Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File No. 0-11550
December 31, 1998
Pharmos Corporation
(Exact name of registrant as specified in its charter)
Nevada 36-3207413
(State or other jurisdiction of (IRS Employer Id. No.)
incorporation or organization)
99 Wood Avenue South, Suite 301
Iselin, NJ 08830
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (732) 452-9556
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.03 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No[_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the registrant's Common Stock at March 15, 1999
held by those persons deemed to be non-affiliates was approximately $50,673,356.
As of March 15, 1999, the Registrant had outstanding 40,538,685 shares of
its $.03 par value Common Stock.
PART I
Item 1. Business
Introduction
Pharmos Corporation (the "Company") is a pharmaceutical company specializing in
the modification of existing molecules through proprietary techniques to reduce
undesirable side effects and/or enhance efficacy. The Company is developing
pharmaceuticals in various fields including: site specific drugs for ophthalmic
indications, neuroprotective agents with a novel mechanism of action for the
treatment of central nervous system ("CNS") disorders, newly designed molecules
to treat cancer, and emulsion-based products for topical and systemic
applications. In March 1998, the Company, together with Bausch & Lomb
Pharmaceuticals, Inc. ("BLP"), announced the receipt of approval from the Food
and Drug Administration ("FDA") to manufacture and market two ophthalmic
products, Lotemax(R) (loteprednol etabonate ophthalmic suspension 0.5%) and
Alrex(TM) (loteprednol etabonate ophthalmic suspension 0.2%). BLP began
marketing Lotemax and Alrex in the second quarter of 1998. Product shipments
also began in the second quarter of 1998, when the Company received its initial
product revenues from the sales of these products.
Lotemax is a topical, site-specific steroid that is used to treat steroid
responsive inflammatory eye conditions. The prescription eye drop is also used
for post-operative eye inflammations such as experienced following cataract
surgery. The novel chemical structure of Lotemax allows it to be predictably
transformed by enzymes in the eye to an inactive metabolite, thereby increasing
its safety profile. The safety profile of Lotemax was demonstrated in clinical
trials by a low incidence of elevation in intraocular pressure ("IOP"), a
significant side effect of ophthalmic steroid use. In addition, Lotemax has the
broadest range of approved indications of any ophthalmic steroid on the market.
Alrex is a specially developed formula of loteprednol etabonate that is used in
the treatment of ophthalmic allergies. Alrex is indicated for the treatment of
seasonal allergic conjunctivitis, an inflammation of the eye usually caused by
pollens. Seasonal allergic conjunctivitis produces itching, tearing, redness and
swelling in the conjunctiva, the membrane that covers the inside of the eyelid
and the white part of the eye.
The regulatory approvals for Lotemax and Alrex are the first two of three to be
sought in the United States for the Registrant's and BLP's line of ophthalmic
products containing loteprednol etabonate. The third product, which combines the
active ingredient loteprednol etabonate with an anti-infective agent, is in
final development.
BLP, a subsidiary of the global eye care company, Bausch & Lomb Incorporated,
co-developed Lotemax and Alrex with the Registrant after the Registrant granted
BLP the rights to process and market the new ophthalmic pharmaceutical line in
June 1995. In December 1996, BLP's rights were extended to select international
markets including Europe and Canada.
Dexanabinol (HU-211), the Company's lead CNS product aimed initially at treating
severe head trauma and stroke, is currently in the third cohort of a Phase II
clinical trial for severe head trauma. On October 7, 1998, the Company announced
the results of the first two of the three cohort Phase II Clinical Study.
Highlights of the study included a significant reduction in intracranial
pressure, a 26% reduction in mortality, and a higher percentage of patients able
to resume a normal life ("Good Neurological Outcome") among the treated group.
Strategy
The Company's business is the design and development of novel drugs with
superior safety and efficacy profiles, initially targeted to ophthalmic and
neurological disorders. The Company seeks to enter into collaborative
relationships with established pharmaceutical companies to complete development
and commercialize its products.
The Company is developing pharmaceuticals that are designed to address unmet
needs in certain markets and to exhibit superior efficacy and/or safety profiles
over competing products in other markets. For example, many current
anti-inflammatory ophthalmic drugs have either significant side effects, such as
the elevation of IOP by
2
steroids, or are drugs that are safer, but only moderately effective at reducing
inflammation, such as non-steroidal anti-inflammatory drugs ("NSAIDs"). For many
neurological indications, such as head trauma, there are no effective drug
therapies available.
The Company is applying its experience in drug design and its novel drug
delivery technology in developing products directed at several fields including:
site specific drugs for ophthalmic indications, neuroprotective compounds
targeted at specific CNS biochemical pathways associated with neurological
indications, and systemic drugs for the treatment of cancer.
Products
Loteprednol Etabonate
Lotemax and Alrex are the trade names of drug products in the form of eye drop
suspensions in which the active compound is loteprednol etabonate ("LE"). LE is
a unique steroid, designed to act in the eye and alleviate inflammatory and
allergic conditions, and is quickly hydrolyzed into a predictable inactive
metabolite before it reaches the inner eye or systemic circulation. This
pharmacological profile results in improved safety by avoiding the side effects
related to exposure to most ocular steroids. In the eye, the most unwanted side
effect of steroids is the elevation of IOP, which can be sight threatening.
While steroids, for lack of an alternative, are regularly used for severe
inflammatory conditions of the eye, milder conditions, such as allergies, are
preferentially treated with less effective non-steroidal agents.
In March 1998, Lotemax received product approval from the FDA for the treatment
of steroid responsive inflammatory conditions of the eye, including uveitis and
for post operative eye inflammation. Also in March 1998, Alrex received product
approval from the FDA for the treatment of seasonal allergic conjunctivitis. A
combination of LE with the antibiotic tobramycin ("LE-T") for the treatment of
inflammatory and infectious indications is in development. The final clinical
trial for LE-T reached full enrollment in January 1999 and an NDA filing is
expected this year.
In June 1995, the Company entered into an agreement with BLP to market Lotemax,
Alrex and LE-T in the U.S. A second agreement, covering Europe, Canada and other
selected countries, was signed in December 1996. Both agreements give BLP the
right to purchase the active component LE from the Company, to manufacture the
"drug product" and to assist the Company in developing the products. In 1995,
the Company also signed an agreement with PPG-Sipsy, a unit of PPG Industries,
Inc., for exclusive manufacturing of LE for sale to the Company.
Following FDA approval of Lotemax and Alrex, BLP commenced product shipments in
April 1998, providing the Company with its initial product revenues.
Dexanabinol (HU-211)
Dexanabinol (HU-211) is the Company's lead synthetic cannabinoid compound in a
family of non psychotic cannabinoid molecules originally designed to avoid the
psychotropic and sedative spectrum of cannabinometic agents, while retaining
their beneficial properties as anti-emetics, analgesics and anti-glaucoma
agents.
It is now well established that the psychotropic effects of cannabinoids are
mediated via stereo selective (-) preferring receptors. Dexanabinol is a (+)
optical isomer and does not interact with cannabinoid receptors. More
importantly, it is a stereo selective, non-competitive antagonist of the
glutamate NMDA receptor channel, activation of which is believed to play a key
role in secondary neuronal damage due to head trauma, stroke and cardiac arrest.
The molecule also has free radical scavenging properties, and anti-inflammatory
properties (involving inhibition of TNF-[alpha] production). Both of these
latter mechanisms are important for neuroprotection. Therefore, dexanabinol
appears to have a unique modality to neuroprotection, combining three relevant
mechanisms of action in a single molecule, which act at different time points of
the neurotoxic process in head trauma, stroke and potentially other indications.
3
While head trauma and stroke are the highest priority indications for
dexanabinol, its spectrum of activities has potential as an anti-inflammatory
and protectant in other diseases such as glaucoma, Parkinson's and Alzheimer's
diseases, as well as various other inflammatory conditions. Development of
dexanabinol and other members of this family of compounds for these chronic
indications are being explored at the preclinical level.
In several animal models (including closed head injury, focal and global
forebrain ischemia and optic nerve crush), the drug has demonstrated significant
neuroprotective activity. In these studies, a single injection of dexanabinol
given after the injury resulted in a significant long-term functional
improvement and an increase in neuronal survival.
In early 1996, a Phase I study of rising dose tolerance in healthy volunteers
(50 subjects) showed dexanabinol to be safe and well tolerated at doses up to
and including the expected therapeutic doses. Specifically, there were no
hallucinations, sedation or blood pressure changes of the type reported with
other glutamate antagonists. In late 1996, the Company commenced a Phase II
study of head injured patients, which is targeted for completion in 1999. This
study, conducted at six medical centers in Israel on patients with severe head
injury, was reviewed and approved by the American Brain Injury Consortium (ABIC)
and the European Brain Injury Consortium (EBIC).
On October 7, 1998, the Company announced the results of the first two cohorts
of the three cohort Phase II Clinical Study involving 67 patients. Clinical
endpoints established an excellent safety profile of the drug in the treated
patients. There were no unexpected adverse experiences reported for either the
drug treated or placebo group. Intracranial pressure above a threshold of 25
mmHg, an important risk factor and a predictor of poor neurological outcome, was
significantly reduced in the drug-treated patients through the third day of
treatment, without concomitant reduction in systolic blood pressure. The
mortality rate of 10% (3/30) in the dexanabinol group compared favorably with a
13.5% rate in the placebo group (5/37). The investigators concluded that
dexanabinol was shown to be safe and well tolerated in severe head trauma
patients.
Neurological outcomes in the study, assessed periodically up to 6 months after
injury, established a strong trend of efficacy. The percentage of patients
achieving Good Neurological Outcome, the highest score on the five level Glasgow
Outcome Scale used to assess the recovery of head trauma patients, was higher in
the drug-treated group at each measurement. Among the most severely injured
patients in the study, a better outcome was consistently observed among the drug
treated group than among the placebo treated group. Patients received an
intravenous injection of either dexanabinol or placebo within 6 hours of the
injury. Demographically, all 67 patients were fairly representative of the
characteristics describing severe head trauma.
Tamoxifen Analogs
Several diseases are currently treated with drugs that produce mild to
dose-limiting CNS side effects. For instance, tamoxifen, which is used to treat
breast cancer patients and has been approved for use as a prophylactic agent in
healthy women at risk of developing the disease, causes hot flashes and may be
associated with cognitive and affective deficits as well. Additionally,
corticosteroids, used to treat chronic inflammatory and autoimmune diseases,
cause psychotic reactions in some patients and have been shown to cause
selective neuronal death in animals. Neuropathic pain could be treated by
certain systemic anesthetics, but the resulting CNS side effects make such
therapy unsafe. These side effects could be addressed by designing drugs with
limited passage to the brain through the blood brain barrier (BBB).
In light of this concept, several analogs of tamoxifen with poor CNS uptake have
been synthesized and tested in several animal models. Tamoxifen methiodide, a
permanently charged tamoxifen derivative, was tested in animals (nude mice)
inoculated with human breast cancer cells. Treatment resulted in rapid arrest of
growth followed by tumor regression. Growth arrest was also observed in
estrogen-independent tumors. The rate and magnitude of response was higher than
that seen with tamoxifen itself. The compound retains the anti-osteoporotic
effects of tamoxifen in bone but is considerably less active than tamoxifen as a
utero trophic agent, demonstrating an improved therapeutic profile as compared
to the parent compound.
Further preclinical pharmacology is underway to identify additional analogs of
tamoxifen and to gain a fuller understanding of the mechanism of action.
4
Competition
The pharmaceutical industry is highly competitive. The Company competes with a
number of pharmaceutical companies that have financial, technical and marketing
resources significantly greater than those of the Company. Some companies with
established positions in the pharmaceutical industry may be better equipped than
the Company to develop and market products in the markets the Company is seeking
to enter. A significant amount of pharmaceutical research is also being carried
out at universities and other not-for-profit research organizations. These
institutions are becoming increasingly aware of the commercial value of their
findings and are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for the use of technology they have developed.
These institutions may also market competitive commercial products on their own
or through joint ventures and will compete with the Company in recruiting highly
qualified scientific personnel.
The Company is pursuing areas of product development in which there is a
potential for extensive technological innovation. The Company's competitors may
succeed in developing products that are more effective than those of the
Company. Rapid technological change or developments by others may result in the
Company's potential products becoming obsolete or non-competitive.
Collaborative Relationships
The Company's commercial strategy is to develop products independently and,
where appropriate, in collaboration with established pharmaceutical companies
and institutions. Collaborative partners may provide financial resources,
research and manufacturing capabilities and marketing infrastructure to aid in
the commercialization of the Company's products in development and potential
future products. Depending on the availability of financial, marketing and
scientific resources, among other factors, the Company may license its
technology or products to others and retain profit sharing, royalty,
manufacturing, co-marketing, co-promotion or similar rights. Any such
arrangements could limit the Company's flexibility in pursuing alternatives for
the commercialization of its products. There can be no assurance that the
Company will establish any additional collaborative arrangements or that, if
established, any such relationships will be successful.
Bausch & Lomb Pharmaceuticals, Inc.
On June 30, 1995, the Company signed a definitive agreement with BLP to
manufacture and market Lotemax and Alrex, the Company's lead products, in the
United States upon receipt of FDA approval. The agreement includes one other
loteprednol etabonate-based product, LE-T, currently being co-developed by the
Company and BLP. A second agreement signed December 12, 1996, extends BLP's
rights to market these products in Europe, Canada and other selected countries
pending regulatory approval.
Under the agreements, BLP will purchase the active drug substance from the
Company. As of March 1999, BLP has provided the Company with a total of $5
million in cash advances and is entitled to recoup the advances by way of
credits from sales of Lotemax, Alrex and line extension products. Another $1
million is due subject to receiving regulatory approval for LE-T in the United
States. An additional $1.6 million in advances against future sales by BLP will
be payable to the Company following receipt of regulatory clearance in certain
markets outside of the United States. BLP collaborates in the development of
these products by making available amounts up to 50% of their Phase III clinical
trial costs. The Company retains certain conditional co-marketing rights in the
U.S. to all of the products covered by the marketing agreement. As of December
31, 1998, the company had repaid $ .6 million of the cash advances from BLP by
way of credits from sales of Lotemax and Alrex during 1998.
In a separate agreement completed in December 1996, BLP made a $2 million
investment in the common stock of the Company.
5
Patents, Proprietary Rights and Licenses
Patents and Proprietary Rights
Proprietary protection generally has been important in the pharmaceutical
industry, and the commercial success of products incorporating the Company's
technologies may depend, in part, upon the ability to obtain strong patent
protection.
Some of the technologies underlying the Company's potential products were
invented or are owned by various third parties, including the University of
Florida, Dr. Nicholas Bodor, and the Hebrew University of Jerusalem ("Hebrew
University"). The Company is the licensee of these technologies under patents
held by the applicable owner through licenses that generally remain in effect
for the life of the applicable patent. The Company generally maintains, at its
expense, U.S. and foreign patent rights with respect to both the licensed and
its own technology and files and prosecutes the relevant patent applications in
the U.S. and foreign countries. The Company also relies upon trade secrets,
know-how, continuing technological innovations and licensing opportunities to
develop its competitive position. The Company's policy is to protect its
technology by, among other things, filing, or requiring the applicable licensor
to file, patent applications for technology that it considers important to the
development of its business. The Company intends to file additional patent
applications, when appropriate, relating to its technology, improvements to its
technology and to specific products it develops. There can be no assurance that
any additional patents will be issued, or if issued, that they will be of
commercial benefit to the Company. In addition, it is impossible to anticipate
the breadth or degree of protection that any such patents will afford.
The patent positions of pharmaceutical firms, including the Company, are
uncertain and involve complex factual questions. In addition, the coverage
claimed in a patent application can be significantly reduced before or after the
patent is issued. Consequently, the Company does not know whether any of the
pending patent applications underlying the licensed technology will result in
the issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or will be circumvented or invalidated. Since
patent applications in the U.S. are maintained in secrecy until patents issue
and since publication of discoveries in the scientific or patent literature
often lag behind actual discoveries, the Company cannot be certain that it or
its licensors, as the case may be, were the first creators of inventions covered
by pending and issued patents or that it or its licensors, as the case may be,
were the first to file patent applications for such inventions. Moreover, the
Company may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. There can be no assurance that a court of competent
jurisdiction, if issued, will uphold the patents relating to the licensed
technology, or that a competitor's product will be found to infringe such
patents.
Other pharmaceutical and drug delivery companies and research and academic
institutions may have filed patent applications or received patents in the
Company's fields. If patents are issued to other companies that contain
competitive or conflicting claims and such claims are ultimately determined to
be valid, there can be no assurance that the Company would be able to obtain
licenses to these patents at a reasonable cost or be able to develop or obtain
alternative technology.
The Company also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets.
It is the Company's policy to require its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting or
advisory relationships with the Company. These agreements generally provide that
all confidential information developed or made known to the individual during
the course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific
circumstances. In the case of employees and certain consultants, the agreements
provide that all inventions conceived by the individual in the course of their
employment or consulting relationship shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the
6
Company's trade secrets in the event of unauthorized use or disclosure of such
information. The Company's patents and licenses underlying its potential
products described herein are summarized below.
Site-Specific Drugs. In the general category of site-specific drugs that are
active mainly in the eye and have limited systemic side effects, the Company has
licensed several patents from Dr. Nicholas Bodor. The earliest patents date from
1984 and the most recent from 1996. Some of these patents cover loteprednol
etabonate-based products and its formulations.
Neuroprotective Agents. The Company has licensed from the Hebrew University,
which is the academic affiliation of the inventor, Dr. Raphael Mechoulam,
patents covering novel compounds that have demonstrated certain beneficial
neuropharmacological activity while appearing to be devoid of most of the
deleterious effects usually associated with this class of compounds. This group
of patents has been designed to protect this family of compounds and their uses
devised by the Company and the inventors. The earliest patent applications
resulted in patents issued in 1989, and the most recent patents date from 1997.
These patents cover Dexanabinol, which is under development for the treatment of
head trauma, stroke and other indications.
Tamoxifen Analogs. The Company has filed patent applications in the U.S.,
Israel, Australia, Canada, Japan and the European Patent Office to protect
pharmaceutical compositions of Tamoxifen analogs and Tamoxifen Methiodide. In
July 1997, a patent was issued by the U.S. Patent and Trademark Office with
claims covering the use of permanently ionic derivatives of steroid hormones and
their antagonists known as Tamoxifen Analogs. The patent also claims novel
analogs of tamoxifen and other steroid hormones and their antagonists. The
Company believes that these charged derivatives are superior to the parent
compounds in that they are devoid of CNS side effects and show an overall
improved pharmacological profile.
Emulsion-based Drug Delivery Systems. In the general category of SubMicron
Emulsion (SME) technology, the Company licensed two patents from Hebrew
University and has separately filed ten patent applications that are at
different stages of prosecution. These patents and patent applications have been
devised to protect a group of formulation technologies devised by the Company
and the inventors as they relate to pharmaceutical and medicinal products. The
earliest patent filings for SME technology date from 1986 and the most recent
from 1996. These patents cover Pilocarpine-SME, which is an improved formulation
to treat glaucoma.
Licenses
The Company's license agreements generally require the Company, as licensee, to
pay royalties on sale of products developed from the licensed technologies, and
fees on revenues the Company receives for sublicenses, where applicable. The
royalty rates defined in the licenses are customary and usual in the
pharmaceutical industry. The royalties will be payable for periods up to fifteen
years from the date of certain specified events, including the date of the first
sale of such products, or the date from which the first registered patent from
the developed technologies is in force, or the year following the date in which
FDA approval has been received for a developed product. Certain of the license
agreements also require annual payments.
Government Regulation
The Company's activities and products are significantly regulated by a number of
governmental entities, especially the FDA, in the U.S. and by comparable
authorities in other countries. These entities regulate, among other things,
research and development activities and the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising,
promotion, distribution and sale of the Company's potential products. Product
development and approval within this regulatory framework take a number of years
and involve the expenditure of substantial resources. Many products that appear
promising initially ultimately do not reach the market because they are found to
be unsafe (perhaps too toxic) or to lack effectiveness, as demonstrated by
testing required by government regulation during the development process. In
addition, there can be no assurance that this regulatory framework will not
change or that additional regulation will not arise at any stage of the
Company's product development that may preclude or otherwise adversely affect
approval, delay an application or require additional expenditures by the
Company. Moreover, even if approval is obtained, failure to comply with present
or future regulatory requirements, or new information adversely reflecting on
the safety or effectiveness of the approved drug,
7
can lead to FDA withdrawal of approval to market the product.
The regulatory process required to be completed by the FDA before a new drug
delivery system may be marketed in the U.S. depends significantly on whether the
drug (which will be delivered by the drug delivery system in question) has
existing approval for use and in what dosage form. If the drug is a new chemical
entity that has not been approved, the process includes (i) preclinical
laboratory and animal tests, (ii) an IND application which has become effective,
(iii) adequate and well-controlled human clinical trials to establish the safety
and effectiveness of the drug for its intended indication and (iv) FDA approval
of a pertinent NDA. If the drug has been previously approved, the approval
process is similar, except that certain toxicity tests normally required for the
IND application may not be necessary. Even with previously approved drugs,
additional toxicity testing may be required when the delivery form is
substantially changed, or when a company does not have access to the raw data
from the prior preclinical studies.
The activities required before a pharmaceutical product may be marketed in the
U.S. begin with preclinical testing. Preclinical tests include laboratory
evaluation of product chemistry and other end points and animal studies to
assess the potential safety and efficacy of the product as formulated. The FDA,
under a series of regulations called the Good Laboratory Practice regulations,
regulates the conduct of preclinical studies. Violations of these regulations
can, in some cases, lead to invalidation of the data from these studies,
requiring such studies to be replicated.
The entire body of preclinical development work necessary to administer
investigational drugs to volunteers or patients is summarized in an
Investigative New Drug ("IND") application to the FDA. FDA regulations provide
that human clinical trials may begin thirty days following the submission and
receipt of an IND application, unless the FDA advises otherwise or requests
additional information, clarification or additional time to review the IND
application; it is generally considered good practice to obtain affirmative FDA
response before commencing trials. There is no assurance that the submission of
an IND application will eventually allow a company to commence clinical trials.
Once trials have commenced, the FDA may stop the trials, or particular types or
parts of trials, by placing a "clinical hold" on such trials because of concerns
about, for example, safety of the product being tested or the adequacy of the
trial design. Such holds can cause substantial delay and in some cases may
require abandonment of a product.
Clinical testing involves the administration of the drug to healthy volunteers
or to patients under the supervision of a qualified principal investigator,
usually a physician pursuant to an FDA-reviewed protocol. Each clinical study is
conducted under the auspices of independent Institutional Review Boards ("IRBs")
at the institutions at which the study will be conducted. An IRB will consider,
among other things, ethical factors, the safety of human subjects and the
possible liability of the institution.
Phase I clinical studies are commonly performed in 20 to 40 healthy human
subjects or, more rarely, in selected patients with the targeted disease or
disorder. Their goal is to establish initial data about tolerance and safety of
the drug in humans. Also, the first data regarding the absorption, distribution,
metabolism, and excretion of the drug in humans are established.
In Phase II human clinical studies, preliminary evidence is sought regarding the
pharmacological effects of the drug and the desired therapeutic efficacy in
limited studies with small numbers of selected patients (50 to 200). Efforts are
made to evaluate the effects of various dosages and to establish an optimal
dosage level schedule and validate clinical efficacy endpoints to be used in
Phase III trials. Additional safety data are also gathered from these studies.
Phase III clinical studies consist of expanded, large scale studies of patients
(200 to several thousand) with the target disease or disorder, to obtain
definitive statistical evidence of the effectiveness and safety of the proposed
product and dosing regimen. These studies may also include separate
investigations of the effects in subpopulations of patients, such as the
elderly.
At the same time that the human clinical program is being performed, additional
non-clinical (i.e., animal) studies are also being conducted. Expensive, long
duration (12-18 months) toxicity and carcinogenicity studies are done to
demonstrate the safety of drug administration for the extended period of time
required for effective therapy. Also, a variety of laboratory, animal, and
initial human studies may be performed to establish manufacturing methods for
8
the drug, as well as stable, effective dosage forms.
The results of product development, preclinical studies and clinical studies and
other information are submitted to the FDA in an NDA to seek approval for the
marketing and interstate commercial shipment of the drug. With the NDA, a
company must pay the FDA a user fee of $272,000 (for Fiscal Year 1999).
Companies with less than 500 employees and no revenues from products may be
eligible for an exception. This exception was granted to the Company in
connection with the NDA for Lotemax and Alrex and reduced the fee by 50%, which
is payable 12 months after the NDA is filed by the FDA. The FDA may refuse to
file or deny an NDA if applicable regulatory requirements, such as compliance
with Current Good Clinical Practice ("cGCP") requirements, are not satisfied or
may require additional clinical testing. Even if such data are submitted, the
FDA may ultimately decide that the NDA does not satisfy the requirements for
approval. If the FDA does ultimately approve the product, it may require, among
other things, post-marketing testing, including potentially expensive Phase IV
studies, and surveillance to monitor the safety and effectiveness of the drug.
In addition, the FDA may in some circumstances impose restrictions on the use of
the drug that may be difficult and expensive to administer, and almost always
seeks to require prior approval of promotional materials. Product approvals may
be withdrawn if compliance with regulatory requirements is not maintained or if
problems occur after the product reaches the market. After a product is filed
for a given indication in an NDA, subsequent new indications or dosages for the
same product are reviewed by the FDA via the filing and upon receipt of a
Supplemental NDA ("sNDA") submission as well as payment of a separate user fee.
The sNDA is more focused than the NDA and deals primarily with safety and
effectiveness data related to the new indication or dosage, and labeling
information for the sNDA indication or dosage. Finally, the FDA requires
reporting of certain information, e.g., adverse experience reports, that becomes
known to a manufacturer of an approved drug.
Each domestic drug product manufacturing establishment must be registered with,
and approved by, the FDA and must pay the FDA a registration fee and annual
maintenance fee. In addition, each such establishment must inform the FDA of
every drug product it has in commercial distribution and keep such list updated.
Establishments handling controlled substances must be licensed and are inspected
by the U.S. Drug Enforcement Agency ("DEA"). Domestic establishments are also
subject to inspection by the FDA for compliance with cGMP regulations after an
NDA has been filed and thereafter, at least biennially. The labeling,
advertising and promotion of drug products also must be in compliance with
pertinent FDA regulatory requirements. Failure to comply with applicable
requirements relating to production, distribution or promotion of a drug product
can lead to FDA demands that production and shipment cease, and, in some cases,
that product be recalled, or to enforcement actions that can include seizures,
injunctions and criminal prosecution.
To develop and market its potential products abroad, the Company is also subject
to numerous and varying foreign regulatory requirements, implemented by foreign
health authorities, governing, among other things, the design and conduct of
human clinical trials, pricing and marketing. The approval procedure varies
among countries and can involve additional testing, and the time required to
obtain approval may differ from that required to obtain FDA approval. At
present, foreign marketing authorizations are applied for at a national level,
although within the European Union ("EU") certain registration procedures are
available to companies wishing to market a product in more than one EU member
country. If a regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, marketing authorization is
almost always granted. The foreign regulatory approval process includes all of
the risks associated with obtaining FDA approval set forth above. Approval by
the FDA does not ensure approval by other countries.
Various aspects of the Company's business and operations are also regulated by a
number of other governmental agencies including the DEA, U.S. Department of
Agriculture, Environmental Protection Agency and Occupational Safety and Health
Administration as well as by other federal, state and local authorities. In
addition, numerous foreign authorities would regulate any future international
sales.
There continue to be a number of legislative and regulatory proposals aimed at
changing the health care system. It is uncertain what, if any, legislative
proposals will be adopted or what actions federal or state agencies, or third
party payers may take in response to any health care reform proposals or
legislation. Although the Company cannot predict whether any such legislative or
regulatory proposals will be adopted or the effect such proposals may have on
its business, the uncertainty surrounding such proposals could have a material
adverse effect on the Company.
9
Furthermore, the Company's ability to commercialize its potential product
portfolio may be adversely affected to the extent that such proposals have a
material adverse effect on the business, financial condition and profitability
of other companies that are prospective collaborators for certain of the
Company's potential products.
The Company's ability to commercialize its products successfully may depend in
part on the extent to which reimbursement for the cost of such products and
related treatments will be available from government health administration
authorities, private health insurers and other organizations. There can be no
assurance that adequate third-party coverage will be available to enable the
Company or any of its future licensees to maintain price levels sufficient to
realize an appropriate return on its investment in product development.
Corporate History
Pharmos Corporation (the "Company"), a Nevada corporation, formerly known as
Pharmatec, Inc., was incorporated under the laws of the State of Nevada on
December 20, 1982. On October 29, 1992, the Company completed a merger (the
"Merger") with Pharmos Corporation, a privately held New York corporation ("Old
Pharmos"), and on October 30, 1992 exercised an option to acquire all of the
outstanding shares of Xenon Vision, Inc., a privately held Delaware corporation
("Xenon"). Prior to the Merger, Old Pharmos was a biopharmaceutical company with
proprietary drug delivery and formulation technologies, one of which involved an
initial application of ophthalmic drugs, and another of which involved research
pharmaceuticals with neuroprotective properties being developed for applications
such as stroke and head trauma. Prior to the Merger, the Company was a
publicly-held company primarily engaged in the development and testing of a
chemical delivery system which has been shown in animal studies to permit the
passage of drugs across the blood-brain barrier. Prior to its acquisition, Xenon
was a research-based pharmaceutical company developing several patented products
for the ophthalmic field. In April 1995, the Company acquired Oculon Corporation
("Oculon") a privately held development stage company with anti-cataract
technologies.
Human Resources
As of March 15, 1999, the Company had 40 full time employees, 6 in the U.S. and
34 in Israel, of whom approximately 14 hold doctorate or medical degrees.
The Company's employees are not covered by a collective bargaining agreement.
The Company has never experienced employment-related work stoppages and
considers its employee relations to be excellent.
Public Funding and Grants
The Company's subsidiary, Pharmos Ltd., has received certain funding from the
Chief Scientist of the Israel Ministry of Industry and Trade (the "Chief
Scientist") for research and development of Dexanabinol, SME technology for
injection and nutrition as well as for research relating to pilocarpine,
dexamethasone and ophthalmic formulations for dry eyes. The Company has received
$2,203,199 under such agreements through December 31, 1998. The Company will be
required to pay royalties to the Chief Scientist from 2% to 5% of product sales,
if any, as a result of the research activities conducted with such funds.
Aggregate royalty payments are limited to the amount of funding received.
Additionally, funding by the Chief Scientist places certain legal restrictions
on the transfer of know-how and the manufacture of resulting products outside of
Israel. See "Conditions in Israel."
The Company has received certain funding of $925,780 from the Israel-U.S.
Binational Industrial Research and Development Foundation ("BIRD-F") to develop
Lotemax and LE-T. The Company is required to pay royalties to BIRD-F of 2.5%,
through September 1999, then 5% of product sales thereafter, as a result of the
research activities conducted with such funds. Aggregate royalty payments are
limited to 150% of the amount of such funding received, linked to the exchange
rate of the U.S. dollar and the New Israeli Shekel.
In April 1997, the Company signed an agreement with the Magnet consortium,
operated by the Office of the Chief Scientist, for developing generic
technologies and for the design and development of drug and diagnostic kits.
Under such agreement, the Company is entitled to a non-refundable grant
amounting to approximately 60% of the actual research and development and
equipment expenditures on approved projects. No royalty obligations are required
10
within the framework. To date, the Company has received grants totaling $543,587
pursuant to this agreement.
Conditions in Israel
The Company conducts significant operations in Israel through its subsidiary,
Pharmos Ltd., and therefore is affected by the political, economic and military
conditions to which that country is subject.
Pharmos Ltd. has received certain funding from the Chief Scientist with respect
to its SME Technology and with respect to Dexanabinol. The proclaimed purpose of
the legislation under which such funding was provided is to develop local
industry, improve the state balance of trade and to create new jobs in Israel.
Such funding prohibits the transfer or license of know-how and the manufacture
of resulting products outside of Israel without the permission of the Chief
Scientist. Although it is the Company's belief that the Chief Scientist does not
unreasonably withhold this permission if the request is based upon commercially
justified circumstances and any royalty obligations to the Chief Scientist are
sufficiently assured, there can be no assurance that such consent, if requested,
would be granted upon terms satisfactory to the Company or granted at all.
Item 2. Properties
The Company is headquartered in Iselin, New Jersey where it leases its general
administrative facilities. The Company also leases facilities used in the
operation of its research, development, pilot manufacturing and administrative
activities in Rehovot, Israel. These facilities have been improved to meet the
special requirements necessary for the operation of the Company's research and
development activities. In the opinion of the management these facilities are
sufficient to meet the current and anticipated future requirements of the
Company. In addition management believes that it has sufficient ability to renew
its present leases related to these facilities or obtain suitable replacement
facilities.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
At its Shareholder Meeting held on January 9, 1998 the stockholders of the
Company elected the following persons as directors of the Company to hold office
until the next annual meeting of the stockholders or until their successors are
duly elected and qualified: Haim Aviv (26,386,186 votes for and 1,150,059 votes
against), Stephen C. Knight (26,391,624 votes for and 1,144,621 votes against),
David Schlachet (26,391,149 votes for and 1,145,096 votes against), Marvin P.
Loeb (26,362,624 votes for and 1,173,621 votes against), E. Andrews Grinstead,
III (26,391,624 votes for and 1,144,621 votes against), Fredric D. Price
(26,391,624 votes for and 1,144,621 votes against) and Mony Ben Dor (26,391,149
votes for and 1,145,096 votes against). The stockholders of the Company also
voted to adopt the Company's 1997 Incentive and NonQualified Stock Option Plan
(24,091,679 voted in favor, 2,646,101 voted against and 269,097 abstained or
were withheld). In addition, the stockholders of the Company voted to amend the
Company's Restated Articles of Incorporation to increase the authorized capital
stock of the Company to 60 million shares of common stock (24,533,973 voted in
favor, 2,259,826 voted against and 213,078 abstained or were withheld).
At its Shareholder Meeting held on September 17, 1998 the stockholders of the
Company elected the following persons as directors of the Company to hold office
until the next annual meeting of the stockholders or until their successors are
duly elected and qualified: Haim Aviv (27,980,414 votes for and 261,339 votes
against), Stephen C. Knight (27,763,994 votes for and 357,089 votes against),
David Schlachet (27,960,644 votes for and 251,089 votes against), Marvin P. Loeb
(27,960,664 votes for and 251,089 votes against), E. Andrews Grinstead, III
(27,859,994 votes for and 261,089 votes against), Mony Ben Dor (27,869,794 votes
for and 251,289 votes against) and Georges Anthony Marcel (27,882,664 votes for
and 359,089 votes against). The stockholders of the Company also voted to
approve the issuance of certain shares of Common Stock upon conversion of the
Company's Series C Convertible Participating Preferred Stock (6,869,765 voted in
favor, 1,097,044 voted against and 301,089 abstained). In addition, the
stockholders of the Company voted to amend the Company's 1997 Incentive and
Non-Qualified Stock Option
11
Plan to increase the number of shares of Common Stock issuable under the plan
from 600,000 to 1,000,000 (27,045,129 voted for, 1,026,621 voted against and
178,518 abstained).
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded on the Nasdaq SmallCap Marketsm. The
following table sets forth the range of high and low bid prices for the Common
Stock as reported on the NASDAQ National Market System and the Nasdaq SmallCap
Market during the periods indicated.
Year ended December 31, 1998 HIGH LOW
- ---------------------------- ----- -----
1st Quarter .................................... $3.56 $1.63
2nd Quarter .................................... 3.28 2.47
3rd Quarter .................................... 2.75 1.44
4th Quarter .................................... 2.25 1.47
Year ended December 31, 1997 HIGH LOW
- ---------------------------- ----- -----
1st Quarter .................................... $1.94 $1.28
2nd Quarter .................................... 2.19 1.09
3rd Quarter .................................... 3.00 1.44
4th Quarter .................................... 3.00 1.66
The foregoing represent inter-dealer prices, without retail mark-up, mark-down
or commission, and may not necessarily represent actual transactions.
On March 15, 1999, there were 462 record holders of the Common Stock of the
Company and approximately 6,700 beneficial owners of the Common Stock of the
Company, based upon the number of shares of Common Stock held in "street name".
The Company has paid no dividends on its Common Stock and does not expect to pay
cash dividends in the foreseeable future. The Company is not under any
contractual restriction as to its present or future ability to pay dividends.
The Company currently intends to retain any future earnings to finance the
growth and development of its business.
12
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Revenues $ 1,539,941 -- -- $ 75,000 $ 7,815
Gross Margin 1,102,228 -- -- -- --
Operating expenses (6,109,809) (8,563,091) (8,354,991) (8,253,666) (13,036,461)
Loss Before Extraordinary Item (4,663,347) (8,233,547) (8,077,210) (8,096,085) (12,955,299)
Extraordinary gain from
forgiveness of debt -- 416,248 -- -- --
Dividend embedded in
convertible preferred stock (642,648) (1,952,767) -- -- --
Preferred Stock dividends (242,295) (240,375) -- -- --
Net loss applicable to
common shareholders ($ 5,548,290) ($10,010,441) ($ 8,077,210) ($ 8,096,085) ($12,955,299)
============ ============ ============ ============ ============
Loss per share applicable
to common shareholders before
extraordinary gain - basic ($ 0.15) ($ 0.32) ($ 0.28) ($ 0.37) ($ 1.19)
Extraordinary gain per share -- (0.01) -- -- --
------------ ------------ ------------ ------------ ------------
Net loss per share applicable
to common shareholders - basic ($ 0.15) ($ 0.31) ($ 0.28) ($ 0.37) ($ 1.19)
============ ============ ============ ============ ============
Total assets $ 8,066,670 $ 8,421,841 $ 7,468,293 $ 9,461,654 $ 4,289,416
============ ============ ============ ============ ============
Long term obligations $ 2,691,023 $ 4,100,000 $ 4,161,767 $ 2,294,268 $ 91,318
============ ============ ============ ============ ============
Cash dividends declared -- -- -- -- --
13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
During 1998, the Company began to generate revenues from product sales, but
continues to be dependent upon external financing, interest income, and research
and development contracts to pursue its intended business activities. The
Company has not been profitable since inception and has incurred a cumulative
net loss of $77,779,075 through December 31, 1998. Losses have resulted
principally from costs incurred in research activities aimed at identifying and
developing the Company's product candidates, clinical research studies, merger
and acquisition costs, the write-off of purchased research and development, and
general and administrative expenses. The Company expects to incur additional
operating expenses over the next several years as the Company's research and
development and clinical trials programs continue. The Company's ability to
achieve profitability is dependent on the level of revenues from the sale of
drug substance to support Lotemax and Alrex coupled with its ability to develop
and obtain regulatory approvals for its product candidates, to enter into
agreements for product development and commercialization with strategic
corporate partners and to develop the capacity to manufacture and sell its
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Results of Operations
Years Ended December 31, 1998 and 1997
During the year ended December 31, 1998, the Company reported revenues from sale
of product for the first time. Product sales commenced in April 1998, and
revenues totaled $1,188,278 for the period. Additionally, the Company recorded
license income of $351,663 for the year ended December 31, 1998 ($0 for the year
ended December 31, 1997). The license income was primarily generated from a
non-recurring payment received by the Company in exchange for the transfer of
certain drug technology.
Cost of goods sold for the year ended December 31, 1998 totaled $437,713. Cost
of goods sold includes the cost of the active drug substance and royalty
payments.
Total operating expenses decreased $2,453,210 or 29%, from $8,563,019 in 1997 to
$6,109,809 in 1998. The decrease in operating expenses is primarily due to a
decrease in research and development expenses.
Net research and development expenses decreased by $1,972,125 or 36%, from
$5,463,508 in 1997 to $3,491,383 in 1998. The decrease in R&D expense is
primarily due to the closure of the company's R&D facilities in Florida during
the fourth quarter of 1997, a lower than anticipated level of research and
development expenditures at the Company's Israel facility and reduced regulatory
expenses resulting from the granting of waivers for fees previously paid to the
FDA.
Selling, general and administrative expenses decreased by $495,837 or 19%, from
$2,632,477 in 1997 to $2,136,640 in 1998. The decrease is primarily due to costs
incurred by the Company during 1997 under marketing agreements to supply Bausch
& Lomb Pharmaceuticals, Inc. ("BLP") with certain specified quantities of
loteprednol etabonate ("LE"). These quantities of LE, totaling $598,385, were
purchased during 1997 for use in testing, manufacturing and various marketing
activities, and were charged to results of operations in 1997. No such amounts
were incurred in 1998.
Patent expenses increased by $2,626, or 1 %, from $211,316 in 1997 to $213,942
in 1998. This increase is due to the timing of completion of certain patent
applications.
Depreciation and amortization expenses increased by $12,125, or 5 %, from
$255,718 in 1997 to $267,844 in 1998, reflecting a higher level of purchases of
fixed assets during 1998.
Interest and other income, net of interest and other expenses, increased by
$14,762, or 4.5 %, from $329,472 in
14
1997 to $344,234 in 1998. Interest and other income, net, increased principally
as a result of higher average cash balances during 1998.
Years Ended December 31, 1997 and 1996
Total operating expenses increased by $208,028, or 2.5 %, from $8,354,991 in
1996 to $8,563,019 in 1997. Marketing expenses totaling $598,385, which is
comprised of bulk material purchases of LE, the active drug-substance of Lotemax
and Alrex, were principally offset by reductions in research and development,
net, patents, general and administrative and depreciation and amortization
expenses.
Net research and development expenses decreased by $141,084, or 2.5%, from
$5,604,592 in 1996 to $5,463,508 in 1997. The completion of the clinical trials
associated with the Company's NDA submissions for LE resulted in a decrease in
R&D expense. The company increased participation in approved R&D reimbursement
programs that contributed to a reduction in R&D expense. Increased costs for
toxicology studies for the LE-T program (a combination of LE and Tobramycin) and
Dexanabinol, as well as activities to advance the manufacturing of LE, partially
offset the decrease in R&D expense.
In accordance with its obligations under the Marketing Agreements to supply BLP
with specified quantities of LE (the active drug-substance), the Company
purchased quantities of LE and smaller quantities of a key reagent required for
the manufacture of LE, in the amount of $2,403,012. Certain quantities of LE,
totaling $598,385, that were purchased during 1997, for use in testing, and
marketing activities (principally producing free samples of the product) were
charged to results of operations in 1997. Purchases of LE that totaled
$1,804,627 and were made subsequent to the Company being advised by the FDA that
LE was an approvable drug have been recorded as inventory at December 31, 1997.
In September 1997, the Company signed an agreement terminating the 1992
licensing agreement with the University of Florida, and returned the rights to
technologies that the Company had previously ceased developing. The termination
agreement included a waiver of $416,249 in accounts payable due the University.
General and administrative expense increased by $509,079, or 24 %, from
$2,123,392 in 1996 to $2,632,471 in 1997. The increase is primarily due to costs
incurred to supply BLP with LE, totaling $598,385, partially offset by lower
expenses associated with the completion of the Company's NDAs for Lotemax and
Alrex as well as the closure of its Florida.
Patent expenses decreased by $70,096, or 25%, from $281,412 in 1996 to $211,316
in 1997. This decrease is due to the timing of completion of certain patent
applications.
Depreciation and amortization expenses decreased by $89,877, or 26%, from
$345,595 in 1996 to $255,718 in 1997, reflecting reduced depreciation expense
relating to the Alachua, Florida operation.
Interest and other income, net of interest and other expenses, increased by
$51,692, or 19%, from $277,782 in 1996 to $329,472 in 1997. Interest and other
income, net, increased as a result of higher average cash balances, and net
foreign exchange gains.
Years Ended December 31, 1996 and 1995
Total revenues decreased by $75,000 from 1995 to $-0- in 1996. The 1995 revenues
resulted from the sublicensing of certain technologies that were not being
actively developed by the Company.
Total operating expenses increased by $101,325, or 1%, from $8,253,666 in 1995
to $8,354,991 in 1996 due to increased research and development spending
partially offset by lower general, administrative and other expenses.
15
Research and development expenses increased by $925,513, or 20%, primarily due
to significant spending on clinical trails in 1996. During the past year, the
company initiated and completed Phase III clinical trials of Lotemax for the
treatment of uveitis and post cataract surgery as well as Phase III clinical
trials of Alrex for the treatment of seasonal ocular allergies. In October of
1996, the Company commenced a Phase II study of HU-211 for severe head injury.
In February 1997, the Company submitted an NDA for Alrex and in March 1997, the
Company amended and supplemented the previously filed NDA for Lotemax with the
results of the 1996 clinical trials. The increased clinical trial expenses were
partially offset by cost saving measures taken by the Company in early 1995 that
focused research and development activities on products which were closest to
commercialization. BLP net reimbursements for clinical trials totaled $1.2
million during 1996, thereby reducing research and development expenses by this
amount.
General and administrative costs decreased by $434,326, or 17%, in 1996. This
reduction resulted primarily from the 1995 relocation of corporate headquarters
from New York to the Company's existing facility in Alachua, Florida.
Patent expense decreased by $199,447, or 41%, in 1996. The company was able to
reduce patent maintenance costs by returning to an original patent holder
several patents covering technologies that were no longer being pursued.
Further, the Company's in-house patent counsel now executes work previously
undertaken by external patent attorneys.
Depreciation and amortization expenses decreased by $190,415, or 35%, in 1996
due to the absence in 1996 of depreciation of New York facilities following the
1995 closing, a write-off of certain leasehold improvements, as well as reduced
depreciation relating to the Florida operation.
Net interest income increased by $195,200 in 1996, reflecting the higher level
of investable funds in 1996. In addition, the Company had higher interest
expense in 1995 relating to interest on the convertible debentures issued by the
Company in February 1995 , and converted into Common Stock by July 1995, and a
note that was paid in full.
Liquidity and Capital Resources
The Company had no sources of recurring revenues until the commencement of
product sales in April 1998, and has incurred operating losses since its
inception. At December 31, 1998, the Company has an accumulated deficit of
$77,779,095. The Company has financed its operations with public and private
offerings of securities, advances and other funding pursuant to a marketing
agreement with BLP, research contracts, license fees, royalties and sales, and
interest income.
The Company had working capital of $2.3 million, including cash and cash
equivalents of $3.5 million, as of December 31, 1998. On February 4, 1998, the
Company completed a private placement of convertible preferred stock and
warrants that generated $5 million in gross proceeds. On December 10, 1998, the
Company obtained a $10 million equity line of credit with a single institutional
investor. During 1998, the Company received additional equity of $1.7 million
from the exercise of warrants to purchase the Company's common stock.
Management believes that the equity line of credit, existing cash and cash
equivalents combined with anticipated cash inflows from investment income, R&D
grants and proceeds from sales of the drug substance for Lotemax and Alrex to
BLP will be sufficient to support operations through the first half of 2000. The
Company is continuing to actively pursue various funding options, including
additional equity offerings, strategic corporate alliances, business
combinations and the establishment of product related research and development
limited partnerships, to obtain the additional financing that would be required
to continue the development of its products and bring them to commercial
markets. The Company's success depends upon many factors that are beyond the
Company's immediate control, including market acceptance of Lotemax and Alrex,
competition, and the ability to obtain additional financing. There can be no
assurance that the Company will be successful in obtaining additional financing
or commercializing its product candidates, or that Lotemax or Alrex will achieve
market acceptance.
16
During 1997, the Company raised equity of $5.8 million through the issuance of
common stock, convertible preferred stock and warrants. All net proceeds were
available to fund the Company's operations. Pursuant to the U.S. Marketing
agreement with BLP and following the NDA submission for Alrex, the Company
received in March 1997, an additional $ 1 million in advances against future
sales of the active drug substance (needed to manufacture the drug), $143,333 of
which was advanced to the license holder. Cumulative advances from BLP as of
December 31, 1998 totaled $5 million. BLP is entitled to recoup the advances by
withholding certain amounts from the proceeds payable to the Company for
purchases of the active drug substance used in the production of Lotemax, Alrex
and line extension products. As of December 31, 1998, the outstanding advances
from BLP amounted to $4.4 million. The Company may be obligated to repay such
advances if it is unable to supply BLP with certain specified quantities of the
active drug substance.
The Year 2000
The Company has completed its assessment of the potential impact of the year
2000 on the ability of the Company's computerized information systems to
accurately process information that may be date sensitive. Any of the Company's
programs that recognize a date using "00" as the year 1900 rather than the year
2000 could result in errors or systems failures. The Company currently believes
that the costs of addressing this issue will not have a material adverse impact
on the Company's financial position. The Company has not been able to complete
an assessment of any year 2000 issues that may effect third parties, including
the Company's current and prospective suppliers. The Company plans to devote all
resources required to resolve any significant third-party year 2000 compliance
problems in a timely manner. Any year 2000 compliance problems of the Company,
its customers or vendors could have a material adverse effect on the Company's
business, results of operations and financial condition.
Item 8. Financial Statements and Supplementary Data
The information called for by this Item 8 is included following the "Index to
Financial Statements" contained in this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
17
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors, officers and key employees of the Company are as follows:
Name Age Position
- ----- ---- -------
Haim Aviv, Ph.D. 59 Chairman, Chief Executive Officer,
Chief Scientist and Director
Gad Riesenfeld, Ph.D. 55 President, Chief Operating Officer
Robert W. Cook 43 Vice President Finance and
Chief Financial Officer
Anat Biegon, Ph.D. 45 Vice President/Research and Development
Marvin P. Loeb 72 Director
E. Andrews Grinstead III 53 Director
Stephen C. Knight, M.D. 39 Director
David Schlachet 53 Director
Mony Ben Dor 53 Director
George Anthony Marcelt,
M.D., Ph.D. 57 Director
Stephan Guttmann, Ph.D. 71 Director
Haim Aviv, Ph.D., is Chairman, Chief Executive Officer, Chief Scientist and a
Director of the Company and co-founded in 1990, Pharmos Corporation, a New York
corporation ("Old Pharmos"), which merged into the Company in October 1992 (the
"Merger"). Dr. Aviv also served as Chairman, Chief Executive Officer, Chief
Scientist and a Director of Old Pharmos prior to the Merger. Dr. Aviv was the
co-founder in 1980 of Bio-Technology General Corp. ("BTG"), a publicly-traded
company engaged in the development of products using recombinant DNA, its
General Manager and Chief Scientist from 1980 to 1985, and a Director and Senior
Scientific Consultant until August 1993. Prior to that time, Dr. Aviv was a
professor of molecular biology at the Weizmann Institute of Science. Dr. Aviv is
the principal stockholder of Avitek Ltd., a stockholder of the Company. Dr. Aviv
is also an officer and/or significant stockholder of several privately held
Israeli biopharmaceutical and venture capital companies.
Gad Riesenfeld, Ph.D., was named President and Secretary in February 1997, and
has served as Chief Operating Officer since March 1995. He served as Executive
Vice President from December 1994 to February 1997, Vice President of Corporate
Development and General Manager of Florida Operations from October 1992 to
December 1994, and was employed by Pharmos from March 1992 until the Merger.
Prior thereto, he was engaged in free-lance consulting relating to the
commercialization of intellectual property, primarily in the pharmaceutical and
medical fields. From March 1990 through May 1991 Dr. Riesenfeld was a Managing
Director of Kamapharm Ltd., a private company specializing in human blood
products. Prior thereto, from May 1986, he was Managing Director of Galisar
Ltd., a private company involved in extracorporeal blood therapy.
Robert W. Cook was elected Vice President Finance and Chief Financial Officer of
Pharmos in January 1998. From May 1995 until his appointment as the Company's
Chief Financial Officer, he was a vice president in GE Capital's commercial
finance subsidiary, based in New York. From 1977 until 1995, Mr. Cook held a
variety of corporate finance and capital markets positions at The Chase
Manhattan Bank, both in the U.S. and in several overseas locations. He was named
a managing director of Chase in January 1986. Mr. Cook holds a degree in
international finance from The American University, Washington, D.C.
Anat Biegon, Ph.D., has served as Vice President of Research and Development
since December 1994. Dr. Biegon became head of Research and Development for the
Company in 1994. From 1992 to 1994, Dr. Biegon was director of Pharmos Ltd.'s
Department of Pharmacology. From 1991 to 1992, she was a Staff Physiologist at
the University of California at Berkeley's Lawrence Berkeley Laboratory,
Division of Research Medicine and Radiation Biophysics. From 1990 to 1991, Dr.
Biegon was a Research Associate Professor in the Department of Psychiatry at New
York
18
University Medical Center. From 1988 to 1990, she was an Associate Professor in
the Department of Neurobiology at the Weizmann Institute of Science. Dr. Biegon
resigned from her position effective April 1999 in order to pursue other
interests. She will, however, continue to support the dexanabinol development
program and will be working with the Company through 1999.
Marvin P. Loeb, a Director, was Chairman of the Board of the Company (then known
as Pharmatec, Inc.) from December 1982 through October 1992, and has remained a
Director of the Company since 1992. He has been Chairman of Trimedyne, Inc. (and
its subsidiaries), a publicly-held company engaged in the manufacture of lasers,
optical fibers and laser delivery systems, since April 1981; a Director of Gynex
Pharmaceuticals, Inc., from April 1986 until its merger with and into
Biotechnology General Corporation in 1993, a publicly-held company engaged in
the development and commercialization of pharmaceutical products. A Director and
Chairman of Automedix Sciences, Inc. from September 1980 until August 1997.
Automedix Sciences, Inc. changed its name to COMC, Inc. in August 1997 and is a
publicly held voice and data transmission company. Chairman of Cardiomedics,
Inc., a privately held company engaged in the development of heart assist
devices, since May 1986. President and Director of Marvin P. Loeb & Co. since
1965, and Master Health Services, Inc. since 1972, both of which are family-held
companies engaged in licensing of inventions and financial consulting.
E. Andrews Grinstead, III, a Director of the Company since 1991, is Chairman of
the Board and Chief Executive Officer of Hybridon, Inc., a privately-held
biotechnology company. Mr. Grinstead joined Hybridon in 1991. From 1987 to
October 1990, he was Managing Director and Group Head of the life sciences group
at PaineWebber, Inc. From 1986 to 1987, Mr. Grinstead was Managing Director and
Group Head of the life sciences group at Drexel Burnham Lambert, Inc. From 1984
to 1986, he was a Vice President at Kidder, Peabody & Co., Inc., where he
developed the life sciences corporate finance specialty group. Prior to his
seven years on Wall Street, Mr. Grinstead served in a variety of operational and
executive positions with Eli Lilly & Company, most recently as general manager
of Venezuelan Pharmaceutical, Animal Health and Agricultural Chemical
Operations. Since 1991, Mr. Grinstead has served as a Director of EcoScience
Corporation, a development-stage company engaged in the development of
biopesticides. He also serves as a director of Meridian Medical Technologies,
Inc., a pharmaceutical and medical device company. Mr. Grinstead has served as a
member of the Board of Trustees for the Albert B. Sabine Vaccine Foundation, a
501(c)(3) charitable foundation dedicated to disease prevention since 1994, and
on the Board of the Massachusetts Biotech Counsel since 1997. Mr. Grinstead was
appointed to the President's Council of the National Academy of Sciences and the
Institute of Medicine in 1992. Mr. Grinstead received an A.B. from Harvard
College in 1967, a J.D. from the University of Virginia School of Law in 1974
and an M.B.A. from the Harvard Graduate School of Business Administration in
1976.
Stephen C. Knight, M.D., a Director of the Company since November 1994, is Chief
Financial Officer, Senior Vice President Finance &Corporate Development, of Epix
Medical, Inc. Prior to joining Epix Medical in July 1996, Dr. Knight was a
Senior Consultant at Arthur D. Little, Inc., where he specialized in R&D
valuations, and mergers and acquisitions in the pharmaceutical, biotechnology,
health care information, medical equipment and diagnostic industries. Prior to
joining Arthur D. Little, Dr. Knight worked as a consultant at APM, Inc. Dr.
Knight has performed medical research at the National Institutes of Health, AT&T
Bell Laboratories, and Yale and Columbia Universities. Dr. Knight holds an M.D.
from the Yale University School of Medicine and an MBA from the Yale School of
Organization and Management.
David Schlachet, a Director of the Company since December 1994, has served as
the Chairman of Elite Industries Ltd. from July 1997. From January 1996 to June
1997, Mr. Schlachet served as the Vice President of the Strauss Group and Chief
Executive Officer of Strauss Holdings Ltd. The Strauss Group is Israel's largest
privately owned food manufacturer. Mr. Schlachet was Vice President of Finance
and Administration at the Weizmann Institute of Science in Rehovot, Israel from
1990 to December, 1995. Mr. Schlachet was responsible for the Institute's
administration and financial activities, including personnel, budget and
finance, funding, investments, acquisitions and collaboration with the
industrial and business communities. From 1989 to 1990, Mr. Schlachet was
President and Chief Executive Officer of YEDA Research and Development Co. Ltd.,
a marketing and licensing company at the Weizmann Institute of Science. Mr.
Schlachet is a Director of Taya Investment Company Ltd., an Israeli
publicly-held investment company.
19
Mony Ben Dor, a Director of the Company since September 1997, has been Vice
President of The Israel Corporations, Ltd. since May 1997, and chairman of two
publicly traded subsidiaries: H.L. Finance and Leasing and Albany Bonded
International Trade. He is also a director of a number of subsidiary companies
of Israel Chemicals Ltd. From 1992 to 1997, Mr. Ben Dor was Vice President of
Business Development for Clal Industries Ltd. (a subsidiary of Clal Israel),
which is one of the leading investment groups in Israel. He was actively
involved in the acquisition of companies including Jaffora Ltd. and a portfolio
of pharmaceutical companies including Pharmaceutical Resources Inc. and Finetech
Ltd. He served as a director representing Clal Industries in all of the acquired
companies as well as other companies of Clal Industries. Prior to his position
at Clal Industries Ltd., Mr. Ben Dor served as Business Executive at the
Eisenberg Group of companies.
Georges Anthony Marcel, M.D., Ph.D., a Director of the Company since September
1998, is President and Chief Executive Officer of TMC Development S.A., a
biopharmaceutical consulting firm based in Paris, France. Prior to founding TMC
Development in 1992, Dr. Marcel held a number of senior executive positions in
the pharmaceutical industry, including Chief Executive Officer of Amgen's French
subsidiary, Vice President of Marketing for Rhone-Poulenc Sante and Director of
Development for Roussel-Uclaf. Dr. Marcel teaches biotechnology industrial
issues and European regulatory affairs at the Faculties of Pharmacy of Paris and
Lille. Dr. Marcel is also a member of the Gene Therapy Advisory Committee at the
French Medicines Agency.
Stephan Guttmann, Ph.D., a Director of the Company since December 1998, retired
as Senior Vice President of Research and Development at Sandoz Pharma Ltd.,
which merged with Ciba-Geigy in 1997 to form Novartis. Earlier in his career,
Dr. Guttmann lead Sandoz' Worldwide Pharma Research and Development. Prior to
that, at the Sandoz Pharmaceutical Chemical Research Department, Dr. Guttmann
held a variety of positions including head of the Pharmaceutical Development and
Preclinical Research departments. Dr. Guttmann has served on the board of
Systemix and the Scientific Advisory Board of Sequana Pharmaceuticals and is
currently on the boards of Modex Pharmaceuticals.
Section 16 Filings
No person who, during the fiscal year ended December 31, 1998, was a director,
officer or beneficial owner of more than ten percent of the Company's Common
Stock which is the only class of securities of the Company registered under
Section 12 of the Securities Exchange Act of 1934 (the "Act"), a "Reporting
Person" failed to file on a timely basis, reports required by Section 16 of the
Act during the most recent fiscal year. The foregoing is based solely upon a
review by the Company of Forms 3 and 4 during the most recent fiscal year as
furnished to the Company under Rule 16a-3(d) under the Act, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, and any representation received by the Company from any reporting
person that no Form 5 is required.
Item 11. Executive Compensation
The following table summarizes the total compensation of the Chief Executive
Officer of the Company for 1998 and the two previous years, as well as all other
executive officers of the Company who received compensation in excess of
$100,000 for 1998.
20
Summary Compensation Table
Annual Compensation Long Term Compensation
-------------------- -----------------------------
Stock
Name/ Restricted Underlying
Principal Position Year Salary Bonus Other Stock Options
- ----------------- ---- ------ ----- ---------- ---------- ----------
Haim Aviv, Ph.D
Chairman, Chief 1998 $236,347 $ 4,197(1) 100,000
Executive Officer, and 1997 $227,471 $ 40,000 $ 16,119(1)
Chief Scientist 1996 $236,453 $ 27,435(1)
Gad Riesenfeld, Ph.D
President and 1998 $175,000 $ 25,000 $ 50,728(2) 80,000
Chief Operating Officer 1997 $175,000 $ 44,948(2)
1996 $150,000 $ 43,798(2)
Robert W. Cook
Vice President Finance 1998 $165,000 $ 20,000 $ 4,800(1) 150,000
and Chief Financial Officer
Anat Biegon, Ph.D
Vice President of 1998 $ 88,830 $ 14,396 $ 23,490(1) 60,000
Research and 1997 $ 81,873 $ 20,456 $ 27,860(1)
Development 1996 $ 85,516 $ 26,565(1)
(1) Consists of contributions to insurance premiums, car allowance and car
expenses.
(2) Consists of housing allowance, contributions to insurance premiums, and car
allowance.
The following tables set forth information with respect to the named executive
officers concerning the grant, repricing and exercise of options during the last
fiscal year and unexercised options held as of the end of the fiscal year.
Option Grants for the YearEnded December 31, 1998
Common Stock
Underlying % of Total Options
Options Granted to Exercise Price
Granted Employees per Share Expiration Date
------------ ------------------ -------------- ---------------
Haim Aviv, Ph.D 100,000 15.2% $ 2.78 5/18/08
Gad Riesenfeld, Ph.D 80,000 12.2% $ 2.78 5/18/08
Robert W. Cook 100,000 15.2% $ 2.00 1/1/08
50,000 7.6% $ 2.78 5/18/08
Anat Biegon, Ph.D 60,000 9.1% $ 2.78 5/18/08
21
Aggregated Option Exercises
for the Year Ended December 31, 1998
and Option Values as of December 31, 1998:
Value of Unexercised
In-the-Money Options at
Number of Number of Unexercised December 31, 1998
Shares Options at December 31, 1998 -----------------------
Acquired on Value ------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ------------ ------------- ----------- -------------
Haim Aviv, Ph.D 0 0 312,376 112,000 $ -- $ --
Gad Riesenfeld, Ph.D 0 $60,022(1) 71,333 88,000 $ -- $ --
Robert W. Cook 0 0 25,000 125,000 $ -- $ --
Anat Biegon, Ph.D 0 0 44,533 66,000 $ -- $ --
(1) Represents 43,750 shares
Stock Option Plans
It is currently the Company's policy that all full time key employees are
considered annually for the possible grant of stock options, depending upon
employee performance. The criteria for the awards are experience, uniqueness of
contribution to the Company and level of performance shown during the year.
Stock options are intended to improve loyalty to the Company and help make each
employee aware of the importance of the business success of the Company.
As of December 31, 1998, the Company has 1,551,101 options to purchase shares of
the Company's Common Stock outstanding under various option plans, 536,765 of
which are non-qualified options. A summary of the various established stock
option plans is as follows:
1991 Plan. Old Pharmos established a stock option plan in 1991. There are
currently 11,476 options outstanding under this plan and it is anticipated that
future grants of stock options will not be made from this plan.
1992 Plan. The maximum number of shares of the Company's Common Stock available
for issuance under the 1992 Plan is 750,000 shares, subject to adjustment in the
event of stock splits, stock dividends, mergers, consolidations and the like.
Common Stock subject to options granted under the 1992 Plan that expire or
terminate will again be available for options to be issued under the 1992 Plan.
As of December 31, 1998, there were options to purchase 701,166 shares of the
Company's Common Stock outstanding under this plan. Each option granted
outstanding under the 1992 plan as of December 31, 1998 expire by January 2008.
It is anticipated that future grants of stock options will not be made from this
plan.
1997 Plan. The 1997 Plan will be administered by a committee appointed by the
Board of Directors (the "Compensation Committee"). Members of the Compensation
Committee will not be eligible to receive options while they are members except
to the extent otherwise permitted under the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934. The Compensation Committee will designate the
persons to receive options, the number of shares subject to the options and the
terms of the options, including the option price and the duration of each
option, subject to certain limitations.
The maximum number of shares of Common Stock available for issuance under the
1997 Plan, as amended, is 1,000,000 shares, subject to adjustment in the event
of stock splits, stock dividends, mergers, consolidations and the like. Common
Stock subject to options granted under the 1997 Plan that expire or terminate
will again be available for options to be issued under the 1997 Plan.
22
The price at which shares of Common Stock may be purchased upon exercise of an
incentive stock option must be at least 100% of the fair market value of Common
Stock on the date the option is granted (or at least 110% of fair market value
in the case of a person holding more than 10% of the outstanding shares of
Common Stock (a "10% Stockholder")).
The aggregate fair market value (determined at the time the option is granted)
of Common Stock with respect to which incentive stock options are exercisable
for the first time in any calendar year by an optionee under the 1997 Plan or
any other plan of the Company or a subsidiary, shall not exceed $100,000. The
Compensation Committee will fix the time or times when, and the extent to which,
an option is exercisable, provided that no option will be exercisable earlier
than one year or later than ten years after the date of grant (or five years in
the case of a 10% Stockholder). The option price is payable in cash or by check.
However, the Board of Directors may grant a loan to an employee, pursuant to the
loan provision of the 1997 Plan, for the purpose of exercising an option or may
permit the option price to be paid in shares of Common Stock at the then current
fair market value, as defined in the 1997 Plan.
Upon termination of an optionee's employment or consultancy, all options held by
such optionee will terminate, except that any option that was exercisable on the
date employment or consultancy terminated may, to the extent then exercisable,
be exercised within three months thereafter (or one year thereafter if the
termination is the result of permanent and total disability of the holder), and
except such three month period may be extended by the Compensation Committee in
its discretion. If an optionee dies while he is an employee or a consultant or
during such three-month period, the option may be exercised within one year
after death by the decedent's estate or his legatees or distributees, but only
to the extent exercisable at the time of death.
The 1997 Plan provides that outstanding options shall vest and become
immediately exercisable in the event of a "sale" of the Company, including (i)
the sale of more than 75% of the voting power of the Company in a single
transaction or a series of transactions, (ii) the sale of substantially all
assets of the Company, (iii) approval by the stockholders of a reorganization,
merger or consolidation, as a result of which the stockholders of the Company
will own less than 50% of the voting power of the reorganized, merged or
consolidated company.
The Board of Directors may amend, suspend or discontinue the 1997 Plan, but it
must obtain stockholder approval to (i) increase the number of shares subject to
the 1997 Plan, (ii) change the designation of the class of persons eligible to
receive options, (iii) decrease the price at which options may be granted,
except that the Board may, without stockholder approval accept the surrender of
outstanding options and authorize the granting of new options in substitution
therefor specifying a lower exercise price that is not less than the fair market
value of Common Stock on the date the new option is granted, (iv) remove the
administration of the 1997 Plan from the Compensation Committee, (v) render any
member of the Compensation Committee eligible to receive an option under the
1997 Plan while serving thereon, or (vi) amend the 1997 Plan in such a manner
that options issued under it intend to be incentive stock options, fail to meet
the requirements of Incentive Stock Options as defined in Section 422 of the
Code.
Under current federal income tax law, the grant of incentive stock options under
the 1997 Plan will not result in any taxable income to the optionee or any
deduction for the Company at the time the options are granted. The optionee
recognizes no gain upon the exercise of an option. However the amount by which
the fair market value of Common Stock at the time the option is exercised
exceeds the option price is an "item of tax preference" of the optionee, which
may cause the optionee to be subject to the alternative minimum tax. If the
optionee holds the shares of Common Stock received on exercise of the option at
least one year from the date of exercise and two years from the date of grant,
he will be taxed at the time of sale at long-term capital gains rates, if any,
on the amount by which the proceeds of the sale exceed the option price. If the
optionee disposes of the Common Stock before the required holding period is
satisfied, ordinary income will generally be recognized in an amount equal to
the excess of the fair market value of the shares of Common Stock at the date of
exercise over the option price, or, if the disposition is a taxable sale or
exchange, the amount of gain realized on such sale or exchange if that is less.
If, as permitted by the 1997 Plan, the Board of Directors permits an optionee to
exercise an option by delivering already owned shares of Common Stock valued at
fair market value) the optionee will not recognize gain as a result of the
payment of the option price with such already owned shares. However, if such
shares were acquired pursuant to the previous
23
exercise of an option, and were held less than one year after acquisition or
less than two years from the date of grant, the exchange will constitute a
disqualifying disposition resulting in immediate taxation of the gain on the
already owned shares as ordinary income. It is not clear how the gain will be
computed on the disposition of shares acquired by payment with already owned
shares.
1997 Employees and Directors Warrants Plan
The 1997 Employees and Directors Warrants Plan was approved by the Stock Option
Committee as of February 12, 1997 and March 19, 1997. 1,030,000 Warrants to
purchase 1,030,000 shares of Common Stock were granted to certain employees of
the Company. Of such warrants, 955,000 were granted at an exercise price of
$1.59 per share and 75,000 were granted and an exercise price of $1.66 per share
(together, the "1997 Employees Warrants"). The 1997 Employees Warrants become
exercisable in increments of 25% each on their first, second, third and fourth
anniversaries, respectively, and shall expire in the year 2007. 100,000 Warrants
to purchase 100,000 shares of Common Stock were granted to directors of the
Company at an exercise price of $1.59 per share (the "1997 Directors Warrants")
on February 12, 1997. The 1997 Directors Warrants become exercisable in
increments of 25% each on the first, second, third and fourth anniversaries of
February 12, 1997 and shall expire on February 12, 2003. At December 31, 1998,
there were 845,750 1997 Employees Warrants at $1.59, 10,000 1997 Employees
Warrants at $1.66 and 95,000 1997 Directors Warrants at $1.59 outstanding.
Upon termination of a Warrant Holder's employment, consultancy or affiliation
with the Company, all Warrants held by such Warrant Holder will terminate,
except that any Warrant that was exercisable on the date which the employment,
consultancy or affiliation terminated may, to the extent then exercisable, be
exercised within three months thereafter (or one year thereafter if the
termination is the result of permanent and total disability of the holder). If a
Warrant Holder dies while he or she is an employee, consultant or affiliate of
the Company, or during such three month period, the Warrant may be exercised
within one year after death by the decedent's estate or his legatees or
distributees, but only to the extent exercisable at the time of death.
Employment/Consulting Contracts/Directors' Compensation
Haim Aviv, Ph.D. In addition to serving as Chairman of the Board and Chief
Executive Officer of the Company, Dr. Aviv has provided consulting services
under a consulting agreement with an initial three-year term ended May 3, 1993.
The term automatically renews for additional one-year periods unless either the
Company or Dr. Aviv terminates the agreement at least 90 days prior to a
scheduled expiration date. The agreement has been renewed on an annual basis and
presently expires on May 3, 1999. Dr. Aviv is entitled to severance pay equal to
25% of his salary in the event of termination or non-renewal without cause.
Under the agreement, Dr. Aviv is required to render certain consulting services
to the Company and in consideration therefore, Dr. Aviv is entitled to receive
$170,000 per year, subject to yearly increases and review.
The Company's subsidiary, Pharmos Ltd., employs Dr. Aviv as its Chief Executive
Officer under an employment agreement with Dr. Aviv pursuant to which Dr. Aviv
receives $50,000 per year, subject to yearly increases and review. Dr. Aviv is
required to devote at least 50% of his business time and attention to the
business of Pharmos, Ltd. and to serve on its Board of Directors.
Gad Riesenfeld, Ph.D. In October 1992, Old Pharmos entered into a one-year
employment agreement with Dr. Riesenfeld, which is automatically renewable for
successive one-year terms unless either party gives three months prior notice of
non-renewal. Under the Agreement, Dr. Riesenfeld devotes his full time to
serving as President and Chief Operating Officer of the Company. Dr.
Riesenfeld's annual gross salary is $185,000.
Robert W. Cook In January 1998, the Company entered into a one-year employment
agreement with Mr. Cook, which is automatically renewable for successive
one-year terms unless either party gives three months prior notice of
non-renewal. Under the Agreement, Mr. Cook devotes his full time to serving as
Vice President Finance and Chief Financial Officer of the Company. Mr. Cook's
annual gross salary is $175,000.
Directors' Compensation. In 1998, Directors did not receive any compensation for
service on the Board or for attending Board meetings.
24
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 15, 1999, by (i)
each person who was known by the Company to own beneficially more than 5% of any
class of the Company's Common Stock, (ii) each of the Company's Directors, and
(iii) all current Directors and executive officers of the Company as a group.
Except as otherwise noted, each person listed below has sole voting and
dispositive power with respect to the shares listed next to such person's name.
Amount of
Name and Address of Beneficial Percentage of
Beneficial Ownership Ownership Total (1)
- -------------------- ---------- -------------
Haim Aviv, Ph.D.(2) 1,349,305 3.3%
c/o Pharmos Ltd.
Kiryat Weitzman
Rehovot, Israel
Marvin P. Loeb(3) 305,646 *
Trimedyne, Inc.
2810 Barranca Road
Irvine, CA 92714
E. Andrews Grinstead III(4) 115,738 *
Hybridon, Inc.
One Innovation Drive
Worcester, MA 01605
Stephen C. Knight, M.D.(4) 8,333 *
Epix Medical, Inc.
71 Rogers Street
Cambridge, MA 02142
David Schlachet(4) 20,000 *
Strauss Ltd.
16 Bazel Street
Petach-Tikva, Israel 49510
Mony Ben Dor(4) 1,875 *
The Israel Corporation
4 Weizman St
Tel-Aviv 61336, Israel
Georges Anthony Marcel, M.D., Ph.D 0 *
c/o TMC Development
9, rue de Magdebourg
75116 Paris France
Stephan Guttmann, Ph.D. 0 *
Hegenheimermattweg
CH-4123 Allschwil
Switzerland
All Directors and 2,083,013 5.0%
Executive Officers as a group
(11 persons)(5)
25
- ----------
* Indicates ownership of less than 1%.
(1) Based on 40,538,685 shares of Common Stock outstanding, plus each
individual's currently exercisable warrants or options. Assumes that no
other individual will exercise any warrants and/or options.
(2) Includes 276,153 shares of Common Stock held in the name of Avitek Ltd., of
which Dr. Aviv is the Chairman of the Board of Directors and the principal
stockholder, and, as such, shares the right to vote and dispose of such
shares. Also includes currently exercisable options to purchase 437,376
shares of Common Stock.
(3) Held jointly with his wife. Also includes currently exercisable options and
warrants to purchase 60,000 shares of Common Stock. Does not include shares
held by his adult children, his grandchildren or a trust for the benefit of
his grandchildren.
(4) Consists of currently exercisable options and warrants to purchase Common
Stock.
(5) Based on the number of shares of Common Stock outstanding, plus 915,438
currently exercisable warrants and options held by the Directors and
executive officers.
Item 13. Certain Relationships and Related Transactions
None.
26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Exhibits
(1) FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are
not applicable or the required information is shown in the
financial statements or note thereto.
(3) EXHIBITS; EXECUTIVE COMPENSATION PLANS
Exhibits
2 Plan of acquisition, reorganization, arrangement, liquidation or succession
2(a) Agreement and Plan of Merger dated as of March 28, 1995 between
Pharmos Corporation, PMC Merger Corporation and Oculon
Corporation (Incorporated by reference to the Company's Current
Report on Form 8-K, dated April 11, 1995, as amended).
3 Articles of Incorporation and By-Laws
3(a) Restated Articles of Incorporation (Incorporated by reference to
Appendix E to the Joint Proxy Statement/Prospectus included in
the Form S-4 Registration Statement of the Company dated
September 28, 1992 (No. 33-52398) (the "Joint Proxy
Statement/Prospectus").
3(b) Certificate of Amendment of Restated Articles of Incorporation
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1994).
3(c) Amended and Restated By-Laws (Incorporated by reference to Form
S-1 Registration Statement of the Company dated June 30, 1994
(No. 33-80916)).
3(d) Certificate of Amendment of Restated Articles of Incorporation
dated January 16, 1998 (Incorporated by reference to the
Company's Current Report on Form 8-K, dated February 6, 1998).
4 Instruments defining the rights of security holders, including indentures
4(a) 1983 Incentive Stock Option Plan (The Company's 1984 and 1986
Plans are identical in all respects except as to the number of
shares subject to option) (Incorporated by reference to Form S-18
Registration Statement of the Company dated June 7, 1983
(2-84298-C)).
27
4(b) Amendment of 1983, 1984 and 1986 Incentive Stock Option Plans
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1988).
4(c) 1988 Incentive Stock Option Plan (Incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1988).
4(d) Pharmos Corporation 1991 Incentive Stock Option Plan
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1992).
4(e) 1992 Incentive and Non-Qualified Stock Option Plan (Annexed as
Appendix F to the Joint Proxy Statement/Prospectus).
4(f) Form of Class A Warrant to purchase (x) shares of Common Stock
and (y) Class B Warrants (Incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1991).
4(g) Form of Class B Warrant to purchase shares of Common Stock
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1991).
4(h) Unit Purchase Option Agreement dated February 18, 1992 between
the Company and David Blech (Incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1991).
4(i) Form of Warrant to purchase Common Stock at an exercise price of
$1.31 per share (pre-reverse split) (Incorporated by reference to
Form S-3 Registration Statement of the Company dated September
14, 1993 (33-68762)).
4(j) Form of Placement Agent's Warrant Agreement, dated August 13,
1993, to purchase shares of Common Stock (Incorporated by
reference to Form S-3 Registration Statement of the Company dated
September 14, 1993 (33-68762)).
4(k) Registration Agreement dated as of January 18, 1994 by and among
the Company, David Blech and Lake Charitable Remainder Trust
(Incorporated by reference to Form S-3 Registration Statement of
the Company dated January 28, 1993 (33-74638)).
4(l) Form of Stock Purchase Agreement dated as of September 2, 1994
between the Company and the Purchaser (Incorporated by reference
to Form S-1 Registration Statement of the Company dated June 30,
1994 [No. 33-80916], Amendment No. 2).
4(m) Form of Warrant Agreement dated September 2, 1994 to purchase
42,000 shares of Common Stock (Incorporated by reference to Form
S-1 Registration Statement of the Company dated June 30, 1994
[No. 33-80916], Amendment No. 2).
4(n) Form of Common Stock Purchase Agreement dated as of October 4,
1994 between the Company and the Purchasers (Incorporated by
reference to Form S-3 Registration Statement of the Company dated
November 25, 1994 [No. 33-86720]).
4(o) Warrant Agreement dated October 4, 1994 between the Company and
Judson Cooper (Incorporated by reference to Form S-3 Registration
Statement of the Company dated November 25, 1994 [No. 33-86720]).
4(p) Form of Convertible Debenture Purchase Agreement dated as of
February 7, 1995 between the Company and the Investors
(Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1994).
28
4(q) Warrant Agreement dated February 7, 1995 between the Company and
Judson Cooper (Incorporated by reference to Annual Report on Form
10-K for the year ended December 31, 1994).
4(r) Form of Employee Warrant Agreement, dated April 11, 1995, between
the Company and Oculon Corporation (Incorporated by reference to
the Company's Current Report on Form 8-K, dated April 11, 1995,
as amended).
4(s) Form of Penalty Warrant Agreement, dated April 11, 1995, between
the Company and Oculon Corporation (Incorporated by reference to
the Company's Current Report on Form 8-K, dated April 11, 1995,
as amended).
4(t) Form of Unit Purchase Agreement dated as of September 14, 1995
between the Company and the Investors (Incorporated by reference
to the Company's Current Report on Form 8-K, dated September 14,
1995).
4(u) Form of Warrant Agreement dated as of September 14, 1995 between
the Company and the Investors (Incorporated by reference to the
Company's Current Report on Form 8-K, dated September 14, 1995).
4(v) Form of Warrant Agreement dated as of April 30, 1995 between the
Company and Charles Stolper (Incorporated by reference to Form
S-3 Registration Statement of the Company dated November 14,
1995, as amended [No. 33-64289]).
4(w) Form of Warrant Agreement dated as of April 30, 1995 between the
Company and Janssen/Meyers Associates, L.P. (Incorporated by
reference to Form S-3 Registration Statement of the Company dated
November 14, 1995, as amended [No. 33-64289]).
4(x) Form of Warrant Agreement dated as of October 31, 1995 between
the Company and S. Colin Neill (Incorporated by reference to Form
S-3 Registration Statement of the Company dated November 14,
1995, as amended [No. 33-64289]).
4(y) Certificate of Designation, Rights, Preferences and Privileges of
Series A Preferred Stock of the Company (Incorporated by
reference to Form S-3 Registration Statement of the Company dated
December 20, 1996, as amended [No. 333-15165]).
4(z) Form of 5% Preferred Stock Securities Purchase Agreement dated as
of September 30, 1996 between the Company and the Investors
(Incorporated by reference to Form S-3 Registration Statement of
the Company dated December 20, 1996, as amended [No. 333-15165]).
4(a)(a) Form of Stock Purchase Warrant dated as of September 30, 1996
between the Company and the Investors (Incorporated by reference
to Form S-3 Registration Statement of the Company dated December
20, 1996, as amended [No. 333-15165]).
4(a)(b) Form of Stock Purchase Warrant dated as of September 30, 1996
between the Company and Alan M. Mark (Incorporated by reference
to Form S-3 Registration Statement of the Company dated December
20, 1996, as amended [No. 333-15165]).
4(a)(c) Form of Warrant Agreement dated as of March 15, 1996 between the
Company and Michael E. Lewis, Ph.D. (Incorporated by reference to
Form S-3 Registration Statement of the Company dated December 20,
1996, as amended [No. 333-15165]).
4(a)(d) Stock Purchase Agreement, dated December 12, 1996, between the
Company and Bausch & Lomb Pharmaceuticals, Inc.(Incorporated by
reference to Annual Report on Form 10-K dated
29
March 29, 1997.
4(a)(e) Certificate of Designation, Rights Preferences and Privileges of
Series B Preferred Stock of the Company (Incorporated by
reference to Form S-3 Registration of the Company dated April 30,
1997 [No. 333-26155]).
4(a)(f) Form of 5% Preferred Stock Securities Purchase Agreement dated as
of March 31, 1997 between the Company and the Investors
(Incorporated by reference to Form S-3 Registration of the
Company dated April 30, 1997 [No. 333-26155]).
4(a)(g) Form of Stock Purchase Warrant dated as of March 31, 1997 between
the Company and the Investors (Incorporated by reference to Form
S-3 Registration Statement of the Company dated April 30, 1997
[No. 333-26155]).
4(a)(h) Certificate of Designation, Rights Preferences and Privileges of
Series C Preferred Stock of the Company (Incorporated by
reference to the Company's Current Report on Form 8-K filed on
February 4, 1998).
4(a)(i) Form of Securities Purchase Agreement dated as of February 4,
1998 between the Company and the Investor (Incorporate by
reference to the Company's Current Report on Form 8-K filed on
February 4, 1998).
4(a)(j) Form of Stock Purchase Warrant dated as of February 4, 1998
between the Company