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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 of the Securities Exchange Act of 1934
Year Ended December 31, 1999
Commission File Number 0-24320
NAPRO BIOTHERAPEUTICS, INC.
Incorporated in Delaware IRS ID No. 84-1187753
6304 Spine Road, Unit A
Boulder, Colorado 80301
(303) 530-3891
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0075 par value; Preferred Stock Purchase Rights
The registrant (1) has filed all reports required to be filed by Section 13 or
15(b) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing require ments for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K will be
contained, to the best of registrant's knowledge, in a definitive proxy
statement incorporated by reference in Part III of this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $177,336,000 as of March 24, 2000.
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 24, 2000:
Common Stock 23,197,477
Nonvoting Common Stock 395,000
Incorporated by reference in Part III of this report is certain information
contained in the NaPro Proxy Statement for its 2000 Annual Meeting of
Stockholders.
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Table of Contents
Item Page
Part I 1 Business 3
2 Properties 20
3 Legal Proceedings 20
4 Matters Submitted to Stockholders' Vote 21
Part II 5 Market Information and Related Stockholder Matters 22
6 Selected Financial Data 23
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
7A Quantitative and Qualitative Disclosures about
Market Risk 31
8 Financial Statements and Supplementary Data 32
9 Changes in and Disagreements with Accountants 32
Part III 10 Directors and Executive Officers 33
11 Executive Compensation 33
12 Security Ownership of Certain Beneficial Owners and
Management 33
13 Certain Relationships and Related Transactions 33
Part IV 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 33
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Part I
Item 1
Business
General
NaPro BioTherapeutics, Inc. (together with its subsidiaries, "NaPro" or "the
Company") is a natural product pharmaceutical company focused primarily on the
development, manufacture and commercialization of cancer chemotherapeutic
agents and related technologies. Natural product substances have been, and
continue to be, the primary source of new chemotherapeutic anti-cancer agents,
especially compounds which exert their anti-cancer activity by novel mechanisms
of action. NaPro's lead product is paclitaxel, a naturally occurring
chemotherapeutic anti-cancer agent found in certain species of yew (Taxus)
trees. In addition to its efforts with paclitaxel, NaPro is actively engaged in
evaluating the in-licensing or purchase of potential new products and/or
technologies, either derived from natural products or otherwise. Such
evaluations may involve individual molecules, classes of compounds or platform
technologies, both in the cancer field and otherwise, which could involve the
acquisition of entire private or publicly traded companies. NaPro is also
working internally on several classes of compounds which have promising in vitro
and in vivo activity as anti-tumor agents that function by new and novel
mechanisms that may increase the likelihood of their success as new
chemotherapeutic agents. See chart at end of this section.
To date, the majority of NaPro's resources have been directed toward the
development and manufacture of paclitaxel. The market for paclitaxel is
dominated by Bristol-Myers Squibb Company ("Bristol"). Bristol has publicly
announced that worldwide sales of its formulation of paclitaxel were
approximately $1.5 billion in 1999 and approximately $1.2 billion in 1998.
Bristol's paclitaxel is the only U.S. Food and Drug Administration ("FDA")
approved formulation of paclitaxel in the United States and is indicated for the
treatment of breast and ovarian cancers, Kaposi's sarcoma, and non-small cell
lung cancer when used in combination with cisplatin. NaPro believes that by
combining its proprietary extraction, isolation and purification ("EIP(TM)") and
semisynthetic manufacturing technology, the renewable sources of Taxus biomass
being developed by NaPro, and current as well as possible future long-term,
exclusive agreements with major international pharmaceutical companies, NaPro
will be positioned to participate significantly in the worldwide paclitaxel
market. There can be no assurance, however, that NaPro paclitaxel will prove
safe and effective, meet applicable standards necessary for regulatory approvals
or be successfully marketed.
NaPro's strategy for advancing the development and commercialization of NaPro
paclitaxel has been to form strategic alliances through long-term exclusive
agreements with major pharmaceutical companies. On July 23, 1999, NaPro entered
into a 20-year collaborative agreement (the "Abbott Agreement") with Abbott
Laboratories ("Abbott") to develop and commercialize one or more formulations of
paclitaxel for the treatment of a variety of cancer indications. The exclusive
agreement covers only the United States and Canada. Pursuant to the Abbott
Agreement, NaPro will be responsible for supply of bulk drug and may jointly
conduct clinical trials with Abbott. Abbott will be responsible for finishing,
regulatory filings, marketing and sale of the finished drug product. NaPro has
licensed to Abbott its paclitaxel-related patents
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in the United States and Canada. Most primary decisions related to the
development program will be made by a joint NaPro-Abbott Development Committee.
See "Strategic Alliances - Abbott."
In 1992, NaPro entered into a 20-year exclusive agreement (the "Faulding
Agreement") with F.H. Faulding & Co., Ltd., Australia's largest domestic
pharmaceutical company ("Faulding"), for the clinical development, sales,
marketing and distribution of NaPro paclitaxel in Australia, New Zealand and
much of southeast Asia. Faulding currently sells NaPro paclitaxel in 18
countries. See "Strategic Alliances - Faulding."
NaPro supplies NaPro paclitaxel to Faulding, which formulates it into a
commercial drug product named ANZATAX(TM). Faulding has agreed to fund and, with
NaPro's input, perform development work leading to regulatory approvals of
ANZATAX(TM) in its territories. NaPro is responsible for supplying Faulding with
NaPro paclitaxel for clinical and commercial purposes. NaPro is currently
receiving payments from Faulding based on clinical sales and commercial sales
in territories where sales of ANZATAX(TM) have been approved.
Faulding obtained regulatory approval and began marketing ANZATAX(TM) as a
pharmaceutical for the treatment of refractory breast and ovarian cancers in
Australia in January 1995. Faulding subsequently obtained regulatory approval
and began marketing ANZATAX(TM) in several countries in the Middle East and
Asia, and is seeking approvals to market ANZATAX(TM) in other countries in its
defined territory. See "Clinical Status of NaPro paclitaxel, Faulding."
NaPro is in discussions with companies aimed at forming alliances for the
development, sales, marketing and distribution of NaPro paclitaxel in Europe,
South America and other territories. There can be no assurance, however, that
NaPro will succeed in entering into additional strategic development and
marketing agreements.
The compound, paclitaxel, is not patented. Bristol has obtained, however, U.S.
patents covering the method of administration upon which its FDA approval was
received. A number of companies have filed applications with the FDA for generic
paclitaxel based upon Bristol's initial FDA approval. Anyone obtaining FDA
approval for generic paclitaxel will rely upon a method of administration that
might infringe the Bristol patents. Bristol has sued those companies that are
seeking FDA approval for generic paclitaxel for infringement of its patents. The
court before which the action is pending ruled that several key claims of the
patents are invalid. The court has approved an expedited appeal of the ruling.
NaPro and Abbott are reviewing the effects of the foregoing on their drug
development program. See "Patents and Proprietary Technology."
NaPro is currently conducting the preclinical development of a proprietary oral
delivery system for paclitaxel. NaPro believes that the oral method of
administration will have several advantages over the currently used intravenous
delivery of the drug, including the elimination of the adverse reactions caused
by the current intravenous vehicle and the elimination of risk inherent in
intravenous administration of any drug. Commercialization of the technology
under development will depend on completion of the preclinical formulation
development, successful clinical demonstration of safety and efficacy, and FDA
approval to market. In addition, successful commercialization of this technology
may involve acquisition of intellectual property by NaPro, successful
prosecution of NaPro's intellectual property rights, and/or avoidance of
infringements of intellectual property rights of third parties. The success of
none of these steps can be assured.
The following chart identifies the commercial products and several classes of
compounds in which NaPro is currently engaged in research.
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NaPro Drugs: Commercial or in Development
Product Indication(s) Development Status
- ------- ------------- ------------------
ANZATAX(TM)paclitaxel for Breast & Ovarian Cancer Commercialized in 18
injection (Faulding) countries outside the US
NaPro Paclitaxel for Injection Solid tumors Clinical
NaPro Oral Paclitaxel Proprietary delivery system Preclinical
for solid tumors
NaPro 82739, NaPro 80239, Solid tumors Development candidate
NaPro 80661 selection
Paclitaxel Overview
Cancer is the second leading cause of death in the United States with over one
million new cases diagnosed each year. Cancer is generally treated by surgery,
radiation, chemotherapy or a combination of these therapies. Since gaining
approval in December 1992, paclitaxel has become the largest selling drug of the
class of cancer chemotherapy drugs known as cytotoxic agents.
Paclitaxel is a natural product that was recognized by the National Cancer
Institute (the "NCI") in 1963 as showing cytotoxic activity against leukemia
cells and inhibitory activity against a variety of tumors. Over the next two
decades, researchers working under grants from the NCI conducted studies to
determine paclitaxel's structure and its mechanism of action. The NCI studies
indicated that paclitaxel inhibits the normal action of microtubules in cancer
cell division. Microtubules, located in the cytoplasm of cells, play a vital
role in cellular division. Paclitaxel promotes microtubule assembly and blocks
normal microtubule disassembly in cells, thereby arresting cell division and
inducing the death of cancer cells. This cytoplasmic mechanism of action
contrasts with the nuclear mechanism of action of the majority of cytotoxic
drugs which kill the cell by attacking nuclear components such as DNA.
In June 1991, the NCI formalized a Collaborative Research and Development
Agreement ("CRADA") for development of paclitaxel with Bristol, the world's
largest oncology company. Bristol assumed develop ment of paclitaxel, including
completion of the necessary clinical trials and manufacturing scale-up. In June
1992, Bristol submitted a New Drug Application ("NDA") to the FDA. Bristol
received approval for the sale of paclitaxel as a treatment for refractory
ovarian cancer in December 1992 and has subsequently received approval for the
sale of paclitaxel as a treatment for various other cancer indications.
Paclitaxel is one of a family of compounds, commonly referred to as taxanes,
which share a hydrocarbon ring (diterpene) structure. Taxanes are found
naturally in many parts of various species of yew trees. The concentration of
taxanes in yew trees is very small, generally less than 1,000 parts per million,
and accordingly, the process of extracting taxanes from yew biomass is
complicated and challenging. Several production approaches can be used to arrive
at a final stage paclitaxel product for use in clinical trials and for
commercialization. NaPro believes the two most prevalent processes used today
are conventional biomass extraction and semisynthesis.
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With conventional extraction, the manufacturing process must be designed to
extract, isolate and purify paclitaxel from yew biomass leaving behind other
components, including non-paclitaxel taxanes. The extraction, isolation and
purification processes, however, are complicated since there are more than 100
different taxanes present in yew biomass. In a semisynthesis process, the
initial extraction, isolation and purification is similar to that of the
conventional extraction process, except that the process not only isolates
paclitaxel, but also isolates certain other taxanes (which are otherwise
considered waste byprod ucts) and converts these taxanes into paclitaxel through
chemical synthesis. By converting other taxanes into paclitaxel, the
semisynthesis process increases the yield of paclitaxel from the same quantity
of biomass. Regardless of which process is used, the final product must have
levels of impurities meeting regulatory criteria.
Historically, the Pacific yew tree was the primary source of biomass. Most
species of Taxus, including the Pacific yew, grow slowly, requiring a number of
years to reach harvestable size. As a result of its slow growth, Taxus in the
wild is generally found in old growth forests, frequently the habitat of
endangered species, including the spotted owl. Biomass from the Pacific yew tree
has historically included the bark, obtained only by destroying the tree. As a
result, there was a considerable amount of public debate and controversy in the
United States and other countries by environmental groups and others regarding
the harvesting of bark from the wild tree. NaPro halted harvesting bark from
wild Pacific yew trees in 1994. See "Corporate Strategy" and "Biomass -
Manufacturing."
Other companies have developed taxane analogues that are similar, but not
chemically identical, to paclitaxel. For example, Aventis S.A., ("Aventis"), a
large international pharmaceutical company, has developed docetaxel, one such
taxane analog, which is being marketed in various parts of the world under the
trademark Taxotere(R) . Taxotere(R) has a different toxicity profile than
paclitaxel and has side effects not observed with paclitaxel. In May 1996, the
FDA approved Taxotere(R) for treatment of anthracycline-resistant breast cancer
in patients without impaired liver function.
Clinical Development of NaPro Paclitaxel
Pursuant to the Abbott Agreement, NaPro is responsible for supply of bulk drug
and may jointly conduct clinical trials with Abbott. Abbott is responsible for
finishing, regulatory filings, marketing and sale of the finished drug product.
NaPro has licensed to Abbott its paclitaxel-related patents in the United States
and Canada. Most primary decisions related to the development program will be
made by a joint NaPro- Abbott Development Committee.
Pursuant to the Faulding Agreement, Faulding has the primary responsibility for
pursuing regulatory approval of NaPro paclitaxel within the Faulding territory.
NaPro has responsibility for supporting the regulatory approvals in regard to
information related to NaPro's manufacturing processes. NaPro has filed
confidential Drug Master Files ("DMF") and other information containing certain
of NaPro's proprietary processes used in the manufacture of NaPro paclitaxel
with regulatory agencies in the United States, Canada, Europe, Australia and
southeast Asia. In addition, NaPro performed toxicological and chemical
characterization necessary for filing an Investigational New Drug Application
("IND") for extracted paclitaxel.
Existing regulatory approvals have a direct impact on the clinical and marketing
strategy being pursued by NaPro. In December 1992, Bristol obtained NDA approval
in the United States for its paclitaxel product. Under the Waxman-Hatch Act, a
non-patented drug such as paclitaxel that gains approval through an NDA process
is granted a five-year period of marketing exclusivity, which prevents
submission by another party of an Abbreviated New Drug Application ("ANDA") for
generic substitutes until such
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period of exclusivity expires. Bristol's exclusivity period in the United Stated
expired in December 1997. Additional provisions under the Waxman-Hatch Act may
result in an additional 30 month delay in the approval of an ANDA if the sponsor
(in this case Bristol) has published a patent related to the product. This
30-month period of exclusivity ends June 2, 2000. A statute comparable to the
Waxman-Hatch Act exists in Europe, although the related period of exclusivity is
ten years. See "Government Regulation and Product Approvals."
NaPro NaPro filed an IND in May 1998, and initiated clinical trials of NaPro
paclitaxel for three indications in June 1998 and March 1999. These studies were
not specifically designed to support an NDA filing. Meetings and correspondence
with the FDA continue with respect to expanding the NaPro/Abbott drug
development program in paclitaxel. NaPro does not currently intend to disclose
the status or results of clinical studies prior to submitting those results in
regulatory filings. The two companies have engaged in communication with the FDA
concerning a development plan for various clinical indications. There can be no
assurance that these trials will demonstrate NaPro paclitaxel to be safe or
effective.
Faulding In January 1995, Faulding received generic regulatory approval from the
Australian Therapeutic Goods Administration ("TGA") to market ANZATAX(TM) in
Australia. Under Australian law there is no exclusivity period comparable to
that provided by the Waxman-Hatch Act, and, therefore, approval of a generic
substitute was possible without the need for additional clinical trials.
Faulding did, however, conduct clinical investigations with ANZATAX(TM) in order
to support marketing in Australia and to support applications for regulatory
approval in other countries. NaPro and Faulding have obtained regulatory
approval from the TGA for NaPro to supply NaPro paclitaxel to Faulding from its
U.S. and Canadian manufacturing facilities. In addition to Australia, Faulding
markets ANZATAX(TM) in Cyprus, Egypt, Hong Kong, India, Jordan, Kuwait, Lebanon,
Oman, Pakistan, Peoples Republic of China, the Phillippines, Republic of China
(Taiwan), Saudi Arabia, Singapore, Thailand, Turkey and Vietnam. Faulding has
marketing applications pending in three other countries. There can be no
assurance, however, that Faulding will receive approval in any of these
additional countries.
Biomass - Manufacturing
Biomass Paclitaxel and other taxanes used in the production of NaPro paclitaxel
are present in many parts of various species of yew trees. NaPro's EIP(TM)
technology is designed to allow extraction and purification of paclitaxel and
extration of other taxanes, which can be chemically converted into paclitaxel,
from renewable sources of biomass such as needles and limbstock harvested from
cultivated yew trees.
NaPro believes that it may be able to reduce its raw material cost while at the
same time allowing it to increase the yield of NaPro paclitaxel by planting and
propagating a reliable and renewable homogeneous biomass source. In order to
have access to such a stable, long-term supply of biomass for use in the
production of NaPro paclitaxel, NaPro entered into agreements with, among
others, PRT Biopharms Inc. ("PBI") in 1993, Zelenka Nursery, Inc. in 1996 and
Cass-Mill, Inc. in 1997 (the "PBI Agreement", "Zelenka Agreement" and "Cass-Mill
Agreement", respectively). NaPro made its first small harvest at Zelenka in
1996, and during 1997 completed another small harvest at Zelenka. During 1998,
NaPro conducted a larger harvest at Zelenka. During 1999, NaPro conducted its
initial harvest at Cass-Mill. During 1998 and 1999, NaPro conducted research
related to enhancing paclitaxel production in cultivated yew trees. The PBI
Agreement was terminated in 1998. Under the terms of termination, there is up to
a 2 year winding down of the agreement. A fair market value lease of the
facilities and contract for ongoing maintenance of the plantation is currently
under negotiation with PBI. NaPro believes that it has sufficient time to
harvest the trees and/or to locate and contract with a new nursery for the
planting and care of the yew trees that had been planted under the PBI
Agreement.
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Manufacturing The manufacture of paclitaxel occurs in three steps. First, a
crude paclitaxel is extracted from cultivated yew trees and delivered to NaPro's
manufacturing facilities. Second, the extracted crude paclitaxel mixture is
isolated and purified and, in the final step, the resulting active drug
substance is delivered to Faulding's final fill and finish facility in Australia
where NaPro paclitaxel is formulated by Faulding for final packaging. For
product delivered to Abbott, the fill and finish will be performed at an Abbott
facility.
From December 1996 to February 1998, a third party extracted crude paclitaxel
from cultivated yew trees pursuant to a manufacturing agreement with NaPro. In
February 1998 that agreement was terminated under an arrangement that provided
for, with certain exceptions, mutual releases from the obligations of the
manufacturing agreement and from claims related to such agreement. NaPro
believes that it has sufficient quantities of crude paclitaxel to fulfill
NaPro's requirements for its clinical program. However, at such time as NaPro
needs additional crude paclitaxel, NaPro will be required to find another
third-party extractor or undertake such extraction itself. NaPro believes that
it will be able to develop or obtain adequate extraction operations when needed,
but no assurance thereof can be provided. In addition to paclitaxel manufactured
from its own yew trees, NaPro also manufactures paclitaxel from raw material
extracted from yew trees purchased from others.
NaPro currently operates a manufacturing facility in Boulder, Colorado and until
April 1998 operated a small-scale manufacturing facility in British Columbia,
Canada. In December 1997, the FDA refused to allow marketing of NaPro paclitaxel
in the United States under an NDA filed by IVAX Corporation ("IVAX"), NaPro's
then strategic partner in the United States, because of an exclusive right
previously granted to Bristol under the Orphan Drug Act. See "Strategic
Alliances." Such refusal resulted in a decrease in the projected demand for
NaPro paclitaxel. As a result, NaPro suspended manufacturing in British Columbia
in April 1998. Both NaPro's Colorado manufacturing facility and its British
Columbia manufacturing facility have been inspected by the TGA and approved for
the commercial production of NaPro paclitaxel for sale in Australia. NaPro
believes that the Boulder, Colorado facility has adequate capacity to meet
Faulding's clinical and commercial requirements and NaPro's clinical demands for
the near future.
With the prospect of NaPro paclitaxel entering the U.S. market under the IVAX
NDA, NaPro pursued construction of a large-scale commercial manufacturing
facility in Boulder, Colorado. During 1997, NaPro completed necessary structural
modifications to the facility and began equipment installation. As a result of
the FDA's refusal to allow marketing under the IVAX NDA, equipment installation
was stopped in December 1997. NaPro believes that construction of this
large-scale facility can be resumed and completed at such time, if ever, as the
demand for NaPro paclitaxel requires an increase in production beyond the
capacity of its existing facilities. There can be no assurance, however, that
NaPro will succeed in adapting its EIP(TM) technology for large scale commercial
manufacturing, or that such facility and manufacturing processes will receive
necessary regulatory approvals.
In order to diversify its supply options and increase its manufacturing
capacity, NaPro is developing, and has applied for patent protection for, a
semisynthesis process for manufacturing NaPro paclitaxel from certain other
taxanes contained in renewable biomass sources. NaPro owns or has licensed
several issued patents relating to this process and has applied for others.
Semisynthesis manufacturing initially involves extraction of paclitaxel and
other taxanes from yew sources. Certain of the taxanes are then chemically
converted into paclitaxel. During 1999, NaPro manufactured crude paclitaxel with
the semisynthesis process in a pilot-scale contracted facility. This crude
paclitaxel was then purified at NaPro's manufacturing facility in Boulder,
Colorado. Because this semisynthesis process uses both paclitaxel and other
taxanes, NaPro expects that use of a semisynthesis process will increase the
paclitaxel yield from its
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biomass sources. However, the use of semisynthesis will require regulatory
approvals, which cannot be assured. Furthermore, there can be no assurance
NaPro's semisynthesis process will perform as expected or that NaPro will be
able to effectively adapt the process to commercial-scale manufacturing. See
"Patents and Proprietary Technology."
Strategic Alliances
NaPro's strategy has been to pursue and enter into strategic alliances with
large international pharmaceuti cal companies. In April 1998, NaPro initiated
discussions toward the formation of new strategic alliances. These discussions
with various potential partners ultimately resulted in a 20 year collaborative
agreement with Abbott Laboratories to develop and commercialize one or more
formulations of paclitaxel for the treatment of a variety of cancer indications.
The exclusive agreement with Abbott is limited to paclitaxel and covers the
United States and Canada. It was executed on July 23, 1999. Pursuant to the
Abbott Agreement, NaPro is responsible for supplying bulk drug and may jointly
conduct clinical trials with Abbott. Abbott is responsible for finishing,
regulatory filings, marketing and sale of the finished drug product. NaPro has
licensed to Abbott its paclitaxel-related patents. Most primary decisions
related to the development program will be made by a joint NaPro-Abbott
Development Committee. In connection with the Abbott Agreement, NaPro may
receive total funding of up to $125 million from Abbott in the form of
development and marketing milestone payments, a secured loan and an equity
investment. On July 26, 1999, NaPro received $5 million, consisting of an
initial $1 million milestone payment, $2 million for the purchase by Abbott of
NaPro common stock at $5.00 per share, and a $2 million draw-down on a secured
loan. NaPro has access to up to $20 million under a secured loan arrangement
with Abbott, of which NaPro has drawn $5 million as of December 31, 1999. The
loan bears a primary interest rate of 6.5% and is due in full on the earliest
of: 1) the second anniversary of the first sale of finished product by Abbott to
a wholesaler or end-user customer following approval of finished product by the
FDA; 2) the termination of the Abbott Agreement; or 3) January 1, 2007. The loan
is limited to a borrowing base of collateralized assets, recomputed monthly.
Under terms of the Agreement, Abbott will purchase bulk drug from NaPro. Once
the paclitaxel product is approved and commercialized, Abbott will pay a
percentage of its net paclitaxel sales to NaPro, less Abbott's payments to NaPro
for purchase of bulk drug. Abbott may terminate the Agreement at any time with
or without cause. Should Abbott terminate without cause, it is obligated to make
certain payments to NaPro.
In addition to the Abbott Agreement, NaPro has formed a strategic alliance
through a long-term exclusive agreement with Faulding that covers ten countries,
including Australia, New Zealand and much of Southeast Asia (the "Faulding
Territory"). Pursuant to this agreement, Faulding agreed to fund and, with
NaPro's input, undertake the development work required to obtain regulatory
approvals for commercializ ing NaPro paclitaxel in the Faulding Territory. NaPro
is responsible for supplying Faulding with NaPro paclitaxel for clinical trials
and commercial purposes and Faulding is required to purchase all of its
paclitaxel requirements from NaPro. Faulding pays a fixed price for
non-commercial sales and a substantial share of gross revenue for NaPro
paclitaxel sold commercially. Under the Faulding agreement, NaPro is able to
utilize Faulding's resources, including expertise in clinical testing and sales,
marketing and distribution. NaPro believes that its alliance with Faulding
enables it to compete more effectively, within the Faulding territory, with
Bristol, Aventis, generic drug manufacturers and other companies, research
organizations, and academic institutions that are developing paclitaxel and are
attempting to develop new and advanced forms of anti-cancer drugs. There can be
no assurance, however, that Faulding will succeed in obtaining further
regulatory approvals to market NaPro paclitaxel within its territory.
Furthermore, if such approvals are received, there can be no assurance that
Faulding will market NaPro paclitaxel successfully in these additional
countries.
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Until March 20, 1998, NaPro and IVAX were parties to a long-term, exclusive
agreement (the "IVAX Agreement"), under which IVAX was responsible for
performing clinical trials, filing for regulatory approvals, and selling,
marketing, and distributing commercial formulations of NaPro paclitaxel. In
March 1998, NaPro and IVAX entered into an agreement (the "Termination
Agreement") terminating the long-term, exclusive agreement.
Abbott Abbott is a large, multinational, diversified health care company with
1999 sales of over $13 billion. The Abbott Agreement grants Abbott the exclusive
right to develop and market NaPro paclitaxel in the United States and Canada for
intravenous and oral anti-cancer uses. Pursuant to the Abbott Agreement, Abbott
is required to purchase all of its requirements of paclitaxel from NaPro, except
in certain circumstances when NaPro is unable to supply Abbott's requirements.
Abbott may terminate the Abbott Agreement at any time with or without cause.
Except for limited instances where termination is due to specific breaches of
the Abbott Agreement by NaPro, NaPro retains exclusive rights to any clinical
data which may be generated during the course of the Abbott Agreement. Pursuant
to the Abbott Agreement, NaPro is required to indemnify Abbott for defects in
NaPro paclitaxel that is shipped to Abbott, for breaches of NaPro's warranties
or obligations under the Abbott Agreement, for harm caused by inappropriate
co-marketing activities, and for certain intellectual property and product
liability claims. Abbott is required to indemnify NaPro for defects in a
finished product containing NaPro paclitaxel manufactured by Abbott, for
breaches of Abbott's representations and warranties under the Abbott Agreement,
for harm caused by inappropriate marketing activities, and for certain
intellectual property and product liability claims.
Abbott owns 400,000 shares of NaPro common stock, which it purchased at $5 per
share. Upon satisfaction of certain milestones relating to paclitaxel
development, Abbott is required to purchase an aggregate of 1,600,000 additional
shares of NaPro Common Stock at $5 per share. There can be no assurance,
however, that any of these milestones will be reached, or that the Abbott will
not terminate the Abbott Agreement, and therefore it is not certain that Abbott
will be required to purchase such shares.
Faulding Faulding, Australia's largest pharmaceutical company with 1999 sales of
approximately $1.2 billion, actively markets anti-cancer pharmaceuticals and
other health care products in Australia, Southeast Asia and other countries
throughout the world. NaPro entered into a development and marketing agreement
with Faulding in 1992. The Faulding Agreement, as amended and restated, has an
initial term of 20 years, through 2012, and will continue thereafter from year
to year unless terminated by either party.
The Faulding Agreement grants Faulding the exclusive right to develop and market
NaPro paclitaxel in ten countries, including Australia, New Zealand and much of
Southeast Asia. The Faulding Agreement also grants Faulding the non-exclusive
right to sell NaPro paclitaxel in certain countries in the Middle East. Pursuant
to the Faulding Agreement, Faulding is required to purchase all of its
requirements of paclitaxel from NaPro, except in certain circumstances when
NaPro is unable to supply Faulding's requirements.
Faulding may terminate the Faulding Agreement: (i) upon the reorganization or
insolvency of NaPro; (ii) if Faulding becomes controlled by a pharmaceutical
company that sells paclitaxel in the Faulding territory; (iii) if NaPro becomes
controlled by IVAX or Bristol; (iv) if NaPro is purchased by a pharmaceutical
company that sells paclitaxel in the Faulding territory and that company refuses
to be bound by the terms of the Faulding Agreement; or (v) if NaPro is unable to
meet the paclitaxel supply requirements of Faulding. NaPro may terminate the
Faulding Agreement: (i) upon the reorganization or insolvency of Faulding; or
(ii) in certain circumstances, upon a change in control of Faulding.
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NaPro is required to indemnify Faulding pursuant to the Faulding Agreement for
any defect in NaPro paclitaxel that is shipped to Faulding and for uncured
breaches of NaPro's warranties or obligations under the Faulding Agreement.
Faulding is required to indemnify NaPro against all losses (i) resulting from a
defect in a product containing NaPro paclitaxel manufactured by Faulding except
where such defect is the fault of NaPro, (ii) resulting from a product
containing NaPro paclitaxel formulated, stored, handled, promoted, distributed,
registered or sold by Faulding and (iii) for uncured breaches of Faulding's
representations and warranties under the Faulding Agreement.
Faulding currently owns 395,000 shares of NaPro Nonvoting Common Stock.
Marketing and Sales
Marketing and sales of NaPro paclitaxel in the Faulding Territory are conducted
by Faulding. Anticipated marketing and sales, if any, of NaPro paclitaxel in the
Abbott Territory, will be conducted by Abbott. Currently, NaPro has no sales
force, has only limited marketing capabilities and has no present intention to
establish a sales or marketing force. Sales to Faulding account for a
substantial portion of NaPro's revenue. As a result, the loss of Faulding or
Abbott as a customer or the failure of Faulding or Abbott to successfully market
NaPro paclitaxel could have a material adverse effect on NaPro in the absence of
a comparable alternative strategic alliance arrangement. See "Strategic
Alliances."
Competition
The biopharmaceutical industry is an expanding and rapidly changing industry
characterized by intense competition for product sales, financing, executive
talent and intellectual property. NaPro competes with all entities developing
and producing therapeutic agents for cancer treatment, many of whom have much
greater capital resources and research and development capabilities.
Within the paclitaxel segment of this industry, the success of competitors in
entering the market for paclitaxel may reduce NaPro's potential market share and
reduce the price of NaPro paclitaxel, each of which could have a material
adverse effect on NaPro. In addition, regulatory approvals and marketing are
being handled exclusively by Abbott and Faulding within their respective
territories. Although NaPro believes Abbott and Faulding have capable drug
development and marketing abilities, there can be no assurance that they will be
capable or effective in gaining additional regulatory approvals on a timely
basis, if at all, or be able to compete effectively with existing or new
competitors within their territories.
Bristol, the world's largest oncology company, is marketing paclitaxel
commercially in the United States, Australia, Canada, Europe and certain other
territories. In addition, Aventis has developed a proprietary analog of
paclitaxel, docetaxel, which is marketed under the trademark Taxotere.(R)
Taxotere(R) has a microtubule binding mechanism of action similar to that of
paclitaxel. Taxotere(R) is approved in the United States, the European Union,
Australia, Canada and a number of other countries. Taxotere(R) is approved in
the United States for treatment of anthracycline-resistant breast cancer in
patients without impaired liver function. While treatment with Taxotere(R) may
cause certain side effects not observed with paclitaxel, Taxotere(R) competes
with paclitaxel, and thereby may reduce overall paclitaxel sales. In addition,
in connection with the termination of the IVAX Agreement, NaPro licensed one of
its patents to IVAX on a non-exclusive basis. NaPro anticipates that IVAX will
continue to seek entry to the global paclitaxel market independently of NaPro
and may compete with NaPro in the future. Furthermore, due to the expiration, in
December 1997, of the five-year marketing protection from generic competition
which was provided to Bristol's paclitaxel product by the Waxman-Hatch Act, IVAX
and other generic manufacturers could enter the U.S. market in 2000. In most
cases, a similar European exclusivity period will end 10
- 11 -
years after Bristol's initial approval. However, IVAX may market paclitaxel for
Kaposi's Sarcoma (with potential for additional "off label" uses as well) in
Europe in 2000. NaPro is aware of several pharmaceutical companies that are in
the process of developing generic paclitaxel in the United States, Canada,
Mexico and Europe. Finally, academic and research organizations and
pharmaceutical and biotechnology companies are pursuing, among other things,
genetically engineered drugs, chemical synthesis and cell-tissue culture that
may compete with NaPro's products or technology. In addition, certain companies
are pursuing the production of paclitaxel and other taxanes from natural product
extraction techniques.
Many of NaPro's competitors, most notably Bristol and Aventis, have
substantially greater capital resources, research and development capabilities,
manufacturing and marketing resources and experience than NaPro. NaPro expects
Bristol to compete intensely to maintain its dominance of the paclitaxel market,
including pursuit of an aggressive patent strategy. NaPro's competitors may
succeed in developing products that are more effective or less costly than any
that may be developed by NaPro and may gain regulatory approval prior to NaPro.
Many companies and research institutions are also seeking means to obtain
paclitaxel and taxanes from renewable biomass components of yew trees and other
sources in order to increase paclitaxel yields, avoid environmental concerns and
reduce the cost of biomass. In addition, NaPro is aware of several potential
competitors that have developed and patented or are developing various processes
for producing paclitaxel and paclitaxel-related substances semisynthetically,
which may allow such competitors to produce a low-cost paclitaxel. The discovery
by a third party of a cost-effective means to fully synthesize paclitaxel in
commercial quantities or the manufacture of taxane derivatives or analogs that
are more efficacious than paclitaxel in treating cancer could have a material
adverse effect on NaPro.
Patents and Proprietary Technology
NaPro's success depends, in part, on its ability to obtain patents, maintain
trade secret protection and operate without infringing on the proprietary rights
of third parties. Where appropriate, NaPro seeks protection of its proprietary
technology by applying for patents in the United States and abroad. NaPro owns
patents and patent applications in the United States and in other countries
throughout the world. Additionally, NaPro has obtained licenses from third
parties to use their proprietary technology, for which patent applications have
been filed in the United States and in certain other areas of the world. NaPro
expects to make such additional filings as it believes appropriate. The majority
of these patents and applications relate to certain paclitaxel formulations,
methods of administration and/or uses of paclitaxel, paclitaxel analogs and
related compounds, and methods for paclitaxel and taxane manufacture. NaPro has
also licensed technology relating to a class of compounds which has promising in
vitro activity as an anti- tumor agent. Recently, NaPro has entered into an
exclusive license agreement related to a patented targeted delivery technology.
NaPro believes that application of this targeted technology may enhance the
safety and/or efficacy of certain chemotherapeutic compounds by preferentially
targeting cancerous cells. There can be no assurance that either NaPro's or its
licensors' existing patent applications will become issued patents or that, if
issued, the coverage claimed in the applications will not be significantly
reduced prior to issuance. There can be no assurance that NaPro will be able to
obtain any necessary or desired additional licenses to patents or technologies
of others or that NaPro will be able to develop its own additional patentable
technologies. In addition, there can be no assurance that future patents issued
to NaPro, if any, will provide it with competitive advantages, that products or
processes covered by such patents will not be challenged as infringing upon the
patents or proprietary rights of others or that any such patents will not be
invalidated, or that the patents or proprietary rights of others will not have a
material adverse affect on the ability of NaPro to do business. Patent
applications in the United States are maintained in secrecy until patents are
issued and patent applications in certain other countries generally are not
published until more than 18 months after they are filed. In addition,
publication of scientific or
- 12 -
patent literature often lags behind actual discoveries. As a result, NaPro
cannot be certain it or any of its licensors was the first creator of inventions
covered by NaPro's or its licensors' pending patent applica tions or that NaPro
or its licensors were the first to file such applications. Furthermore, there
can be no assurance that others will not independently develop similar
technology or, if patents are issued to NaPro, that others will not design
technology to circumvent NaPro's patents or proprietary rights.
Much of NaPro's proprietary technology, including much of its EIP(TM)
technology, is not protected by patents and is held by NaPro as trade secrets.
NaPro's success will depend in part on its ability to protect the trade secrets
relating to extracting, isolating and purifying paclitaxel as well as to other
technology. NaPro relies on proprietary know-how and confidential information
and employs various methods, such as entering into confidentiality and
non-compete agreements with its employees and with third parties to whom it
divulges proprietary information, to protect the processes, concepts, ideas and
documentation associated with its technologies, including its paclitaxel
production process. Such methods may afford incomplete protection and NaPro
cannot assure that it will be able to protect adequately its trade secrets or
that other companies will not acquire information that NaPro considers to be
proprietary. The inability to maintain its trade secrets for its exclusive use
could have a material adverse effect on NaPro.
The patent position of pharmaceutical companies generally is highly uncertain
and involves complex legal and factual questions. Paclitaxel is an unpatentable,
naturally-occurring compound. Various compositions containing paclitaxel, and
also various processes and other technologies, including those relating to
extracting paclitaxel and preparing the drug for finished formulation, are or
may be patented. In addition, certain methods of administering paclitaxel are or
may be patented. Certain of these patents are owned or controlled by Bristol and
Aventis. Bristol's key patents include a patent that covers stabilized
paclitaxel compositions for formulation and patents that cover various
paclitaxel dosing regimens. Bristol's dosing regimen patent claims in the United
States include claims to a 3-hour infusion of 135-175mg/m2 of paclitaxel, which
is the current FDA-approved regimen for Taxol(R). Taxol(R) is a registered
trademark of Bristol for an anti-cancer pharmaceutical preparation containing
paclitaxel. The compound, paclitaxel, is not patented. Bristol has obtained,
however, U.S. patents covering the method of administration upon which its FDA
approval was received. A number of companies have filed applications with the
FDA for generic paclitaxel based upon Bristol's initial FDA approval. Anyone
obtaining FDA approval for generic paclitaxel will rely upon a method of
administration that might infringe the Bristol patents. Bristol has sued those
companies that are seeking FDA approval for generic paclitaxel for infringement
of its patents. The court before which the action is pending ruled that several
key claims of the patents are invalid. The court has approved an expedited
appeal of the ruling. NaPro and Abbott are reviewing the effects of the
foregoing on their drug development program. The appeals process could take
anywhere from several months to several years. Under U.S. laws, during the
patent appeals process, Bristol would retain U.S. patent rights to the disputed
patents until all appeals are exhausted. Therefore, if the appeal is ultimately
resolved in Bristol's favor, and the validity of Bristol's patents is upheld,
generic competitors could face substantial liability for patent infringement.
NaPro is aware of competitors and potential competitors who are pursuing patent
protection for various aspects of the extraction, preparation, formulation,
administration and production of natural, semisynthetic and synthetic
paclitaxel. If NaPro's technology, products or activities are deemed to infringe
the rights of others, NaPro could be subject to damages or prevented from using
such technology, or NaPro could be required to obtain licenses to use such
technology. No assurance can be given that any such licenses would be made
available on terms acceptable to NaPro, or at all. If NaPro were unable to
obtain such licenses or was prevented from using its technology, it could
encounter significant delays in product market introductions while it attempted
to design around the patents or rights infringed, or could find the development,
manufacture or sale of products to be foreclosed, any of which would likely have
a material
- 13 -
adverse effect on NaPro. In addition, NaPro could experience a loss of revenue
and may incur substantial cost in defending itself and indemnifying Faulding or
Abbott in patent infringement or proprietary rights violation actions brought
against them. NaPro could also incur substantial cost if it finds it necessary
to assert claims against third parties to prevent the infringement of its
patents and proprietary rights by others. Participation in such infringement
proceedings could have a material adverse effect on NaPro, even if the eventual
outcome were favorable. See "Strategic Alliances" and "Item 3 - Legal
Proceedings."
Government Regulation and Product Approvals
The production and marketing of NaPro paclitaxel and NaPro's research and
development activities are subject to extensive regulation by numerous
governmental authorities in the United States and other countries. In the United
States, drugs are subject to FDA regulation. The Federal Food, Drug and Cosmetic
Act ("FDC Act"), and the regulations promulgated thereunder, and other federal
and state statutes and regulations govern, among other things, the testing,
manufacture, quality, safety, efficacy, labeling, storage, advertising and
promotion of pharmaceutical products. Product development within this regulatory
framework takes a number of years and involves the expenditure of substantial
resources. The marketing of drugs in the United States may not begin without FDA
approval.
The steps required before a new pharmaceutical product may be marketed in the
United States include: (i) preclinical laboratory tests, animal pharmacology,
toxicology studies and formulation studies; (ii) the submission to the FDA of an
IND for human clinical testing, which must become effective before human
clinical trials commence; (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug; (iv) the submission of
an NDA to the FDA; and (v) FDA approval of the NDA prior to any commercial sale
or shipment of the drug. In addition to safety and efficacy requirements, the
FDA requires the applicant to demonstrate to the FDA's satisfaction that it can
manufacture the drug in compliance with the FDA's current Good Manufacturing
Practices ("cGMP") regulations. In addition to obtaining FDA approval for each
product, each domestic drug manufacturing establishment must be registered with
the FDA. Domestic drug manufacturing establishments are subject to regular
inspections by the FDA and must comply with cGMP regulations. To supply products
for use in the United States, foreign manufacturing establishments must comply
with cGMP regulations and are subject to periodic inspection by the FDA or by
corresponding regulatory agencies in their home countries under reciprocal
agreements with the FDA.
Preclinical studies include the laboratory evaluation of in vitro and in vivo
cytotoxicity, pharmacology, product chemistry and product formulation to assess
the potential safety and activity of the product. Preclinical safety tests must
be conducted by laboratories that comply with FDA regulations regarding good
laboratory practices. The results of the preclinical tests are submitted to the
FDA as part of an IND and are reviewed by the FDA prior to the commencement of
human clinical trials. The data in an IND consists of animal data on safety,
possibly human data from a related use, and chemistry, formulation and
manufacturing data. If the FDA objects, the study may not commence. There can be
no assurance that submission of an IND will result in FDA authorization to
commence clinical trials.
Clinical trials involve the administration of the investigational new drug to
patients under the supervision of a qualified principal investigator. Supplies
for clinical trials must be manufactured and formulated according to cGMP.
Clinical trials must be conducted in accordance with good clinical practices
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety, and the efficacy criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the IND. Each clinical study must be
conducted under the auspices of an Institutional Review Board ("IRB") at the
institution at which the study will be conducted. The IRB will consider, among
other things, the safety of
- 14 -
human subjects and the possible liability of the institution. The company
sponsoring the trials is required to select qualified investigators to supervise
the administration of the drug and to ensure that the trials are adequately
monitored in accordance with FDA regulations and present minimum risk to the
volunteer subjects.
Clinical trials typically are conducted in three sequential phases, which may
overlap. In Phase I, the initial introduction of the drug into humans, the drug
is tested for safety (adverse effects), dosage tolerance, absorption,
distribution, metabolism, excretion and pharmacodynamics (clinical
pharmacology). Phase II involves studies in a limited patient population to: (i)
determine the efficacy of the drug for specific, targeted indications; (ii)
determine dosage tolerance and optimal dosage; (iii) identify possible adverse
effects and safety risks; and (iv) define the structure of larger Phase III
trials. When a compound is found likely to be effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to evaluate further clinical efficacy and to test further for safety
within an expanded patient population at geographically dispersed clinical study
sites. Clinical trials require substantial time, effort and expense. There can
be no assurance that Phase I, Phase II or Phase III testing will be completed
successfully within any specific time period, if at all.
The results of the pharmaceutical development, preclinical studies and clinical
studies are submitted to the FDA in the form of an NDA for approval of the
marketing and commercial shipment of the drug product. An NDA is a systematic
compilation of data, analysis and conclusions on a new drug product based on
studies conducted under an IND. An NDA requests approval to market a particular
drug in a particular formulation for a specific disease indication. The NDA
testing and approval process requires substantial time, effort and expense, and
there can be no assurance that approval will be granted on a timely basis, if at
all. The FDA may refuse to approve an NDA if the FDA does not view the NDA as
containing adequate evidence of the safety and efficacy of the drug, or if other
applicable regulatory criteria are not satisfied. In addition, the FDA may
require additional testing or information, or require post-marketing testing and
surveillance. Notwithstanding the submission of complete data, the FDA may
ultimately decide that the application does not satisfy its criteria for
approval. Moreover, if regulatory approval of a drug is granted, such approval
may entail limitations on the indicated uses for which the drug may be marketed.
Finally, product approvals may be withdrawn if compliance with regulatory
standards is not maintained, if problems occur following initial marketing or if
previously unknown information demonstrates a lack of safety or effectiveness.
Following an approved NDA, a Supplemental NDA ("SNDA") may be submitted to the
FDA which requests a change in the existing approval. An SNDA can be for changes
in formulation, manufacturing or quality control, or for changes in product
labeling such as indications or warnings.
Manufacturers of drugs sold in the United States are required to satisfy the FDA
that their manufacturing facilities and processes adhere to applicable standards
for cGMP and to engage in extensive record keeping and reporting. Thus, even if
regulatory approval for NaPro paclitaxel is acquired, NaPro's current and any
future facilities will be subject to periodic review and inspections by the FDA
or the analogous regulatory authorities of other countries for compliance with
cGMP or similar foreign regulatory standards. Compliance with cGMP regulations
requires substantial time, attention and financial resources. Following
inspections of NaPro's United States and Canadian manufacturing facilities by a
cGMP Auditor of the Australian TGA, the TGA issued approvals to NaPro as an
Australian cGMP compliant paclitaxel manufacturer. In addition, NaPro's Boulder,
Colorado facility was found to be in compliance with U.S. cGMP regulations by
the FDA. These facilities are subject to periodic reinspection, and there can be
no assurance that the FDA or foreign regulatory authorities will find NaPro's
current facilities, or facilities being constructed, to be in compliance with
U.S. cGMP regulations or analogous foreign standards in the future. Subsequent
discovery of previously unknown problems with a product or NaPro's manufacturing
- 15 -
facilities may result in restrictions, including withdrawal of the product from
the market. Failure to comply with the applicable regulatory requirements by
NaPro, Faulding, or any future strategic partner could, among other things,
result in criminal prosecution and fines, product recalls, product seizures and
operating restrictions.
When patents or other periods of exclusivity on brand-name drugs expire,
manufacturers can apply to the FDA to sell generic versions by submitting an
ANDA. An ANDA contains data that provide for the review, by the FDA's Center for
Drug Evaluation and Research, Office of Generic Drugs, and ultimate approval, of
a generic drug product. Generic drug applications are termed "abbreviated"
because they are generally not required to include preclinical (animal) and
clinical (human) data to establish safety and effectiveness. Instead, generic
applicants must scientifically demonstrate that their product is bioequivalent
(i.e., performs in the same manner as the innovator drug). They must also fully
document the generic drug's chemistry, manufacturing steps, and quality control
measures. Each step of the process must be detailed for FDA review. The FDA must
be assured that the raw materials and the finished product meet USP
specifications, if these have been set. Stability of the generic drug under
extremes of heat and humidity must be shown before it can be sold. Once on the
market, the manufacturer must continue to monitor the drug's stability. The
generic applicant must show that the container and its closure system do not
interact with the drug. A full description of the facilities used to
manufacture, process, test, package, label and control the drug must be
provided. The generic applicant must certify that it complies with federal
regulations about cGMP and undergo FDA inspection of the manufacturing facility
to assure compliance. The generic drug's labeling must contain information that
is essentially the same as that of the approved drug. The FDA's review process
may take from 9 to 24 months. Once approved, an applicant may manufacture and
market the generic drug product to provide a safe, effective, low cost
alternative for the American public.
To the extent required by the terms of the Termination Agreement, NaPro has
supported and is required to continue to support the IVAX NDA in the United
States and an equivalent filing in the European Union for a period co-incident
with the original term of the IVAX Agreement. In this capacity, NaPro has
communicated with the FDA to discuss the biomass strategy employing
plantation-grown yews and technical issues associated with NaPro's DMF submitted
in support of the approval of its bulk drug product as part of the IVAX NDA. In
addition, during 1998, NaPro's manufacturing facilities underwent a pre-approval
inspection by the European Agency for the Evaluation of Medicinal Products (the
"European Agency") in support of IVAX's European regulatory submission. Based
upon the findings of that inspection and NaPro's responses, the inspectors
recommended to the European Agency that NaPro's Boulder, Colorado manufacturing
facility be named as a supplier for paclitaxel.
NaPro is also subject to U.S. statutes and regulations applicable to exporting
drugs. Such laws authorize the export of a drug before marketing approval is
obtained in the United States, to any country, if the drug (a) complies with the
laws of the importing country, and (b) has valid marketing authorization by the
appropriate authority in a country listed by the law, one of which is Australia.
NaPro's paclitaxel has received valid marketing authorization from Australia and
NaPro's Boulder, Colorado manufacturing facility has been found to be compliant
with cGMP by the Australian TGA.
NaPro is also subject to, among others, the regulations of Canada, the Province
of British Columbia, the U.S. Environmental Protection Agency, the Department of
Interior (U.S. Fish and Wildlife Services and the Bureau of Land Management),
the Department of Agriculture (U.S. Forest Service) and other countries and
regulatory agencies. Pursuant to the National Environmental Policy Act, certain
U.S. agencies have prepared an Environmental Impact Statement that addresses the
impact of harvesting wild Pacific yew trees, including cutting down Pacific yew
trees on federally-managed land. NaPro is also
- 16 -
subject to federal, state and local laws and regulations governing the use and
disposal of hazardous materials as well as regulations imposed by the
Occupational Safety and Health Administration governing worker safety. NaPro has
made and will continue to make expenditures to comply with such requirements,
however, there can be no assurance that NaPro is at all times in complete
compliance with all such requirements. Compliance with these regulations is
time-consuming and costly. The failure to comply with these regulations,
however, could have a material adverse effect on NaPro's business, financial
condition and results of operations.
The adoption by federal, state or local governments of significant new laws or
regulations or a change in the interpretation or implementation of existing laws
or regulations relating to environmental or other regulatory matters could
increase the cost of producing products, delay regulatory approval or otherwise
adversely affect NaPro's ability to produce or sell NaPro paclitaxel or other
products. Adverse govern mental regulations which might arise from future
legislative or administrative regulations or other actions cannot be predicted.
In addition, certain paclitaxel production has been opposed by the Oregon
Natural Resources Council ("ONRC") because of their concern over Pacific yew in
old growth forests. The ONRC and the FDA have reached an agreement on the
National Environmental Policy Act ("NEPA") requirements for NDAs, ANDAs and INDs
reporting clinical trials with more than 200 patients using paclitaxel from
Pacific yew trees. The agreement provides that an applicant shall include an
Environmen tal Assessment ("EA") which will identify all sources of Pacific yew
which are expected to be harvested in connection with the manufacture of
paclitaxel relating to the application. The FDA is to subject such EAs to the
NEPA process and shall complete and issue a Finding of No Significant Impact, or
an Environmental Impact Statement and Record of Decision as required by NEPA,
before approving any NDA or ANDA involving paclitaxel derived from or otherwise
involving the Pacific yew tree. Because NaPro relies on plantation-grown yews,
and will not harvest any Pacific yew trees to manufacture paclitaxel for a
marketed product, NaPro believes that the ONRC-FDA agreement requirements can be
met, and that these requirements will not jeopardize approval of any NDA that
may be filed by NaPro in the future. However, there can be no assurance that the
ONRC and other environmental activist groups will not oppose other activities of
NaPro, which may have the effect of delaying or halting production of NaPro
paclitaxel, each of which could have a material adverse effect on NaPro's
business, financial condition and results of operations.
NaPro currently manufactures paclitaxel for use in the United States from
cultivated hicksii yew. NaPro may elect to manufacture commercial paclitaxel for
use in the United States from other species or cultivars of yew, and will
address any related environmental assessment matters on a case-by-case basis.
Outside the United States, NaPro's ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authority. This foreign regulatory approval process includes all of the risks
associated with FDA approval set forth above.
NaPro has filed confidential DMFs and other documents containing certain of
NaPro's proprietary manufacturing processes with regulatory agencies in the
United States, Australia, Canada and Europe, relating to NaPro's manufacture of
NaPro paclitaxel. Faulding, referring to NaPro's Australian DMF, has received
marketing approval in Australia and other countries for NaPro paclitaxel for
treating refractory ovarian and breast cancers. Additionally, Faulding has
completed clinical trials with NaPro paclitaxel in Australia, which may form the
basis for applications for further marketing approvals in Australia and other
countries where Faulding has the right to market NaPro paclitaxel.
IVAX, using NaPro's U.S. DMF, filed an IND with the FDA in June 1994, relating
to NaPro paclitaxel and began its Phase I clinical trials relating to NaPro
paclitaxel in the United States in October 1994.
- 17 -
IVAX began Phase II/III clinical trials in May 1995. In 1997, IVAX filed the
IVAX NDA seeking commercial approval to sell NaPro paclitaxel in the United
States. On December 24,1997, the FDA ruled on the IVAX NDA and determined that
NaPro paclitaxel was safe and effective in the treatment of Kaposi's sarcoma,
but denied IVAX the authority to market NaPro paclitaxel due to Bristol's prior
orphan drug approval for that indication. No assurance can be given, however,
that NaPro paclitaxel will prove to be safe and effective in future clinical
trials, or that NaPro will be able to obtain approval to market NaPro paclitaxel
in the United States or other countries.
NaPro filed an IND in May 1998, and initiated clinical trials of NaPro
paclitaxel for three indications in June 1998 and March 1999. These studies were
not specifically designed to support an NDA filing. Meetings and correspondence
with the FDA continue with respect to expanding the NaPro/Abbott drug
development program in paclitaxel. NaPro does not currently intend to disclose
the status or results of clinical studies prior to submitting those results in
regulatory filings. The two companies have engaged in communication with the FDA
concerning a development plan for various clinical indications. There can be no
assurance that these trials will demonstrate NaPro paclitaxel to be safe or
effective.
Research and Development
During the years ended December 31, 1997, 1998 and 1999, NaPro spent
approximately $11.8 million, $10 million and $12 million respectively, on
Company sponsored research and development activity and to produce NaPro
paclitaxel sold to Faulding and IVAX. Research and development is expected to
remain a significant cost component of NaPro's business. In the short term,
research and development is expected to concentrate primarily on clinical
trials, improvement of paclitaxel yield, production cost reduction, development
of NaPro's semisynthesis process for paclitaxel production, and yield
improvement in NaPro's paclitaxel production methodology for processing needles,
limbstock and roots. NaPro plans to contract out research considered essential
but for which it lacks facilities or staff. NaPro also plans to continue in
early stage research and development of other potential natural product cancer
chemotherapeutic drugs with novel mechanisms of action. NaPro is assessing
late-stage pharmaceutical product development opportunities in an effort to
expand its pipeline of new products. See "General."
- 18 -
Foreign and Domestic Operations; Export Sales
The following table sets forth, for the past three years, revenue, profitability
(operating loss), and identifiable assets attributable to NaPro's U.S. and
foreign operations (amounts in thousand dollars):
Year Ended December 31,
1999 1998 1997
---- ---- ----
Sales to Unaffiliated Customers
U.S. $7,592 $4,498 $2,684
Canada - 454 1,130
--------- ------- -------
Total Sales (1) 7,592 4,952 3,814
Operating Loss
U.S. (10,624) (12,852) (12,854)
Canada (165) (526) (952)
Identifiable Assets
U.S. 16,095 23,260 26,419
Canada 3,162 2,406 3,939
- ------------
(1) Includes export sales to Australia of $5,121 in 1999, $2,189 in 1998 and
$1,303 in 1997.
Sales from Canada included sales of product manufactured and shipped from NaPro
Canada, NaPro's Canadian subsidiary. Such products sold by NaPro Canada to NaPro
were then re-sold to Faulding for use outside the United States. Such "exported"
products never physically entered the United States. NaPro suspended Canadian
operations in 1998.
Sales of NaPro paclitaxel into foreign markets accounted for approximately 48%
of NaPro's revenue for the year ended December 31, 1998 and 68% of NaPro's
revenue for the year ended December 31, 1999. NaPro anticipates that a
significant portion of its revenue will continue to be derived from sales of its
products in foreign markets for at least the year ending December 31, 2000.
A substantial portion of NaPro's revenues and operations will thus continue to
be subject to the risks associated with foreign business, including economic or
political instability, shipping delays, fluctuations in foreign currency
exchange rates and various trade restrictions, all of which could have a
significant impact on NaPro's ability to deliver products on a competitive and
timely basis. Future imposition of, or significant increases in, the level of
customs duties, export quotas, drug regulatory restrictions or other regulatory
or trade restrictions could have a material adverse effect on NaPro.
Employees
On February 17, 1998, NaPro announced a planned layoff of 53 employees, with a
resulting 43% reduction in full time positions. As part of this downsizing,
NaPro Canada discontinued production at its British Columbia manufacturing
facility.
As of March 15, 2000, NaPro had 81 full-time employees, 3 part-time employees,
and 3 project employees. Thirteen of these employees hold Ph.D. or M.D. degrees.
Four employees were engaged in
- 19 -
biological and clinical research, 23 in chemical research, 14 in quality
assurance, 23 in manufacturing, 18 in administration and finance, 3 in
regulatory affairs, and 2 in legal. NaPro believes that its relations with its
employees are good.
Item 2
Properties
NaPro leases approximately 54,000 square feet of space in Boulder, Colorado,
that is used for research and development and is planned to be used for
commercial-scale manufacturing upon completion of improvements and installation
and validation of equipment. This facility is also used for NaPro's executive
offices and warehousing of raw materials and equipment. NaPro leases an
additional 5,900 square feet of space in Boulder that is used for manufacturing.
NaPro leases a facility of approximately 3,400 square feet in British Columbia,
Canada that was used for manufacturing until April 1998, but is currently
inactive.
As part of the downsizing announced by the Company on February 17, 1998, NaPro
temporarily closed its British Columbia manufacturing facility and suspended
construction of its large scale manufacturing facility in Boulder. Completion of
the Boulder facility will require additional financing, which NaPro intends to
seek at such time as it anticipates sufficient product demand to warrant
completion of the facility. The British Columbia manufacturing facility is
currently inactive, but NaPro believes this facility could be reactivated at
such time as additional manufacturing capacity is required.
Item 3
Legal Proceedings
On May 14, 1997, Bristol was issued a European patent relating to certain
methods of treatment with paclitaxel. On the same day, NaPro instituted
revocation proceedings in the United Kingdom against this European Patent as
issued in the U.K. and a separate but related British Patent also owned by
Bristol.
The revocation action was not in response to any lawsuit or allegations of
infringement against NaPro relating to the patents, but Bristol subsequently
sued NaPro and Baker Norton Pharmaceuticals, Inc., a subsidiary of IVAX ("BNP")
in the United Kingdom, alleging patent infringement with respect to clinical
trials carried out in the United Kingdom involving paclitaxel. NaPro and BNP
counter-claimed to revoke the patent as invalid. The outcome of the trial of
that action, concerning EP (UK) Patent Number 0,584,001 (the "Bristol Patent")
(GB Patent Number 2,269,319 was surrendered by Bristol), was a judgment rendered
by the English High Court on October 1, 1998. The judge held that the Bristol
Patent was invalid on the basis of lack of novelty and obviousness.
Bristol has lodged a Notice of Appeal dated November 1998 from the High Court
decision. It is NaPro's belief that this appeal will be decided sometime during
2000. In view of the minimal activity, if any, by NaPro in the United Kingdom,
NaPro believes that the risk of an award of substantial damages against NaPro,
in the event of an unfavorable Court of Appeal ruling, to be low. In addition,
BNP is required to indemnify NaPro for any damages (not including payment of
attorneys' fees) suffered as a result of this legal action. However, litigation
is an uncertain process, and an adverse result of the appeal could have a
material adverse effect on NaPro.
- 20 -
Item 4
Matters Submitted to Stockholders' Vote
At the Annual Meeting of Stockholders held on October 28, 1999 (the "Annual
Meeting"), the following proposals were adopted as indicated:
1. The election of one Class III director to hold office until the 2002
annual meeting of stockholders:
Number of Shares
Nominee For Withheld
- ------- --- --------
Sterling K. Ainsworth 21,324,694 321,949
In addition, the terms for the following members of the Board of Directors
continued after the Annual Meeting: Leonard Shaykin; Patricia A. Pilia, Ph.D.;
Arthur H. Hayes, Jr., M.D.; Stanley Knowlton; and Seth Rudnick, M.D.
2. Approval of an amendment to NaPro's 1994 Long Term Incentive Plan
increasing the number of shares of common stock thereunder:
Number of
Shares
For 18,800,796
Against 2,049,513
Abstain 796,334
3. The ratification of the selection by the Board of Directors of Ernst &
Young LLP as NaPro's independent auditors for the year ending December
31, 1999.
Number of
Shares
For 21,603,128
Against 30,033
Abstain 13,482
- 21 -
Part II
Item 5
Market Information and Related Stockholder Matters
Market Information
NaPro's common stock is traded in the Nasdaq National Market under the symbol
"NPRO." The following table sets forth, for the periods indicated, the high and
low closing sale prices for the common stock.
High Low
2000 First Quarter (through $10 $2 9/16
March 24, 2000
1999 Fourth Quarter $ 3 7/16 $2 3/16
Third Quarter 3 7/8 1 21/32
Second Quarter 2 3/16 1 5/8
First Quarter 2 1/2 1 3/18
1998 Fourth Quarter $ 1 29/32 $ 7/8
Third Quarter 2 7/32 31/32
Second Quarter 2 7/32 1 1/16
First Quarter 2 1/2 27/32
Stockholders
As of December 31, 1999 there were approximately 202 common stockholders of
record.
Dividends
To date, NaPro has not paid any dividends on the common stock. NaPro intends to
retain future earnings, if any, to finance the operation and expansion of its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future, if at all.
Recent Sales of Unregistered Securities
On June 4, 1997, NaPro privately issued $10.3 million of senior convertible
notes due in 2000. The notes were sold to private investors. The notes are
convertible into common stock at a 10% discount from the market price of the
common stock during specified periods prior to the conversion. In 1999, 1998 and
1997 NaPro issued 19,234, 296,017 and 2,239 shares of common stock,
respectively, in payment of $27,000, $295,000 and $9,000 interest on the notes
and 3,585,203, 2,833,587 and 342,667 shares of common stock on the conversion of
$5,061,000, $2,900,000 and $1,059,000 principal of the notes. As a negotiated
transaction with sophisticated investors not involving any public offering, the
sale of the notes, and the issuance of common stock in the payment of interest
and upon conversion of the notes, was exempt under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") and Regulation D
thereunder.
- 22 -
On December 8, 1997, NaPro closed a private placement of 5,000 shares of Series
C Senior Convertible Preferred Stock (the "C Preferred") for an aggregate
issuance price of $5 million. The C Preferred is convertible into common stock
at a 5% discount from the conversion date. In 1999 and 1998, NaPro issued
1,299,085 and 986,666 shares of common stock, respectively, in conversion of the
C Preferred and 6,761 and 186,656 shares of common stock in payment of dividends
on the C Preferred. As an issuance to a single sophisticated investor not
involving any public offering, the sale of the C Preferred and the issuance of
common stock in the payment of dividends and upon conversion of the C Preferred
was exempt under Section 4(2) of the Securities Act and Regulation D thereunder.
On July 23, 1999, as part of the Abbott Agreement, NaPro privately sold to
Abbott 400,000 shares of common stock. As a negotiated transaction with an
accredited investor not involving any public offering, the sale of common stock
to Abbott was exempt under Section 4(2) of the Securities Act and Regulation D
thereunder.
On December 31, 1999, NaPro issued 16,000 shares of common stock upon exercise
of a founders' stock option by an officer and director. On March 23, 1998 NaPro
issued 145,467 shares of common stock upon exercise of founders' stock options
by two individuals, both officers and directors. As issuances to accredited
investors not involving any public offering, the issuances were exempt under
Section 4(2) of the Securities Act and Regulation D thereunder. These issuances
upon the exercise of compensatory stock options granted before NaPro was a
reporting company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), were also exempt under Rule 701 under the Securities Act.
Item 6
Selected Financial Data
The selected financial data presented below for each year in the five years
ended December 31, 1999, are derived from NaPro's financial statements, which
have been audited by Ernst & Young LLP, independent auditors, and are qualified
by reference to such Financial Statements and Notes thereto. The data presented
below should be read in conjunction with the consolidated financial statements
at December 31, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999, the related Notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information included elsewhere in this report.
- 23 -
Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
Product Sales $ 7,592 $ 4,952 $ 3,814 $ 3,473 $ 2,623
--------- -------- -------- -------- -------
Operating Expense:
Research, development and cost of products sold 12,047 9,973 11,769 6,837 4,325
General and administrative 6,188 6,458 5,992 3,712 2,309
(Gain) loss on retirement of assets 146 1,899 (141) 27 1
Plantation cost - - - - 272
-------------------------------------- ------------ --------
Total operating expense 18,381 18,330 17,620 10,576 6,907
--------- --------- ---------- --------- --------
Operating loss (10,789) (13,378) (13,806) (7,103) (4,284)
Other income (expense):
License fees 2,320 11,110 - - -
Interest income 309 550 494 651 373
Interest expense (842) (902) (2,161) (373) (160)
--------- ----------- ----------- ---------- ---------
Net loss $ (9,002) $ (2,620) $(15,473) $ (6,825) $(4,071)
========= ========== ========= ========= ========
Net loss attributable to common stockholders $10,213) $ (3,212) $(15,537) $ (6,825) $(4,071)
======== ========== ========= ========= ========
Net loss per share $ (0.50) $ (0.22) $ (1.28) $ (0.68) $ (0.51)
========= ========== ========== ========= ========
Weighted average shares outstanding 20,554 14,642 12,104 9,973 7,973
======== ========= ========= ========= =======
Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term securities $ 1,937 $ 7,441 $ 8,102 $14,767 $ 7,800
Working capital 2,915 7,121 (2,485) 14,224 8,453
Total assets 19,257 25,666 30,358 25,021 11,953
Long-term obligations, net of current maturities 4,723 80 480 751 1,618
Senior convertible debt, long term portion - 5,176 - - -
Senior convertible redeemable preferred stock - 3,805 4,344 - -
Minority interest 622 622 2,574 3,715 3,715
Accumulated deficit (52,620) (43,618) (40,998) (25,525) (18,700)
Stockholders' equity 11,133 10,884 7,262 16,569 5,424
Item 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the results of
operations of NaPro. This discussion should be read in conjunction with the
Financial Statements and Notes included elsewhere in this report. Special Note:
Certain statements set forth below constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). See "Special Note Regarding Forward Looking Statements."
General
NaPro is a natural product pharmaceutical company focused primarily on the
development, manufacture and commercialization of cancer chemotherapeutic agents
and related technologies. Natural product substances have been, and continue to
be, the primary source of new chemotherapeutic anti-cancer agents, especially
compounds which exert their anti-cancer activity by novel mechanisms of action.
NaPro's lead product is paclitaxel, a naturally occurring chemotherapeutic
anti-cancer agent found in certain species of
- 24 -
yew (Taxus) trees. In addition to its efforts with paclitaxel, NaPro is actively
engaged in evaluating the in-licensing or purchase of potential new products
and/or technologies, either derived from natural products or otherwise. Such
evaluations may involve individual molecules, classes of compounds or platform
technologies, both in the cancer field and otherwise, which could involve the
acquisition of entire private or publicly traded companies. NaPro is also
working internally on several classes of compounds which have promising in vitro
and in vivo activity as anti-tumor agents that function by new and novel
mechanisms that may increase the likelihood of their success as new
chemotherapeutic agents. NaPro has terminated discussions for the licensing of
certain technology that were reported in its Form 12b-25 filed with the
Securities and Exchange Commission on March 30, 2000. NaPro is in active
discussions with others and remains committed to the diversification of its
business through the acquisition and development of new products and compounds.
Regarding paclitaxel, NaPro has devoted its efforts to the development and
implementation of its propriety extraction, isolation and purification (EIP(TM))
technology and the development of its proprietary semisynthetic method for
producing NaPro paclitaxel. To advance the development and commercializa tion of
NaPro paclitaxel, NaPro is party to 20-year, exclusive agreements with Abbott
Laboratories ("Abbott") and F.H. Faulding & Co., Ltd. ("Faulding") for the
clinical development, sales, marketing and distribution of NaPro paclitaxel.
Although NaPro has increased sales through December 31, 1999, NaPro continues to
incur substantial expense for research and development related to clinical
trials, improving manufacturing processes and other development activity.
Accordingly, NaPro has incurred significant operating losses, including
operating losses of approximately $10.8 million, $13.4 million and $13.8 million
for the years ended December 31, 1999, 1998 and 1997, respectively, resulting in
an accumulated deficit of $52.6 million as of December 31, 1999. NaPro expects
that it will continue to have a high level of operating expense and will be
required to make significant up-front expenditures in connection with its
biomass procurement, product development and research and development
activities. NaPro anticipates that operating losses will continue until such
time, if ever, as NaPro is able to generate sufficient revenue to support its
operations.
Primarily, the ability of NaPro to generate sufficient revenue to support its
operations depends upon the successful completion of a joint drug development
program with Abbott, a New Drug Application ("NDA") filing, and regulatory and
marketing approval by the U.S. Food and Drug Administration ("FDA") followed by
Abbott's successful marketing of the product. In addition to the NaPro-Abbott
drug development program efforts, NaPro is actively searching for other partners
to facilitate the marketing of its product in major markets outside the United
States.
In February 1997, Bristol-Myers Squibb Company ("Bristol") submitted a
Supplemental New Drug Application with orphan drug designation for paclitaxel
for the treatment of Kaposi's sarcoma ("KS") ahead of the filing by IVAX of an
NDA for the same indication. The Bristol application was approved by the FDA in
August 1997. Under the Orphan Drug Act of 1983, this approval resulted in
IVAX/NaPro being denied marketing approval for the KS indication for seven
years.
In February 1998, due to the delay in receiving marketing approval for
paclitaxel, NaPro underwent a restructuring to decrease overall cost and
announced the layoff of 53 employees that resulted in a one-time charge of
approximately $250,000. As part of this restructuring, NaPro discontinued
operations at its British Columbia manufacturing facility and suspended
construction of its commercial scale manufacturing facility in Boulder,
Colorado. Completion of the Boulder facility will require additional financing,
which NaPro intends to seek at such time as NaPro anticipates sufficient product
demand to warrant completion
- 25 -
of the facility. NaPro incurred $434,000 of losses on asset retirements and
$110,000 of other expense as a result of the suspended construction.
In March 1998, NaPro and IVAX Corporation ("IVAX") terminated the marketing
arrangement which had previously been in place between the two companies.
On July 23, 1999, NaPro entered into a collaborative agreement of up to 20 years
(the "Abbott Agreement") with Abbott to develop and commercialize one or more
formulations of paclitaxel for the treatment of a variety of cancer indications.
The exclusive agreement covers the United States and Canada. Abbott may
terminate the Agreement at any time with or without cause. Should Abbott
terminate without cause, it is obligated to make certain payments to NaPro.
NaPro will be responsible for supply of bulk drug and may jointly conduct
clinical trials with Abbott. Abbott will be responsible for finishing,
regulatory filings, marketing and sale of the finished drug product. NaPro has
licensed its paclitaxel-related patents to Abbott. Most primary decisions
related to the development program will be made by a joint NaPro-Abbott
Development Committee. Under the Abbott Agreement NaPro and Abbott are
developing the next phase of pivotal clinical studies on one or more different
cancers in a variety of populations.
NaPro has planned with Abbott a drug development program exploring the use of
NaPro's patented formulation of paclitaxel using its patented method of
administration. NaPro anticipates that information gained in such program will
be useful in the filing of a regulatory submission with the FDA for NaPro
paclitaxel. The cost of such program is increasing and will be significant.
NaPro has received and will, contingent upon successful development of product
and achievement of milestones, receive funding from Abbott in the form of
development and marketing milestone payments, a secured loan and an equity
investment. In 1999, NaPro received $8 million, consisting of an initial $1
million fee, $2 million from the purchase by Abbott of NaPro common stock at
$5.00 per share, and a $5 million draw-down on the secured loan.
Contingent upon NaPro's successful achievement of all development milestones and
in addition to the payments received in 1999, NaPro could receive up to $45
million consisting of $37 million in development fees and up to $8 million for
the purchase of 1.6 million shares of NaPro common stock. In addition, NaPro
will have access to up to a total of $20 million under a secured loan
arrangement with Abbott, including the 1999 draws of $5 million. The loan bears
a primary interest rate of 6.5% and is due in full on the earlier of: 1) the
second anniversary of the first sale of finished product by Abbott to a
wholesaler or end-user customer following approval of finished product by the
FDA; 2) the termination of the Abbott Agreement; or 3) January 1, 2007. The loan
is limited to a borrowing base of collateralized assets, recomputed monthly.
Substantially all of NaPro's hard assets are collateralized as security for the
loan.
Contingent upon receiving regulatory approval and achieving certain commercial
sales thresholds over several years, NaPro may receive additional milestone
payments from Abbott in the range of zero to $57 million. No assurance can be
given that regulatory approval or sales thresholds will be achieved.
Under terms of the Abbott Agreement, Abbott will purchase bulk drug from NaPro.
Once the paclitaxel product is approved and commercialized, Abbott will pay a
percentage of its net paclitaxel sales to NaPro, less Abbott's payments to NaPro
for purchase of bulk drug.
- 26 -
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
- ---------------------------------------------------------------------
Sales. 1999 sales were $7.6 million, up $2.6 million from 1998. Sales to
Faulding for 1999 were $5.1 million, up $2.9 million from 1998. The increase was
partially due to an increase in the number of countries in which Faulding is
licensed to sell paclitaxel. The increase was also partially due to the timing
of product shipments and to inventory fluctuations of NaPro's strategic
partners. Sales to IVAX, as a result of the Termination Agreement, ended in the
third 1999 quarter. Sales may vary significantly depending on a number of
factors, including the potential, if any, for commercial sales in the Abbott
territory, the timing and size of any clinical trials, NaPro's obtaining
additional strategic partners, changes in demand, the level of inventory carried
and changes in approved markets. This variability will continue until stable
commercial demand has been established for the product in at least one principal
market.
Research, Development and Cost of Products Sold. Research and development
expense and cost of products sold for 1999 was $12 million, up by $2 million
from 1998. The increase resulted primarily from an increase in clinical trial
activity and increased cost associated with development of the semisynthetic
manufacturing process. NaPro's production process is not distinct from its
research and development processes. Accordingly, the cost of products sold is
included within NaPro's research and development expense.
General and Administrative Expense. General and administrative expense for 1999
was $6.2 million, down $300,000 from 1998. The decrease is attributable
primarily to a decrease of $700,000 in legal expense related to European patent
litigation, partially offset by increased compensation and increases in
retirement plan contributions.
License Fee Income. License fees for 1999 were $2.3 million, down $8.8 million
from 1998. The 1999 amount included $1 million in milestone payments under the
Abbott Agreement. The remainder of the 1999 license fees and all of the 1998
license fees were paid under the terms of the IVAX Termination Agreement.
License fees and milestone payments are unusual and may be non-recurring. No
further payments are expected under the IVAX agreement.
Interest Income. Interest income for 1999 was $300,000, down $200,000 from 1998.
The decrease is primarily attributable to lower overall balances of interest
bearing investments. See "Liquidity and Capital Resources."
Interest Expense. Interest and other expense for 1999 was $800,000, down
$100,000 from 1998. The decrease is primarily attributable to the decreased
interest on the senior convertible debt because of the final conversion,
partially offset by interest on the Abbott loan. See "Liquidity and Capital
Resources."
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
- ---------------------------------------------------------------------
Sales. 1998 sales were $5 million, up $1.2 million from 1997. Sales to IVAX for
1998 were $2.7 million, up $400,000 from 1997. Sales other than to IVAX for 1998
were $2.2 million, up $700,000 from 1997. The increase was due primarily to the
timing of product shipments and to inventory fluctuations of NaPro's strategic
partners.
Research, Development and Cost of Products Sold. Research and development
expense and cost of products sold for 1998 was $10 million, down by $1.8 million
from 1997. The decrease resulted primarily from the benefits of the February
1998 restructuring, a decrease in the level of process development and research,
and lower production cost.
- 27 -
General and Administrative Expense. General and administrative expense for 1998
was $6.5 million, up $500,000 from 1997. The increase was attributable primarily
to increases of $700,000 in legal expense related to the European patent
litigation and $200,000 of consulting expense primarily related to the IVAX
Termination Agreement, partially offset by a reduction in recruiting and
relocation expense.
License Fee Income. License fees for 1998 were $11.1 million, up $11.1 million
from 1997. All of the 1998 license fees were paid under the terms of the IVAX
termination agreement.
Interest Income. Interest income for 1998 was $600,000, up $100,000 from 1997.
The increase was attributable to overall higher interest rates realized on
interest bearing investments.
Interest Expense. Interest and other expense for 1998 was $900,000, down $1.3
million from 1997. The decrease was primarily attributable to the non-recurrence
of the $1.1 million 1997 expense related to the amortization of original issue
discount on the senior convertible debt, to decreased interest on the senior
convertible debt and to decreased borrowing on equipment financing.
Liquidity and Capital Resources
NaPro's capital requirements have been and will continue to be significant. As
of December 31, 1999, NaPro had a working capital balance of $2.9 million
compared to a working capital balance of $7.1 million as of December 31, 1998.
NaPro has a $20 million secured borrowing arrangement with Abbott, of which $5
million had been drawn as of December 31, 1999. Therefore, NaPro does not have
the need to carry large balances of cash. To date, the funding of NaPro's
capital requirements has been dependent primarily on the net proceeds of public
offerings of its common stock of approximately $21.1 million, on private
placements of its equity securities of approximately $29.5 million, on the
exercise of warrants and options of $5.9 million, on net borrowings of $15.6
million, and on loans and advances from its stockholders and strategic partners.
NaPro's existing capital, projected 2000 sales, and available borrowing under
the Abbott loan are expected to provide adequate capital to fund its necessary
operations and capital expenditures in 2000. However, pharmaceutical development
is a costly and time consuming process. NaPro is actively pursuing additional
partners to assist in the development and marketing of its products, and may
seek other forms of long-term financing should such financing become available
on acceptable terms. NaPro may in-license or purchase new products or
technologies. The cost of acquiring and developing such resources, and related
capital expenditures, may be very large. As a result, NaPro may need to attract
substantial amounts of capital. No assurance can be given that NaPro will be
able to do so.
In June 1997, NaPro privately placed $10.3 million of senior convertible notes.
The notes bore interest of 5% and were all redeemed or converted into common
stock by July 1999. Interest on the notes was payable in cash or in common stock
at NaPro's option. In 1999 NaPro issued 3,585,203 shares of common stock in
conversion of $5,061,000 principal of the notes, and 19,234 shares of common
stock in payment of $27,000 interest on the notes.
In 1998 NaPro redeemed $647,000 in note principal and paid $53,000 premium and
interest in connection with the redemption. In 1999 NaPro redeemed $633,000 in
note principal and paid $162,000 premium and interest in connection with the
redemption.
In December 1997, NaPro closed a private placement of 5,000 shares of Series C
Senior Convertible Preferred Stock (the "C Preferred") for an aggregate issuance
price of $5 million. The C Preferred
- 28 -
accrued dividends at 5% per year payable in common stock or cash at NaPro's
option. In 1999, NaPro issued 1,299,085 shares of common stock in conversion of
the C Preferred and 6,761 shares of common stock in payment of dividends on the
C Preferred. By September 1999, all of the C Preferred had been redeemed or
converted into common stock. NaPro exercised its option to redeem $2 million of
the C Preferred at 140% of the outstanding principal and accrued dividends and
interest.
Working Capital and Cash Flow Cash and cash equivalents decreased $5.3 million
to $1.9 million for the year ended December 31, 1999 from $7.2 million at
December 31, 1998. Net cash used by 1999 operations of $8.4 million was offset
by investing activity of $600,000 and by financing activity of $2.5 million.
Inventory increased $400,000 from December 31, 1998 to $4.6 million at December
31, 1999. The amount of work-in-progress inventory and finished goods inventory
is dependent on a number of factors, including the shipping requirements of
NaPro's strategic partners and NaPro's production planning for meeting those
needs. Inventory balances may vary significantly during product development and
launch periods.
Capital Expenditures NaPro expended $900,000 during 1999 for capital projects.
These expenditures primarily included plantation cost and laboratory equipment.
The amount and timing of future capital expenditures will depend upon numerous
factors, including the cost of manufacturing scale-up for paclitaxel; the cost
of development of new products; the cost of manufacturing resources for new
products; the nature of NaPro's relationship with its strategic partners; the
establishment of additional strategic relationships; the progress of NaPro's
research and development programs; the magnitude and scope of these activities;
the cost of preparing, filing, prosecuting, maintaining and enforcing patent
claims and other intellectual property rights; competing technological and
marketing developments; and changes in or terminations of existing strategic
relationships. NaPro may seek additional long-term financing to fund capital
expenditures should such financing become available on terms acceptable to
NaPro.
Net Operating Loss Carryforwards As of December 31, 1999, NaPro had
approximately $43 million of net operating loss carryforwards to offset future
taxable income. The Tax Reform Act of 1986 contains provisions that limit the
utilization of net operating loss carryforwards if there has been a "change of
ownership" as described in Section 382 of the Internal Revenue Code. Such a
change of ownership may limit NaPro's utilization of its net operating loss
carryforwards, and could be triggered by sales of securities by NaPro or its
stockholders.
Year 2000 Issue Until recently many computer programs used only the last two
digits to refer to a year. Such programs do not properly recognize a year that
begins with "20" instead of the familiar "19." If not corrected, many computer
applications could have failed or created erroneous results. This matter is
commonly referred to as the Year 2000 issue or Y2K.
NaPro upgraded several computer programs which had not been Y2K compliant. To
date NaPro has incurred no problems caused by Y2K. The programs which were
upgraded would have been upgraded regardless of Y2K. Accordingly, NaPro has
incurred no significant expense in becoming Y2K compliant.
- 29 -
Special Note Regarding Forward-looking Statements
Certain statements in this report constitute "forward-looking statements" within
the meaning of the federal securities laws, including the Reform Act. In
addition, NaPro or persons acting on its behalf sometimes make forward-looking
statements in other written and oral communications. Such forward-looking
statements may include, among other things:
statements concerning NaPro's plans, objectives and future economic
prospects, such as matters relative to seeking and obtaining additional
strategic partners and developing new products;
the availability of patent and other protection for its intellectual
property;
the completion of clinical trials and regulatory filings;
the prospects for and timing of regulatory approvals;
the need for and availability of additional capital;
the amount and timing of capital expenditures;
timing of product introductions and revenue;
the availability of raw materials;
prospects for future operations; and
other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends and similar expressions concerning matters
that are not historical facts.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of NaPro, or industry results, to be materially different from any
future results, performance or achievements expressed or implied by such for
ward-looking statements. Such factors include, among other things, the
following:
adverse economic and general business conditions;
competition from Bristol and other existing and new producers of
paclitaxel and other drugs;
technological advances in cancer treatment and drug development;
the ability to obtain rights to technology;
the ability to obtain and enforce patents;
the ability to obtain raw materials and commercialize manufacturing
processes;
the effectiveness of NaPro paclitaxel and other pharmaceuticals
developed by NaPro in treating disease;
- 30 -
the results of clinical studies;
the results of research and development activities;
the ability to purchase or license new products;
the successful development of new products;
the business abilities and judgment of NaPro's management and other
personnel;
the availability of qualified personnel generally;
the ability of contract manufacturers to perform adequately under
anticipated contracts;
changes in and compliance with governmental regulations;
the effect of capital market conditions and other factors on capital
availability for NaPro and other biopharmaceutical companies;
the ability of Abbott and Faulding to perform their obligations under
their existing agreements with NaPro;
the ability of NaPro to perform its obligations under its existing
agreements with Abbott and Faulding;
the effect on NaPro's revenue, cash flow and earnings from foreign
exchange rate fluctuations;
the ability of NaPro to establish relationships with capable strategic
partners to develop and market NaPro paclitaxel in the territories not
covered by the Abbott and Faulding Agreements;
and other factors referenced in this report.
Item 7A
Quantitative and Qualitative Disclosures about Market Risk.
During 1999, virtually all of NaPro's revenue resulted from sales of NaPro
paclitaxel to Faulding and IVAX. The final shipment of NaPro paclitaxel required
by the Termination Agreement was made to IVAX during the third quarter of 1999.
Following this final delivery to IVAX, and in the absence of sales to another
strategic partner, sales of NaPro paclitaxel to Faulding will constitute
substantially all of NaPro's sales revenue in 2000. NaPro anticipates sales to
Abbott; such sales may be quite limited until such time as NaPro and Abbott
obtain approval for commercial sales, if ever.
Faulding purchases NaPro paclitaxel from NaPro at a price which varies in
proportion to the price at which Faulding sells NaPro paclitaxel. Under the
Faulding Agreement, NaPro is paid a fixed sum for NaPro paclitaxel supplied for
noncommercial uses, and a fixed percentage of Faulding's sales price for NaPro
paclitaxel supplied for commercial use. In March of each year, Faulding
estimates the sales price it will receive for NaPro paclitaxel in the upcoming
year, and, based upon that estimate, NaPro determines the price it will charge
Faulding for NaPro paclitaxel (the "Unadjusted Price"). NaPro recognizes the
- 31 -
corresponding revenue at the time of shipment of NaPro paclitaxel to Faulding,
based upon the intended use indicated by Faulding on its purchase orders.
However, Faulding may or may not use the product in accordance with the original
use stated on its purchase orders. Additionally, Faulding's actual selling price
may differ from the amounts originally budgeted and indicated to NaPro on its
purchase orders. On or about May 31, 2000, Faulding will communicate to NaPro
the final amount and type of sales made during the period beginning on April 1,
1999 and ending on March 31, 2000, and an adjustment will be calculated that may
increase or decrease NaPro's revenue from sales of products to Faulding during
this period.
Faulding's sales are made in the currencies of each of the countries in which it
sells NaPro paclitaxel. As a result, NaPro's revenue from sales is affected by
fluctuations in the value of these various foreign currencies relative to the
U.S. dollar. Faulding's largest single market is Australia, accounting for
approximately 31% of Faulding's commercial sales during the period beginning
March 31, 1998 and ending March 31, 1999. In the past, fluctuations in various
currencies, especially the Australian dollar, were a major factor in prior
reductions in the Unadjusted Price. If changes in foreign currency markets
continue to cause a decrease in the price per gram NaPro receives from Faulding,
there could be a material adverse effect on NaPro's earnings and cash flow. For
example, during the period beginning March 31, 1998 and ending March 31, 1999,
NaPro's revenue attributable to sales of NaPro paclitaxel to be resold
commercially by Faulding totaled $2,156,000. Had there been additional negative
pressure on the relevant exchange rates such that the Unadjusted Price had been
reduced by 15% NaPro's earnings would have been reduced by approximately
$323,000 and NaPro would have experienced materially reduced cash flow. However,
while Faulding will continue to have a significant impact on NaPro's revenue,
NaPro's continuation of operations is dependent upon sources other than revenue
from Faulding. NaPro anticipates that its operations will be dependent upon
borrowing and equity funding provided by the strategic alliance with Abbott. See
"Item 1 - Business - Strategic Alliances."
To the extent NaPro's efforts in developing international markets outside the
Faulding Territories are successful, NaPro may face similar foreign currency
exchange risk as that described above for Faulding.
Certain statements set forth in Item 7A may constitute "forward-looking
statements" within the meaning of the Reform Act. See "Special Note Regarding
Forward-looking Statements."
Item 8
Financial Statements and Supplementary Data
The information required by this item begins at Page F-1.
Item 9
Changes in and Disagreements with Accountants
None
- 32 -
Part III
Item 10
Directors and Executive Officers
The information concerning NaPro's directors and executive officers is
incorporated by reference to the section entitled "Election of Directors" in
NaPro's definitive Proxy Statement with respect to NaPro's 2000 Annual Meeting
of Stockholders (the "Proxy Statement").
Item 11
Executive Compensation
The section labeled "Executive Compensation" appearing in NaPro's Proxy
Statement is incorporated herein by reference, except for such information as
need not be incorporated by reference under rules promulgated by the Securities
and Exchange Commission.
Item 12
Security Ownership of Certain Beneficial Owners and Management
The section labeled "Security Ownership of Directors and Executive Officers and
Certain Beneficial Owners" appearing in NaPro's Proxy Statement is incorporated
herein by reference.
Item 13
Certain Relationships and Related Transactions
The section labeled "Certain Relationships and Related Transactions" appearing
in NaPro's Proxy Statement is incorporated herein by reference.
Part IV
Item 14
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements
The Financial Statement Index is on Page F-1.
Financial Statement Schedules
All schedules are omitted because they are not applicable or not required or
because the information is included in the consolidated financial statements or
the notes thereto.
Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed dur