 0-26866
SONUS PHARMACEUTICALS, INC.
(Exact name of the registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4343413
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
22026 20TH AVENUE S.E., BOTHELL, WASHINGTON 98021
(Address of principal executive offices)
(425) 487-9500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.001 per share
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 report), 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 the 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. [ ]
As of March 5, 1999, the aggregate market value of the registrant's Common Stock
held by non-affiliates of the Registrant was $53,474,086 based on the closing
sales price of $7.25 per share of the Common Stock as of such date, as reported
by The Nasdaq National Market. As of March 5, 1999, 8,632,702 shares of the
registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed in
connection with the solicitation of proxies for its 1999 Annual Meeting of
Stockholders to be held April 29, 1999 are incorporated by reference in Items
10, 11, 12, and 13 of Part III hereof.
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EXHIBIT INDEX APPEARS ON PAGE 48
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PART I
ITEM 1. BUSINESS
SONUS Pharmaceuticals, Inc. (the "Company") is engaged in the research,
development and commercialization of proprietary ultrasound contrast agents and
drug delivery systems based on its proprietary technology. Ultrasound imaging is
a widely used, non-invasive, cost-effective technique to examine soft tissues,
internal body organs and blood flow in the body. In contrast to other imaging
modalities, ultrasound imaging is currently largely performed without the use of
a contrast agent. The Company's principal product under development, EchoGen(R)
(perflenapent injectable emulsion), is a contrast agent designed to be
administered to a patient prior to performing ultrasound studies to improve
image quality. Based upon the Company's clinical trials to date involving over
1,800 people, the Company believes that EchoGen will significantly improve the
effectiveness of ultrasound imaging by increasing the reflectivity differential
between the bloodstream which carries the contrast agent and the surrounding
soft tissue being imaged.
EchoGen is a stable, liquid emulsion, based on the Company's proprietary
PhaseShift(TM) technology, which changes from microscopic liquid droplets of
dodecafluoropentane ("DDFP") to gas microbubbles during administration. The
Company believes EchoGen offers significant benefits as a contrast agent
including (i) small bubble size which allows EchoGen to pass through capillaries
in the lungs and other organs, (ii) a long half-life which will allow physicians
sufficient time to complete an EchoGen-enhanced ultrasound study, (iii)
intensity of the sound wave reflectivity or echogenicity providing for better
quality images and (iv) EchoGen works in fundamental and other imaging modes.
In 1996, the Company filed a New Drug Application ("NDA") with the U.S. Food
and Drug Administration ("FDA") for the approval to market EchoGen in the U.S.
In February 1998, the Company received an action letter from the FDA which
indicated that the EchoGen NDA was completed and the application was considered
inadequate for approval, citing certain deficiencies in the application. In
August 1998, the Company submitted to the FDA an amendment of the NDA and in
October 1998, the Company submitted additional information requested by the FDA.
The Company has received notice from the FDA that the amendment filing was
considered complete as of October 19, 1998. Under the Food and Drug
Administration Modernization Act, the FDA has up to 180 days to review the
amendment which has requested approval of EchoGen for echocardiography
indications. Once the FDA review is complete, the Company expects that the
agency will issue another action letter. There can be no assurance that the
action letter will be favorable or that FDA approval will be obtained. See
"Certain Factors That May Affect the Company's Business and Future Results
Uncertainty of Governmental Regulatory Requirements; Lengthy Approval Process."
A Marketing Authorization Application ("MAA") was submitted to the European
Medicines Evaluation Agency ("EMEA") in November 1996 for the approval to market
EchoGen in the European Union ("E.U."). In March 1998, the EMEA's Committee for
Proprietary Medicinal Products ("CPMP") issued a positive opinion on EchoGen for
use as a transpulmonary echocardiographic contrast agent in patients with
suspected or established cardiovascular disease who have had previous
inconclusive non-contrast studies. In July 1998, the EMEA ratified the CPMP
recommendation and granted a marketing authorization for EchoGen in the 15
countries of the European Union ("E.U."). The Company and its marketing partner,
Abbott Laboratories
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("Abbott"), are preparing for the commercialization of EchoGen in the E.U. after
necessary pricing, reimbursement and manufacturing modification approvals are
received. However, there can be no assurance that the necessary approvals will
be obtained in a timely manner, if at all. See "Certain Factors That May Affect
the Company's Business and Future Results - Uncertainty of Governmental
Regulatory Requirements; Lengthy Approval Process."
The Company is also developing a second ultrasound contrast agent, QW7437, a
charge-stabilized emulsion of DDFP. In addition, the Company is investigating
the application of its technology in the development of drug delivery systems.
OVERVIEW
Medical imaging to diagnose and treat disease states and conditions has been
an important element of medical treatment since the introduction of x-ray
technology. As imaging technology has advanced in recent decades, applications
of medical imaging have expanded to address increasingly complex disease states
and conditions involving soft tissues and internal body organs. For example,
medical imaging currently plays an important role in the diagnosis and treatment
of disease states and conditions affecting the vascular and nervous systems and
major organs such as the heart, kidney and liver. Industry sources indicate over
85 million soft tissue and organ imaging studies are performed annually in the
U.S.
The most widely used imaging modalities for soft tissues and organs include
ultrasound, computed tomography ("CT"), magnetic resonance imaging ("MRI"),
nuclear medicine and x-ray angiography. Each medical imaging modality requires
specialized equipment and has different patterns of use and applications. The
imaging modality to be used is selected based on a variety of factors, including
the particular disease state or condition to be studied, image quality, the cost
of the study and the status of the patient in the patient management cycle. The
use of image-enhancing contrast agents is crucial to some imaging modalities,
and has greatly clarified images in others, and in general has broadened the
number of imaging applications. A contrast agent is a substance that is
administered to the patient, either intravenously, orally or by other routes of
injection, to enhance the image by increasing the visibility of the blood
vessels or body cavities, as well as other tissues and organs containing the
contrast agent. It is estimated that 24 million imaging studies utilizing
contrast agents are performed annually in the U.S.
ULTRASOUND IMAGING
Ultrasound was introduced for medical imaging purposes as a safe,
non-invasive and relatively inexpensive method to provide images of most major
soft tissues and organs. Initially, ultrasound was used to image the general
shape, size and structure of internal soft tissues and organs. With advances in
technology, ultrasound imaging has been used to image blood flow in soft
tissues, organs and the vascular system as a means of determining the presence
of a disease state or condition. Based on published reports, the Company
believes that over 60 million ultrasound imaging procedures are performed
annually in the U.S., of which a majority are for cardiology and radiology
indications. According to industry sources, approximately 15 million ultrasound
studies are performed annually in the U.S. for cardiac function indications at a
typical cost to payors of approximately $400. In an ultrasound study for cardiac
function indications, known as echocardiography, the physician attempts to
obtain an image of the internal heart structure, including
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the valves and chambers, to diagnose coronary artery disease, valvular disease
and congenital heart defects. In addition, industry sources indicate
approximately 27 million radiology ultrasound studies are performed annually in
the U.S. at a typical cost to payors of approximately $200 per study to image
various tissues and organs. In an ultrasound study for radiology indications,
the physician attempts to image soft tissues and organs and to identify
abnormalities and obstructions of the major veins and arteries of the body.
According to published reports, there are nearly 80,000 ultrasound systems
installed in the U.S. in substantially all hospitals and clinics and in many
physicians' offices.
Ultrasound systems use low-power, high-frequency sound waves to produce
real-time images. The sound waves emitted by the ultrasound transducer, which is
placed on the skin or in a body cavity near the targeted area, are reflected by
tissues and fluids, thus allowing the physician to view, characterize and define
tissues and organs. The reflected sound waves, or echoes, are received and
processed by the ultrasound system and displayed in real-time on the system's
monitor. The intensity of the echoes received by the ultrasound system is
proportional to the acoustical reflectivity of the tissue or fluid. In standard
ultrasound imaging, known as grayscale for radiology applications or
two-dimensional ("2D") for cardiology applications, the physician can diagnose,
treat and monitor disease states and conditions by analyzing the relative
shading of tissues or organs.
In 1984, color Doppler ultrasound system enhancements were introduced that
utilize the principle that the frequency of sound waves reflected by moving
objects is altered in proportion to their velocity (a Doppler frequency shift).
These enhancements allow physicians to make a hemodynamic assessment (the study
of blood circulation through the body) of the patient based on the direction and
speed of blood flow through the body as well as in the chambers and valves of
the heart. However, since the velocity of blood flow measured by the Doppler
ultrasound transducer is dependent upon the angle of the blood vessel in
relation to skin surface, the use of Doppler enhancements for certain
applications, such as the imaging of the renal artery, which is parallel to the
skin, has been limited. Also, the use of "power" Doppler systems, which are
capable of measuring the variation of the intensity of signals that have
undergone a Doppler frequency shift, has improved the diagnostic utility of
ultrasound imaging systems by reducing much of the angle dependence of earlier
generation Doppler systems and by allowing the imaging of smaller vessels and
vessels with lower blood flow than could be imaged effectively with earlier
systems.
Beginning in 1996, the manufacturers of ultrasound equipment introduced
systems with the optional capability to perform a new technique called harmonic
imaging. Harmonic imaging utilizes the nonlinear properties of ultrasound
contrast agents by transmitting at the fundamental transducer frequency but
receiving at the first harmonic, which is twice the fundamental frequency.
Because contrast agents can act as harmonic oscillators, this technique can
improve tissue-agent contrast and extend the persistence of contrast agents. The
manufacturers are also making additional technological advances including power
harmonic imaging, flash echo imaging and pulse inversion imaging. However, all
of these techniques are currently available only on premium priced ultrasound
systems and most of the installed base of equipment cannot be upgraded. As a
result, these new techniques have penetrated a very limited portion of the
installed base as of the end of 1998.
Despite such advancements in ultrasound equipment, ultrasound imaging
produces images that are less defined and more difficult to interpret than
images produced by other imaging modalities
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such as CT and MRI. For example, the depth and angle of certain organs or
arterial vessels within the body limit the use of ultrasound imaging because of
the inability to receive echoes from deep within the body and the inability to
see the entire length of certain arterial vessels such as the renal artery. In
addition, the low acoustic density and reflectivity of blood also limits the use
of ultrasound imaging for vascular or perfusion imaging. Accordingly, while
anatomical structures may be viewed effectively using ultrasound imaging,
physiologic functions of the body, such as blood flow, are not monitored easily.
As a further limitation, the lower velocity of blood flow in certain vessels of
the body makes it difficult for ultrasound systems to detect Doppler frequency
shift signals. For example, infections (abscesses) and tumors, which are
characterized by lower velocity blood flow, may not be detected by most of
today's ultrasound systems. As a result, many ultrasound procedures are
non-diagnostic for technical reasons because the physician is not able to make a
definitive diagnosis with the information that is provided by the ultrasound
image.
ULTRASOUND CONTRAST AGENTS
While the use of contrast agents in diagnostic imaging is well established
and broadly utilized in other imaging modalities, historically there has been a
lack of commercially available ultrasound contrast agents. For many years,
scientists have attempted to develop such agents focusing primarily on methods
to encapsulate air microbubbles that reflect the sound waves generated by the
ultrasound system. Historically, the development of an effective contrast agent
has been hampered by the lack of persistence of the microbubbles, or by the
challenge that microbubbles were too fragile to pass through the lungs or too
large to pass through small blood vessels. Persistence, size and stability of
microbubbles are important characteristics given that, once injected in the
bloodstream, the contrast agent must pass through the lungs, where gas exchange
can eliminate the microbubbles, before reaching the left chambers of the heart
and before circulating throughout the vascular system.
Cardiology Indications. The Company believes that an effective ultrasound
contrast agent could enable physicians to assess the function of the
cardiovascular system as well as myocardial perfusion. An effective ultrasound
contrast agent could improve echocardiography by allowing physicians to use left
ventricular chamber opacification to assist cardiac function analysis
regionally, through wall motion analysis and globally, through ejection fraction
measurements. Further, an ultrasound contrast agent, which is persistent and
able to pass through small blood vessels, could allow physicians to assess
myocardial perfusion to differentiate functioning cardiac tissue from ischemic
(blood deficient) and infarcted (dead) tissue. The use of exercise stress to
increase the work load of the heart before contrast-enhanced echocardiography
could also assist the differentiation of ischemia from infarction. In 1994, the
FDA approved the first ultrasound contrast agent for use as an aid for the
enhancement of images of ventricular chambers and improved endocardial (inner
heart chamber) border definition in patients with suboptimal echoes undergoing
certain cardiac function studies and a second agent was approved in December
1997. In addition, the Company believes that at least one other company's
ultrasound contrast agent is being reviewed by the FDA and several others are in
clinical trials.
Radiology Indications. The Company believes that the development of an
effective ultrasound contrast agent could improve the capabilities of ultrasound
imaging for radiology indications, including diagnostic imaging of kidney,
liver, prostate and peripheral vascular diseases, by increasing the visibility
of blood flow and blood flow patterns, and by improving the detection of
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small lesions or structures deep within the body, where acoustic energy is lost
as the transmitted acoustical beam passes through the body. The Company believes
EchoGen may have clinical utility for both macrovascular and microvascular
indications. In macrovascular indications (the diagnosis of disease states and
conditions of the major arteries and veins of the body), an effective ultrasound
contrast agent may aid in the detection of strokes and pre-stroke conditions
through visualization of intracranial (within the skull) blood vessels,
atherosclerosis, vascular graft patency and peripheral vascular thrombosis, a
major cause of pulmonary emboli (blood clots in the pulmonary artery and the
lungs). For microvascular indications (the diagnosis of disease states and
conditions through the analysis of patterns of small vessel blood flow),
ultrasound contrast agents may allow the physician to identify lesions, tumors
or other diseases in the liver (e.g., adenomas and hemangiomas), kidneys,
prostate and other tissues and organs. Although the Company has conducted
clinical trials for radiology indications for EchoGen, the Company's NDA for
EchoGen, as amended, does not include radiology indications. There are no FDA
approved ultrasound contrast agents for intravascular radiology indications
although the Company believes that at least one other contrast agent is being
reviewed by the FDA and that several others are in clinical trials.
TECHNOLOGY AND PRODUCTS
ECHOGEN
The Company has primarily focused its research and development efforts on
the development of EchoGen, which is injected as small microbubbles into the
bloodstream that persist long enough to permit completion of diagnostic
ultrasound studies and which can be manufactured and packaged with an acceptable
shelf life. To develop EchoGen, the Company initially focused its efforts on
identifying a chemical agent that exhibited the desired properties of high
persistence and the ability to form small microbubbles during administration.
The Company measures the persistence of microbubbles by a standard the Company
has defined as a "Q factor." By definition, a Q factor of one equals the length
of time an air bubble three microns in diameter remains undissolved in the
blood. After studying over 400 chemicals, primarily fluorocarbons, the Company
selected DDFP to develop as a potential contrast agent. DDFP has a Q factor of
approximately 200,000, which permits it to persist in the blood for over 10
minutes. In addition, DDFP has a boiling point of 28.5(Degree)C (approximately
83(Degree)F), which allows it to exist as a liquid while stored at room
temperature or below but change into a gas during the administration process.
This process, which the Company calls the PhaseShift(TM) process, leads to the
injection of microbubbles into the patient's bloodstream. Through its research
and development efforts, and utilizing its proprietary technology, the Company
developed EchoGen. EchoGen is a stable, 2% emulsion of DDFP, that through the
PhaseShift process creates microbubbles that are small enough to pass through
the lungs and circulate in the vascular system. EchoGen is packaged in vials and
easily administered by the physician with a single peripheral venous injection
prior to or during the ultrasound study. Based on studies conducted to date, the
Company believes EchoGen has a useful shelf life of 18 months at room
temperature.
The Company believes that EchoGen has the following characteristics, which
the Company believes will provide physicians the capability to improve
diagnostic imaging using ultrasound:
- Long Persistence. Based on results from clinical trials, the Company
believes that EchoGen is sufficiently persistent to complete typical
cardiology and radiology studies. The period of
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persistence of EchoGen varies widely depending upon numerous factors. In
Phase 3 studies of cardiac function, where 2D grayscale is the preferred
imaging modality, EchoGen persisted for approximately three to five
minutes. In radiology indications where color doppler is the primary
imaging modality, EchoGen persisted on average for approximately fifteen
minutes.
- Small Microbubble Size. Following administration, EchoGen microbubbles
are small enough to pass through the lungs and circulate in the vascular
system, enabling imaging of small blood vessels and tissues.
- Sound Wave Reflectivity. EchoGen exhibits significant sound wave
reflectivity, thereby improving image quality and allowing imaging of
vessels or organs that are deep within the body.
- Safety. Results from preclinical and clinical trials conducted to date
indicate that DDFP, the active ingredient of EchoGen, is substantially
excreted from the body through the lungs within 25 minutes of
administration without metabolic changes. Some patients experience
transient side effects such as feeling of warmth, taste perversion,
headache and nausea.
QW7437
The Company is developing a second fluorocarbon-based ultrasound agent,
QW7437, a charge-stabilized emulsion of DDFP. Preclinical and Phase 1 clinical
studies in Europe have suggested that QW7437 may have improved persistence in
grayscale imaging of blood flow in tissue compared to EchoGen or other
fluorocarbon-based contrast agents. Such grayscale tissue imaging may have
application in assessing perfusion (blood flow) in the microvasculature of the
myocardium (heart muscle tissue). Imaging myocardial perfusion may help
clinicians assess the area of risk of the myocardium during coronary occlusion,
the size of an infarct following reperfusion, the amount of collateral blood
flow and the success of therapeutic interventions such as coronary angioplasty.
STATUS OF CLINICAL TRIALS
The Company commenced clinical trials of EchoGen in January 1994 and of
QW7437 in September 1997. The Company uses academic institutions and clinical
research organizations to conduct and monitor its clinical trials. Under the
Company's agreements with Abbott Laboratories ("Abbott"), SONUS is responsible
for conducting clinical trials and obtaining regulatory clearances in the U.S.
and E.U. Abbott is responsible for conducting clinical trials and obtaining all
regulatory clearances in all other countries of the world, excluding Japan and
nine other countries in the Pacific Rim. The E.U. marketing authorization and
the NDA under review by the FDA for EchoGen are primarily based on the results
of a pivotal Phase 3 echocardiography clinical trial. This trial was conducted
from late 1995 to early 1996 at 19 sites in the U.S. to evaluate the efficacy of
EchoGen in improving the use of echocardiography to assess cardiovascular
disease in patients who previously had a suboptimal (non-diagnostic) echo exam.
Based on an evaluation of EchoGen's efficacy by independent blinded reviewers,
EchoGen significantly increased the proportion of patients with optimal
echocardiograms. After the baseline exam, 5 to 21% of exams were optimal,
compared with 47 to 90% of exams following administration of EchoGen. Based on
evaluations made by the
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principal investigators of the study, EchoGen led to an increased diagnostic
confidence in 76% of the patients, disclosed findings not present at baseline in
63% and prevented the need for further studies in 19% of patients.
SAFETY RESULTS OF ECHOGEN
In analyzed clinical trials with 1,834 patients utilizing the current
formulation of EchoGen, there were no findings that the Company believes would
suggest a toxicologic or pharmacologic response to the administration of
EchoGen. There were no effects on organ function, blood chemistry, hematologic
or urinalysis results. Adverse events that were considered possibly, probably or
definitely related to EchoGen administration were experienced by 9.4% of
patients. Those events occurring in greater than 1.0% of patients include
feeling of warmth and flushing (3.2%), taste perversion (1.4%) and headache
(1.6%). The events were usually mild, occurred within 30 minutes of injection,
generally required no treatment and left no sequelae.
ADDITIONAL CLINICAL STUDIES OF ECHOGEN AND QW7437
In March 1997, a Phase 1 trial in 20 healthy volunteers undergoing stress
echocardiography with EchoGen was completed in the U.K. The results of the trial
suggest that the administration of EchoGen in multiple doses at rest and peak
stress are safe and effective when used in conjunction with either pharmacologic
or exercise stress echocardiography. In October 1998, the Company completed
enrollment in a 275 patient Phase 3 multi-center single blinded study
investigating the use of EchoGen during Dobutamine (pharmacologic) stress
echocardiography. Non-enhanced and enhanced stress echo results are being
compared to the results of each patient's cardiac catheterization procedure. The
evaluation of efficacy by blinded readers is currently underway.
In March 1998, the Company completed enrollment in a 213 patient Phase 3
multi-center trial to assess the use of EchoGen improving the detection of
prostate cancer by contrast ultrasound aided biopsy. Patients with elevated PSA
(prostate specific antigen) levels and/or abnormal rectal examinations who have
been referred for biopsy received a contrast enhanced transrectal ultrasound
examination using EchoGen. Data analysis of the results of this trial have been
deferred pending completion of the FDA review of the EchoGen NDA for cardiology
indications.
In late 1997, SONUS completed a Phase 1 trial of QW7437 at the Leicester
Clinical Research Unit in the U.K. There were no serious adverse events among
the 20 normal human subjects at a range of doses. Investigators concluded that
the results of the trial suggested that QW7437 was safe and well tolerated.
In August 1997, the Company completed two multi-center Phase 2 trials to
determine the safety of EchoGen as a contrast agent during echocardiography in
135 patients with severe chronic obstructive pulmonary disease and in 146
patients with NYHA Class III or IV congestive heart failure. The results suggest
that there are no clinically or statistically significant differences in the
safety profiles exhibited by EchoGen and the inactive placebo (saline) in these
patient populations.
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The commercialization of QW7437, or of EchoGen for new indications, beyond
those contained in the NDA, will require approval of separate regulatory
submissions based on extensive additional clinical testing. There can be no
assurance the clinical trial results from the above or future trials will
demonstrate any efficacy or will be adequate for regulatory approval.
None of the Company's products have been approved by the FDA and there can
be no assurance that such approval will be obtained. See "Certain Factors That
May Affect the Company's Business and Future Results - Uncertainty of
Governmental Regulatory Requirements; Lengthy Approval Process; and Unproven
Safety and Efficacy; Uncertainty of Clinical Trials."
MARKETING AND DISTRIBUTION
The Company's strategy is to market EchoGen and QW7437 through arrangements
with third parties in the U.S. and the rest of the world.
The Company and Abbott have formed a strategic alliance for the marketing,
manufacturing and distribution of ultrasound contrast agents, including EchoGen,
in the U.S., Europe, Latin America, Canada, Africa, Middle East and certain
countries in the Pacific Rim. Under the alliance Abbott has the responsibility
for marketing, selling and distribution, and for technical marketing support
outside the U.S. The Company has the responsibility to provide technical
marketing support during the launch and commercialization of EchoGen in the U.S.
In November 1998, the Company and Daiichi Pharmaceutical Co., Ltd.
("Daiichi") terminated a licensing agreement for Daiichi's exclusive marketing
and distribution rights to EchoGen in Japan and in nine other countries in the
Pacific Rim. The Company is investigating potential partners for this territory.
See "Strategic Alliances."
There can be no assurance that the Company's strategic relationship with
Abbott will be successful or that the Company will be successful in obtaining
another partner to market EchoGen and QW7437 in the Pacific Rim territory. See
"Certain Factors That May Affect the Company's Business and Future Results -
Dependence on Third Parties for Funding, Clinical
Development and Distribution."
MANUFACTURING
The Company has utilized three outside FDA-certified organizations to
manufacture EchoGen under current Good Manufacturing Practices ("GMP")
requirements for the Company's use in preclinical and clinical studies and one
of these organizations to produce QW7437. The Company produces non-GMP batches
of EchoGen at its facilities in Bothell, Washington as part of the Company's
ongoing development of the product.
The Company has entered into an agreement with Abbott pursuant to which
Abbott has agreed to scale-up, manufacture and sell EchoGen to the Company at a
fixed price, subject to increases in the producer's price index, packaged in
final dosage form for a period of five years from the date of FDA approval,
subject to automatic renewal unless otherwise terminated by either party with 12
months prior notice. Abbott has produced EchoGen in commercial-scale lots for
use by the Company
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in its clinical trials in the U.S. EchoGen is manufactured from raw materials
supplied to Abbott by the Company. Under the agreement, the Company must
purchase certain of its requirements of EchoGen, and the Company has retained
the right to manufacture or to have a third party manufacture a portion of its
requirements. In addition, Abbott has agreed to supply a kit into which EchoGen
will be packaged along with other items used in the administration of the
product. The inability of Abbott or any alternative contract manufacturer to
manufacture and supply the Company with EchoGen or the kit would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Strategic Alliances" and "Certain Factors That May Affect the
Company's Business and Future Results."
The active chemical ingredients in EchoGen, DDFP and PEG Telomer B, a
surfactant, are manufactured by a limited number of vendors worldwide. In March
1998, the Company entered into a commercial supply agreement for one of these
raw materials. In the event that EchoGen is approved by the FDA, the Company is
obligated to purchase certain minimum quantities of the material over a
five-year period. The inability of this or any other vendors to supply raw
materials to the Company could delay the Company's manufacture of, or cause the
Company to cease the manufacturing of, EchoGen. Any such delay or cessation
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes the other raw
materials of EchoGen are readily available from various suppliers.
RESEARCH AND DEVELOPMENT
The Company currently conducts research and development activities at its
facilities in Bothell, Washington. The Company also engages in certain research,
preclinical studies and clinical development efforts at universities and other
institutions. The Company's primary research and development efforts are
directed at the development and application, including clinical trials, of
EchoGen, QW7437 and QW8184. QW8184 is the Company's first project in the
application of its emulsion technology for drug delivery applications. QW8184 is
a proprietary formulation of paclitaxel, the compound used in Taxol(R), a
oncology drug with annual worldwide sales of over $1.0 billion. Based on
preclinical studies to date, the Company believes its emulsion formulation of
paclitaxel may enable its administration in a bolus administration and with an
improved safety profile. Taxol is currently administered by infusion and
requires premedication with other drugs to minimize the impact of certain side
effects. In addition, the Company is conducting research in other applications
of its proprietary technology in the areas of ultrasound contrast agents and
intravascular oral, and pulmonary drug delivery.
The Company incurred expenses of approximately $10.5 million, $11.6 million
and $11.2 million on research and development in fiscal 1998, 1997 and 1996,
respectively.
STRATEGIC ALLIANCES
The Company's strategy is to enter into strategic alliances to facilitate
the development, manufacture and distribution of its products.
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ABBOTT LABORATORIES
In May 1993, the Company and Abbott, a worldwide manufacturer of health care
products, entered into a supply agreement relating to EchoGen. Under this
agreement, Abbott has agreed to develop the manufacturing process, assist the
Company in FDA submissions and manufacture and sell the product to the Company
for an initial five-year period after FDA approval, subject to automatic renewal
unless otherwise terminated by either party with 12 months prior notice. Abbott
is supplying the Company with most of its requirements for EchoGen clinical
trials. The Company has agreed to purchase a portion of the U.S. commercial
requirements of EchoGen upon receipt of FDA approval, subject to increases in
the producer's price index.
In May 1996, the Company entered into additional agreements with Abbott for
the marketing and sale of EchoGen in the U.S. The Company has primary
responsibility for clinical development, regulatory affairs, and medical and
technical marketing support of EchoGen, and Abbott has primary responsibility
for manufacturing and U.S. marketing and sales. Abbott has agreed to pay the
Company $31.0 million in license, clinical support and milestone payments
conditioned upon specific events, of which the Company had received $23.0
million as of December 31, 1998. After the FDA has approved the marketing of
EchoGen, for which there can be no assurance, the Company will receive 47% of
net EchoGen revenues in the U.S. - a portion of which the Company must use to
fund its responsibilities under the agreement. Subject to early termination, the
agreement spans the later of the life of the patents relating to EchoGen or the
introduction of a generic equivalent by a third party. Abbott can acquire the
rights to certain additional indications for EchoGen by making additional
clinical support payments. Abbott has paid to the Company $1.7 million and $2.1
million in 1998 and 1997, respectively, to support clinical trials for the
indications of stress echocardiography and prostate cancer. In addition, in
1996, Abbott paid $4.0 million for five year warrants to acquire 500,000 shares
of the Company's common stock at an exercise price of $16.00 per share.
In October 1996, the Company expanded its strategic alliance with Abbott by
signing an agreement for EchoGen that extends Abbott's licensed territory to
include Europe, Latin America, Canada, Middle East, Africa and certain
Asia/Pacific Rim countries. Under the agreement, Abbott has agreed to pay the
Company $34.6 million in payments conditioned upon the achievement of certain
regulatory and commercialization milestones (of which $12.6 million may be
offset against future royalty payments). As of December 31, 1998, the Company
had received $12.6 million under the agreement of which $5.6 million is
creditable against future royalties. Subject to early termination, the agreement
spans the later of the life of the patents relating to EchoGen in the countries
of the territory, 10 years from the date of the agreement, or the introduction
of a generic equivalent by a third party.
In January 1999, the Company amended its strategic alliance agreements with
Abbott for both the U.S. and international territories. The amendments redefined
future milestone payments under the agreements. Under the amended agreements,
there are $30.0 million of potential milestone payments remaining, of which
$9.55 million are conditioned upon the approval and first shipment of EchoGen
echocardiography indications in the U.S. and Europe; $9.55 million for approval
and first shipment of EchoGen radiology indications in the U.S. and Europe; and
$10.9 million conditioned upon achievement of annual sales targets in Abbott's
international territory. The amendments allow the Company to request prepayment
of radiology milestone payments in exchange for common stock of the Company at
the then fair market value. The amendments also
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reduced the royalty rates, that vary based on a combination of factors, on sales
of EchoGen by Abbott in its international territory to a range of 24% to 42%.
If the Company's relationship with Abbott were to terminate, it would have a
material adverse effect on the Company's business, financial condition and
results of operation. See "Certain Factors That May Affect the Company's
Business and Future Results - Dependence on Third Parties for Funding, Clinical
Development and Distribution."
DAIICHI PHARMACEUTICAL CO., LTD.
In April 1993 and March 1995, the Company and Daiichi entered into
agreements pursuant to which Daiichi was granted exclusive marketing and
distribution rights to EchoGen in the Pacific Rim countries of Japan, Taiwan,
The Peoples Republic of China, South Korea, Hong Kong, Thailand, Indonesia,
Singapore, Malaysia and the Philippines. In addition, in November 1993, the
Company issued a convertible subordinated debenture to Daiichi in the principal
amount of $3.0 million, which was converted into 462,857 shares of common stock
concurrently with the closing of the Company's initial public offering. In
November 1998, the Company and Daiichi terminated the licensing agreement and
the Company has no further obligation under the agreement. All of the product
rights to EchoGen have reverted back to the Company. As of the date of
termination, Daiichi had paid the Company option, license and milestone fees
totaling $12.8 million. The Company is currently investigating obtaining a new
partner for this territory.
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and other countries is a
significant factor in the production and marketing of the Company's products and
in its ongoing research and development activities. In order to undertake
clinical tests, to produce and to market products for human diagnostic or
therapeutic use, mandatory procedures and safety standards established by the
FDA and comparable agencies in foreign countries must be followed.
The standard process required by the FDA before a pharmaceutical agent may
be marketed in the U.S. includes (i) preclinical studies, (ii) submission to the
FDA of an application for an Investigational New Drug Application ("IND"), which
must become effective before human clinical trials may commence, (iii) adequate
and well-controlled human clinical trials to establish the safety and efficacy
of the drug in its intended application, (iv) submission to the FDA of an NDA
with respect to the drug, which application is not automatically accepted by the
FDA for consideration and (v) FDA approval of the NDA prior to any commercial
sale or shipment of the drug. In addition to obtaining FDA approval for each
product, each domestic drug manufacturing establishment must be registered or
licensed by the FDA. Domestic manufacturing establishments are subject to
inspections by the FDA and by other Federal, state and local agencies and must
comply with GMP requirements applicable to the production of pharmaceutical
agents.
Preclinical studies include laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of the product and
its formulation. The results of the preclinical studies are submitted to the FDA
as part of an IND, and unless the FDA objects, the IND will become effective 30
days following its receipt by the FDA. Clinical trials involve the
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administration of the drug to healthy volunteers or to patients under the
supervision of a qualified principal investigator. Clinical trials are conducted
in accordance with protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol is submitted to the FDA as part of the IND. Each
clinical study is approved and monitored by an independent Institutional Review
Board ("IRB") at the institution at which the study will be conducted. The IRB
will consider, among other things, ethical factors, informed consents, the
safety of human subjects and the possible liability of the institution.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. In Phase 1, the initial introduction of the drug to humans
or the first studies involving new routes of administration or unusual
conditions, such as stress echocardiography, the drug is tested for safety,
dosage tolerance, metabolism, distribution, excretion and clinical pharmacology
in healthy adult subjects. Phase 2 involves detailed evaluation of safety and
efficacy of the drug in a range of doses in patients with the disease or
condition being studied. Phase 3 trials consist of larger scale evaluation of
safety and efficacy and may require greater patient numbers, depending on the
clinical indications for which marketing approval is sought.
The process of completing clinical testing and obtaining FDA approval for a
new product is likely to take a number of years and require the expenditure of
substantial resources. The FDA may grant an unconditional approval of a drug for
a particular indication or may grant approval conditioned on further
post-marketing testing. The FDA also may conclude that the submission is not
adequate to support an approval and may require further clinical and preclinical
testing, re-submission of the NDA, and further time consuming review. Even after
initial FDA approval has been obtained, further studies may be required to
provide additional data on safety or to gain approval for the use of a product
as a treatment for clinical indications other than those for which the product
was approved initially. Also, the FDA may require post-marketing testing and
surveillance programs to monitor the drug's efficacy and side effects. Results
of these post-marketing programs may prevent or limit the further marketing of
the drug.
In August 1996, the Company submitted an NDA for EchoGen with the FDA based
on the data from the Phase 3 clinical trials for cardiology and radiology
indications. The FDA accepted the NDA as filed in September 1996. In October
1997, the Company was informed by the FDA that a Medical Imaging Drug Committee
Advisory meeting is not necessary to complete the review of the NDA for EchoGen.
In February 1998, the Company received an action letter from the FDA which
indicated that the review of the EchoGen NDA was completed and the application
was considered inadequate for approval, citing certain deficiencies in the
application. In August 1998, the Company submitted to the FDA an amendment of
the NDA and in October 1998, the Company submitted additional information
requested by the FDA. The Company received notice from the FDA that the
amendment filing was considered complete as of October 19, 1998. Under the Food
and Drug Administration Modernization Act, the FDA has up to 180 days to review
the amendment which has requested approval of EchoGen for echocardiography
indications. Once the FDA review is complete, the Company expects that the
agency will issue another action letter. No assurance can be given that the
Company will successfully address the deficiencies raised by the FDA or that the
FDA will ultimately approve the NDA. See "Certain Factors That May Affect the
Company's Business and Future Results - Uncertainty of Governmental Regulatory
Requirements; Lengthy Approval Process."
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Sales of pharmaceutical products outside of the U.S. are subject to
regulatory requirements that vary widely from country to country. In the E.U.,
the general trend has been towards coordination of common standards for clinical
testing of new drugs, leading to changes in various requirements imposed by each
E.U. country.
In November 1996, the Company submitted a MAA to the EMEA for EchoGen under
the new centralized "fast track" application procedures whereby a generally
binding approval is obtained by a single application, valid for all 15 nations
of the E.U., including the U.K., Ireland, France, Germany, Italy, Spain,
Portugal, Sweden, Finland, Denmark, Belgium, Luxembourg, the Netherlands, Greece
and Austria.
In March 1998, the EMEA's CPMP issued a positive opinion on EchoGen for use
as a transpulmonary echocardiographic contrast agent in patients with suspected
or established cardiovascular disease who have had previous inconclusive
non-contrast studies. In July 1998, the EMEA ratified the CPMP recommendation
and granted a marketing authorization for EchoGen in the 15 countries of the
E.U. The Company and its marketing partner, Abbott, are preparing for the
commercialization of EchoGen in the E.U. after necessary pricing, reimbursement
and manufacturing modification approvals are received. However, there can be no
assurance that the necessary approvals will be obtained in a timely manner, if
at all. See "Certain Factors That May Affect the Company's Business and Future
Results - Uncertainty of Governmental Regulatory Requirements; Lengthy Approval
Process."
The level of regulation in other foreign jurisdictions varies widely. The
time required to obtain regulatory approval from comparable regulatory agencies
in each foreign country may be longer or shorter than that required for FDA or
EMEA approval. In addition, in certain foreign markets, the Company may be
subject to governmentally mandated prices for EchoGen.
The Company is and may be subject to regulation under state and Federal law
regarding occupational safety, laboratory practices, handling of chemicals,
environmental protection and hazardous substance control. The Company also will
be subject to other present and possible future local, state, federal and
foreign regulations.
COMPETITION
The health care industry is characterized by extensive research efforts and
rapid technological change. Competition in the development of ultrasound imaging
contrast agents is intense and expected to increase. Although there are
currently only two FDA approved ultrasound imaging contrast agents in the U.S.
for certain cardiology applications and, to the knowledge of the Company, only
one other ultrasound imaging agent has been submitted to the FDA for approval,
the Company believes that other medical and pharmaceutical companies are in
clinical trials with ultrasound contrast agents. In addition, there are two
ultrasound contrast agents, other than EchoGen, approved for marketing in
certain countries in Europe for certain cardiology and radiology indications and
the Company believes that other agents are in clinical trials. The Company also
believes that other medical and pharmaceutical companies will compete with the
Company in areas of research and development, acquisition of products and
technology licenses, and the manufacturing and marketing
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of ultrasound contrast agents. The Company expects that competition in the
ultrasound contrast imaging agent field will be based primarily on efficacy,
safety, ease of administration, breadth of approved indications and physician,
healthcare payor and patient acceptance. Although the Company believes that if
and when EchoGen is approved for commercial sale in the U.S., EchoGen will be
well positioned to compete successfully, there can be no assurance that the
Company will be able to do so. Many of the Company's competitors and potential
competitors have substantially greater financial, technical and human resources
than the Company and have substantially greater experience in developing
products, obtaining regulatory approvals and marketing and manufacturing medical
products. Accordingly, these competitors may succeed in obtaining FDA or foreign
jurisdictional approval for their products more rapidly than the Company.
Historically, products that reach the market first generally have a market
advantage. In addition, other technologies or products such as advancements in
ultrasound equipment may be developed that have an entirely different approach
or means of accomplishing the enhancement of ultrasound imaging or other imaging
modalities that would render the Company's technology and products uncompetitive
or obsolete.
PATENTS AND PROPRIETARY RIGHTS
The Company considers the protection of its technology to be important to
its business. In addition to seeking U.S. patent protection for many of its
inventions, the Company is seeking patent protection in certain foreign
countries in order to protect its proprietary rights to inventions. The Company
also relies upon trade secrets, know-how, continuing technological innovations
and licensing opportunities to develop and maintain its competitive position.
The Company's success will depend, in part, on its ability to obtain
patents, defend patents and protect trade secrets. The Company has filed patent
applications in the U.S. and in over 40 foreign countries relating to its
principal technologies. In the U.S., 11 patents have been issued to the Company,
the claims of which are primarily directed to ultrasound contrast media which
include fluorine-containing chemicals (such as EchoGen) as well as methods of
making and using these media. The patent position of medical and pharmaceutical
companies is highly uncertain and involves complex legal and factual questions.
There can be no assurance that any claims which are included in pending or
future patent applications will be issued, that any issued patents will provide
the Company with competitive advantages or will not be challenged by third
parties, or that the existing or future patents of third parties will not have
an adverse effect on the ability of the Company to commercialize its products.
Furthermore, there can be no assurance that other companies will not
independently develop similar products, duplicate any of the Company's products
or design around patents that may be issued to the Company. Litigation may be
necessary to enforce any patents issued to the Company or to determine the scope
and validity of others' proprietary rights in court or administrative
proceedings. Any litigation or administrative proceeding could result in
substantial costs to the Company and distraction of the Company's management. An
adverse ruling in any litigation or administrative proceeding could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has been involved in administrative
proceedings and has initiated a patent infringement suit against one of its
competitors. See "Legal Proceedings" and "Certain Factors That May Affect the
Company's Business and Future Results - Dependence on Patents and Proprietary
Rights."
The commercial success of the Company also will depend in part on not
infringing patents issued
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to competitors. There can be no assurance that patents belonging to competitors
or others will not require the Company to alter its products or processes, pay
licensing fees or cease development of its current or future products. Any
litigation regarding infringement could result in substantial costs to the
Company and distraction of the Company's management, and any adverse ruling in
any litigation could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, there can be no
assurance that the Company will be able to license other technology that it may
require at a reasonable cost or at all. Failure by the Company to obtain a
license to any technology that it may require to commercialize its products
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, to determine the priority of
inventions and the ultimate ownership of patents, the Company may participate in
interference, reissue or re-examination proceedings conducted by the U.S. Patent
and Trademark Office ("PTO") or in proceedings before foreign agencies with
respect to any of its existing patents or patent applications or any future
patents or applications, any of which could result in loss of ownership of
existing, issued patents, substantial costs to the Company and distraction of
the Company's management. Two of the Company's 11 U.S. patents, U.S. 5,573,751
('751) and U.S. 5,558,094 ('094) have been re-examined by the PTO in four
separate proceedings. In December 1998, the Company announced it received
decisions from the PTO indicating the patentability of claims in all four
re-examination proceedings. The PTO has determined that a number of the claims
included in the original '094 and '751 patents as well as some claims that were
amended will be confirmed. Certain claims, which included reference to
fluorinated chemicals other than perfluoropropane, perfluorobutane and
perfluoropentane, were cancelled during the re-examination process. See "Legal
Proceedings."
The Company has obtained registered trademarks for its corporate name and
for EchoGen in the U.S. and certain foreign countries. There can be no assurance
that the registered or unregistered trademarks or trade names of the Company may
not infringe upon third party rights or will be acceptable to regulatory
agencies such as the FDA. The requirement to change the trademarks or trade name
of the Company could entail significant expenses and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also relies on unpatented trade secrets, proprietary know-how
and continuing technological innovation which it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators, employees
and consultants. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets or know-how will not otherwise become known or be
independently discovered by competitors. Further, there can be no assurance that
the Company will be able to protect its trade secrets or that others will not
independently develop substantially equivalent proprietary information and
techniques.
PRODUCT LIABILITY INSURANCE
The clinical testing, manufacturing and marketing of the Company's products
may expose the Company to product liability claims. The Company maintains
liability insurance for claims arising from the use of its products in clinical
trials with limits of $5.0 million per claim and in the aggregate. Although the
Company has never been subject to a product liability claim, there can be no
assurance that the coverage limits of the Company's insurance policies will be
adequate or that
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one or more successful claims brought against the Company would not have a
material adverse effect upon the Company's business, financial condition and
results of operations. Further, if EchoGen is approved by the FDA for marketing,
there can be no assurance that adequate product liability insurance will be
available, or if available, that it will be available at a reasonable cost. Any
adverse outcome resulting from a product liability claim could have a material
adverse effect on the Company's business, financial condition and results of
operations.
HUMAN RESOURCES
At March 1, 1999, the Company had 54 employees, 37 engaged in research and
development, regulatory, clinical and manufacturing activities, and 17 in
marketing and administration. The Company considers its relations with its
employees to be good, and none of its employees is a party to a collective
bargaining agreement.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS
FORWARD-LOOKING STATEMENTS. THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, AND THE COMPANY INTENDS THAT SUCH FORWARD-LOOKING STATEMENTS BE
SUBJECT TO THE SAFE HARBORS CREATED THEREBY. EXAMPLES OF THESE FORWARD-LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, (i) THE SUBMISSION OF APPLICATIONS
FOR AND THE TIMING OR LIKELIHOOD OF MARKETING APPROVALS FOR ONE OR MORE
INDICATIONS, (ii) MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS, (iii) THE
COMPANY'S ANTICIPATED FUTURE CAPITAL REQUIREMENTS AND THE TERMS OF ANY CAPITAL
FINANCING, (iv) THE PROGRESS AND RESULTS OF CLINICAL TRIALS, (v) THE TIMING AND
AMOUNT OF FUTURE MILESTONE PAYMENTS, PRODUCTS REVENUES AND EXPENSES; AND (vi)
THE ANTICIPATED OUTCOME OR FINANCIAL IMPACT OF LITIGATION. WHILE THESE
STATEMENTS MADE BY THE COMPANY ARE BASED ON MANAGEMENT'S CURRENT BELIEFS AND
JUDGMENT, THEY ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO VARY. IN EVALUATING SUCH STATEMENTS, STOCKHOLDERS AND INVESTORS
SHOULD SPECIFICALLY CONSIDER A NUMBER OF FACTORS AND ASSUMPTIONS, INCLUDING
THOSE DISCUSSED IN THE TEXT AND THE FINANCIAL STATEMENTS AND THEIR ACCOMPANYING
FOOTNOTES IN THIS REPORT AND THE RISK FACTORS SET FORTH BELOW AND AS DETAILED
FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FOLLOWING FACTORS, AMONG OTHERS.
Uncertainty of Governmental Regulatory Requirements; Lengthy Approval
Process. The Company is subject to uncertain governmental regulatory
requirements and a lengthy approval process for its products prior to any
commercial sales of its products. The development and commercial use of the
Company's products is regulated by the FDA, EMEA and comparable foreign
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regulatory agencies. The regulatory approval process for new ultrasound contrast
agents, including required preclinical studies and clinical trials, is lengthy
and expensive. The Company has filed for approval of only one product, EchoGen,
with the FDA and the EMEA. In February 1998, the Company received an action
letter from the FDA which indicated that the review of the EchoGen NDA was
completed and the application was considered inadequate for approval, citing
certain deficiencies in the application. In August 1998, the Company submitted
to the FDA an amendment of the NDA and in October 1998, the Company submitted
additional information requested by the FDA. The Company has received notice
from the FDA that the amendment filing was considered complete as of October 19,
1998. Under the Food and Drug Administration Modernization Act, the FDA has up
to 180 days to review the amendment which has requested approval of EchoGen for
echocardiography indications. Once the FDA review is complete, the Company
expects that the agency will issue another action letter. No assurance can be
given that the Company will successfully address the deficiencies raised by the
FDA or that the FDA will ultimately approve the NDA. In March 1998, the EMEA's
CPMP issued a positive opinion on EchoGen for use as a transpulmonary
echocardiographic contrast agent in patients with suspected or established
cardiovascular disease who have had previous inconclusive non-contrast studies.
In July 1998, the EMEA ratified the CPMP recommendation and granted a marketing
authorization for EchoGen in the 15 countries of the E.U. The Company and its
marketing partner, Abbott, are preparing for the commercialization of EchoGen in
the E.U. after necessary pricing, reimbursement and manufacturing modification
approvals are received. However, there can be no assurance that the necessary
approvals will be obtained in a timely manner, if at all.
Abbott is responsible for regulatory filings in all other jurisdictions of
it's licensed territories, none of which have been approved. The Company and
Abbott may encounter significant delays or excessive costs in its efforts to
secure necessary approvals. There can be no assurance that the necessary FDA and
other regulatory approvals will be obtained in a timely manner, if at all. The
Company cannot predict if or when any of its products under development will be
commercialized. See "Government Regulations."
Unproven Safety and Efficacy; Uncertainty of Clinical Trials. The Company
currently has only two products, EchoGen and QW7437, in human clinical trials.
Although the Company has completed the necessary pivotal clinical trials it
believes will satisfy the requirements for approval of EchoGen, the FDA issued
an action letter in February 1998 indicating that the NDA was inadequate for
approval, citing certain deficiencies in the application. In August 1998, the
Company submitted to the FDA an amendment of the NDA and in October 1998, the
Company submitted additional information requested by the FDA. There can be no
assurance that the FDA will not require additional clinical trials or that such
trials if begun, will demonstrate any efficacy or will be completed successfully
in a timely manner, if at all. See "Status of Clinical Trials" and "Government
Regulations." In addition, EMEA approval and the amended FDA filing for approval
of EchoGen only relates to certain cardiology applications. The Company believes
EchoGen may be used in other applications, such as liver, kidney, peripheral
vascular, prostate and stress echocardiology exams. Each of those applications
will require specific clinical studies to support submissions to regulatory
agents for expanded labeling in those applications which will be lengthy and
expensive. Failure to complete successfully any of its clinical trials on a
timely basis or at all would have a material adverse effect on the Company's
business, financial condition and results of operations. In clinical trials in
humans to date adverse events related to the final formulation of EchoGen have
been
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infrequent, generally mild and transient, including feelings of warmth, taste
perversion, headache and nausea. There can be no assurance that more serious
side effects will not be encountered in future trials.
Future U.S. or foreign legislative or administrative actions also could
prevent or delay regulatory approval of the Company's products. Even if
regulatory approvals are obtained, they may include significant limitations on
the indicated uses for which a product may be marketed. A marketed product also
is subject to continual FDA, EMEA and other regulatory agency review and
regulation. Later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market, as well as
possible civil or criminal sanctions. In addition, if marketing approval is
obtained, the FDA, EMEA or other regulatory agency may require post-marketing
testing and surveillance programs to monitor the drug's efficacy and side
effects. Results of these post-marketing programs may prevent or limit the
further marketing of the monitored drug.
History of Operating Losses; Uncertainty of Future Financial Results. The
Company's future financial results are uncertain. Although the Company reported
net income of $1.0 million and $1.7 million for the years ended December 31,
1997 and 1996, respectively, the Company reported a net loss of $11.2 million in
1998 and has experienced significant losses since its inception in 1991, and is
expected to incur net losses in the foreseeable future. These losses have
resulted primarily from expenses associated with the Company's research and
development activities, including preclinical and clinical trials, and general
and administrative expenses. The Company anticipates that its operating expenses
will increase significantly in the future as the Company prepares for the
anticipated commercialization of EchoGen and increases its research and
development expenditures on new products. However, there can be no assurance
that the Company will obtain regulatory approvals necessary in order to generate
product revenues. If the Company is unable to generate significant product
revenues, it may incur substantial losses. Moreover, even if the Company
generates significant product revenues, there can be no assurance that the
Company will be able to sustain profitability. The Company's results of
operations have varied and will continue to vary significantly from quarter to
quarter and depend on, among other factors, the timing of fees and milestone
payments made by Abbott, the entering into of new product license agreements by
the Company, the timing and costs of clinical trials conducted by the Company,
and costs related to obtaining, defending and enforcing patents.
Uncertainty of Market Acceptance. To date, only two contrast agents for use
in ultrasound imaging have received FDA approval, and the general market
acceptance of contrast agents for ultrasound imaging has not been rapid. If the
existing approved contrast agents continue to fail to gain significant market
acceptance it could make the market acceptance of EchoGen more difficult. Market
acceptance of EchoGen may depend upon a number of factors, including efficacy,
safety, price and ease of administration. In addition, market acceptance may
depend upon the Company's ability to educate the medical community on the
diagnostic and clinical efficacy of ultrasound contrast agents in general and
EchoGen in particular and the ability to obtain reimbursement from third party
payors. Market acceptance may also depend upon the clinical utility and cost
effectiveness of EchoGen. There can be no assurance that EchoGen, if
successfully developed and commercialized, will gain market acceptance. Failure
of EchoGen to gain market acceptance would
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have a material adverse effect on the Company's business, financial condition
and results of operations.
Future Capital Requirements and Uncertainty of Additional Funding. The
Company's development efforts to date have consumed substantial amounts of cash
and the Company has generated only limited revenues from payments received from
its collaborative partners. There can be no assurance that the Company will
continue to receive such payments in the future. The Company expects that its
cash requirements will increase significantly in the future, and there can be no
assurance that such cash requirements will be met on satisfactory terms, if at
all. The Company's future capital requirements depend on many factors including
the ability of the Company to obtain and retain continued funding from third
parties under collaborative agreements, the ability to maintain the Company's
bank line of credit, the time and costs required to gain regulatory approvals,
the progress of the Company's research and development programs, clinical
trials, the costs of filing, prosecuting and enforcing patents, patent
applications, patent claims and trademarks, the costs of marketing and
distribution, the status of competing products, and the market acceptance and
third-party reimbursement of the Company's products, if and when approved. There
can be no assurance that additional regulatory approvals will be achieved or
achieved in the near-term or that, in any event, additional financing will be
available on acceptable terms, if at all. Any equity financing would likely
result in substantial dilution to existing stockholders. If the Company is
unable to raise additional financing, the Company would be required to curtail
or delay the development of its products and new product research and
development.
Dependence on Third Parties for Funding, Clinical Development and
Distribution. The Company is dependent on Abbott for a variety of activities,
including conducting foreign clinical trials, obtaining required foreign
regulatory approvals and manufacturing, marketing and distributing its products.
The Company has entered into a number of agreements with Abbott for the
manufacturing, marketing and distribution of EchoGen in all territories of the
world except for Japan and nine other Pacific Rim countries. The Company is
dependent on Abbott to fund a substantial portion of the Company's operating
expenses, to manufacture EchoGen for clinical trials and for commercial sale, if
approved, to conduct clinical trials and obtain regulatory approval in its
territories outside of the U.S. and the E.U., and to market and distribute
EchoGen in its territories. There can be no assurance that the collaboration
will continue or be successful. Abbott has the right, in its sole discretion, to
terminate the marketing collaboration at any time with 12 months notice to the
Company. If the agreements with Abbott are terminated or the collaboration is
not successful, the Company will not receive scheduled milestone and funding
payments and will be required to identify an alternative collaborative partner,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Strategic Alliances."
In November 1998, the Company and Daiichi terminated a licensing agreement
for Daiichi's exclusive marketing and distribution rights to EchoGen in Japan
and in nine other countries in the Pacific Rim. The Company is investigating
potential partners for this territory. There can be no assurance that the
Company will be successful in obtaining another partner to market EchoGen and
QW7437 in the Pacific Rim territory. See "Strategic Alliances."
Dependence on Patents and Proprietary Rights. The Company's success will
depend, in part, on its ability to obtain patents, defend patents and protect
trade secrets. The Company has filed
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patent applications in the U.S. and in over 40 foreign countries relating to its
principal technologies. In the U.S., 11 patents have been issued to the Company,
the claims of which are primarily directed to ultrasound contrast media which
include fluorine-containing chemicals (such as EchoGen) as well as methods of
making and using these media. The patent position of medical and pharmaceutical
companies is highly uncertain and involves complex legal and factual questions.
There can be no assurance that any claims which are included in pending or
future patent applications will be issued, that any issued patents will provide
the Company with competitive advantages or will not be challenged by third
parties, or that the existing or future patents of third parties will not have
an adverse effect on the ability of the Company to commercialize its products.
Furthermore, there can be no assurance that other companies will not
independently develop similar products, duplicate any of the Company's products
or design around patents that may be issued to the Company. Litigation may be
necessary to enforce any patents issued to the Company or to determine the scope
and validity of others' proprietary rights in court or administrative
proceedings. Any litigation or administrative proceeding could result in
substantial costs to the Company and distraction of the Company's management. An
adverse ruling in any litigation or administrative proceeding could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has initiated a patent infringement suit
against one of its competitors. See "Legal Proceedings."
The commercial success of the Company also will depend in part on not
infringing patents issued to competitors. There can be no assurance that patents
belonging to competitors will not require the Company to alter its products or
processes, pay licensing fees or cease development of its current or future
products. Any litigation regarding infringement could result in substantial
costs to the Company and distraction of the Company's management, and any
adverse ruling in any litigation could have a material adverse effect on the
Company's business, financial condition and results of operations. Further,
there can be no assurance that the Company will be able to license other
technology that it may require at a reasonable cost or at all. Failure by the
Company to obtain a license to any technology that it may require to
commercialize its products would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, to
determine the priority of inventions and the ultimate ownership of patents, the
Company may participate in interference, reissue or re-examination proceedings
conducted by the PTO or in proceedings before foreign agencies with respect to
any of its existing patents or patent applications or any future patents or
applications, any of which could result in loss of ownership of existing, issued
patents, substantial costs to the Company and distraction of the Company's
management. Two of the Company's 11 U.S. patents, U.S. 5,573,751 ('751) and U.S.
5,558,094 ('094) have been re-examined by the PTO in four separate proceedings.
In December 1998, the Company announced it received decisions from the PTO
indicating the patentability of claims in all four re-examination proceedings.
The PTO has determined that a number of the claims included in the original '094
and '751 patents as well as some claims that were amended will be confirmed.
Certain claims, which included reference to fluorinated chemicals other than
perfluoropropane, perfluorobutane and perfluoropentane, were cancelled during
the re-examination process. See "Legal Proceedings."
Competition and Risk of Technological Obsolescence. The health care industry
is characterized by extensive research efforts and rapid technological change.
Competition in the development of ultrasound imaging contrast agents is intense
and expected to increase. Although there is currently only two FDA approved
ultrasound imaging contrast agents in the U.S. for certain cardiology
21
<PAGE> 22
applications and, to the knowledge of the Company, only one other ultrasound
imaging agent has been submitted to the FDA for approval, the Company believes
that other medical and pharmaceutical companies are in clinical trials with
ultrasound contrast agents. The Company also believes that other medical and
pharmaceutical companies will compete with the Company in the areas of research
and development, acquisition of products and technology licenses, and the
manufacturing and marketing of ultrasound contrast agents. The Company expects
that competition in the ultrasound contrast imaging agent field will be based
primarily on efficacy, safety, ease of administration, breadth of approved
indications and physician, healthcare payor and patient acceptance. Although the
Company believes that if and when EchoGen is approved for commercial sale,
EchoGen will be well positioned to compete successfully, there can be no
assurance that the Company will be able to do so. Many of the Company's
competitors and potential competitors have substantially greater financial,
technical and human resources than the Company and have substantially greater
experience in developing products, obtaining regulatory approvals and marketing
and manufacturing medical products. Accordingly, these competitors may succeed
in obtaining FDA approval for their products more rapidly than the Company. In
addition, other technologies or products such as advancements in ultrasound
equipment may be developed that have an entirely different approach or means of
accomplishing the enhancement of ultrasound imaging or other imaging modalities
that would render the Company's technology and products uncompetitive or
obsolete.
Limited Manufacturing Experience; Dependence on Limited Contract
Manufacturers and Suppliers. The Company currently relies primarily on Abbott to
produce EchoGen for research and development and clinical trials. Abbott's
manufacturing site is subject to routine FDA and other regulatory inspections of
its manufacturing practices. In addition there are a limited number of contract
manufacturers that operate under GMP regulations, as required by the FDA. Unless
the Company develops an in-house manufacturing capability or is able to identify
and qualify alternative contract manufacturers, it will be entirely dependent on
Abbott for the manufacture of EchoGen. There can be no assurance that the
Company's reliance on Abbott for the manufacture of its products will not result
in interruptions, delays or stoppages in the supply of EchoGen. The active
chemical ingredients in EchoGen, DDFP and PEG Telomer B, a surfactant, are
manufactured by a limited number of vendors worldwide. The inability of these
vendors to supply medical-grade materials to the Company could delay the
Company's manufacture of, or cause the Company to cease the manufacturing of,
EchoGen. Any such delay or cessation could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Manufacturing" and "Strategic Alliances."
Lack of Marketing and Sales Experience. The Company has no experience in
marketing, sales and distribution. The Company's strategy is to market EchoGen
through its established strategic alliances and distribution arrangements with
Abbott. There can be no assurance that the Company will be successful in
maintaining these arrangements or that Abbott will be successful in marketing
and selling the Company's products. The Company's agreement with Abbott requires
the Company to provide technical marketing support to Abbott's sales, marketing
and distribution activities in the U.S. There can be no assurance that the
Company will be successful in establishing technical support capability. If the
Company does not provide adequate technical support, Abbott can choose to take
over the technical support responsibilities and SONUS would be required to
negotiate a lower royalty rate with Abbott to reflect the reduced
responsibilities.
22
<PAGE> 23
Limitations on Third-Party Reimbursement. The Company's ability to
successfully commercialize EchoGen will depend in part upon the extent to which
reimbursement of the cost of EchoGen and related treatments will be available
from domestic and foreign health administration authorities, private health
insurers and other payor organizations. Third party payors are increasingly
challenging the price of medical products and services or restricting the use of
certain procedures in an attempt to limit costs. Further, significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and there can be no assurance that adequate third party coverage will
be available. In certain foreign markets, the Company may be subject to
governmentally mandated prices for EchoGen. If adequate reimbursement is not
provided by governments and third party payors for the Company's potential
products or if adverse pricing is mandated by foreign governments, the Company's
business, financial condition and results of operations would be materially
adversely affected.
Continued Listing on the Nasdaq National Market. The Company is
currently listed on the Nasdaq National Market under the symbol "SNUS." For
continued inclusion on the Nasdaq National Market, a company must meet a net
tangible asset test and a public float test. In addition, Nasdaq requires a
minimum bid price of $1.00 per share for continued listing. As of December 31,
1998, the Company had net tangible assets of approximately $7.5 million. In the
event that the Company fails to satisfy the listing standards on a continuous
basis, the Company's Common Stock may be removed from listing on the Nasdaq
National Market. If the Company's Common Stock is delisted from the Nasdaq
National Market, trading of the Company's Common Stock, if any, would be
conducted in the over-the-counter market in the so-called "pink sheets" or, if
available, the NASD's "Electronic Bulletin Board." As a result, stockholders
could find it more difficult to dispose of, or to obtain accurate quotations as
to the value of, the Company's Common Stock and the trading price per share
could be reduced.
Dependence on Key Employees. The Company is highly dependent on its
founder and Chief Executive Officer, Steven C. Quay, M.D., Ph.D., its President
and Chief Operating Officer, Michael A. Martino, and its Chief Financial
Officer, Gregory Sessler. The loss of any one or more of these individuals or
the inability to recruit and retain qualified scientific personnel to perform
research and development and qualified management personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to attract and retain such personnel on acceptable terms, if at all, given the
competition for experienced scientists and other personnel among numerous
medical and pharmaceutical companies, universities and research institutions.
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market could have an adverse effect on the market price of
the Common Stock. Shares of Common Stock that have been purchased in the open
market or pursuant to a registration statement are freely tradable without
restriction or further registration under the Securities Act of 1933 (the
"Securities Act"), unless purchased by "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act. The remaining shares of the
Company are "restricted securities," as that term is defined in Rule 144.
Restricted securities may be sold in the public market only if registered or
pursuant to an exemption from registration, such as Rule 144 under the
Securities Act. Restricted securities that are held in excess of two years are
generally freely tradable under Rule 144, unless such shares are owned by
affiliates. Shares of the Company's Common Stock held by affiliates of the
Company are eligible for sale under Rule 144 subject to the volume and other
restrictions of Rule 144. As of March 5, 1999, 1,256,966 shares were held by
affiliates of the Company. Shares held by affiliates will become freely
tradable under Rule 144 three months after the affiliate status of such
person terminates.
23
<PAGE> 24
ITEM 2. PROPERTIES
The Company currently leases approximately 27,000 square feet of laboratory
and office space in a single facility in Bothell, Washington. The lease expires
in April 2002 and includes an option to extend the term of the lease for three
years. The Company believes that this facility will be adequate to meet its
projected needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In January 1998, the Company announced that it had filed a patent
infringement action in the U.S. District Court in Seattle, Washington, against
Molecular Biosystems Inc. ("MBI") and Mallinckrodt, Inc. The suit alleges that
one of MBI's ultrasound contrast agents infringes one or more of the Company's
patents. MBI has filed counterclaims alleging that the patents asserted by the
Company are invalid and not infringed, and that the Company has made false
public statements and engaged in other actions intended to damage MBI and one of
its ultrasound contrast agents. The Company does not believe there is any merit
to these counterclaims and intends to defend its position vigorously. In October
1998, the court granted the Company's motion to stay the litigation until the
PTO had completed its re-examination of the patents in this lawsuit (see below).
The stay was lifted in January 1999. A trial date has been set for this lawsuit
in February 2000.
Four separate re-examination proceedings directed to the two SONUS patents
at issue in the patent infringement lawsuit, U.S. 5,558,094 ('094) and U.S.
5,573,751 ('751) were initiated by the PTO beginning in July 1997 at the request
of MBI. In December 1998, the Company announced it received decisions from the
PTO indicating the patentability of claims in all four re-examination
proceedings. The PTO has determined that a number of the claims included in the
original '094 and '751 patents as well as some claims that were amended will be
confirmed. Certain claims, which included reference to fluorinated chemicals
other than perfluoropropane, perfluorobutane and perfluoropentane, were
cancelled during the re-examination process.
In August 1998, various class action complaints were filed against the
Company in the Superior Court of Washington and in the U.S. District Court for
the Western District of Washington against the Company and certain of its
officers and directors, alleging violations of Washington State and U.S.
securities laws. The Company has moved to dismiss and stay the State court
action and expects to move to dismiss the federal actions. The Company does not
believe there is any merit to the claims in these actions and intends to defend
its position vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
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<PAGE> 25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
The Company's common stock first began trading on the Nasdaq National
Market under the symbol SNUS on October 12, 1995. No cash dividends have been
paid on the common stock and the Company does not anticipate paying any cash
dividends in the foreseeable future. As of March 5, 1999, there were 146
stockholders of record and approximately 6,500 beneficial stockholders of the
Company's common stock. The high and low sales prices of the Company's common
stock as reported by Nasdaq are as follows:
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1997
- ----
First Quarter 34 3/4 25 1/8
Second Quarter 31 21 3/4
Third Quarter 46 3/4 25 1/2
Fourth Quarter 46 7/8 31 5/8
1998
- ----
First Quarter 40 1/2 17 3/4
Second Quarter 25 1/4 9 3/4
Third Quarter 17 6
Fourth Quarter 12 5/8 3 3/8
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ........................ $ 5,100 $18,900 $16,600 $ 4,500 $ 1,053
Total operating expenses ........ 17,012 18,763 14,988 9,416 9,259
Net income (loss) ............... (11,173) 1,011 1,722 (5,939) (8,897)
Net income (loss) per share:
Basic ...................... $ (1.30) $ 0.12 $ 0.20 $ (1.81) $ (4.19)
Diluted .................... $ (1.30) $ 0.11 $ 0.19 $ (1.81) $ (4.19)
Shares used in calculation of net
income (loss) per share:
Basic ...................... 8,622 8,565 8,481 3,281 2,122
Diluted .................... 8,622 9,580 9,064 3,281 2,122
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities.... $16,955 $26,571 $25,131 $ 8,221 $ 1,644
Total assets ..................... 18,818 28,946 26,762 19,646 3,195
Long-term liabilities ............ 2,049 939 240 468 7,403
Stockholders' equity (deficit).... 7,495 18,505 16,877 10,947 (13,041)
</TABLE>
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<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis set forth below contains trend analysis,
discussions of regulatory approval and other forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statement as a result of the following factors, among others: uncertainty of
governmental regulatory requirements; lengthy approval process; unproven safety
and efficacy; uncertainty of clinical trials; history of operating losses;
uncertainty of future financial results; uncertainty of market acceptance;
future capital requirements and uncertainty of additional funding; dependence on
third parties for funding, clinical development and distribution; dependence on
patents and proprietary rights; competition and risk of technological
obsolescence; limited manufacturing experience; dependence on limited contract
manufacturers and suppliers; lack of marketing and sales experience; and
limitations on third-party reimbursement. See "Business -- Certain Factors That
May Affect the Company's Business and Future Results."
OVERVIEW
SONUS Pharmaceuticals, Inc. (the "Company") is engaged in the research,
development and commercialization of proprietary ultrasound contrast agents and
drug delivery systems based on its proprietary technology. The Company's
products are being developed for use in the diagnosis and treatment of heart
disease, cancer and other debilitating conditions. The Company has financed its
research and development and clinical trials through payments received under
agreements with its collaborative partners, private equity and debt financings,
and an initial public offering ("IPO") of common stock completed in October
1995. Clinical trials of the Company's initial ultrasound contrast product under
development, EchoGen(R) (perflenapent injectable emulsion), began in January
1994. In 1996, the Company filed a New Drug Application ("NDA") with the U.S.
Food and Drug Administration ("FDA") for EchoGen as well as a Marketing
Authorization Application ("MAA") with the European Medicines Evaluation Agency
("EMEA").
In February 1998, the Company received an action letter from the FDA which
indicated that the review of the EchoGen NDA was completed and the application
was considered inadequate for approval, citing certain deficiencies in the
application. In August 1998, the Company submitted to the FDA an amendment of
the NDA and in October 1998, the Company submitted additional information
requested by the FDA. The Company has received notice from the FDA that the
amendment filing was considered complete as of October 19, 1998. Under the Food
and Drug Administration Modernization Act, the FDA has up to 180 days to review
the amendment which has requested approval of EchoGen for echocardiography
indications. Once the FDA review is complete, the Company expects that the
agency will issue another action letter.
In March 1998, the EMEA's Committee for Proprietary Medicinal Products
("CPMP") issued a positive opinion on EchoGen for use as a transpulmonary
echocardiographic contrast agent in patients with suspected or established
cardiovascular disease who have had previous inconclusive non-contrast studies.
On July 20, 1998, the EMEA ratified the CPMP recommendation and granted a
marketing authorization for EchoGen in the 15 countries of the European Union
("E.U."). The Company and its marketing partner, Abbott Laboratories ("Abbott"),
are preparing for the commercialization of EchoGen in the E.U.
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<PAGE> 27
In May 1996, the Company formed a strategic alliance with Abbott for
marketing and selling of ultrasound contrast agents, including EchoGen, in the
U.S. Under the agreement, Abbott agreed to make certain payments to the Company,
primarily conditioned upon the achievement of milestones, of which $23.0 million
has been paid as of December 31, 1998. In addition, Abbott purchased in May
1996, for $4.0 million, warrants to acquire 500,000 shares of common stock of
the Company. The warrants are exercisable over five years at $16.00 per share.
In October 1996, the Company and Abbott entered into an agreement expanding
Abbott's territory to include Europe, Latin America, Canada, Middle East, Africa
and certain Asia/Pacific countries. Under the October 1996 agreement, Abbott has
agreed to pay the Company certain additional license and milestone payments, a
portion of which will be credited against future royalties once EchoGen is
approved for commercial sale. As of December 31, 1998, $12.6 million has been
paid to the Company by Abbott under the October 1996 agreement of which $5.6
million is creditable against future royalties.
In January 1999, the Company amended its strategic alliance agreements
with Abbott for both the U.S. and international territories. The amendments
redefine future milestone payments under the agreements. Under the amended
agreements, there are $30.0 million of potential milestone payments remaining,
of which $9.55 million are conditioned upon the approval and first shipment of
EchoGen echocardiography indications in the U.S. and Europe; $9.55 million for
approval and first shipment of EchoGen radiology indications in the U.S. and
Europe; and $10.9 million conditioned upon achievement of annual sales targets
in Abbott's international territory. The amendments allow the Company to request
prepayment of radiology milestone payments in exchange for the issuance of
common stock of the Company at the then fair market value. The amendments also
reduce the royalty rates on sales of EchoGen by Abbott in its international
territory that range, based on a combination of factors, from 24% to 42%. The
U.S. royalty rate of 47% and the aggregate amount of U.S. and international
milestone payments were not changed.
In March 1995, the Company granted Daiichi Pharmaceutical Co., Ltd.
("Daiichi"), exclusive marketing and distribution rights to EchoGen in Japan and
in certain other countries in the Pacific Rim. In November 1998, the Company and
Daiichi terminated the licensing agreement and the Company has no further
obligation under the agreement. As of the date of termination, Daiichi paid the
Company option, license and milestone fees totaling $12.8 million. There can be
no assurance that new collaborative partners will be found to develop and
distribute EchoGen in Japan and the other countries in the Pacific Rim.
The Company's results of operations have varied and will continue to vary
significantly from quarter to quarter and depend on, among other factors, the
timing of milestone payments made by Abbott, the timing of regulatory approvals,
the entering into additional product license agreements by the Company, and the
timing and costs of the clinical trials conducted by the Company. Abbott can
terminate their agreements on short notice, and there can be no assurance that
the Company will receive any additional funding or milestone payments.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
To date, the Company's reported revenues have been derived from payments
received under
28
<PAGE> 28
collaborative agreements with third parties. Revenue received under
collaborative agreements was $5.1 million for the year ended December 31, 1998
compared with $18.9 million in the prior year. All revenue during 1998
represented payments under the Company's strategic alliance agreements with
Abbott. Revenues in 1997 represented milestone payments of $18.5 million and
$0.4 million from Abbott and Daiichi, respectively.
Research and development expenses were $10.5 million as of December 31,
1998 compared with $11.6 million in the prior year. The decrease was primarily
due to a reduction in clinical trial activity when compared to the prior year,
offset in part by additional expenses related to the regulatory approval
process. In addition, the Company received $2.1 million from Abbott during 1998
for reimbursement of certain clinical costs related to prostate and stress
echocardiography indications for EchoGen compared to $1.7 million in 1997.
Pursuant to the funding agreement with Abbott, 50% of these clinical
reimbursements will be repaid with interest in five years from the date of
funding, payable in cash or common stock of the Company. Accordingly, 50% of the
total funding has been reported as a long-term liability with the remaining 50%
reported as an offset to research and development expenses.
General and administrative expenses were $6.5 million as of December 31,
1998 compared with $7.2 million in the prior year. The decrease was primarily
due to a reduction in marketing programs due to the delay in U.S. regulatory
approval of EchoGen, offset in part by increases in legal costs - see "Legal
Proceedings".
Revenues in future quarters will be primarily dependent upon the
achievement and timing of certain regulatory and commercialization milestones
and associated payments under collaborative agreements. In addition, total
operating expenses are expected to increase in future quarters due to ongoing
and planned clinical trials to study additional indications for EchoGen, further
clinical trials for the Company's second ultrasound contrast agent, QW7437, new
product research and development, and higher marketing and administrative
expenses in conjunction with the commercialization of EchoGen. The Company also
expects to incur significant expenses relating to legal matters - see "Legal
Proceedings."
Interest income, net of interest expense, was $739,000 for the year ended
December 31, 1998, compared to $965,000 in the prior year. The decrease was
primarily due to the lower levels of invested cash during 1998 and higher
interest expense due to larger amounts payable to Abbott for clinical
development funding.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
Revenues from collaborative agreements were $18.9 million for the year ended
December 31, 1997 as compared to $16.6 million in the prior year. Revenue in
1997 consisted of $18.5 million and $0.4 million of payments received from
Abbott and Daiichi, respectively. In 1996, revenue consisted of $12.0 million
and $4.6 million of payments received from Abbott and Daiichi, respectively.
Research and development expenses were $11.6 million for year ended December
31, 1997 compared to $11.2 million in the prior year primarily due to ongoing
and new clinical trials
29
<PAGE> 29
investigating additional indications for EchoGen and continued investment in the
research and development of new products, offset by clinical development cost
reimbursement from Abbott.
General and administrative expenses were $7.2 million for the year ended
December 31, 1997 compared to $3.8 million in the prior year. The higher level
of general and administrative expenses reflected the implementation of marketing
programs in anticipation of FDA approval and planned product launch of EchoGen,
costs of filing, prosecuting and protecting patents and patent applications, and
growth in marketing and administration personnel.
Interest income, net of interest expense, was $965,000 in 1997 compared to
$620,000 in the prior year. The increase was primarily due to the larger cash
and marketable securities balances in 1997 arising from the higher level of
payments under collaborative agreements.
The Company recorded $90,000 of income tax expense as of December 31, 1997
compared to $510,000 in the prior year. Income tax expense was lower than that
computed at statutory rates primarily due to the use of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with payments from
collaborative agreements, proceeds from equity financings and a bank line of
credit. At December 31, 1998, the Company had cash, cash equivalents and
marketable securities of $17.0 million, compared to $26.6 million at December
31, 1997. The decrease was primarily due to the $11.2 million net loss reported
for the year ended December 31, 1998, offset in part by $1.2 million of clinical
development funding from Abbott which, under the agreements with Abbott, will be
repaid with interest in five years in stock or cash.
The Company has a bank loan agreement which provides for a $5.0 million
revolving line of credit facility and bears interest at the prime rate plus 1.0%
per annum. At December 31, 1998, there was $5.0 million outstanding under the
line of credit. The line of credit expires August 31, 1999 and is secured by the
tangible assets of the Company. The Company is required to maintain certain
minimum balances of cash and marketable securities in order to borrow under the
line of credit. There can be no assurance that the Company will be able to
maintain the minimum balances necessary to borrow under the line.
The Company expects that its cash needs will increase significantly in
future periods due to pending and planned clinical trials and higher
administrative and marketing expenses as the Company prepares for
commercialization of EchoGen. Based on its operating plan, the Company estimates
that existing cash and marketable securities will be sufficient to meet its cash
requirements through 1999. If regulatory approvals are not achieved or are
delayed, the Company will be required to obtain additional funding through
available means, which may include debt and/or equity financing or the licensing
or sale of proprietary or marketing rights. The Company's future capital
requirements depends on many factors including the ability of the Company to
obtain and retain continued funding from third parties under collaborative
agreements, the ability to maintain the Company's bank line of credit, the time
and costs required to gain regulatory approvals, the progress of the Company's
research and development programs, clinical trials, the costs of filing,
prosecuting
30
<PAGE> 30
and enforcing patents, patent applications, patent claims and trademarks, the
costs of marketing and distribution, the status of competing products, and the
market acceptance and third-party reimbursement of the Company's products, if
and when approved. There can be no assurance that regulatory approvals will be
achieved or achieved in the near-term or that, in any event, additional
financing will be available on acceptable terms, if at all. Any equity financing
would likely result in substantial dilution to existing stockholders. If the
Company is unable to raise additional financing, the Company would be required
to curtail or delay the development of its products and new product research and
development.
MARKET RISK
The market risk inherent in the Company's short-term investment portfolio
and long-term debt represents the potential loss arising from adverse changes in
interest rates. If market rates hypothetically increase immediately and
uniformly by 100 basis points from levels at December 31, 1998, the decline in
the fair value of the investment portfolio and the increase in interest expense
on the long-term debt would not be material. Because the Company has the ability
to hold its fixed income investments until maturity, it does not expect its
operating results or cash flows to be affected to any significant degree by a
sudden change in market interest rates on its securities portfolio.
YEAR 2000
Many computer systems may experience difficulty processing dates beyond the
year 1999 and will need to be modified prior to the year 2000. Failure to make
such modifications could result in systems failures or miscalculations, causing
a disruption of operations.
The Company has undertaken an initial comprehensive review of its
information technology computer systems and believes that the Year 2000 issue
does not pose significant operational problems. The majority of the Company's
software and computer equipment has been purchased within the last five years
from third-party vendors who have already provided upgrades intended to bring
their products into Year 2000 compliance. In addition, the Company plans to
survey significant vendors, including Abbott, to determine any possible Year
2000 risks. If Year 2000 problems exist with these third parties, it could
affect the ability of vendors to satisfy their obligations to the Company or for
the Company to electronically communicate with such parties, which could have an
adverse effect on the Company's business, financial condition and results of
operations.
The Company intends to establish a contingency plan to address "high-risk"
issues, if any, that could affect day-to-day operations or delay its efforts to
bring products to market. The Company expects to complete its review of the Year
2000 issue by the end of the third quarter of 1999.
Based upon the Company's initial review of its computer systems, the Company
estimates that the cost to replace older, non-compliant computers and software
is not material. The full cost of correcting the Year 2000 issue will be known
after the Company completes its survey of its significant vendors; however,
based on currently available information, the Company believes that the total
costs will not exceed $100,000.
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<PAGE> 31
ITEM 7A. QUALITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Response to this item is included in "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSTS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Market Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS: PAGE
- ------------------------------ ----
<S> <C>
Report of Ernst and Young LLP, Independent Auditors................................. 32
Balance Sheets as of December 31, 1998 and 1997..................................... 33
Statements of Operations for the years ended December 31, 1998, 1997 and 1996....... 34
Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and
1996................................................................................ 35
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996....... 36
Notes to the Financial Statements................................................... 37
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
32
<PAGE> 32
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
SONUS Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of SONUS Pharmaceuticals,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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 SONUS Pharmaceuticals, Inc.
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
January 31, 1999
33
<PAGE> 33
SONUS PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and marketable securities....... $ 16,954,842 $ 26,571,062
Other current assets.................................. 419,018 639,970
------------ ------------
Total current assets........................... 17,373,860 27,211,032
Equipment, furniture and leasehold improvements, net... 1,444,090 1,734,737
------------ ------------
Total assets........................................... $ 18,817,950 $ 28,945,769
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank line of credit.................................. $ 5,000,000 $ 5,000,000
Accounts payable and accrued expenses................ 2,954,530 2,612,065
Accrued clinical trial expenses...................... 1,226,335 1,743,208
Current portion of capital lease obligations......... 93,178 146,762
------------ ------------
Total current liabilities......................... 9,274,043 9,502,035
Long-term debt......................................... 2,049,221 845,939
Capital lease obligations, less current portion........ -- 93,178
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
5,000,000 shares authorized; no shares outstanding -- --
Common stock, $.001 par value:
20,000,000 shares authorized; 8,632,225 and
8,611,376 shares issued and outstanding in 1998
and 1997, respectively............................. 35,009,368 34,860,237
Accumulated deficit.................................. (27,514,682) (16,338,949)
Deferred compensation................................ -- (16,671)
------------ ------------
Total stockholders' equity......................... 7,494,686 18,504,617
------------ ------------
Total liabilities and stockholders' equity............. $ 18,817,950 $ 28,945,769
============ ============
</TABLE>
See accompanying notes.
34
<PAGE> 34
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Collaborative agreements ............................... $ 5,100,000 $ 18,900,000 $ 16,600,000
Operating expenses:
Research and development ............................... 10,463,573 11,561,849 11,181,468
General and administrative ............................. 6,548,833 7,201,553 3,806,858
------------ ------------ ------------
Total operating expenses ............................ 17,012,406 18,763,402 14,988,326
------------ ------------ ------------
Operating income (loss) .................................. (11,912,406) 136,598 1,611,674
Other income (expense):
Interest income ........................................ 970,146 1,093,149 832,936
Interest expense ....................................... (231,024) (128,468) (212,465)
------------ ------------ ------------
Income (loss) before income taxes ........................ (11,173,284) 1,101,279 2,232,145
Income taxes ............................................. -- 90,000 510,000
------------ ------------ ------------
Net income (loss) ........................................ $(11,173,284) $ 1,011,279 $ 1,722,145
============ ============ ============
Net income (loss) per share:
Basic ................................................. $ (1.30) $ 0.12 $ 0.20
Diluted ............................................... $ (1.30) $ 0.11 $ 0.19
Shares used in calculation of net income (loss) per share:
Basic ................................................. 8,621,759 8,565,279 8,481,084
Diluted ............................................... 8,621,759 9,580,240 9,063,744
</TABLE>
See accompanying notes.
35
<PAGE> 35
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED DEFERRED
SHARES AMOUNT DEFICIT COMPENSATION TOTAL
---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995...... 8,448,082 $30,106,638 $(19,066,414) $ (92,929) $ 10,947,295
Issuance of common stock........ 82,829 168,377 -- -- 168,377
Proceeds from issuance of
warrants........................ -- 4,000,000 -- -- 4,000,000
Net income...................... -- -- 1,722,145 -- 1,722,145
Amortization of deferred
compensation.................... -- -- -- 50,538 50,538
Unrealized losses on marketable
securities...................... -- -- (11,105) -- (11,105)
---------- ----------- ------------ ---------- ------------
Balance at December 31, 1996...... 8,530,911 34,275,015 (17,355,374) (42,391) 16,877,250
Issuance of common stock........ 80,465 585,222 -- -- 585,222
Net income...................... -- -- 1,011,279 -- 1,011,279
Amortization of deferred -- -- -- 25,720 25,720
compensation....................
Unrealized gains on marketable
securities...................... -- -- 5,146 -- 5,146
---------- ----------- ------------ ---------- ------------
Balance at December 31, 1997...... 8,611,376 34,860,237 (16,338,949) (16,671) 18,504,617
Issuance of common stock........ 20,849 149,131 -- -- 149,131
Net loss........................ -- -- (11,173,284) -- (11,173,284)
Amortization of deferred
compensation.................... -- -- -- 16,671 16,671
Unrealized losses on marketable
securities...................... -- -- (2,449) -- (2,449)
---------- ----------- ------------ ---------- ------------
Balance at December 31, 1998...... 8,632,225 $35,009,368 $(27,514,682) $ -- $ 7,494,686
========== =========== ============ ========== ============
</TABLE>
See accompanying notes.
36
<PAGE> 36
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .................................... $(11,173,284) $ 1,011,279 $ 1,722,145
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .................... 831,188 619,268 471,636
Amortization of Discount on marketable
securities ....................................... (5,571) (24,815) (11,105)
Realized (gains) losses on marketable
securities ....................................... (13,952) 21,383 --
Loss on asset retirements ........................ -- -- 53,958
Changes in operating assets and liabilities:
Other current assets ............................... 220,952 (177,359) (160,703)
Accounts payable and accrued expenses .............. 342,465 408,259 749,199
Accrued clinical trial expenses .................... (516,873) 529,645 (355,429)
Deferred revenue ................................... -- (1,000,000) 1,000,000
------------ ------------ ------------
Net cash provided by (used in) operating activities .. (10,315,075) 1,387,660 3,469,701
INVESTING ACTIVITIES:
Purchases of equipment, furniture and leasehold
improvements ....................................... (523,870) (1,159,782) (520,470)
Purchases of marketable securities ................... (28,308,701) (36,802,059) (74,256,557)
Proceeds from sales of marketable securities ......... 24,600,104 22,144,047 62,529,763
Proceeds from maturities of marketable securities .... 13,292,590 11,243,205 6,396,857
------------ ------------ ------------
Net cash provided by (used in) investing activities .. 9,060,123 (4,574,589) (5,850,407)
FINANCING ACTIVITIES:
Proceeds from line of credit borrowings .............. 20,000,000 20,000,000 21,400,000
Repayment of line of credit borrowings ............... (20,000,000) (20,000,000) (21,400,000)
Proceeds from long-term debt ......................... 1,203,282 845,939 --
Repayment of capital lease obligations ............... (146,762) (227,620) (207,676)
Proceeds from issuance of common stock and warrants .. 149,131 585,222 4,168,377
------------ ------------ ------------
Net cash provided by financing activities ............ 1,205,651 1,203,541 3,960,701
------------ ------------ ------------
Change in cash and equivalents for the period ........ (49,301) (1,983,388) 1,579,995
Cash and equivalents at beginning of period .......... 5,253,227 7,236,615 5,656,620
------------ ------------ ------------
Cash and equivalents at end of period ................ 5,203,926 5,253,227 7,236,615
Marketable securities at end of period ............... 11,750,916 21,317,835 17,894,450
------------ ------------ ------------
TOTAL CASH, CASH EQUIVALENTS AND MARKETABLE
SECURITIES ....................................... $ 16,954,842 $ 26,571,062 $ 25,131,065
============ ============ ============
Supplemental cash flow information:
Interest paid ................................... $ 64,531 $ 127,770 $ 198,934
Income taxes paid ............................... $ 7,500 $ 55,272 $ 460,000
</TABLE>
See accompanying notes.
37
<PAGE> 37
SONUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
SONUS Pharmaceuticals, Inc. (the "Company") is engaged in the research,
development and commercialization of proprietary ultrasound contrast agents and
drug delivery systems based on its proprietary technology. The Company's
products are being developed for use in the diagnosis and treatment of heart
disease, cancer and other debilitating conditions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with a
maturity of three months or less at the date of purchase.
MARKETABLE SECURITIES
The Company classifies the marketable securities investment portfolio as
available-for-sale, and such securities are stated at fair value based on quoted
market prices, with the unrealized gains and losses included as a component of
accumulated deficit. Interest earned on securities available-for-sale is
included in interest income. The cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion are included in interest income. Realized gains
and losses and declines in value judged to be other than temporary on securities
available-for-sale also are included in interest income. The cost of securities
sold is based on the specific identification method.
CONCENTRATIONS OF CREDIT RISK
The Company invests its excess cash in accordance with guidelines which
limit the credit exposure to any one financial institution and to any one type
of investment, other than securities issued by the U.S. government. The
guidelines also specify that the financial instruments are issued by
institutions with strong credit ratings. These securities are generally not
collateralized and mature within one year.
REVENUES FROM COLLABORATIVE AGREEMENTS
Payments under collaborative agreements are recorded as earned based upon
the provisions of each agreement. Payments received which have not met the
appropriate revenue recognition criteria are recorded as deferred revenue.
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements are stated at cost.
Depreciation of equipment is provided using the straight-line basis over three
to five years, the estimated useful life of the assets. Leasehold improvements
are amortized over the lesser of the economic useful lives of the improvements
or the term of the related lease.
38
<PAGE> 38
STOCK COMPENSATION
In 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). In accordance with
SFAS 123, the Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the market price of the Company's common
stock at the date of grant over the stock option exercise price. Under the
Company's plans, stock options are generally granted at fair market value.
PER SHARE DATA
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share ("EPS")." In accordance with this statement, the
Company has presented both basic and diluted EPS. Basic EPS is based on the
weighted average number of common shares outstanding. Diluted EPS is based on
the weighted average number of common shares and dilutive potential common
shares. Dilutive potential common shares are calculated under the treasury stock
method and consist of unexercised stock options and warrants.
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.
RECLASSIFICATIONS
Certain reclassifications were made to the 1997 and 1996 financial
statements to conform with the 1998 presentation. The reclassifications do not
affect net income, stockholders' equity or cash flows as previously reported.
2. MARKETABLE SECURITIES
Marketable securities consist of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
1998: COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government Obligations .. $ 3,260,271 $ 3,219 $ (208) $ 3,263,282
Corporate Debt Securities
(principally commercial paper) 8,493,094 1,099 (6,559) 8,487,634
------------ ------------ ------------ ------------
$ 11,753,365 $ 4,318 $ (6,767) $ 11,750,916
============ ============ ============ ============
1997:
U.S. Government Obligations .. $ 3,137,012 $ 287 $ (249) $ 3,137,050
Corporate Debt Securities
(principally commercial paper) 18,175,677 5,308 (200) 18,180,785
------------ ------------ ------------ ------------
$ 21,312,689 $ 5,595 $ (449) $ 21,317,835
============ ============ ============ ============
</TABLE>
39
<PAGE> 39
The realized gains on sales of available-for-sale securities were $14,000
and $29,000 in 1998 and 1997, respectively. The realized losses on sales of
available for sale securities were $0 and $50,000 in 1998 and 1997,
respectively. There were no realized gains or losses in 1996. All marketable
securities at December 31, 1998 and 1997 mature within one year.
3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Laboratory equipment ................................................. $2,183,489 $1,755,770
Office furniture and equipment ....................................... 1,031,327 970,465
Leasehold improvements ............................................... 782,060 746,771
---------- ----------
3,996,876 3,473,006
Less accumulated depreciation and amortization ....................... 2,552,786 1,738,269
---------- ----------
$1,444,090 $1,734,737
========== ==========
</TABLE>
Depreciation expense was $814,517, $593,548 and $421,098 for the years ended
December 31, 1998, 1997 and 1996, respectively.
4. DEBT
The Company has a Loan Agreement with Silicon Valley Bank which provides for
a $5.0 million revolving line of credit facility. Borrowings bear interest at
the prime rate plus 1.0% per annum (8.75% at December 31, 1998). At December 31,
1998 and December 31, 1997, there was $5.0 million outstanding under the line of
credit. The line of credit expires in August 1999 and is secured by the tangible
assets of the Company. The Company is required to maintain a minimum balance of
cash and marketable securities in order to borrow under the line of credit.
Prior to 1996, substantially all of the Company's equipment and furniture
was financed through a capital lease agreement. In the aggregate, the Company
has borrowed approximately $1.4 million under the lease agreement. The
obligations bear interest at rates ranging from 15.8% to 17.0%, with principal
and interest payable monthly at approximately $7,100 per month.
Future minimum payments under these leases are as follows:
<TABLE>
<S> <C>
1999................................................. $ 101,420
Less amounts representing interest................... 8,242
----------
Present value of minimum lease payments.............. $ 93,178
==========
</TABLE>
Abbott Laboratories ("Abbott") has agreed to fund certain clinical trials of
the Company in accordance with the Company's collaborative agreements with
Abbott (see Note 5). Of the total funding, 50% is to be paid back to Abbott
within five years of the receipt of funds, plus accrued interest, in either cash
or exchange for common stock of the Company at the then fair market value. The
Company received funding of $2.1 million and $1.7 million in 1998 and 1997,
respectively,
40
<PAGE> 40
from Abbott for reimbursement of certain clinical trial costs. The obligation
to Abbott, representing 50% of total funding and reported as long-term debt,
bears interest at the prime rate plus 1% per annum (8.75% at December 31, 1998).
The balance including interest was $2,049,221 and $845,939 as of December 31,
1998 and 1997, respectively.
5. COLLABORATIVE AGREEMENTS
In May 1996, the Company formed a strategic alliance with Abbott for the
marketing and selling of ultrasound contrast agents in the U.S., including the
Company's initial product, EchoGen. The Company has primary responsibility for
clinical development, regulatory affairs, and medical and technical marketing
support of EchoGen, and Abbott has primary responsibility for manufacturing and
U.S. marketing and sales. Under the agreement, Abbott has agreed to pay the
Company $31.0 million in license and milestone payments, of which the Company
had received $23.0 million as of December 31, 1998. The remaining payments are
conditioned upon the achievement of specified milestones. After the U.S. Food
and Drug Administration ("FDA") has approved the marketing of EchoGen, for which
there can be no assurance, the Company will receive 47% of EchoGen sales in the
U.S. -- a portion of which the Company must use to fund its responsibilities
under the agreement. Subject to early termination, the agreement spans the later
of the life of the patents relating to EchoGen or the introduction of a generic
equivalent by a third party. Abbott can acquire the rights to certain additional
indications for EchoGen by making additional clinical support payments. In
addition, Abbott paid $4.0 million in 1996 for five year warrants to acquire
500,000 shares of the Company's common stock at an exercise price of $16.00 per
share.
In October 1996, the Company expanded its strategic alliance with Abbott
by signing a second agreement for EchoGen that extends Abbott's licensed
territory to include: Europe, Latin America, Canada, Middle East, Africa and
certain Asia/Pacific Rim countries. Under the agreement, Abbott has agreed to
pay the Company $34.6 million in payments conditioned upon the achievement of
certain regulatory and commercialization milestones (of which $12.6 million may
be offset against future royalty payments). As of December 31, 1998, the Company
had received $12.6 million under the agreement of which $5.6 million is
creditable against future royalties. Subject to early termination, the agreement
spans the later of the life of the patents relating to EchoGen in the countries
of the territory, 10 years from the date of the agreement, or the introduction
of a generic equivalent by a third party.
In January 1999, the Company amended its strategic alliance agreements
with Abbott for both the U.S. and international territories. The amendments
redefine future milestone payments under the agreements. Under the amended
agreements, there are $30.0 million of potential milestone payments remaining,
of which $9.55 million are conditioned upon the approval and first shipment of
EchoGen echocardiography indications in the U.S. and Europe; $9.55 million for
approval and first shipment of EchoGen radiology indications in the U.S. and
Europe; and $10.9 million conditioned upon achievement of annual sales targets
in Abbott's international territory. The amendments allow the Company to request
prepayment of radiology milestone payments in exchange for the issuance of
common stock of the Company at the then fair market value. The amendments also
reduce the royalty rates on sales of EchoGen by Abbott in its international
territory that range, based on a combination of factors, from 24% to 42%.
41
<PAGE> 41
In March 1995, the Company granted Daiichi Pharmaceutical Co., Ltd.
("Daiichi"), exclusive marketing and distribution rights to EchoGen in Japan and
in certain other countries in the Pacific Rim. In November 1998, the Company and
Daiichi terminated the licensing agreement and the Company has no further
obligation under the agreement. As of the date of termination, Daiichi paid the
Company option, license and milestone fees totaling $12.8 million.
6. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Federal - current $ -- $ 50,000 $ 50,000
Foreign - current -- 40,000 460,000
--------- -------- --------
Total ........... $ -- $ 90,000 $510,000
========= ======== ========
</TABLE>
The Company's foreign income tax expense in 1997 and 1996 is for withholding
taxes paid in Japan relating to the collaborative payments made by Daiichi (see
Note 5).
A reconciliation of the Federal Statutory tax rate of 34% to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Statutory tax rate ................................ 34.00% 34.00% 34.00%
Utilization of net operating loss carryforwards.... -- (35.91) (34.19)
Change in valuation allowance...................... (34.20) -- --
Permanent differences ............................. 0.20 1.91 0.19
Federal tax expense (AMT) ......................... -- 4.54 2.24
Foreign tax expense ............................... -- 3.63 20.61
-------- ------- ------
Effective tax rate ................................ --% 8.17% 22.85%
======== ======= ======
</TABLE>
Significant components of the Company's net deferred tax assets and
liabilities as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforwards ...... $ 8,745,000 $ 5,049,000
Accrued expenses .............................. 139,000 197,000
Research and development credits .............. 1,212,000 983,000
Foreign tax credits ........................... 1,183,000 1,183,000
Book in excess of tax depreciation expense .... 87,000 --
Deferred compensation -- 6,000
------------ ------------
Total deferred tax assets ....................... 11,366,000 7,418,000
Deferred tax liabilities:
Tax in excess of book depreciation expense .... -- (14,000)
------------ ------------
Gross deferred tax assets ....................... 11,366,000 7,404,000
Valuation allowance for net deferred tax assets (11,366,000) (7,404,000)
------------ ------------
Net deferred tax assets ......................... $ -- $ --
============ ============
</TABLE>
42
<PAGE> 42
Due to the uncertainty of the Company's ability to generate taxable income
to realize its net deferred tax assets at December 31, 1998 and 1997, a
valuation allowance has been recognized for financial reporting purposes. The
Company's valuation allowance for deferred tax assets increased $3,962,000 and
$45,000 for the years ended December 31, 1998 and 1997, respectively.
At December 31, 1998 the Company has federal net operating loss
carryforwards of approximately $25,720,000 for income tax reporting purposes and
research and development tax credit carryforwards of approximately $1,212,000.
The federal operating loss carryforwards and research and development credits
begin to expire in 2006.
The initial public offering of common stock by the Company caused an
ownership change pursuant to applicable regulations in effect under the Internal
Revenue Code of 1986. Therefore, the Company's use of losses incurred through
the date of ownership change will be limited during the carryforward period and
may result in the expiration of net operating loss carryforwards before
utilization.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
At December 31, 1998, the Company had remaining reserved shares of common
stock for the following purposes:
<TABLE>
<S> <C>
Stock option plans......................... 1,547,246
Warrants................................... 777,278
Other stock options........................ 76,335
Employee stock purchase plan............... 23,918
---------
Total reserved shares................. 2,424,777
=========
</TABLE>
STOCK OPTION PLANS
The Company has adopted two plans which provide for the granting of
incentive and nonqualified stock options. As of December 31, 1998, 1,900,000
shares have been reserved for issuance under the employee plan and 122,137
shares reserved under the director plan. As of December 31, 1998, there were
388,825 shares available for future grant under the plans. Employee stock
options vest over a period of time determined by the Board of Directors,
generally four years, and director options are fully vested at the date of
grant. All options expire 10 years from the date of grant.
43
<PAGE> 43
A summary of activity related to the Company's stock option plans follows:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
--------- ---------------
<S> <C> <C>
Balance, December 31, 1995 ............. 200,016 $ .07 -- 8.19
Granted .............................. 649,955 13.00 -- 23.00
Exercised ............................ (68,766) .07 -- 7.86
Canceled ............................. (34,276) .07 -- 20.00
---------
Balance, December 31, 1996 ............. 746,929 .07 -- 23.00
Granted .............................. 287,802 24.13 -- 44.00
Exercised ............................ (51,484) .20 -- 23.00
Canceled ............................. (14,663) .20 -- 40.13
---------
Balance, December 31, 1997 ............. 968,584 .07 -- 44.00
Granted .............................. 823,215 6.25 -- 38.63
Exercised ............................ (11,765) .07 -- 24.13
Canceled ............................. (545,278) 3.93 -- 44.00
---------
Balance, December 31, 1998 ............. 1,234,756 .20 -- 44.00
=========
Options exercisable at December 31, 1998 757,775 $ .20 -- 44.00
=========
</TABLE>
In 1998, the Company repriced 444,691 outstanding stock options for
non-officer employees from a weighted average exercise price of $18.90 to $6.25.
The options are included in granted and canceled in the table above.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ---------------- ------------- ---------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
$ 0.20-$ 8.19 510,601 8.47 years $ 6.02 155,171 $ 4.86
$ 8.25-$20.50 585,542 7.26 years $13.75 536,177 $13.87
$24.13-$44.00 138,613 8.45 years $32.62 66,427 $32.47
</TABLE>
For total options outstanding as of December 31, 1998, the weighted average
exercise price and weighted average remaining contractual life was $12.67 and
7.89 years, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). In accordance with
SFAS 123, the Company has elected to continue following the intrinsic value
method allowed under the statement for its stock option plans and present pro
forma disclosures using the fair value method.
Had the Company elected to recognize compensation cost based on the fair
value of the options as prescribed by SFAS 123, the pro forma amounts for net
income (loss) and associated basic net income (loss) per share amounts would
have been $(13.5) million or $(1.57) per share, $(1.0) million or $(0.11) per
share and $0.3 million or $0.03 per share for the years ended December 31, 1998,
44
<PAGE> 44
1997 and 1996, respectively. The fair value of each option is estimated using
the Black-Scholes option pricing model. The assumptions used in this model
include an estimated option life of one to four years, expected stock price
volatility ranging from .576 to .659, a dividend yield of 0.0% and a risk-free
interest rate at the grant date ranging from 4.43% to 7.70%. The weighted
average fair value per share of options granted during 1998, 1997 and 1996 was
$4.27, $14.91 and $6.72, respectively.
STOCK PURCHASE PLAN
The Company has an employee stock purchase plan whereby employees may
contribute up to 15% of their compensation to purchase shares of the Company's
common stock at 85% of the stock's fair market value at the lower of the
beginning or end of each three-month offering period. Shares purchased under the
plan were 9,698, 4,012 and 6,111 in 1998, 1997 and 1996, respectively. At
December 31, 1998, 23,918 shares were reserved for future purchases by employees
under the plan.
WARRANTS
In connection with the Abbott Agreement signed in May 1996, Abbott
purchased, for $4.0 million, warrants to acquire 500,000 shares of common stock.
The warrants are exercisable for five years at $16.00 per share.
In connection with a bridge financing in 1994 and 1995, the Company issued
warrants to purchase an aggregate of 303,590 shares of common stock at exercise
prices ranging from $5.24 to $7.05 per share. The warrants expire at various
times through July 2000, as of December 31, 1998, 7,883 warrants had expired. No
warrants were exercised in 1998. 26,114 and 5,361 warrants were exercised in
1997 and 1996, respectively.
In connection with the deferral of the payment of reimbursements related to
the relocation of the Company's executive offices, in November 1994 the Company
issued warrants to purchase an aggregate of 17,949 shares of common stock to
certain employees at an exercise price of $6.55 per share. No warrants were
exercised in 1998. 2,315 and 2,588 warrants were exercised in 1997 and 1996,
respectively.
As of December 31, 1998, a total of 777,278 warrants were outstanding.
OTHER OPTIONS
In September 1994, the Board of Directors granted an option, expiring in
2004, to purchase 76,335 shares of common stock to the Company's Chief Executive
Officer. The option is exercisable at $0.66 per share. In connection with the
grant, the Company recorded deferred compensation of $50,000, representing the
excess of the deemed fair value for financial reporting purposes of the common
stock issuable over the exercise price, which was amortized over the vesting
period of the option.
45
<PAGE> 45
SHAREHOLDER RIGHTS PLAN
In 1996, the Board of Directors of the Company adopted a Shareholder Rights
Plan ("Plan"). Under the Plan, the Board declared a dividend of one Preferred
Stock Purchase Right ("Right") for each outstanding common share of the Company.
The Rights have an exercise price of $140 per Right and provide the holders with
the right to purchase, in the event a person or group acquires 15% or more of
the Company's common stock, additional shares of the Company's common stock
having a market value equal to two times the exercise price of the Right. The
Rights expire in 2006.
8. EARNINGS PER SHARE (EPS)
A reconciliation between basic and diluted EPS follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income (loss)................................. $(11,173,284) $ 1,011,279 $ 1,722,145
Weighted average common shares.................... 8,621,759 8,565,658 8,481,084
Basic EPS ..................................... $ (1.30) $ 0.12 $ 0.20
DILUTED EARNINGS PER SHARE:
Net income (loss)................................. $(11,173,284) $ 1,011,279 $ 1,722,145
Weighted average common shares ................... 8,621,759 8,565,658 8,481,084
Dilutive potential common shares ................. -- 1,014,582 582,660
------------ ----------- -----------
Total shares ..................................... 8,621,759 9,580,240 9,063,744
============ =========== ===========
Diluted EPS ................................... $ (1.30) $ 1.11 $ 0.19
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company has leased office space and equipment under two operating lease
agreements which expire in April 2002 and April 2003, respectively. Under the
office lease, the Company has the option to extend the lease for an additional
three years at the then fair market value of the premises. Future minimum lease
payments under these leases are as follows:
<TABLE>
<S> <C>
1999.................................................... $ 614,391
2000.................................................... 584,730
2001.................................................... 612,684
2002.................................................... 186,726
2003.................................................... 13,878
----------
$2,012,409
==========
</TABLE>
Rental expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $564,000, $458,000 and $340,000, respectively.
46
<PAGE> 46
In May 1993, the Company entered into a manufacturing and supply agreement
with Abbott. In the event that EchoGen is approved by the FDA, the Company is
obligated to purchase certain minimum quantities of materials from Abbott or
make cash payments for the shortages from the predetermined purchase level over
a five-year period.
In March 1998, the Company entered into a commercial supply agreement for
certain medical grade raw materials for the Company's initial product in the
U.S., EchoGen. In the event that EchoGen is approved by the FDA, the Company is
obligated to purchase certain minimum quantities of the material over a
five-year period.
10. LEGAL PROCEEDINGS
In January 1998, the Company announced that it had filed a patent
infringement action in the U.S. District Court in Seattle, Washington, against
Molecular Biosystems Inc. ("MBI") and Mallinckrodt, Inc. The suit alleges that
one of MBI's ultrasound contrast agents infringes one or more of the Company's
patents. MBI has filed counterclaims alleging that the patents asserted by the
Company are invalid and not infringed, and that the Company has made false
public statements and engaged in other actions intended to damage MBI and one of
its ultrasound contrast agents. The Company does not believe there is any merit
to these counterclaims and intends to defend its position vigorously. A trial
date has been set for this lawsuit in February 2000. In October 1998, the court
granted the Company's motion to stay the litigation until the U.S. Patent and
Trademark Office ("PTO") had completed its re-examination of the patents in this
lawsuit (see below). The stay was lifted in January 1999.
Four separate re-examination proceedings directed to the two SONUS patents
at issue in the patent infringement lawsuit, U.S. 5,558,094 (`094) and U.S.
5,573,751 (`751) were initiated by the PTO beginning in July 1997 at the request
of MBI. In December 1998, the Company announced it received decisions from the
PTO indicating the patentability of claims in all four re-examination
proceedings. The PTO has determined that a number of the claims included in the
original `094 and `751 patents as well as some claims that were amended will be
confirmed. Certain claims, which included reference to fluorinated chemicals
other than perfluoropropane, perfluorobutane and perfluoropentane, were
cancelled during the re-examination process.
In August 1998, various class action complaints were filed against the
Company in the Superior Court of Washington and in the U.S. District Court for
the Western District of Washington against the Company and certain of its
officers and directors, alleging violations of Washington State and U.S.
securities laws. The Company has moved to dismiss and stay the State court
action and expects to move to dismiss the federal actions once a consolidated
complaint is filed. The Company does not believe there is any merit to the
claims in these actions and intends to defend its position vigorously.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting comprehensive income, defined as net income
(loss) plus other comprehensive income. For the years ended December 31, 1998
and 1997, the total of other comprehensive income, consisting of unrealized
gains and losses on marketable securities, was not material.
47
<PAGE> 47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required hereunder is incorporated by reference from the
section of the Company's Proxy Statement to be filed in connection with its 1999
Annual Meeting of Stockholders entitled "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference from the
section of the Company's Proxy Statement to be filed in connection with its 1999
Annual Meeting of Stockholders entitled "Compensation of Executive Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required hereunder is incorporated by reference from the
section of the Company's Proxy Statement to be filed in connection with its 1999
Annual Meeting of Stockholders entitled "Security Ownership of Management and
Certain Beneficial Owners."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required hereunder is incorporated by reference from the
sections of the Company's Proxy Statement to be filed in connection with its
1999 Annual Meeting of Stockholders entitled "Compensation of Executive
Officers" and "Compensation Committee Interlocks and Insider Participation."
48
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The financial statements filed as a part of this Report are listed
on the "Index to Financial Statements" on Page 31.
(2) All schedules are omitted because they are not required or the
required information is included in the financial statements or
notes thereto.
(3) Exhibits
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------------------------------------------------- --------
<S> <C> <C>
3.2 Amended and Restated Certificate of Incorporation of *
the Company.
3.4 Amended and Restated Bylaws of the Company. *
4.1 Specimen Certificate of Common Stock. *
4.2 Rights Agreement, dated as of August 23, 1996, ***
between the Company and U.S. Stock Transfer Corporation.
10.1 SONUS Pharmaceuticals, Inc. Incentive Stock Option, *
Nonqualified Stock Option and Restricted Stock Purchase
Plan -- 1991 (the "1991 Plan"), as amended.
10.2 Form of Incentive Stock Option Agreement pertaining *
to the 1991 Plan.
10.3 Form of Nonqualified Stock Option Agreement pertaining to *
the 1991 Plan.
10.4 Form of Restricted Stock Purchase Agreement pertaining to the *
1991 Plan.
10.5 SONUS Pharmaceuticals, Inc. 1995 Stock Option Plan *
for Directors (the "Director Plan").
10.6 Form of Stock Option Agreement pertaining to the *
Director Plan.
10.12 License Agreement dated as of March 31, 1995 by and *
between the Company and Daiichi Company (portions omitted
pursuant to Rule 406 of the Securities Act of 1933,
as amended (the "1933 Act")).
10.14 Contrast Agent Development and Supply Agreement *
dated May 6, 1993 by and between the Company and Abbott
Laboratories, Inc. (portions omitted pursuant to Rule 406
of the 1933 Act).
10.14A Amendment to Contrast Agent Development and Supply *
Agreement dated August 22, 1995 by and between the Company
and Abbott Laboratories, Inc. (portions omitted pursuant to
Rule 406 of the 1933 Act).
10.18 Lease Agreement dated January 17, 1994 between the *
Company and WRC Properties, Inc.
10.18A Amendment 2 dated October 28, 1997 to Lease Agreement dated +
January 17, 1994
10.18B Amendment 3 dated October 15, 1998 to Lease Agreement dated +
January 17, 1994
10.19 Form of Indemnification Agreement for Officers and *
Directors of the Company.
</TABLE>
49
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------------------------------------------------- --------
<S> <C> <C>
10.21 Loan and Security Agreement dated August 11, 1995 by *
and between the Company and Silicon Valley Bank.
10.21A Loan Modification Agreement dated September 10, 1997 +
to Loan and Security Agreement by and between the Company
and Silicon Valley Bank.
10.21B Loan Modification Agreement dated August 31, 1998 to Loan +
and Security Agreement by and between the Company and Silicon
Valley Bank.
10.22 SONUS Pharmaceuticals, Inc. Employee Stock Purchase Plan. **
10.24 Employment Agreement, effective as of January 16, 1996, #
by and between the Company and Steven C. Quay, M.D.,
Ph.D.
10.25 Agreement between Abbott Laboratories, Inc. and the ##
Company, dated May 14, 1996 (portions omitted pursuant to
Rule 24b-2).
10.26 Third Amended and Restated Registration Rights Agreement ###
dated as of May 15, 1996.
10.28 International License Agreement, dated October 1, ####
1996, by and between Abbott Laboratories, Inc. and the
Company (portions omitted pursuant to Rule 24b-2).
10.29 Commercial Supply Agreement dated March 6, 1998 ++
10.30 Change in Control Agreement for Steven C. Quay ****
10.31 Change in Control Agreement for Michael Martino ****
10.32 Change in Control Agreement for Gregory Sessler ****
10.33 First Amendment to Agreement by and between Abbott ++++
Laboratories and SONUS Pharmaceuticals, Inc. dated
January 31, 1999.
10.34 First Amendment to International License Agreement ++++
by and between Abbott International, Ltd. And SONUS
Pharmaceuticals, Inc. dated January 31, 1999.
10.35 Securities Purchase Agreement between Abbott ++++
Laboratories and SONUS Pharmaceuticals, Inc. dated
January 31, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors +
24.1 Power of Attorney (included on the Signature Page of
this Annual Report on Form 10-K).
27.1 Financial Data Schedule. +
27.1A Restated Financial Data Schedule - First Quarter 1997 +++
27.1B Restated Financial Data Schedule - Second Quarter 1997 +++
27.2A Restated Financial Data Schedule - 1996 Annual Report +++
filed on Form 10-K
99.1 Press Release dated February 1, 1999. ++++
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.1 1991 Plan. *
10.2 Form of Incentive Stock Option Agreement pertaining to *
the 1991 Plan.
10.3 Form of Nonqualified Stock Option Agreement pertaining to
the 1991 Plan
10.4 Form of Restricted Stock Purchase Agreement pertaining to *
the 1991 Plan.
10.5 Director Plan. *
10.6 Form of Stock Option Agreement pertaining to the *
Director Plan.
10.22 SONUS Pharmaceuticals, Inc. Employee Stock Purchase **
Plan.
10.24 Employment Agreement, effective as of January 16, 1996, #
by and between the Company and Steven C. Quay, M.D., Ph.D.
</TABLE>
50
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------------------------------------------------- --------
<S> <C> <C>
10.30 Change in Control Agreement for Steven C. Quay ****
10.31 Change in Control Agreement for Michael Martino ****
10.32 Change in Control Agreement for Gregory Sessler ****
</TABLE>
- -------------
* Incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form S-1, Reg. No. 33-96112.
** Incorporated by reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-8, Registration No. 33-80623.
*** Incorporated by reference to the Company's Registration Statement on
Form 8-A, dated August 23, 1996.
**** Incorporated by reference to the referenced exhibit number to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998.
# Incorporated by reference to the referenced exhibit number to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1996.
## Incorporated by reference to the referenced exhibit number to the
Company's Current Report on Form 8-K dated May 14, 1996.
### Incorporated by reference to the referenced exhibit number to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996.
#### Incorporated by reference to the referenced exhibit number to the
Company's Current Report on Form 8-K dated October 1, 1996.
+ Filed herewith
++ Incorporated by, reference to the referenced exhibit number to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998.
+++ Incorporated by reference to the referenced exhibit number to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.
++++ Incorporated by reference to the referenced exhibit number to the
Company's Current Report on Form 8-K dated February 3, 1999.
(b) The Company filed no reports on Form 8-K during the quarter ended December
31, 1998.
EchoGen(R) is a registered trademark and PhaseShift(TM) is a trademark of
SONUS Pharmaceuticals, Inc.
51
<PAGE> 51
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, in the City of Bothell,
State of Washington, on March 25, 1999.
SONUS PHARMACEUTICALS, INC.
Dated: March 25, 1999 By: /s/ Steven C. Quay, M.D., Ph.D.
------------------------------------
Steven C. Quay, M.D., Ph.D.
Chairman of the Board,
Chief Executive Officer
and Secretary
We, the undersigned directors and officers of SONUS Pharmaceuticals, Inc.,
do hereby constitute and appoint Steven C. Quay, M.D., Ph.D., Michael A. Martino
and Gregory Sessler, or any of them, our true and lawful attorneys and agents,
with full powers of substitution to do any and all acts and things in our name
and behalf in our capacities as directors and officers and to execute any and
all instruments for us and in our names in the capacities indicated below, which
said attorneys and agents may deem necessary or advisable to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K, including
specifically but without limitation, power and authority to sign for us or any
of us in our names in the capacities indicated below, any and all amendments
hereto; and we do hereby ratify and confirm all that said attorneys and agents,
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Steven C. Quay, M.D., Ph.D. Chairman of the Board, March 25, 1999
- --------------------------------------- Chief Executive Officer
Steven C. Quay, M.D., Ph.D. and Secretary
(Principal Executive Officer)
/s/ Gregory Sessler Chief Financial Officer March 25, 1999
- --------------------------------------- (Principal Financial and
Gregory Sessler Accounting Officer)
/s/ George W. Dunbar, Jr. Director March 25, 1999
- ---------------------------------------
George W. Dunbar, Jr.
/s/ Christopher S. Henney, Ph.D., D.Sc. Director March 25, 1999
- ---------------------------------------
Christopher S. Henney, Ph.D., D.Sc.
/s/ Robert E. Ivy Director March 25, 1999
- ---------------------------------------
Robert E. Ivy
</TABLE>
52
<PAGE> 52
<TABLE>
<S> <C> <C>
/s/ Michael A. Martino President, Chief Operating Officer March 25, 1999
- --------------------------------------- and Director
Michael A. Martino
/s/ Dwight Winstead Director March 25, 1999
- ---------------------------------------
Dwight Winstead
</TABLE>
<PAGE> 1
SECOND AMENDMENT TO LEASE
ADDITION OF SQUARE FEET
WRC Properties, Inc,. a Delaware corporation, Landlord and SONUS
Pharmaceuticals, Inc., a Delaware corporation, Tenant, being parties to that
certain Lease dated January 17, 1994 for premises located at 22026 20th Avenue
S.E., Bothell, WA 98021 Building L, Unit 102 hereby express their mutual intent
to extend the terms of the lease and amend the following clauses as of this 28th
day of October, 1997.
Effective the 1st day of May, 1998 the portions of the Lease as numbered below
shall be amended to read as follows:
1.b. TENANT: SONUS Pharmaceuticals, Inc.
Trade Name: SONUS Pharmaceuticals
Address (Leased Premises): 22026 20th Avenue S.E., Bothell, WA 98021
Building/Unit: L/102
Address (For Notices): Attn: Vice President, Operations
3505 Cadillace Avenue, Suite F-7
Costa Mesa, CA 96262
e. PREMISES AREA: Approximately 26,780 Rentable Square Feet
f. PROJECT AREA: Approximately 444,999 Rentable Square Feet
h. BASE MONTHY RENT: May 1, 1998 $33,632.00
m. SECURITY DEPOSIT: $33,632.00* NON-REFUNDABLE CLEANING FEE $0.00
* of which $18,039.00 has previously been deposited.
2. PREMISES: Landlord leases to Tenant the premises described in Section 1 and
in Exhibit A-1, (the "Premises"). Landlord reserves the right to modify Tenant's
percentage of the Project as set forth in Section 1 if the Project seize is
increased through the development of additional property. By entry on the
Premises, Tenant acknowledges that it has examined the Premises and accepts the
Premises in their present condition, subject to any additional work Landlord has
agreed to do.
All other terms and conditions of the above described Lease shall remain in full
force and effect.
Landlord: WRC Properties, Inc.
By: /S/ James Garofalo
-----------------------------------
Its: Assistant Secretary
Tenant: SONUS Pharmaceuticals, Inc.
By: /S/ Steven C. Quay, M.D., Ph.D.
------------------------------------
Its: Chief Executive Officer
<PAGE> 1
THIRD AMENDMENT TO LEASE
RENEWAL
Teachers Insurance & Annuity Association of America, Inc., a Delaware
corporation as successor to WRC Properties, Inc., Landlord and SONUS
Pharmaceuticals, Inc., a Deleware corporation Tenant, being parties to that
certain Lease dated January 17, 1994 for premises located at 22026 20th Avenue
S.E., Bothell, WA 98021 , Unit 102 hereby express their mutual intent to extend
the terms of the lease and amend the following clauses as of this 15th day of
October , 19 98.
Effective the 1st day of May , 1999 the portions of the Lease as numbered below
shall be amended to read as follows:
1.g. EXTENDED TERM OF LEASE: Commencement May 1, 1999 Expiration April 30,
2002 Number of Months 36
1.h. BASE MONTHLY RENT FOR EXTENDED TERM:
<TABLE>
<S> <C>
Effective Date of New Base
Rent Increase Monthly Rent
May 1, 1999 $38,831.00
--------------------- ----------------
May 1, 2001 $41,937.00
--------------------- ----------------
--------------------- ----------------
</TABLE>
1.k. SECURITY DEPOSIT $18,039.00* NON-REFUNDABLE CLEANING FEE $0.00
* which has previously been deposited with Landlord.
30. TENANT IMPROVEMENT ALLOWANCE: Landlord shall make up to Fifty Three Thousand
Five Hundred Sixty Dollars ($53,560) (the "Tenant Improvement Allowance")
available to Tenant to reimburse Tenant for actual out-of-pocket costs paid to
third parties for designing and constructing tenant improvements to the Premises
pursuant to plans reasonably approved by Landlord and otherwise subject to the
provisions of Section 14. Landlord shall pay the Tenant Improvement Allowance
within thirty (30) days of invoice submitted after the improvements have been
inspected and accepted by Tenant (less minor punch list items).
35. OPTION TO RENEW. Tenant is granted the right to extend the term of this
Lease beyond the expiration date of the initial Lease Term for one (1)
successive period of thirty-six (36) months (the "Extended Term"). If Tenant has
materially defaulted in its obligations under this Lease, and failed to cure
such defaults within any applicable cure period, then Tenant's right to extend
the Lease for the Extended Term shall automatically terminate. Tenant's right to
extend the Lease for the Extended Term is personal to Tenant and may not be
exercised by any subtenant. Tenant's extension rights shall apply to all of the
Property under lease to Tenant at the time. From and after the commencement of
the Extended Term, all of the terms, covenants, and conditions of the Lease
shall continue in full force and effect as written, except that Base Rent for
the Extended Term shall be at the-then prevailing market rate (the "Fair Market
Rent") for similar space in the Project but not less than that paid in the last
month of the initial term. Tenant shall provide Landlord one-hundred eighty
(180) days written notice of its intent to renew the Lease.
<PAGE> 2
If Landlord and Tenant are not able to agree on the Fair Market Rent for the
Extended Term within thirty days after Tenant's notice of election to renew,
then such Fair Market Rent shall be determined as follows. Landlord and Tenant
shall each select an appraiser with at least ten years experience in the
office/high-tech industrial market in the eastside area. If the two appraisers
are unable to agree within ten days after their selection, they shall select a
similarly qualified third appraiser (the "Neutral Appraiser"). Within twenty
days after selection of the Neutral Appraiser, the three appraisers shall
simultaneously exchange determinations of Fair Market Rent. If the lowest
appraisal is not less than ninety percent (90%) of the highest appraisal, then
the three appraisals shall be averaged and the result shall be the Fair Market
Rent. If the lowest appraisal is less than ninety percent (90%) of the highest
appraisal, then the Fair Market Rent shall be deemed the rent set forth in the
appraisal that is closest in dollar amount to the appraisal submitted by the
Neutral Appraiser.
All other terms and conditions of the above described Lease shall remain in full
force and effect.
Landlord: Teachers Insurance & Annuity Association
of America, Inc.
By /s/ James Garofalo
--------------------------------------
James Garofalo
Its Assistant Secretary
Tenant: Sonus Pharmaceuticals, Inc.
By /s/ Steven C. Quay
--------------------------------------
Steven C. Quay, M.D., Ph.D.
Its Chief Executive Officer
<PAGE> 1
LOAN MODIFICATION AGREEMENT
BETWEEN: SONUS Pharmaceuticals, a Delaware corporation ("Borrower"), whose
address is 22026 - 20th Avenue S.E., Suite 102, Bothell, WA 98021
AND: Silicon Valley Bank ("Silicon"), whose address is 3003 Tasman
Drive, Santa Clara, California 95054;
DATE: September 10, 1997
This Loan Modification Agreement is entered into on the above date by
Borrower and Silicon.
1. Background. Borrower entered into a Loan and Security Agreement with
Silicon (as amended from time to time, the "Loan Agreement"). Capitalized terms
used in this Loan Modification Agreement shall, unless otherwise defined in this
Agreement, have the meaning given to such terms in the Loan Agreement.
Silicon and Borrower are entering into this Agreement to state the terms
and conditions of certain modifications to the Loan Agreement and the Schedule,
as amended prior to the date of this Agreement.
2. Modifications to Loan Agreement and Schedule.
2.1 Section 3.7 of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
"3.7 Financial Condition and Statements. All financial
statements now or in the future delivered to Silicon have been,
and shall be, prepared in conformity with generally accepted
accounting principles and now and in the future shall completely
and accurately reflect the financial condition of the Borrower,
at the times and for the periods therein stated. Since the last
date covered by any such statement, there has been no material
adverse change in the financial condition or business of the
Borrower. The Borrower is now and shall continue to be solvent.
The Borrower shall provide Silicon: (i) within 30 days after the
end of each month, a monthly financial statement (consisting of a
income statement and balance sheet) prepared by the Borrower in
accordance with generally accepted accounting principles; (ii)
within 20 days after the end of each month, an accounts
receivable report and an accounts payable report, in such form as
Silicon shall reasonably specify; (iii) within 30 days after the
end of each month, a Compliance Certificate in such form as
Silicon shall reasonably specify, signed by the Chief Financial
Officer of the Borrower, certifying that throughout such month
the Borrower was
<PAGE> 2
in full compliance with all terms and conditions of this
Agreement and the Schedule, and providing such other information
as Silicon shall reasonably request; (iv) within 90 days
following the end of the Borrower' fiscal year, complete annual
CPA-audited financial statements, such audit being conducted by
independent certified public accountants reasonably acceptable to
Silicon, together with an unqualified opinion of such
accountants; and (v) within 5 days of the filing date, any 10Q,
10K or 8K filings made by Borrower with the Securities and
Exchange Commission."
2.2 The Schedule to the Loan Agreement is hereby deleted and
replaced by the Amended and Restated Schedule to Loan and Security Agreement
attached to this Agreement.
2.3 Borrower acknowledges and agrees that all Obligations,
including without limitation Borrower's obligation to repay amounts advanced by
Silicon to Borrower on the terms of the Loan Agreement and Schedule as modified
by this Loan Modification Agreement, are secured by all liens and security
interests granted by Borrower to Silicon in the Loan Agreement.
3. Conditions Precedent. This Loan Modification Agreement shall not take
effect until Borrower delivers to Silicon a Certified Resolution of Borrower and
such other documents as Silicon shall reasonably require to give effect to the
term of this Loan Modification Agreement.
4. No Other Modifications. Except as expressly modified by this Loan
Modification Agreement, the terms of the Loan Agreement, as amended prior to the
date of this Loan Modification Agreement, shall remain unchanged and in full
force and effect. Silicon's agreement to modify the Loan Agreement pursuant to
this Loan Modification Agreement shall not obligate Silicon to make any future
modifications to the Loan Agreement or any other loan document. Nothing in this
Loan Modification Agreement shall constitute a satisfaction of any indebtedness
of any Borrower to Silicon. It is the intention of Silicon and Borrower to
retain as liable parties all makers and endorsers of the Loan Agreement or any
other loan document. Except as provided in the Amended and Restated Schedule to
Loan and Security Agreement attached to this Agreement, no maker, endorser, or
guarantor shall be released by virtue of this Loan Modification Agreement. The
terms of this paragraph shall apply not only to this Loan Modification
Agreement, but also to all subsequent loan modification agreements.
5. Representations and Warranties.
5.1 The Borrower represents and warrants to Silicon that the
execution, delivery and performance of this Agreement are within the Borrower's
corporate powers, and have been duly authorized and are not in contravention of
law or the terms of the Borrower's articles of incorporation, bylaws or of any
undertaking to which the Borrower is a party or by which it is bound.
5.2 The Borrower understands and agrees that in entering into
this Agreement, Silicon is relying upon the Borrower's representations,
warranties and agreements as set forth in
<PAGE> 3
the Loan Agreement and other loan documents. Borrower hereby reaffirms all
representations and warranties in the Loan Agreement, all of which are true as
of the date of this Agreement.
BORROWER:
SONUS PHARMACEUTICALS, INC.
By: /s/ Gregory Sessler
-----------------------------
Title: Chief Financial Officer
-----------------------------
SILICON:
SILICON VALLEY BANK
By: /s/ Derek Ridgley
-----------------------------
Title: Vice President
-----------------------------
<PAGE> 4
AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
Borrower: Sonus Pharmaceuticals, Inc.
Address: 22026 - 20th Avenue S.E., Suite 102
Bothell, WA 98021
Date: September 10, 1997
SECURED LINE OF CREDIT
CREDIT LIMIT: An amount not to exceed $5,000,000.
INTEREST RATE: The interest rate applicable to the Secured Line of Credit
shall be a rate equal to the "Prime Rate" in effect from
time to time, plus 1.00% per annum. Interest calculations
shall be made on the basis of a 360-day year and the
actual number of days elapsed. "Prime Rate" means the rate
announced from time to time by Silicon as its "prime
rate"; it is a base rate upon which other rates charged by
Silicon are based, and it is not necessarily the best rate
available at Silicon. The interest rate applicable to the
Obligations shall change on each date there is a change in
the Prime Rate.
COMMITMENT FEE: $12,500, which is fully earned and payable at closing.
(Any Commitment Fee previously paid by the Borrower in
connection with this loan shall be credited against this
Fee.)
MATURITY DATE: August 31, 1998, at which time all unpaid principal and
accrued but unpaid interest shall be due and payable.
PRIOR NAMES OF
BORROWER: See attached Exhibit A
TRADE NAMES OF
BORROWER: See attached Exhibit A
OTHER LOCATIONS
AND ADDRESSES: See attached Exhibit A
MATERIAL ADVERSE
LITIGATION: See attached Exhibit A
OTHER COVENANTS: Borrower shall at all times comply with all of the
following additional covenants:
<PAGE> 5
BANKING RELATIONSHIP. Borrower shall at all times maintain
their primary banking relationship with Silicon. Borrower
shall not establish any deposit accounts of any type with
any bank or other financial institution other than Silicon
without Silicon's prior written consent, which consent
shall not be unreasonably withheld.
MINIMUM CASH BALANCE. Borrower shall at all times maintain
cash and cash equivalents of not less than $10,000,000
until all Obligations are repaid in full and the Loan
Agreement is terminated.
CONDITIONS TO
CLOSING: Before requesting any advance, the Borrower shall satisfy
each of the following conditions:
1. Loan Documents:
Silicon shall have received the Loan Modification
Agreement and this Amended and Restated Schedule, executed
by the Borrower, and such guaranties and such loan
documents as Silicon shall require, each duly executed and
delivered by the parties thereto.
2. Documents Relations
to Authority, Etc.
Silicon shall have received each of the following in form
and substance satisfactory to it:
(a) Certified Copies of the Articles of Incorporation
and Bylaws of the Borrower;
(b) A Certificate of Good Standing issued by the
Secretary of State of the Borrower's state of
incorporation and such other states as Silicon may
reasonably request with respect to the Borrower;
(c) A certified copy of a Resolution adopted by the
Board of Directors of the Borrower authorizing the
execution, delivery and performance of this
Agreement, and any other documents or certificates
to be executed by the Borrower in connection with
this transaction;
(d) Incumbency Certificates describing the office and
identifying the specimen signatures of the
individuals signing all such loan documents on
behalf of the Borrower; and
(e) The partnership agreement.
<PAGE> 6
3. Perfection and
Priority of Security:
Silicon shall have received evidence satisfactory to it
that its security interest in the Collateral has been duly
perfected and that such security interest is prior to all
other liens, charges, security interests, encumbrances and
adverse claims in or to the Collateral other than
Permitted Liens, which evidence shall include, without
limitation, a certificate from the Washington Department
of Licensing showing the due filing and first priority of
the UCC Financing Statements to be signed by the Borrower
covering the Collateral.
4. Insurance: Silicon shall have received evidence satisfactory to it
that all insurance required by this Agreement is in full
force and effect, with loss payee designations and
additional insured designations as required by this
Agreement.
5. Other Information:
Silicon shall have received such other statements,
opinions, certificates, documents and information with
respect to matters contemplated by this Agreement as it
may reasonably request, all of which must be acceptable to
Silicon.
Silicon shall have conducted an examination of the
Borrower's books, records, ledgers, journals, and
registers, as Silicon may deem necessary, and shall be
satisfied with the results of such examination in its sole
discretion.
Silicon and the Borrower agree that the terms of this Schedule
supplement the Loan and Security Agreement between Silicon and the Borrower and
agree to be bound by the terms of this Schedule.
BORROWER:
SONUS PHARMACEUTICALS, INC.
By: /s/ Gregory Sessler
-----------------------------
Title: Chief Financial Officer
-----------------------------
SILICON:
SILICON VALLEY BANK
By: /s/ Derek Ridgley
-----------------------------
Title: Vice President
-----------------------------
<PAGE> 7
CERTIFIED RESOLUTION AND INCUMBENCY CERTIFICATE
Borrower: Sonus Pharmaceuticals, Inc., a corporation organized under
the laws of the State of Delaware.
Date: September 10, 1997
I, the undersigned, Secretary or Assistant Secretary of the above-named
Borrower, a corporation organized under the laws of the state set forth above
(the "Company"), do hereby certify that the following is a full, true and
correct copy of resolutions duly and regularly adopted by the Board of Directors
of said corporation as required by law, and by the bylaws of said corporation,
and that said resolutions are still in full force and effect and have not been
in any way modified, repealed, rescinded, amended or revoked:
RESOLVED, that the Chief Executive Officer and the Chief Financial
Officer of the Company (the "Authorized Officers") are each hereby
individually authorized and directed to execute and deliver to Silicon
Valley Bank ("Silicon") the Loan and Security Agreement in substantially
the form presented to the Board of Directors and to execute and deliver
to Silicon such other agreements, documents, and instruments as Silicon
may require from time to time and as such Authorized Officer shall in
his or her judgment determine are necessary or appropriate for the
proper fiscal management of the Company, including but not limited to
any renewals, extensions and/or amendments of the foregoing documents.
FURTHER RESOLVED, that each of the Authorized Officers is hereby
authorized and directed from time to time to borrow such sum or sums of
money from Silicon as in the judgment of such Authorized Officer, the
Company may require.
FURTHER RESOLVED, that each of the Authorized Officers is hereby
authorized and directed to grant, transfer, pledge, mortgage, assign, or
otherwise hypothecate to Silicon all property of any and every kind
belonging to this corporation as security for any and all indebtedness
of this corporation to Silicon, whether arising pursuant to this
resolution or otherwise, and including, but not limited to, any
accounts, inventory, equipment, general intangibles, instruments,
documents, chattel paper, notes, money, deposit accounts, furniture,
fixtures, goods, copyrights and other property of every kind; and to
execute and deliver to Silicon any and all grants, transfers, trust
receipts, loan or credit agreements, pledge agreements, mortgages, deeds
of trust, financing statements, security agreements and other
hypothecation agreements as Silicon may require from time-to-time and as
such Authorized Officer shall in his or her judgment determine are
necessary or appropriate for the proper fiscal management of the
Company.
<PAGE> 8
I also certify that each of the following named individuals is a duly
elected officer of the Company, and holds the office of the Company set
forth opposite his or her name, and do further certify that the signature
written opposite the name and title of such officer is his or her true and
correct signature.
<TABLE>
<CAPTION>
Name Title Signature
- ---- ----- ---------
<S> <C> <C>
Steven C. Quay, M.D., Ph.D. President & CEO /s/ Steven C. Quay
- --------------------------------- --------------------- ---------------------------------
Gregory Sessler CFO /s/ Gregory Sessler
- --------------------------------- --------------------- ---------------------------------
</TABLE>
IN WITNESS WHEREOF, I have hereunto set my hand as such Secretary or
Assistant Secretary on the date set forth above.
/s/ Gregory Sessler
----------------------------------------
Secretary of Assistant Secretary
<PAGE> 1
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of August 31, 1998,
by and between Sonus Pharmaceuticals, Inc. ("Borrower") and Silicon Valley Bank
("Silicon").
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Silicon, Borrower is indebted to Silicon pursuant to, among
other documents, a Loan and Security Agreement, dated August 11, 1995, together
with all Schedules attached thereto, as such agreement may be amended from time
to time (the "Loan Agreement"). The Loan Agreement provided for, among other
things, a Secured Line of Credit in the original principal amount of Five
Million and 00/100 Dollars ($5,000,000.00). Capitalized terms used but otherwise
defined herein shall have the same meaning as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Silicon shall be referred to
as the "Indebtedness".
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by the Collateral as defined in the Loan Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Loan Agreement.
1. The defined term "Maturity Date" shall mean August 30,
1999, at which time all unpaid principal and accrued but
unpaid interest shall be due and payable.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Silicon a fee in the amount of
Twelve Thousand Five Hundred and 00/100 Dollars ($12,500.00) (the "Loan Fee")
plus all out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any amounts
under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below)
understands and agrees that in modifying the existing Indebtedness, Silicon is
relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Silicon's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Silicon to make any future modifications to
the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of the Indebtedness. It is the intention of Silicon and Borrower to
retain as liable parties all makers and endorsers of Existing Loan Documents,
unless the party is expressly released by Silicon in writing. Except as
otherwise expressly provided herein, no maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
1
<PAGE> 2
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: SILICON:
SONUS PHARMACEUTICALS SILICON VALLEY BANK
By: /s/ Gregory Sessler By: /s/ Peter Palsson
--------------------------- ---------------------
Name: Gregory Sessler Name: Peter Palsson
Title: Chief Financial Officer Title: Vice President
2
<PAGE> 1
Consent to Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in (Form S-8 No. 333-08623, No.
333-36093, and No. 333-56933) pertaining to the Incentive Stock Option,
Non-qualified Stock Option, and Restricted Stock Purchase Plan - 1991; 1995
Stock Option Plan for Directors; and Employee Stock Purchase Plan of our report
dated January 31, 1999, with respect to the financial statements of SONUS
Pharmaceuticals, Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Seattle, Washington
March 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 5,203,926
<SECURITIES> 11,750,916
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,373,860
<PP&E> 3,996,876
<DEPRECIATION> (2,552,786)
<TOTAL-ASSETS> 18,817,950
<CURRENT-LIABILITIES> 9,274,043
<BONDS> 0
0
0
<COMMON> 35,009,368
<OTHER-SE> (27,514,682)
<TOTAL-LIABILITY-AND-EQUITY> 18,817,950
<SALES> 0
<TOTAL-REVENUES> 5,100,000
<CGS> 0
<TOTAL-COSTS> 17,012,406
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 231,024
<INCOME-PRETAX> (11,173,284)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,173,284)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,173,284)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
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