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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, 1999
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)
DELAWARE 95-4343413
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22026 20TH AVENUE SE, BOTHELL, WASHINGTON 98021
(Address of principal executive offices)
(425) 487-9500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTON 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 February 1, 2000, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the Registrant was $39,411,715 based on the
closing sales price of $5.00 per share of the Common Stock as of such date, as
reported by The Nasdaq National Market. As of February 1, 2000, 8,990,354 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 2000 Annual Meeting of
Stockholders to be held April 27, 2000 are incorporated by reference in Items
10, 11, 12, and 13 of Part III hereof.
PAGE 1 OF 62 PAGES
EXHIBIT INDEX APPEARS ON PAGE 57
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SONUS PHARMACEUTICALS, INC.
TABLE OF CONTENTS
PART I PAGE
Item 1. Business.............................................................. 3
Overview........................................................... 3
Imaging Overview................................................... 5
Ultrasound Imaging................................................. 5
SONUS Technology and Products...................................... 8
Strategic Alliances................................................ 10
Status of Clinical Trials.......................................... 12
Marketing and Distribution......................................... 13
Manufacturing...................................................... 14
Research and Development........................................... 15
Government Regulation ............................................. 15
Competition........................................................ 18
Patents and Proprietary Rights..................................... 18
Product Liability.................................................. 20
Human Resources.................................................... 21
Certain Factors that May Affect Our Business and Future Results.... 22
Item 2. Properties............................................................ 29
Item 3. Legal Proceedings..................................................... 29
Item 4. Submissions of Matters to a Vote of Security Holders.................. 30
PART II
Item 5. Market for the Registrant's Common Stock.............................. 31
Item 6. Selected Financial Data............................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............ 39
Item 8. Financial Statements and Supplementary Data........................... 39
Item 9. Changes In and Disagreements with Accountants......................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant.................... 56
Item 11. Executive Compensation................................................ 56
Item 12. Security of Ownership of Certain Beneficial Owners and Management..... 56
Item 13. Certain Relationships and Related Transactions........................ 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 57
SIGNATURES...................................................................... 61
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PART I
ITEM 1. BUSINESS
OVERVIEW
SONUS Pharmaceuticals, Inc. is engaged in developing proprietary ultrasound
contrast agents and drug delivery systems for use in the diagnosis and treatment
of heart disease, cancer and other debilitating conditions. Ultrasound imaging
is a widely used, non-invasive, cost-effective technique used to examine soft
tissues, internal body organs and blood flow in the body. While contrast agents
are widely-used in most other imaging modalities, ultrasound imaging is
currently largely performed without the use of a contrast agent. Our first
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. To date, over 2,200 patients and
volunteers have participated in clinical trials of EchoGen. We believe 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 our proprietary
PhaseShift(TM) technology, which changes from microscopic liquid droplets of
dodecafluoropentane ("DDFP") to gas microbubbles upon activation prior to
patient administration. We believe that EchoGen has the following
characteristics which we believe will provide physicians and sonographers the
capability to improve ultrasound imaging:
o long persistence which will allow physicians sufficient time to
complete an EchoGen-enhanced ultrasound study;
o limited attenuation (partial or total image blackout) allowing better
image quality for physician analysis;
o administration through a single bolus injection not requiring multiple
injections or infusions during the course of an ultrasound
examination;
o convenient configuration in a non-refrigerated product kit with all
required materials for patient administration, and;
o safety profile resulting from preclinical and clinical trials
conducted to date
The above product characteristics have been established through our
clinical trials. However, there can be no assurance that characteristics
inconsistent with those from our clinical trials will be encountered in future
use of the product. See "Certain Factors That May Affect Our Business and Future
Results - Unproven Safety and Efficacy; Uncertainty of Clinical Trials."
In 1996, we 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. Since
the NDA filing, we have had the following material correspondence with the FDA
related to the filing:
o In February 1998, we received an action letter from the FDA which
indicated that the EchoGen NDA was considered inadequate for approval
and cited certain deficiencies in the application;
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o In August 1998, we submitted an amendment to the FDA in response to
the February 1998 FDA action letter;
o In October 1998, we were notified by the FDA that the amendment filing
was considered complete;
o In April 1999, we received an "approvable letter" from the FDA. The
approvable letter provided the conditions that must be satisfied
before final approval of echocardiography indications; and
o In September 1999, we submitted a formal response to the conditions of
the approvable letter. The FDA has notified us that it expects to
complete its review of our response by March 2000. Although it is
inappropriate for us to speculate on the outcome of the FDA review, we
believe we have addressed the conditions set forth in the approvable
letter.
No assurance can be given that the FDA will review the response to the
approvable letter in a timely manner or that the FDA will ultimately approve the
NDA. See "Certain Factors That May Affect Our 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 1996 for the approval to market EchoGen
in the European Union ("E.U."). Since the MAA filing, we have had the following
material correspondence with the EMEA related to the filing:
o In July 1998, the EMEA granted a marketing authorization for EchoGen
in the 15 countries of the E.U. 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;
o During 1998 and 1999, we submitted to the EMEA certain variations of
our marketing authorization to bring the manufacturing process and
specifications for European product in line with the process and
specifications submitted to the FDA for approval in the U.S.
o In 1999, we received notifications that the variations to our
marketing license were approved by the EMEA with the final
notification received in December 1999.
In addition to EchoGen, we are also applying our proprietary technology to
research and develop therapeutic products and additional diagnostic products. In
1997, we initiated development of a second ultrasound contrast agent, QW7437.
Preclinical and clinical studies 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.
We are also investigating the application of our technology in the
development of drug delivery systems for therapeutic products. Our strategy is
to apply our proprietary technology and capabilities in emulsion formulations to
improve the bioavailability and reduce the toxicity of water insoluble
compounds. Our plan is to enter into feasibility study agreements with companies
who own active compounds, typically large pharmaceutical companies, to determine
if our drug delivery strategy enhances their active compound. In December 1999,
we entered into our first feasibility study agreement. Under this feasibility
study agreement, we have agreed to use our reasonable best efforts to develop
new formulations of an active compound and provide them to the pharmaceutical
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company for further evaluation. If the feasibility study is successful, our
goal is to negotiate a development and license agreement with the pharmaceutical
company. There can be no assurance that this feasibility study or any new
feasibility studies will result in development or license agreements.
IMAGING 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. 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 90
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 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, which is crucial to some imaging modalities and
has greatly clarified images obtained with others, has broadened the number of
imaging applications. A contrast agent is a substance that is administered to
the patient, typically intravenously or orally, 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
approximately 33 million imaging studies utilizing contrast agents are performed
annually in the U.S.
ULTRASOUND IMAGING
Ultrasound for medical imaging purposes is a safe, non-invasive and
relatively inexpensive method to provide images of most major soft tissues and
organs. Initially used to image the general shape, size and structure of
internal soft tissues and organs, advances in technology and scanning techniques
have expanded its use to areas such as imaging of 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, we believe that
approximately 70 million ultrasound imaging procedures are performed annually in
the U.S., of which a majority are for cardiology and radiology indications.
Cardiac ultrasound, known as echocardiography, is used to assess the
structure and function of the heart, providing information that assists the
physician in the diagnosis and treatment of coronary artery disease, valvular
disease and congenital heart defects. In an ultrasound study for radiology
indications, the physician attempts to image soft tissues and organs such as the
liver or kidney and to identify abnormalities and obstructions of the major
veins and arteries of the body.
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According to published reports, there are nearly 80,000 ultrasound systems
installed in the U.S. in a majority of hospitals and clinics as well as in many
physicians' offices.
Ultrasound systems use 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. With standard ultrasound
imaging, known as grayscale for radiology applications or two-dimensional ("2D")
for cardiology applications, the physician can diagnose 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
apply 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 assess the hemodynamics (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.
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 sound waves at the fundamental transducer
frequency but receiving at the first harmonic, which is twice the fundamental
frequency. Because ultrasound contrast agents can act as non-linear resonators,
they generate a harmonic signal. With an ultrasound system capable of receiving
harmonic signals, this technique enhances the distinction between tissue and
blood and extends the persistence of ultrasound contrast agents. Ultrasound
equipment manufacturers continue to develop system software designed to take
advantage of the unique properties of contrast agents and more recent
developments have included: power harmonic imaging, flash echo imaging, pulse
inversion imaging and real time perfusion 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, the
majority of the installed base of ultrasound equipment is not capable of
performing these new techniques as of the end of 1999.
Despite such advancements in ultrasound equipment, ultrasound imaging
without the use of contrast agents often produces images that are less defined
and more difficult to interpret than images produced by other imaging modalities
such as CT and MRI. For example, the depth and
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angle of certain organs or 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 vessels such as the renal
artery. In addition, the low acoustic reflectivity of blood may limit 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 wide-spread 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 by focusing primarily on methods to
encapsulate air microbubbles that reflect the sound waves generated by the
ultrasound system. 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. We believe that an effective ultrasound contrast
agent could improve echocardiography by allowing physicians to use left
ventricular chamber opacification to assist in cardiac function assessment
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 contrast-enhanced
echocardiography in conjunction with exercise or pharmacological stress
procedures could also assist in the differentiation of ischemia from infarction.
In 1994, the FDA approved the first ultrasound contrast agent for use as an aid
to enhance images of ventricular chambers and endocardial border (inner lining
of the heart chamber) definition in patients with suboptimal echoes undergoing
certain cardiac function studies. A second agent was approved in December 1997
which replaced the first agent. Our NDA for EchoGen, as amended, is currently
under review by the FDA for approval of certain echocardiography indications. In
addition, we believe that at least three other companies ultrasound contrast
agents are being reviewed by the FDA and several others are in clinical trials
for echocardiography indications.
Radiology Indications. We believe that the development of an effective
ultrasound contrast agent could improve the capabilities of ultrasound imaging
for radiology indications, including
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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 small lesions or structures deep within the body,
where acoustic energy is lost as the transmitted acoustical beam passes through
the body. 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, kidneys, prostate and other tissues and organs.
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). Although
we have conducted clinical trials for radiology indications for EchoGen, our NDA
for EchoGen, as amended, does not include radiology indications. There are no
FDA approved ultrasound contrast agents for intravascular radiology indications
although we believe that at least one ultrasound contrast agent for
intravascular radiology indications is being reviewed by the FDA and that
several others are in clinical trials.
SONUS TECHNOLOGY AND PRODUCTS
ECHOGEN
We have primarily focused our research and development efforts to date on
the development of EchoGen, which is injected as small microbubbles into the
bloodstream that persist long enough to permit completion of ultrasound
diagnostic studies and which can be manufactured and packaged with an acceptable
shelf life. To develop EchoGen, initial efforts focused on identifying a
chemical agent that exhibited the desired properties of long persistence and the
ability to form small microbubbles during administration. After studying over
400 chemicals, primarily fluorocarbons, we selected dodecafluoropentane ("DDFP")
to develop as a potential ultrasound contrast agent. DDFP exists as a liquid
while stored at room temperature but changes into a gas through an activation
procedure performed just prior to administration to the patient. This process,
which we call the PhaseShift(TM) process, leads to the injection of microbubbles
into the patient's bloodstream that are small enough to pass through the lungs
and circulate in the vascular system. EchoGen is a stable, 2% emulsion of DDFP,
that through the PhaseShift process creates microbubbles, packaged in vials and
easily administered to the patient with a single peripheral venous injection
prior to or during the ultrasound study. Based on studies conducted to date, we
believe EchoGen has a useful shelf life of 18 months at room temperature.
We believe that EchoGen has the following characteristics which we believe
will provide physicians and sonographers the capability to improve ultrasound
imaging:
o Long Persistence. Based on results from clinical trials, we believe
that EchoGen is sufficiently persistent to enhance typical cardiology
and radiology studies. The period of enhancement of EchoGen varies
depending upon numerous factors. In Phase 3 studies of cardiac
function, where 2D grayscale is the preferred imaging modality,
EchoGen enhanced images for approximately three to five minutes. In
clinical studies of radiology
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indications where color Doppler is the primary imaging modality,
EchoGen enhanced images for an average of approximately fifteen
minutes.
o Limited Attenuation. Our clinical trials of EchoGen have also
demonstrated image enhancement with minimal attenuation. Attenuation
is an undesirable effect of contrast agents whereby the backscatter of
reflective soundwaves causes part or all of the image to blackout or
disappear until the concentration of microbubbles in the blood stream
dissipates.
o Single Bolus Injection. EchoGen is administered with a single bolus
injection and does not require multiple injections or infusions during
the course of an ultrasound procedure.
o Convenient Product Configuration. We intend to supply EchoGen in a
procedure kit which provides all of the materials required to
administer the product and which does not require refrigeration.
o 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
and/or headache. In addition, EchoGen contains no human blood products
which eliminates the potential risk of anaphylactoid (allergic)
reactions or blood borne diseases.
The above product characteristics have been established through our
clinical trials. However, there can be no assurance that characteristics
inconsistent with those from our clinical trials will be encountered in future
use of the product. See "Certain Factors That May Affect Our Business and Future
Results - Unproven Safety and Efficacy; Uncertainty of Clinical Trials."
QW7437
In 1997, we initiated development of a second ultrasound contrast agent,
QW7437. Preclinical studies 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 presence of flow limiting narrowings in coronary
arteries, the amount of collateral blood flow, and the success of therapeutic
interventions such as coronary angioplasty. See "Certain Factors That May Affect
Our Business and Future Results - Unproven Safety and Efficacy; Uncertainty of
Clinical Trials."
DRUG DELIVERY AND QW8184
We are also investigating the development of drug delivery systems
including the application of our proprietary technology and capabilities in
emulsion formulations to improve the bioavailability and reduce the toxicity of
water insoluble compounds. QW8184 is our first project in the application of our
emulsion technology for drug delivery systems. QW8184 is a proprietary
formulation of paclitaxel, the active ingredient in Taxol(R), a widely used
oncology drug. Based on preclinical studies to date, we believe QW8184 may
enable the administration of
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paclitaxel in a bolus administration and also believe it may result in an
improved safety profile. Taxol is currently administered by infusion and
requires premedication with other drugs to minimize certain side effects.
Our strategy is to enter into feasibility study agreements with companies
who own active compounds, typically large pharmaceutical companies, to determine
if our drug delivery strategy enhances their active compound. In December 1999,
we entered into our first feasibility study agreement. Under this feasibility
study agreement, we have agreed to use our reasonable best efforts to develop
new formulations of an active compound and provide them to the pharmaceutical
company for further evaluation. If the feasibility study is successful, our goal
is to negotiate a development and license agreement with the pharmaceutical
company. However, there can be no assurance that this feasibility study or any
new feasibility studies will result in development or license agreements. See
"Certain Factors That May Affect Our Business and Future Results - Uncertainty
Associated with Drug Delivery Technology."
STRATEGIC ALLIANCES
Our strategy is to enter into strategic alliances to facilitate the
development, manufacture and distribution of our products.
ABBOTT LABORATORIES
In 1993, our company and Abbott Laboratories ("Abbott"), a worldwide
manufacturer of health care products, entered into a supply agreement relating
to EchoGen (the "Supply Agreement"). Under the Supply Agreement, Abbott agreed
to develop the manufacturing process, assist us in FDA submissions and
manufacture and sell the product to us 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 us with most of our
product requirements for EchoGen clinical trials. We have agreed to purchase a
portion of the U.S. commercial requirements of EchoGen if FDA approval is
obtained.
In 1996, we entered into two agreements with Abbott for the marketing and
selling of our ultrasound contrast agents, including EchoGen, in: (1) the United
States (the "Abbott U.S. Agreement") and; (2) certain international territories
including Europe, Latin America, Canada, Middle East, Africa and certain
Asia/Pacific countries ("Abbott International Agreement"). In January 1999, we
amended the Abbott U.S. Agreement (the "Amended Abbott U.S. Agreement").
Under the Amended Abbott U.S. Agreement, Abbott agreed to make certain
payments to us, primarily conditioned upon the achievement of regulatory
approval and certain commercialization milestones potentially totaling $31.0
million, of which we have received $23.0 million as of December 31, 1999. In
addition, Abbott has agreed to pay us 47% of net EchoGen revenues in the U.S., a
portion of which we must use to fund our responsibilities under the Amended
Abbott U.S. 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
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making additional clinical support payments. In addition, Abbott purchased in
1996, for $4.0 million, warrants to acquire 500,000 shares of our common stock.
The warrants are exercisable over five years at $16.00 per share.
In February 2000, we entered into an amendment with Abbott that further
modifies the Amended Abbott U.S. Agreement. The modified agreement provides
Abbott the option either to market and distribute EchoGen in the U.S. subject to
our obtaining necessary regulatory approvals, or to terminate the Amended Abbott
U.S. Agreement, whether regulatory approvals are received or not. Abbott's
option terminates on March 31, 2000. No financial payments will be made during
the period of Abbott's option. If Abbott elects to market and sell EchoGen in
the U.S., the parties have agreed to negotiate an amendment by April
30, 2000 to reflect any changes in responsibilities of the parties, the status
of regulatory approval and current market conditions. If Abbott elects to
terminate the Amended Abbott U.S. Agreement by March 31, 2000, Abbott will have
no further economic or other responsibilities under the Amended Abbott U.S.
Agreement and all rights and marketing materials related to EchoGen will be
returned to us. We have also agreed with Abbott to amend the Supply Agreement
under which Abbott manufactures EchoGen for us. If the Amended Abbott U.S.
Agreement is terminated, Abbott will manufacture EchoGen for a period of two
years following FDA approval, if obtained, but in no event later than July 1,
2002, during which time Abbott will transfer EchoGen manufacturing
responsibility, processes and data to us or a third party selected by us. There
can be no assurance that Abbott will elect its option to market and distribute
EchoGen in the U.S., or even if Abbott should determine to do so, that we and
Abbott will agree on mutually acceptable revisions to the Amended Abbott U.S.
Agreement by April 30, 2000. Furthermore, there can be no assurance that in the
event of termination of the Amended Abbott U.S. Agreement, that we can
successfully market and distribute EchoGen, or that we will be successful in
obtaining other partners to market and distribute EchoGen, or that we will be
able to locate and qualify an alternative manufacturer of EchoGen.
In October 1999, our company and Abbott Laboratories International Division
("Abbott International") restructured the Abbott International Agreement. As of
the date of restructuring, Abbott International has paid $14.7 million to us
under the Abbott International Agreement. Under the restructured agreement,
Abbott International has returned all exclusive marketing rights to EchoGen to
us. We have agreed to share with Abbott International, 21% of our net profits
from the sale of EchoGen and will also share 50% of any up-front license fees
paid to us by new partners, of which 50% will be credited against the share of
net profits that we will pay to Abbott International. We have commenced
discussions with new potential marketing partners for the Abbott International
territories. No assurance can be given that we will secure new marketing
partners for the territories under the Abbott International Agreement.
Under the restructured international agreement, Abbott International also
retains a five-year option to elect to become a co-marketer of QW7437, our
second ultrasound contrast agent under development. Abbott International has
also agreed not to market or sell a competing ultrasound contrast product during
the option period, and thereafter if it elects its option to co-market QW7437.
In the event the Amended Abbott U.S. Agreement is terminated, Abbott
International's rights to a percentage of our profits or upfront license fees
and co-marketing rights to QW7437 will terminate.
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We cannot give any assurance that we will receive any additional funding or
milestone payments under the Amended Abbott U.S. Agreement. If our relationship
with Abbott were to terminate or if the form of existing agreements is modified
in a manner materially adverse to us, it could have a material adverse effect on
our business, financial condition and results of operation. See "Certain Factors
That May Affect Our Business and Future Results - Dependence on Third Parties
for Funding, Clinical Development and Distribution."
DRUG DELIVERY FEASIBILITY STUDY
We believe our drug delivery technology can be applied to the formulation
of many water insoluble active compounds which are either currently in use or
being investigated as therapeutic agents. Our strategy is to enter into
feasibility study agreements with companies who own active compounds, typically
large pharmaceutical companies, to determine if our drug delivery technology
enhances their active compound. In late 1999, we entered into our first
feasibility study agreement. Under this feasibility study agreement, we have
agreed to use our reasonable best efforts to develop new formulations of an
active compound and provide them to the pharmaceutical company for further
evaluation. If the feasibility study is successful, our goal is to negotiate a
development and license agreement with the pharmaceutical company. However,
there can be no assurance that this feasibility study or any new feasibility
studies will result in development or license agreements.
STATUS OF CLINICAL TRIALS
We use academic institutions and clinical research organizations to conduct
and monitor our clinical trials. The E.U. marketing authorization and the NDA
under review by the FDA for EchoGen is primarily based on the results of two
pivotal Phase 3 echocardiography clinical trials. These pivotal trials were
conducted from late 1995 to early 1996 at 19 sites in the U.S. to evaluate the
safety and 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, only 5 to 21% of
exams were optimal, compared with 47 to 90% of exams following administration of
EchoGen. Based on evaluations made by the 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. These clinical trials provide the basis for
our EchoGen NDA which has been deemed approvable by the FDA subject to certain
conditions which we believe have now been addressed. However, there can be no
assurance that the EchoGen NDA will obtain final FDA approval. See "Certain
Factors That May Affect Our Business and Future Results - Unproven Safety and
Efficacy; Uncertainty of Clinical Trials."
SAFETY RESULTS OF ECHOGEN
In analyzed clinical trials with 2,230 patients and volunteers utilizing
the current formulation of EchoGen, there were no findings that we believe would
suggest a toxicologic or pharmacologic response to the administration of
EchoGen. There were no effects on organ
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function, blood chemistry, hematologic or urinalysis results. Adverse events
that were considered possibly, probably or definitely related to EchoGen
administration were experienced by 10.2% of patients. Those events occurring in
greater than 1% of patients include feeling of warmth and flushing (3.1%), taste
perversion (1.3%) and headache (1.8%). The events were usually mild, occurred
within 30 minutes of injection, generally required no treatment and left no
lasting aftereffects. See "Certain Factors That May Affect Our Business and
Future Results - Unproven Safety and Efficacy; Uncertainty of Clinical Trials."
ADDITIONAL STUDIES OF ECHOGEN
In addition to the pivotal echocardiology clinical trial, recent clinical
trials investigating the use of EchoGen in additional applications are shown
below:
Application Clinical Phase Number of Patients
- ----------- -------------- ------------------
Pharmacologic and exercise stress Phase 3 275
echocardiography
Detection of prostate cancer Phase 3 213
Three-dimensional measurement of left Phase 2 90
ventricular volume
The commercialization of EchoGen for new indications, beyond those
contained in the E.U. marketing authorization or in the NDA under review, 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 our 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 Our Business and Future Results - Uncertainty of Governmental Regulatory
Requirements; Lengthy Approval Process; and Unproven Safety and Efficacy;
Uncertainty of Clinical Trials."
MARKETING AND DISTRIBUTION
In 1996, we entered into two agreements with Abbott for the marketing and
selling of ultrasound contrast agents, including EchoGen, in: (1) the United
States, the Abbott U.S. Agreement and; (2) the Abbott International Agreement.
In January 1999, we amended the Abbott U.S. Agreement.
In February 2000, we entered into an amendment with Abbott that further
modifies the Amended Abbott U.S. Agreement. The modified agreement provides
Abbott the option either to market and distribute EchoGen in the U.S. subject to
our obtaining necessary regulatory approvals, or to terminate the Amended Abbott
U.S. Agreement, whether regulatory approvals
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are received or not. The option expires March 31, 2000. There can be no
assurance that Abbott will elect their option to market and distribute EchoGen
in the U.S. or even if Abbott should determine to do so, that, our relationship
with Abbott will be successful. Furthermore, there can be no assurance that in
the event of termination of the Amended Abbott U.S. Agreement, that we can
successfully market and distribute EchoGen or that we will be successful in
obtaining other partners to market and distribute EchoGen. See "Certain Factors
That May Affect Our Business and Future Results - Dependence on Third Parties
for Funding, Clinical Development and Distribution."
In October 1999, our company and Abbott International restructured the
Abbott International Agreement. Under the restructured agreement Abbott
International has returned all exclusive marketing rights to EchoGen to us. In
the event the Amended Abbott U.S. Agreement is terminated, Abbott
International's rights to a percentage of our profits or upfront license fees
and co-marketing rights to QW7437 will terminate. We are currently in
discussions with potential partners for the distribution and marketing of
EchoGen in certain countries of the E.U. No assurance can be given that we will
secure new marketing partners for the territories under the Abbott International
Agreement. See "Strategic Alliances." See "Certain Factors That May Affect Our
Business and Future Results - Dependence on Third Parties for Funding, Clinical
Development and Distribution."
MANUFACTURING
We have used three outside FDA-certified organizations to manufacture
EchoGen under current Good Manufacturing Practices ("GMP") requirements for our
use in preclinical and clinical studies and have also used one of these
organizations to produce QW7437. We produce non-GMP batches of EchoGen at our
facilities as part of the ongoing development of the product.
We have entered into an agreement with Abbott pursuant to which Abbott has
agreed to scale-up, manufacture and sell EchoGen to us, 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 us
in our clinical trials. EchoGen is manufactured from raw materials supplied to
Abbott by us. Under the agreement, we must purchase certain of our requirements
of EchoGen, and we have retained the right to manufacture or to have a third
party manufacture a portion of our 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. We have also agreed with Abbott to amend
the Supply Agreement under which Abbott manufactures EchoGen for us. If the
Amended Abbott U.S. Agreement is terminated, Abbott will manufacture EchoGen for
a period of two years following FDA approval, if obtained, but in no event later
than July 1, 2002, during which time Abbott will transfer EchoGen manufacturing
responsibility, processes and data to us or a third party selected by us. The
inability of Abbott or any alternative contract manufacturer to manufacture and
supply us with EchoGen or the kit would have a material adverse effect on our
business, financial condition and results of operations. See "Strategic
Alliances" and "Certain Factors That May Affect Our Business and Future
Results."
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The active chemical ingredients in EchoGen, DDFP and PEG Telomer B (a
surfactant) are manufactured by a limited number of vendors. In 1998, we entered
into a commercial supply agreement for one of these raw materials. In the event
that EchoGen is approved by the FDA, we are 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 us could delay the
manufacture of, or cause us to cease the manufacturing of, EchoGen. Any such
delay or cessation could have a material adverse effect on our business,
financial condition and results of operations. We believe the other raw
materials of EchoGen are readily available from various suppliers.
RESEARCH AND DEVELOPMENT
We currently conduct research and development activities at our facilities.
We also engage in certain research, preclinical studies and clinical development
efforts at universities and other institutions. Our primary research and
development efforts to date have been directed at the development and
application, including clinical trials, of EchoGen, QW7437 and QW8184. In
addition, we are conducting research in other applications of our proprietary
technology in the areas of intravascular and oral drug delivery.
We incurred expenses of approximately $5.6 million, $10.5 million and $11.6
million on research and development in fiscal 1999, 1998 and 1997, respectively.
GOVERNMENT REGULATION - DRUG APPROVAL PROCESS
Regulation by governmental authorities in the U.S. and other countries is a
significant factor in the production and marketing of our products and in our
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 the following steps:
(i) preclinical studies including laboratory evaluation and animal
studies;
(ii) submission to the FDA of 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 Good
Manufacturing Practices ("GMP") requirements applicable to the production of
pharmaceutical agents.
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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 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"). The IRB will consider, among
other things, ethical factors, informed consents, the safety of human subjects
and the possible liability of the institution conducting a clinical study.
Clinical trials typically are conducted in three sequential phases,
although 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.
The following details certain events in the FDA approval process for the
EchoGen NDA to date:
o In 1996, we submitted an NDA for EchoGen to 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;
o In 1997, the FDA informed us that a Medical Imaging Drug Advisory
Committee meeting was not necessary to complete the review of the NDA
for EchoGen;
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o In February 1998, we 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;
o In August 1998, we submitted an amendment to the FDA in response to
the February 1998 FDA letter and, in October 1998, we were notified by
the FDA that the amendment filing was considered complete;
o In April 1999, we received an "approvable letter" from the FDA for
EchoGen. The FDA letter provided the conditions that must be satisfied
before final approval.
o In September 1999, we submitted a formal response to the conditions of
the approvable letter. The FDA has notified us that it expects to
complete its review on our response by March 2000. Although it is
inappropriate for us to speculate on the outcome of the FDA review, we
believe we have addressed the conditions set forth in the approvable
letter.
No assurance can be given that the FDA will review the response to the
approvable letter in a timely manner or that the FDA will ultimately approve the
NDA. See "Certain Factors That May Affect Our Business and Future Results -
Uncertainty of Governmental Regulatory Requirements; Lengthy Approval Process."
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 1996, we submitted a MAA to the EMEA for EchoGen under the new
centralized 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.
The following details certain events in the EMEA approval process for our
EchoGen MAA to date:
o 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;
o In July 1998, the EMEA ratified the CPMP recommendation and granted a
marketing authorization for EchoGen in the 15 countries of the E.U.;
o During 1998 and 1999, we submitted to the EMEA certain variations of
our marketing authorization to bring the manufacturing process and
specifications for European product in line with the process and
specifications submitted to the FDA for approval in the U.S.
o In 1999, we received notifications that the variations to our
marketing license were approved by the EMEA with the final
notification received in December 1999.
See "Certain Factors That May Affect Our Business and Future Results - Ability
to Attract and Retain New Partnerships"
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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, we may be subject to
governmentally mandated prices for EchoGen. We are 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. We 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
contrast agents is intense and expected to increase. Although there is currently
only one FDA approved ultrasound contrast agent being marketed in the U.S. for
certain cardiology applications, there are, to our knowledge, four other
ultrasound contrast agents, including EchoGen, that have been submitted to the
FDA for approval and we believe that other medical and pharmaceutical companies
are conducting clinical trials with ultrasound contrast agents. In addition,
there are three ultrasound contrast agents, including EchoGen, approved for
marketing in certain countries in Europe for certain cardiology and/or radiology
indications and we believe that other ultrasound contrast agents are under
European regulatory review. We also believe that other medical and
pharmaceutical companies will compete with us in areas of research and
development, acquisition of products and technology licenses, and the
manufacturing and marketing of ultrasound contrast agents. We expect that
competition in the ultrasound contrast agent field will be based primarily on
efficacy, safety, ease of administration, breadth of approved indications and
physician, healthcare payor and patient acceptance. Although we believe that if
EchoGen is approved for commercial sale in the U.S., EchoGen will be
well-positioned to compete successfully, there can be no assurance that we will
be able to do so. Many of our competitors and potential competitors have
substantially greater financial, technical and human resources than us 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 us. Generally, products that reach the market
first 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 our technology and
products noncompetitive or obsolete. See "Certain Factors That May Affect Our
Business and Future Results - Competition and Rick of Technological
Obsolescence."
PATENTS AND PROPRIETARY RIGHTS
We consider the protection of our technology to be important to our
business. In addition to seeking U.S. patent protection for many of our
inventions, we are seeking patent protection in certain foreign countries in
order to protect our proprietary rights to inventions. We also rely
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upon trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
Our success will depend, in part, on our ability to obtain patents, defend
patents and protect trade secrets. We have filed patent applications in the U.S.
and in over 40 foreign countries relating to our principal technologies. In the
U.S., 12 patents have been issued to us, the claims of which are primarily
directed to ultrasound contrast media that 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 us 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 our ability to commercialize
our products. Furthermore, there can be no assurance that other companies will
not independently develop similar products, duplicate any of our products or
design around patents that may be issued to us. Litigation may be necessary to
enforce any patents issued to us 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 us
and distraction of our management. An adverse ruling in any litigation or
administrative proceeding could have a material adverse effect on our business,
financial condition and results of operations. We have been involved in
administrative proceedings and have initiated a patent infringement suit against
one of our competitors. See "Legal Proceedings" and "Certain Factors That May
Affect Our Business and Future Results - Dependence on Patents and Proprietary
Rights."
Our commercial success will depend in part on not infringing patents issued
to competitors. There can be no assurance that patents belonging to competitors
or others will not require us to alter our products or processes, pay licensing
fees or cease development of our current or future products. Any litigation
regarding infringement could result in substantial costs to us and distraction
of our management, and any adverse ruling in any litigation could have a
material adverse effect on our business, financial condition and results of
operations. Further, there can be no assurance that we will be able to license
other technology that we may require at a reasonable cost or at all. Failure by
us to obtain a license to any technology that we may require to commercialize
our products would have a material adverse effect on our business, financial
condition and results of operations. In addition, to determine the priority of
inventions and the ultimate ownership of patents, we 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 our 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 us and distraction of our
management. Two of our 12 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 1998,
we announced we 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."
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In August 1999, we entered into an agreement with Nycomed Imaging AS
("Nycomed") for the cross-license of certain proprietary ultrasound contrast
agent technologies. Under the terms of the agreement, we provided Nycomed with
an exclusive license to our ultrasound contrast patents except as related to
perfluoropentane, the gas used in our ultrasound contrast products. Under the
exclusive license to the patents, Nycomed also has the right to freely
sublicense to other companies with a portion of any sublicense fees to be paid
to us. In addition, we have a worldwide, non-exclusive license to certain of
Nycomed's ultrasound contrast agent patents. We also have the right to
sublicense these patents to our collaborative partners. Under the agreement,
Nycomed has paid us a license fee of $10.0 million. In addition, both companies
have agreed to pay royalties to each other based on future sales of our
respective ultrasound contrast agents.
Also, under the agreement, we transferred to Nycomed the responsibilities
and legal costs associated with our patent infringement litigation with
Molecular Biosystems and Mallinckrodt Medical Inc. ("Mallinckrodt"). See "Legal
Proceedings."
We have obtained registered trademarks for our 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 our company
will not infringe upon third party rights or will be acceptable to regulatory
agencies such as the FDA. The requirement to change our trademarks or trade name
could entail significant expenses and could have a material adverse effect on
our business, financial condition and results of operations.
We also rely on unpatented trade secrets, proprietary know-how and
continuing technological innovation which we seek to protect, in part, by
confidentiality agreements with our corporate partners, collaborators, employees
and consultants. There can be no assurance that these agreements will not be
breached, that we will have adequate remedies for any breach, or that our trade
secrets or know-how will not otherwise become known or be independently
discovered by competitors. Further, there can be no assurance that we will be
able to protect our trade secrets or that others will not independently develop
substantially equivalent proprietary information and techniques. See "Certain
Factors That May Affect Our Business and Future Results - Dependence on Patents
and Proprietary Rights."
PRODUCT LIABILITY
The clinical testing, manufacturing and marketing of our products may
expose us to product liability claims. We maintain liability insurance for
possible claims arising from the use of our products in clinical trials with
limits of $5.0 million per claim and in the aggregate. Although we have never
been subject to a product liability claim, there can be no assurance that the
coverage limits of our insurance policies will be adequate or that one or more
successful claims brought against us would not have a material adverse effect
upon our business, financial condition and results of operations. Further, if
EchoGen is approved by the FDA, 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 our business, financial
condition and results of operations.
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HUMAN RESOURCES
As of February 1, 2000, we had 43 employees, 31 engaged in research and
development, regulatory, clinical and manufacturing activities, and 12 in
marketing and administration. We consider our relations with our employees to be
good, and none of our employees is a party to a collective bargaining agreement.
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CERTAIN FACTORS THAT MAY AFFECT OUR 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:
o THE SUBMISSION OF APPLICATIONS FOR AND THE TIMING OR LIKELIHOOD OF
MARKETING APPROVALS FOR ONE OR MORE INDICATIONS;
o MARKET ACCEPTANCE OF OUR PRODUCTS;
o OUR ANTICIPATED FUTURE CAPITAL REQUIREMENTS AND THE TERMS OF ANY
CAPITAL FINANCING;
o THE DECISION OF ABBOTT TO MARKET OUR PRODUCTS IN THE U.S., OUR ABILITY
TO LOCATE AND ENTER INTO AGREEMENTS WITH DISTRIBUTORS FOR
INTERNATIONAL TERRITORIES, OR WITH OTHER PARTIES IN THE U.S., IF
ABBOTT SHOULD DETERMINE NOT TO MARKET OUR PRODUCTS IN THE U.S.;
o OUR ABILITY TO IDENTIFY AND ENTER INTO ACCEPTABLE ARRANGEMENTS WITH
ALTERNATIVE SOURCES OF SUPPLY OF ECHOGEN SHOULD ABBOTT DETERMINE NOT
TO CONTINUE TO MANUFACTURE ECHOGEN;
o THE PROGRESS AND RESULTS OF CLINICAL TRIALS;
o THE TIMING AND AMOUNT OF FUTURE MILESTONE PAYMENTS, PRODUCT REVENUES
AND EXPENSES; AND
o THE ANTICIPATED OUTCOME OR FINANCIAL IMPACT OF LEGAL MATTERS.
WHILE THESE STATEMENTS MADE BY US 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 OUR 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. We are subject to uncertain governmental regulatory requirements and a
lengthy approval process for our products prior to any commercial sales of our
products. The development and commercial use of our products is regulated by the
FDA, EMEA and comparable foreign regulatory agencies. The
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regulatory approval process for new ultrasound contrast agents, including
required preclinical studies and clinical trials, is lengthy and expensive.
In 1998, we 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, we submitted an amendment to the FDA in response to the February
1998 FDA action letter. In April 1999, we received an "approvable letter" from
the FDA for EchoGen. The approvable letter provided the conditions that must be
satisfied before final approval. In September 1999, we submitted a formal
response to the conditions set forth in the approvable letter. The FDA has
notified us that it expects to complete its review of our response by March
2000. Although it is inappropriate for us to speculate on the outcome of the FDA
review, we believe we have addressed the conditions set forth in the approvable
letter. No assurance can be given that the FDA will review the response to the
approvable letter in a timely manner or that the FDA will ultimately approve the
NDA.
Our company, and any collaborative partners may encounter significant
delays or excessive costs in our 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. We cannot predict if or when any of
our products under development will be commercialized.
Future U.S. or foreign legislative or administrative actions also could
prevent or delay regulatory approval of our 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. See "Government Regulations."
Unproven Safety and Efficacy; Uncertainty of Clinical Trials. We currently
have only two products, EchoGen and QW7437, that have been investigated in human
clinical trials. Although EchoGen has received EMEA approval for marketing in
Europe, our application for approval for marketing in the U.S. is currently
under review 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 relate to
certain cardiology applications. We believe EchoGen may be used in other
applications, such as liver, kidney, peripheral vascular, prostate and stress
echocardiography exams. Also, we have investigated EchoGen and QW7437 in limited
clinical trials for application in assessing myocardial perfusion. Each of those
applications will require specific clinical studies to support submissions to
regulatory authorities for expanded labeling in those applications which will be
lengthy and expensive. Failure to complete successfully any of our clinical
trials on a timely basis or at all may have a material
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adverse effect on our business, financial condition and results of operations.
In clinical trials to date, adverse events related to the final formulation of
EchoGen have been infrequent, generally mild and transient, and have included
feelings of warmth, taste perversion and/or headache. There can be no assurance
that more serious side effects will not be encountered in future trials.
History of Operating Losses; Uncertainty of Future Financial Results. Our
future financial results are uncertain. Although we reported net income of $0.4
million, $1.0 million and $1.7 million for the years ended December 31, 1999,
1997 and 1996, respectively, we reported a net loss of $11.2 million in 1998 and
have experienced significant accumulated losses since our inception in 1991, and
are expected to incur net losses in the foreseeable future. These losses have
resulted primarily from expenses associated with our research and development
activities, including preclinical and clinical trials, and general and
administrative expenses. We anticipate that our operating expenses will increase
significantly in the future as we prepare for the anticipated commercialization
of EchoGen, if U.S. regulatory approval is obtained, and as we increase our
research and development expenditures on new products. However, there can be no
assurance that we will obtain the regulatory approvals necessary to
generate product revenues. If we are unable to generate significant product
revenues, we may incur substantial losses. Moreover, even if we generate
significant product revenues, there can be no assurance that we will be able to
sustain profitability. Our results of operations have varied and will continue
to vary significantly and depend on, among other factors:
o the timing of fees and milestone payments, if any, made under the
Amended Abbott U.S. Agreement;
o the entering into of new product license agreements;
o the timing and costs of clinical trials; and
o costs related to obtaining, defending and enforcing patents.
Future Capital Requirements and Uncertainty of Additional Funding. Our
development efforts to date have consumed substantial amounts of cash and we
have generated only limited revenues from payments received from our contractual
agreements. There can be no assurance that we will continue to receive such
payments in the future. We expect that our 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. Our future capital
requirements depend on many factors including:
o our ability to obtain and retain continued funding from third parties
under contractual agreements;
o the ability to maintain our bank line of credit;
o the time and costs required to gain regulatory approvals;
o our progress on research and development programs and clinical trials;
o the costs of filing, prosecuting and enforcing patents, patent
applications, patent claims and trademarks;
o the costs of marketing and distribution;
o the status of competing products;
o the market acceptance and third-party reimbursement of our products,
if approved; and
o the cost of defending, and any damages or settlement payments that may
be paid pursuant
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to legal proceedings.
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 we are
unable to raise additional financing, we would be required to curtail or delay
the development of our products and new product research and development.
Dependence on Third Parties for Funding, Clinical Development and
Distribution. We are dependent on Abbott and other third parties for funding and
performance of a variety of activities including research, clinical development,
manufacturing, marketing and distributing our products. We have entered into
agreements with Abbott for the manufacturing, marketing and distribution of
EchoGen in the U.S. There can be no assurance that the collaboration will
continue or be successful. In February 2000, we entered into an amendment with
Abbott that further modifies the Amended Abbott U.S. Agreement. The modified
agreement provides Abbott the option either to market and distribute EchoGen in
the United States subject to obtaining necessary regulatory approvals, or to
terminate the Amended Abbott U.S. Agreement, whether regulatory approvals are
received or not. Abbott's option terminates on March 31, 2000. If Abbott elects
to market and sell EchoGen in the United States, the parties have agreed to
negotiate a revision to the Amended Abbott U.S. Agreement by April 30, 2000 to
reflect any changes in responsibilities of the parties, the status of regulatory
approval and current market conditions. There can be no assurance that Abbott
will elect its option to market and distribute EchoGen in the U.S., or even if
Abbott should determine to do so, that we and Abbott will agree on mutually
acceptable revisions to the Amended Abbott U.S. Agreement by April 30, 2000. If
the Amended Abbott U.S. Agreement is terminated, Abbott will continue to
manufacture EchoGen following FDA approval for a period of two years, but in no
event later than July 1, 2002 under the Supply Agreement with Abbott. There can
be no assurance that in the event of termination of the Amended Abbott U.S.
Agreement that we can successfully market and distribute EchoGen, or that we
will be successful in obtaining other partners to market and distribute EchoGen.
If these arrangements with third parties, including Abbott, are terminated or
the collaborations are not successful, we will not receive scheduled milestone
and funding payments and will be required to identify alternative partners for
research, clinical development, manufacturing and/or marketing and distribution,
which could have a material adverse effect on our business, financial condition
and results of operations. See "Strategic Alliances."
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 contrast agents is intense
and expected to increase. Although there is currently only one FDA approved
ultrasound contrast agent being marketed in the U.S. for certain cardiology
applications, there are to our knowledge, three other ultrasound contrast agents
that have been submitted by other companies to the FDA for approval and we
believe that other medical and pharmaceutical companies are in clinical trials
with ultrasound contrast agents. We also believe that other medical and
pharmaceutical companies will compete with us in the areas of research and
development, acquisition of products and technology licenses, and the
manufacturing and marketing of ultrasound contrast agents. We expect that
competition in the ultrasound contrast agent field will be based primarily on
efficacy, safety, ease of administration,
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breadth of approved indications and physician, healthcare payor and patient
acceptance. Although we believe that if EchoGen is approved for commercial sale,
EchoGen will be well-positioned to compete successfully, there can be no
assurance that we will be able to do so. Many of our competitors and potential
competitors have substantially greater financial, technical and human resources
than we do 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 us. 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 our technology and
products noncompetitive or obsolete.
Limited Manufacturing Experience; Dependence on Limited Contract
Manufacturers and Suppliers. We currently rely 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
we develop an in-house manufacturing capability or we are able to identify and
qualify alternative contract manufacturers, we will be entirely dependent on
Abbott for the manufacture of EchoGen. There can be no assurance that our
reliance on Abbott for the manufacture of our products will not result in
interruptions, delays or stoppages in the supply of EchoGen, or, if Abbott
elects its option to terminate the Amended Abbott U.S. Agreement, that we will
be able to identify and qualify alternative manufacturers. The active chemical
ingredients in EchoGen, DDFP and PEG Telomer B (a surfactant) are manufactured
by a limited number of vendors. The inability of these vendors to supply
medical-grade materials to us could delay the manufacture of, or cause us to
cease the manufacturing of, EchoGen. Any such delay or cessation could have a
material adverse effect on our business, financial condition and results of
operations. See "Manufacturing" and "Strategic Alliances."
Lack of Marketing and Sales Experience. We currently have no sales,
marketing or distribution capability. In order to commercialize any products, we
must internally develop sales, marketing and distribution capabilities or make
arrangements with a third party to perform these services. In 1996, we entered
into an agreement with Abbott to market and distribute EchoGen in the U.S. In
February 2000, we entered into an amendment that provides Abbott the option to
amend or terminate this agreement by March 31, 2000. There can be no assurance
that Abbott will elect to market our products and that, even if they do elect to
market our products, they will be successful in marketing our products. In the
event that Abbott terminates our Amended Abbott U.S. Agreement, we would be
required to market our products directly and develop a marketing and sales force
with technical expertise and with supporting distribution capabilities or
contract with third parties to provide such services. We may not be able to
establish in-house sales and distribution capabilities or find alternative
marketing and distribution partners or relationships with third parties. Any
such failure to establish our own marketing capabilities or relationships with
third parties could have a material adverse effect on our business, financial
condition and results of operations. See "Manufacturing" and "Strategic
Alliances."
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In the E.U., our strategy is to market EchoGen through new marketing and
distribution agreements and we are currently in discussions with potential
partners for the distribution and marketing of EchoGen in certain countries of
the E.U. There can be no assurance that we will be successful in securing new
marketing or distribution partners for territories outside the U.S. or if
secured, these relationships will be successful. Any such failure to establish
our own marketing capabilities or relationships with third parties could have a
material adverse effect on our business, financial condition and results of
operations. See "Strategic Alliances."
Uncertainty of Market Acceptance. Currently there is only one FDA approved
ultrasound contrast agent being marketed in the U.S. and the general market
acceptance of contrast agents for ultrasound imaging has not been rapid. If
ultrasound 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 our ability to educate the medical community on the diagnostic and
clinical utility and cost-effectiveness of ultrasound contrast agents in general
and EchoGen in particular and the ability to obtain reimbursement from third
party payors. There can be no assurance that EchoGen, if successfully developed
and commercialized, will gain market acceptance. Failure of EchoGen to gain
market acceptance could have a material adverse effect on our business,
financial condition and results of operations.
Dependence on Patents and Proprietary Rights. Our success will depend, in
part, on our ability to obtain patents, defend patents and protect trade
secrets. We have filed patent applications in the U.S. and in over 40 foreign
countries relating to our principal technologies. In the U.S., 12 patents have
been issued to us, 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 us 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 our ability to commercialize its products. Furthermore,
there can be no assurance that other companies will not independently develop
similar products, duplicate any of our products or design around patents that
may be issued to us. Litigation may be necessary to enforce any patents issued
to us 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 us and distraction of our management. An
adverse ruling in any litigation or administrative proceeding could have a
material adverse effect on our business, financial condition and results of
operations.
Our commercial success will depend in part on not infringing patents issued
to competitors. There can be no assurance that patents belonging to competitors
will not require us to alter our products or processes, pay licensing fees or
cease development of our current or future products. Any litigation regarding
infringement could result in substantial costs to us and distraction of our
management, and any adverse ruling in any litigation could have a material
adverse effect on our business, financial condition and results of operations.
Further, there can be no assurance that we
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will be able to license other technology that we may require at a reasonable
cost or at all. Failure by us to obtain a license to any technology that we may
require to commercialize our products would have a material adverse effect on
our business, financial condition and results of operations. In addition, to
determine the priority of inventions and the ultimate ownership of patents, we
may participate in interference, reissue or re-examination proceedings conducted
by the PTO or in proceedings before foreign agencies with respect to any of our
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 us and distraction of our management. Two of our 12 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 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."
Limitations on Third-Party Reimbursement. Our 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, we may be subject to governmentally mandated prices for
EchoGen. If adequate reimbursement is not provided by governments and third
party payors for our potential products or if adverse pricing is mandated by
foreign governments this could have a material adverse affect on our business,
financial condition and results of operations.
Uncertainty Associated with Drug Delivery Technology. Our drug delivery
technology is a new approach to the formulation of water insoluble compounds for
therapeutic applications. To date, we have performed substantial preclinical
testing on only one of our drug delivery projects, QW8184. While results from
this preclinical testing have been encouraging, preclinical results may not be
predictive of results that will be obtained from clinical trials of QW8184 or
from formulations we may develop with other active compounds. Furthermore, there
can be no assurance that the results of any clinical trials of products
developed with our drug delivery technology will demonstrate the safety and
efficacy necessary to obtain regulatory approvals to market such products.
Significant expenditures in additional research and development, clinical
testing, regulatory and sales and marketing activities will be necessary in
order for us to commercialize any products developed with our drug delivery
technology. While it is our strategy to enter into feasibility study agreements
with companies who own active compounds, and we have recently entered into one
such feasibility study, there can be no assurance that we will enter into any
additional feasibility studies. Moreover, there can be no assurance that this
feasibility study or any new feasibility studies will result in development or
license agreements. Without feasibility studies or development or license
agreements, we may need to scale back or
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terminate our efforts to develop our drug delivery technology.
Continued Listing on the Nasdaq National Market. Our common stock is
currently listed on the Nasdaq National Market under the symbol "SNUS." For
continued inclusion on the Nasdaq National Market, we 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. We will need to raise additional
non-debt capital during 2000 to maintain our listing on NASDAQ. In the event
that we fail to satisfy the listing standards on a continuous basis, our
company's Common Stock may be removed from listing on the Nasdaq National
Market. If our Common Stock is delisted from the Nasdaq National Market, trading
of our 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, our Common Stock and the
trading price per share could be reduced.
Dependence on Key Employees. We are highly dependent on Michael A. Martino,
our President and Chief Executive Officer, and Gregory Sessler, our Senior Vice
President - Strategic Market Development and Chief Financial Officer. The loss
of either 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 our business,
financial condition and results of operations. There can be no assurance that we
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.
ITEM 2. PROPERTIES
We currently lease approximately 27,000 square feet of laboratory and
office space in a single facility near Seattle Washington. The lease expires in
April 2002 and includes an option to extend the term of the lease for three
years. We believe that this facility will be adequate to meet our projected
needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In January 1998, we announced that we had filed a patent infringement
action in the U.S. District Court in Seattle, Washington, against Molecular
Biosystems Inc. ("MBI") and Mallinckrodt Medical Inc. (Mallinckrodt"). The suit
alleges that one of MBI's ultrasound contrast agents infringes one or more of
our patents. MBI has filed counterclaims alleging that the patents asserted by
us are invalid and not infringed, and that we have made false public statements
and engaged in other actions intended to damage MBI and one of its ultrasound
contrast agents. We do not believe there is any merit to these counterclaims and
intend to defend our position vigorously; however, there can be no assurance
that the counterclaims will be resolved in our favor. Discovery in the action is
now substantially completed, and on February 10, 2000, the Court issued an order
granting our Motion Regarding Claim Construction and construing disputed terms
in the patents we asserted in the lawsuit. Both parties expect to file shortly
summary judgment motions on various claims and defenses, and the trial date in
the lawsuit currently remains scheduled for
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April 24, 2000.
Under our agreement with Nycomed, Nycomed is an exclusive licensee of our
patents in a field of use including non-perfluoropentane ultrasound contrast
agents. Nycomed has the right to control the patent infringement portion of our
lawsuit against MBI and Mallinckrodt. The court has authorized Nycomed to be
joined as a party in this lawsuit.
In August and September 1998, various class action complaints were filed
in the Superior Court of Washington (the "State Action") and in the U.S.
District Court for the Western District of Washington (the "Federal Action")
against SONUS and certain of our officers and directors, alleging violations of
Washington State and U.S. securities laws. In October 1998, we and the
individual defendants moved to dismiss and stay the State Action. The state law
claims in the State Action were subsequently re-filed in the Federal Action. In
February 1999, plaintiffs filed a consolidated and amended complaint in the
Federal Action, alleging violations of Washington State and U.S. securities
laws. In March 1999, we and the individual defendants filed a motion to dismiss
the consolidated amended complaint in the Federal Action. In July 1999, the
Court entered an order denying in part and granting in part the motion to
dismiss the complaint in the Federal Action. In November 1999, we filed motions
for summary judgment and to stay discovery. On December 15, 1999, the Court
denied in part and granted in part the motion to stay discovery. The motion for
summary judgment is currently noted for July 10, 2000. We do not believe there
is any merit to the claims in these actions and we intend to defend our position
vigorously. Although we do not believe that we or any of our current or former
officers or directors have engaged in any wrongdoing, there can be no assurance
that this stockholder litigation will be resolved in our favor. Any settlement
or adverse judgment in excess of available insurance could have a material
adverse affect on our business, financial condition and results of operations.
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, 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
Our 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 we do not anticipate paying any cash dividends in the
foreseeable future. As of February 1, 2000, there were 156 stockholders of
record and approximately 6,500 beneficial stockholders of our company's Common
Stock. The high and low sales prices of our Common Stock as reported by Nasdaq
for the eight quarters ended December 31, 1999 are as follows:
HIGH LOW
---- ---
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
1999
First Quarter 10 7/8 4 7/8
Second Quarter 8 1/4 5
Third Quarter 7 1/8 3
Fourth Quarter 4 5/8 2 1/16
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues $ 12,050 $ 5,100 $ 18,900 $ 16,600 $ 4,500
Total operating expenses 12,088 17,012 18,763 14,988 9,416
Net income (loss) 435 (11,173) 1,011 1,722 (5,939)
Net income (loss) per share:
Basic $ 0.05 $ (1.30) $ 0.12 $ 0.20 $ (1.81)
Diluted $ 0.05 $ (1.30) $ 0.11 $ 0.20 $ (1.81)
Shares used in calculation of net income
(loss) per share:
Basic 8,836 8,622 8,565 8,481 3,281
Diluted 8,969 8,622 9,580 9,064 3,281
AS OF DECEMBER 31,
-------------------------------------------------------------- -
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- --------- -
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities $ 16,804 $ 16,955 $ 26,571 $ 25,131 $ 8,221
Total assets 18,089 18,818 28,946 26,762 19,646
Long-term liabilities -- 2,049 939 240 468
Stockholders' equity 10,048 7,495 18,505 16,877 10,947
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report 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 we intend 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:
o the submission of applications for and the timing or likelihood of
marketing approvals for one or more indications;
o market acceptance of our products;
o our anticipated future capital requirements and the terms of any
capital financing;
o the decision of Abbott to market our products in the U.S., our ability
to locate and enter into agreements with distributors for
international territories, or with other parties in the U.S., if
Abbott should determine not to market our products in the U.S.;
o our ability to identify and enter into acceptable arrangements with
alternative sources of supply of EchoGen should Abbott determine not
to continue to manufacture EchoGen;
o the progress and results of clinical trials;
o the timing and amount of future contractual payments, product
revenues and operating expenses; and
o the anticipated outcome or financial impact of legal matters.
While these statements made by us are based on our current beliefs and judgment,
they are subject to risks and uncertainties that could cause actual results to
vary.
The discussion and analysis set forth below contains trend analysis,
discussions of regulatory status 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:
o uncertainty of governmental regulatory requirements and lengthy
approval process;
o unproven safety and efficacy of products and uncertainty of clinical
trials;
o history of operating losses and uncertainty of future financial
results;
o future capital requirements and uncertainty of additional funding;
o dependence on third parties for funding, clinical development and
distribution;
o competition and risk of technological obsolescence;
o limited manufacturing experience and dependence on limited contract
manufacturers and suppliers;
o lack of marketing and sales experience;
o uncertainty of market acceptance;
o dependence on patents and proprietary rights;
o limitations on third-party reimbursement;
o uncertainty associated with drug delivery technology;
o continued listing on the NASDAQ National Market; and
o dependence on key employees.
See "Business -- Certain Factors That May Affect Our Business and Future
Results."
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MD&A OVERVIEW
In Management's Discussion and Analysis we explain the general financial
condition and the results of operations for our Company, including:
o an overview of our Company's business;
o regulatory progress;
o contractual agreements;
o results of operations and why those results are different from the
prior year;
o the capital resources our Company currently has and possible sources
of additional funding for future capital requirements;
o the market risk of our investment portfolio; and
o the results of our Year 2000 program.
BUSINESS OVERVIEW
Our Company is engaged in the research, development and commercialization
of ultrasound contrast agents and drug delivery systems based on our proprietary
technology. Our products are being developed for use in the diagnosis and
treatment of heart disease, cancer and other debilitating conditions. We have
financed our research and development and clinical trials through payments
received under contractual agreements, private equity and debt financings, and
an initial public offering ("IPO") of common stock completed in October 1995.
Clinical trials of our initial ultrasound contrast product under development,
EchoGen(R) (perflenapent injectable emulsion), began in January 1994. In 1996,
we filed a New Drug Application ("NDA") with U.S. Food and Drug Administration
("FDA") for EchoGen as well as a Marketing Authorization Application ("MAA")
with the European Medicines Evaluation Agency ("EMEA").
REGULATORY PROGRESS
In April 1999, we received an "approvable letter" from the FDA for EchoGen.
The FDA letter gave the conditions that must be satisfied before final approval.
In September 1999, we filed a formal response to the conditions of the
approvable letter. The FDA has notified us that it expects to complete its
review of our response by March 2000. Although it is inappropriate for us to
speculate on the outcome of the FDA review, we believe we have addressed the
conditions set forth in the approvable letter. No assurance can be given that
the FDA will review the response to the approvable letter in a timely manner or
that the FDA will ultimately approve the NDA.
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.").
During 1998 and 1999, we submitted to the EMEA certain variations of our
marketing authorization to bring the manufacturing process and specifications
for European product in line with the process and specifications submitted to
the FDA for approval in the U.S. Also during 1999, we
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received notifications that the variations to our marketing license were
approved by the EMEA with the final notification received in December 1999. See
"Certain Factors that May Affect Our Business and Future Results - Uncertainty
of Government Regulatory Requirements; Lengthy Approval Process."
CONTRACTUAL AGREEMENTS
In 1999, we entered into a license agreement with Nycomed Imaging AS
("Nycomed") for the cross-license of certain proprietary ultrasound contrast
agent technologies. Under the terms of the agreement, we provided Nycomed with
an exclusive license to our ultrasound contrast patents except as related to
perfluoropentane, the gas we use in our ultrasound contrast products. Under the
exclusive license to the patents, Nycomed also has the right to freely
sublicense to other companies with a portion of any sublicense fees to be paid
to us. In addition, we have a worldwide, non-exclusive license to certain of
Nycomed's ultrasound contrast agent patents. We also have the right to
sublicense these patents to our collaborative partners. Under the agreement,
Nycomed has paid us a license fee of $10.0 million. In addition, both companies
have agreed to pay royalties to each other based on future sales of our
respective ultrasound contrast agents.
Also, under the agreement, we transferred to Nycomed the responsibilities
and legal costs associated with our patent infringement litigation with
Molecular Biosystems and Mallinckrodt Medical Inc. See "Legal Proceedings."
In 1996, we entered into two agreements with Abbott Laboratories ("Abbott")
for the marketing and selling of our ultrasound contrast agents, including
EchoGen, in: (1) the United States (the "Abbott U.S. Agreement") and; (2)
certain international territories including Europe, Latin America, Canada,
Middle East, Africa and certain Asia/Pacific countries ("Abbott International
Agreement"). In January 1999, we amended the Abbott U.S. Agreement ("Amended
Abbott U.S. Agreement").
Under the Amended Abbott U.S. Agreement, Abbott agreed to make certain
payments to us, primarily conditioned upon the achievement of regulatory
approval and certain commercialization milestones potentially totaling $31.0
million of which we have received $23.0 million as of December 31, 1999. In
addition, Abbott purchased in 1996, for $4.0 million, warrants to acquire
500,000 shares of our common stock. The warrants are exercisable over five years
at $16.00 per share.
In February 2000, we entered into an amendment with Abbott that further
modifies the Amended Abbott U.S. Agreement. The modified agreement provides
Abbott the option either to market and distribute EchoGen in the U.S. subject to
obtaining necessary regulatory approvals, or to terminate the Amended Abbott
U.S. Agreement, whether regulatory approvals are received or not. Abbott's
option terminates on March 31, 2000. No financial payments will be made during
the period of Abbott's option. If Abbott elects to market and sell EchoGen in
the U.S., the parties have agreed to negotiate a revision to the Amended Abbott
U.S. Agreement by April 30, 2000 to reflect any changes in responsibilities of
the parties, the status of regulatory approval and current market conditions. If
Abbott elects to terminate the Amended Abbott U.S.
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Agreement by March 31, 2000, Abbott will have no further economic or other
responsibilities under the Amended Abbott U.S. Agreement and all rights and
marketing materials related to EchoGen will be returned to us. We have also
agreed with Abbott to amend the manufacturing and supply agreement under which
Abbott manufactures EchoGen for us. If the Amended Abbott U.S. Agreement is
terminated, Abbott will continue to manufacture EchoGen following FDA approval,
if obtained, for a period of two years, but in no event later than July 1, 2002
under the manufacturing and supply agreement with Abbott. There can be no
assurance that Abbott will elect its option to market and distribute EchoGen in
the U.S., or even if Abbott should determine to do so, that we and Abbott will
agree on mutually acceptable revisions to the Amended Abbott U.S. Agreement by
April 30, 2000. Furthermore, there can be no assurance that in the event of
termination of the Amended Abbott U.S. Agreement, that we can successfully
market and distribute EchoGen, or that we will be successful in obtaining other
partners to market and distribute EchoGen, or that we will be able to locate and
qualify an alternative manufacturer of EchoGen.
In October 1999, our Company and Abbott Laboratories International Division
("Abbott International") restructured the Abbott International Agreement. Under
the restructured agreement, Abbott International has returned all exclusive
marketing rights to EchoGen to us. As of the date of restructuring, Abbott
International has paid $14.7 million to us. In addition, under the restructured
Abbott International Agreement, we have agreed to share with Abbott
International, 21% of our net profits from the sale of EchoGen and will also
share 50% of any up-front license fees paid to us by new partners, of which 50%
will be credited against the share of net profits that we will pay to Abbott
International. We have commenced discussions with new potential marketing
partners for the territories under the Abbott International Agreement. No
assurance can be given that we will secure new marketing partners for the
territories under the Abbott International Agreement.
Under the restructured international agreement, Abbott International also
retains a five-year option to elect to become a co-marketer of QW7437, our
second ultrasound contrast agent under development. Abbott International has
also agreed not to market or sell a competing ultrasound contrast product during
the option period and thereafter if it elects its option to co-market QW7437. In
the event the Amended Abbott U.S. Agreement is terminated, Abbott
International's rights to a percentage of our profits or upfront license fees
and co-marketing rights to QW7437 will terminate.
In addition to the development of our ultrasound contrast agents, we
believe our drug delivery technology can be applied to the formulation of many
water insoluble active compounds which are either currently in use or being
investigated as therapeutic agents. Our strategy is to enter into feasibility
study agreements with companies who own active compounds, typically large
pharmaceutical companies, to determine if our drug delivery strategy enhances
their active compound. In December 1999, we entered into our first feasibility
study agreement. Under this feasibility study agreement, we have agreed to use
our reasonable best efforts to develop new formulations of an active compound
and provide them to the pharmaceutical company for further evaluation. If the
feasibility study is successful, our goal is to negotiate a development and
license agreement with the pharmaceutical company.
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36
RESULTS OF OPERATIONS
Our results of operations have varied and will continue to vary
significantly and depend on, among other factors:
o timing of payments under contractual and license agreements;
o timing of regulatory approvals;
o entering into additional contractual agreements; and
o timing and costs of clinical trials, legal matters and expenses
related to product commercialization.
YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
To date, our reported revenues have been derived from payments received
under contractual and license agreements with third parties. Revenue was $12.1
million for the year ended December 31, 1999 compared to $5.1 million in the
prior year. Revenues during 1999 were derived from our agreements with Nycomed
($10.0 million) and Abbott ($2.1 million). Revenue received in the prior year
was derived from payments received under our agreements with Abbott.
Research and development expenses were $5.6 million for the year ended
December 31, 1999 compared with $10.5 million in the prior year. The decrease
from the prior year was primarily due to a reduction in clinical trials and
associated development activity for EchoGen.
General and administrative expenses were $6.5 million for each of the years
ended December 31, 1999 and 1998. We had an increase in intellectual property
legal costs in 1999 offset by decreases in medical education and other marketing
expenses.