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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 2003
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number 0-24972
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INKINE PHARMACEUTICAL COMPANY, INC.
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(Exact name of registrant as specified in its charter.)
New York 13-3754005
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1787 Sentry Parkway West
Building 18, Suite 440
Blue Bell, Pennsylvania 19422
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 283-6850
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Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
-----------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO __
--
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES X NO__
--
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $153,138,000. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the NASDAQ Small Cap Market of The Nasdaq Stock Market on June 30, 2003. For
purposes of this calculation only, the registrant has defined affiliates as
including all directors and executive officers. In making such calculation, the
registrant is not making a determination of the affiliate or non-affiliate
status of any holders of shares of Common Stock.
The number of shares of the registrant's common stock outstanding as of February
12, 2004 was 48,494,486.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the registrant's 2004 Annual
Meeting of Shareholders to be filed within 120 days after the end of the period
covered by this Annual Report on Form 10-K are incorporated by reference into
Part III of this Form 10-K.
INKINE PHARMACEUTICAL COMPANY, INC.
INDEX TO FORM 10-K
Page
References
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PART I
ITEM 1. BUSINESS.......................................................1
ITEM 2. PROPERTIES....................................................17
ITEM 3. LEGAL PROCEEDINGS.............................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS...........................................18
ITEM 6. SELECTED FINANCIAL DATA.......................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..........................20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...................................................26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........................27
ITEM 9A. CONTROLS AND PROCEDURES.......................................28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............28
ITEM 11. EXECUTIVE COMPENSATION........................................28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................28
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................28
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K...................................................29
SIGNATURES....................................................................32
TABLE OF CONTENTS TO FINANCIAL STATEMENTS....................................F-1
-i-
PART I
ITEM 1. BUSINESS.
FORWARD LOOKING STATEMENTS
In addition to historical facts or statements of current condition, this report
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements provide our current
expectations or forecasts of future events. These may include statements
regarding anticipated scientific progress on our research programs, development
of potential pharmaceutical products, interpretation of clinical results,
prospects for regulatory approval, manufacturing development and capabilities,
market prospects for our products, sales and earnings projections, and other
statements regarding matters that are not historical facts. You may identify
some of these forward-looking statements by the use of words in the statements
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe" or other words and terms of similar meaning. Our performance and
financial results could differ materially from those reflected in these
forward-looking statements due to general financial, economic, regulatory and
political conditions affecting the biotechnology and pharmaceutical industries
as well as more specific risks and uncertainties such as those set forth in the
discussion below. Given these risks and uncertainties, any or all of these
forward-looking statements may prove to be incorrect. Therefore, you should not
rely on any such factors or forward-looking statements. Furthermore, we do not
intend (and we are not obligated) to update publicly any forward-looking
statements. This discussion is permitted by the Private Securities Litigation
Reform Act of 1995.
OVERVIEW
We are a specialty pharmaceutical company focused on developing and
commercializing pharmaceutical products to diagnose and treat gastrointestinal
disorders. Our development strategy has been to acquire late-stage drug
candidates with short time lines to commercialization. We currently market and
sell two pharmaceutical products, Visicol(R) and IBStat(R). These products are
further described below in the "Marketed Products" section. In addition to our
marketed products, we have identified two product candidates, INKP-102 and
Colirest(TM). These product candidates are further described below in the
"Research and Development" section.
The following table outlines our product pipeline from which we intend to focus
the majority of our research, development, marketing and sales efforts at least
through calendar year 2004 and also sets forth the current development status of
our products and product candidates in each targeted therapeutic indication:
Product Therapeutic Indications Development Status
- --------------------------------------------------------------------------------------------------------------------
Visicol Colon cleansing prior to colonoscopy FDA approved; marketed product
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Constipation Post marketing study completed
Phase IV on-going
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Pre-operative colonic surgical Phase IV will commence during the
procedures first half of 2004
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INKP-102 Colon cleansing prior to Phase II will commence during the
(next generation purgative) colonoscopy first half of 2004
- --------------------------- ------------------------------------------ --------------------------------------
IB-Stat Symptoms associated with IBS Marketed product
Reduction of bowel motility during
certain diagnostic procedures
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Colirest Crohn's disease and ulcerative Phase II Crohn's disease complete
colitis, collectively Inflammatory Phase II ulcerative colitis complete
Bowel Disease (IBD) Phase IIb Crohn's disease on-going
- --------------------------------------------------------------------------------------------------------------------
1
MARKETED PRODUCTS
We currently market and sell two pharmaceutical products listed below:
Visicol (brand of sodium phosphate tablets) is the first and only tablet
purgative preparation that is currently indicated for bowel cleansing prior to
colonoscopy.
Background and Statistics. According to the American Cancer Society, 2004 Cancer
Facts and Figures, colorectal cancer is the second leading cause of cancer
related deaths in the United States, with approximately 146,940 new cases and
56,730 deaths expected in 2004. Additionally, 90% of cases diagnosed are in
patients over 50 with 62% of diagnosed patients being at an advanced stage.
Although the five-year case fatality rate is 38%, if the disease can be
diagnosed in an earlier localized stage, the survival rate approaches 90%.
The American Cancer Society's published guideline for colon cancer screening
recommends periodic screening for everybody over the age of 50 years. More
intensive screening, often starting at age 40, is recommended for various groups
at high risk of colon cancer, including people with a family or personal history
of colon cancer. Although colonoscopy is one of several methods used to screen
for colon cancer, colonoscopy is considered to be the "gold standard" for colon
cancer screening. Several large, recently published studies showing that
colonoscopy is better at detecting cancer than several other common screening
methods have strengthened this belief. Colonoscopy is also widely used as a
follow up screening tool in most patients who have had suspicious findings with
other screening methods.
The number of colonoscopy procedures has grown steadily over the last three
years. According to HCIASachs Planning Solution data sources, in 1999
approximately 4.4 million procedures were performed. We estimate that in 2003,
approximately 6.2 million colonoscopy procedures were performed. In spite of the
growing number of procedures, patient concerns about the procedure and
intolerance to current liquid bowel preparations have deterred patients from
seeking a colonoscopy screening. This helps explain why, based on a 2003 Center
for Disease Control study, in 2001, only 50% of the 77 million Americans older
than age 50 had received colorectal cancer testing within the recommended
screening periods.
Cleansing the colon with a purgative agent is necessary prior to colonoscopy to
get a clear view of the colon's lining. Ineffective cleansing can result in poor
visualization, which in turn can reduce the accuracy of the colonoscopy. Patient
intolerance to the liquid bowel preparation methods has become an impediment to
the initiation of colon screening. Nausea, vomiting, bloating, abdominal pain
and taste are often the unpleasant aspects of the currently available liquid
preparations. In a recently published study in The American Journal of
Gastroenterology, bowel preparation was found to be the most commonly cited
deterrent by patients to undergoing colonoscopy screening. This study cited a
tablet bowel preparation as the most preferred alternative to liquid
preparations.
Competition. The most commonly prescribed bowel preparations, other than
Visicol, are administered in liquid form. The most frequently used liquid bowel
preparations in the U.S. contain either polyethylene glycol salt solution (PEG)
or sodium phosphate. There are three dominant prescription products which use
PEG: Golytely(R) and NuLYTELY(R), which are manufactured by Braintree
Laboratories, Inc., and Colyte(R), which is manufactured by Schwarz Pharma, Inc.
Each product requires the ingestion, over roughly three to four hours, of over a
gallon of PEG, which tastes salty and is viscous. Sodium phosphate diluted in
clear liquid (Fleet's Phospho-soda, manufactured by C.B. Fleet Company, Inc.)
has also been used as an alternative. While the patient must ingest less than
half the volume of liquid for effective colonic cleansing, the extremely salty
taste of the sodium phosphate solution frequently causes nausea and vomiting.
Summary of Clinical Data. Clinical trials have shown that Visicol tablets
provide effective colon cleaning with a significantly better side-effect profile
than the most frequently prescribed liquid PEG bowel preparation, and that
patients tolerate Visicol better than the most frequently prescribed liquid PEG
bowel preparation. Study patients taking Visicol reported significantly less
nausea, vomiting and bloating compared to patients taking the most frequently
prescribed PEG. In addition, Visicol is virtually taste free and can be taken
with water, ginger ale, lemonade or any other clear liquid. In our clinical
studies, over 92% of patients who took Visicol were able to complete the entire
preparation, as compared to 56% of patients who took the liquid bowel
preparation. Over 90% of patients using Visicol in the same study reported that
they would take Visicol again as a bowel preparation for a future colonoscopy.
2
FDA Approval and New Formulation. In September 2000, we received notification
that Visicol, was approved for marketing as a preparation for colonoscopy.
Following this notification, we immediately commenced marketing and sales
efforts and in January 2001, we began shipping Visicol to our customers. During
2001, gastroenterologists reported the visualization of microcrystalline
cellulose (MCC), in some patients receiving Visicol tablets. MCC is a commonly
used, inert, but highly insoluble substance that binds and fills Visicol
tablets. The presence of MCC may lengthen the colonoscopy procedure and
therefore deterred some gastroenterologists from prescribing Visicol. As a
result 2001 revenues were adversely affected.
We adopted three strategies for overcoming the issue of MCC visualization during
colonoscopy. First, in October 2001, we conducted a Phase IV clinical study,
which showed that Visicol's efficacy at a reduced dosing regimen (20% and 30%
less tablets and clear liquid volume) was comparable to the labeled dose, with
significantly reduced MCC visualization. Secondly, in March 2002, the FDA
approved a supplemental new drug application (SNDA), for a new formulation of
Visicol containing approximately 50% less MCC. In May 2002, we began shipping
this new formulation to customers, and since that time, we have become the
fastest growing bowel preparation for use in patients undergoing colonoscopy.
Lastly, during 2003 we developed and filed a provisional patent application with
the U.S. Patent and Trademark office for an MCC-free new generation purgative
tablet (INKP-102). This product candidate is further described below in the
"Research and Development" section.
Since our launch of the new formulation, physician groups and university centers
have conducted a number of independent studies to determine patient preference
of bowel preparations. One study, conducted in October 2002 at Rush Medical
College in Chicago Illinois, compared Visicol tablets to a liquid PEG product.
The study demonstrated that 92% of patients taking Visicol tablets would take
the preparation again compared to only 12% of patients who took the liquid PEG
solution. Additionally, 66% of patients who took the liquid PEG solution would
prefer to take Visicol tablets. Visicol has been prescribed for use in over
750,000 patients since its introduction in 2001.
Another similar study, conducted by a clinical faculty member of the University
of Pittsburgh and presented at the American College of Gastroenterology's annual
meeting in October 2003, compared Visicol to both a liquid PEG solution and
liquid sodium phosphate solution. The study concluded that Visicol and the
liquid PEG solution cleansed better than the liquid sodium phosphate solution,
there was significantly less vomiting with Visicol, there was a numerical trend
towards less nausea and cramping with Visicol, and more patients were able to
complete the Visicol preparation compared to the liquid preparations.
Finally, in April 2003, the American Society for Gastrointestinal Endoscopy
cited sodium phosphate tablets (Visicol) as one of three widely accepted bowel
preparations for colonoscopy. The guidelines state that "when compared with the
polyethylene glycol-based preparation, sodium phosphate tablets demonstrate
similar efficacy in cleansing of the colon, better patient tolerance, and fewer
gastrointestinal side effects." Additionally, the guidelines state that "sodium
phosphate tablets have been developed providing the same dose of salts as found
in liquid solution without the unpleasant taste."
Additional Indications. We believe that Visicol may be effective as a laxative
for constipation. The total U.S. market for constipation remedies in 2003 was
approximately $1.0 billion, of which approximately $250 million is prescription
drugs. 90% of the prescription drug market is comprised of two products. The
most frequently prescribed prescription laxative, which entered the market in
1999, generated sales of over $110 million for the twelve months ending
September 30, 2003. We believe that Visicol, administered in smaller doses than
for bowel preparation, will prove to be an effective laxative that will compare
favorably to existing products.
A recent controlled, randomized open-label post-marketing study using Visicol as
a laxative was completed in 31 healthy adult volunteers. The study, which
compared the safety and laxative effects of Visicol tablets to the most
frequently prescribed prescription laxative, showed a consistent statistically
significant pattern of greater and more prompt laxative effects for Visicol
compared to the other product. Patients who took Visicol had significantly more
daily bowel movements after just one day using Visicol than patients using the
most frequently prescribed prescription laxative, whose label indicates that
laxation may not occur for two to four days. We are currently conducting a Phase
IV open-label dose ranging study of the use of Visicol to relieve the symptoms
of chronic constipation. In this study, which we anticipate completing in the
first half of 2004, we expect to learn the appropriate dosing regimen for
Visicol in a broad range of constipated patients, as well as the safety of
continued dosing over four weeks.
3
Additionally, colonic purgation can be required in pre-operative
gastrointestinal, gynecological and urological surgical procedures. We believe
that Visicol can be used as a pre-operative preparation instead of the liquid
bowel preparations, which are currently used in a majority of procedures. We
plan to commence a Phase IV study for the use of Visicol in pre-operative
colonic surgical procedures during the first half of 2004.
IB-Stat (brand of hyoscyamine sulfate oral spray) is used for the treatment of
symptoms associated with Irritable Bowel Syndrome (IBS) and other diagnostic
procedures. IB-Stat is an acute antispasmodic product that is available for
absorption more rapidly than solid dose formulations.
Background and Statistics. IBS is a functional gastrointestinal disorder most
commonly diagnosed in people in their 20's to 40's. A functional disorder does
not show any evidence of an organic or physical disease, and the cause of a
functional gastrointestinal disorder does not show up in a blood test or an
x-ray. The disorders are diagnosed based on symptoms, and often require tests to
rule out the likelihood of another disease.
The symptoms of functional gastrointestinal disorders can cause discomfort,
ranging from inconvenience to deep personal distress. These symptoms include
abdominal pain or discomfort associated with a change in bowel pattern such as
loose or more frequent bowel movements, diarrhea or constipation. For those with
severe symptoms, the disorders can be debilitating, leaving individuals unable
to fully participate in life and work. IBS is a leading cause of worker
absenteeism, second only to the common cold.
While the cause of IBS is not fully understood, it appears that IBS is a
disturbance in the interaction among the intestinal tract, the brain and the
nerves that regulate bowel motility (motor function) and sensory function.
Research has shown that the bowel in IBS sufferers is more sensitive than usual
and this sensitivity sets off a reaction that causes the symptoms. The bowel is
a muscular tube that propels food from mouth to anus, allowing nutrients to be
digested and absorbed along the way. Regular muscular contractions propel the
contents through the colon. If the bowel is overactive, the contents pass more
rapidly and the patient gets diarrhea, whereas sluggish activity causes
constipation. Muscle spasm in the bowel causes discomfort and cramping pain.
While IBS may cause pain and discomfort, it is not a life-threatening disease.
The life expectancy of patients with IBS is no different than that of the
general population. According to the International Foundation for Functional
Gastrointestinal Disorders, IBS affects 15-20% of adults and is the most
commonly presented gastrointestinal illnesses seen by physicians in primary care
or gastroenterology. While it is estimated that only 30% of people with IBS seek
medical assistance, these people account for 12% of primary care visits. Even
more compelling is the fact that IBS is the most common reason for referral to
gastroenterologists, constituting 20-50% of referred patients.
Treatment of IBS. Typical IBS treatment entails eliminating or diminishing
stressful situations, managing the patient's response to stress, modifying the
diet and using drugs to reduce the colonic spasm. To modify the diet physicians
often use high fiber diets and often recommend a fiber supplement. Fiber
supplements are often used for both constipation and diarrhea symptoms of IBS.
Drug treatment is administered to reduce abdominal pain, diarrhea and
constipation. Anticholinergic agents also called antispasmodic agents are very
effective when given before or at the onset of acute attacks of pain or before
meals. Antispasmodics produce their effect by blocking the autonomic nervous
system signals at the smooth muscle of the intestine. Other agents including
loperamide (Imodium(R)) can be used for diarrhea-predominant symptoms.
4
RESEARCH AND DEVELOPMENT
We are currently developing two pharmaceutical products candidates listed below:
INKP-102. We have filed a provisional United States patent application for a new
generation of purgative products. The invention covers several highly soluble
colonic purgative formulations in solid dosage forms that can be used to soften
stool, promote laxation and/or induce complete purgation. If a patent issues,
the new product will be protected for a significant period beyond the 2013
patent expiration of our current franchise product, Visicol. Clinical batches of
this new product have been manufactured and formulated to yield smaller tablets
that may be easier to ingest. Additionally, the new product does not contain any
MCC. We intend to conduct clinical studies using alternative dosing regimens
that utilize fewer tablets and allow for single-day administration and apply for
FDA approval of this new product. We intend to complete a Phase II and initiate
a Phase III clinical trial studying INKP-102's use as a purgative during 2004.
Colirest. We are currently evaluating Colirest for the treatment of Crohn's
disease and ulcerative colitis. Colirest is a progesterone analog that inhibits
pro-inflammatory mediators and may offer distinct safety advantages over
traditional glucocorticoid steroid therapy.
Glucocorticoid hormones are small molecules that rank among the most effective
therapeutic agents in the treatment of IBD. While glucocorticoids are used
widely in autoimmune diseases such as IBD, substantial side effects limit their
overall effectiveness. Toxic effects observed include exacerbation of diabetes,
hypertension, electrolyte imbalance, weight gain, osteoporosis and increased
susceptibility to infection.
Background and Statistics. IBD is a serious inflammatory disease of the
gastrointestinal (GI) tract. It predominates in the intestine (ileum) and the
large intestine (colon), but may occur in any section of the GI tract. IBD
usually causes diarrhea, crampy abdominal pain, often fever, and at times rectal
bleeding. Loss of appetite and subsequent weight loss also may occur.
Crohn's disease and ulcerative colitis are chronic diseases, whose cause is not
known. Research has shown that in IBD the body's defenses are operating against
some substances in the body, perhaps in the digestive tract, which they
recognize as foreign. These foreign substances (antigens) may themselves cause
the inflammation, or may stimulate the body's defenses to produce an
inflammation that continues without control. Medication currently available
decreases inflammation and usually controls the symptoms, but does not provide a
cure.
Crohn's disease differs from ulcerative colitis in that Crohn's disease affects
all layers of the intestine and ulcerative colitis affects only the innermost
lining of the colon. It is estimated that there are approximately one million
Americans with IBD, split evenly between Crohn's disease and ulcerative colitis.
Males and females appear to be affected equally. While Crohn's disease afflicts
people of all ages, ulcerative colitis is primarily a disease of the young. Most
cases are diagnosed before age 30, but the disease can occur in the sixth,
seventh and later decades of life.
Because no medical cure for IBD exists, the goals of medical treatment are to
suppress the inflammatory response, permit healing of tissue and relieve the
symptoms of fever, diarrhea, rectal bleeding and abdominal pain. Several groups
of drugs form the mainstay of therapy. They are:
1. Aminosalicylates: These medications include aspirin-like medications
such sulfasalazine and mesalamine and 5-aminosalicylic acid.
2. Corticosteroids: These medications include prednisone,
methylprednisolone and budesonide.
3. Immune modifiers: These medications include azathioprine,
6-mercaptopurine (6-MP), methotrexate and cyclosporine.
4. Antibiotics: These medications include metronidazole, ampicillin,
ciprofloxacin and others.
5. Anti-TNF Inhibitor: infliximab.
5
Surgery becomes necessary when medication can no longer control the symptoms, or
when there is an intestinal obstruction or other complication. In most Crohn's
disease cases, the diseased segment of bowel is removed and the two ends of
healthy bowel are joined together. It is not considered a cure for Crohn's
disease because the disease frequently recurs at or near the site of anastomosis
(i.e., the surgical reconnection of the bowel). For ulcerative colitis cases,
the surgery involves the removal of the entire colon and rectum with the
creation of an ileostomy or external stoma. Ulcerative colitis differs from
Crohn's disease in that it is considered cured once the colon is removed.
Summary of Clinical Data. To date, we have completed a Phase II study in humans
for use of Colirest to treat Crohn's disease and a Phase II study in humans for
use of Colirest to treat ulcerative colitis. The results of the Phase II studies
indicate that Colirest appears safe and effective in the treatment of both
Crohn's disease and ulcerative colitis. We currently have approximately 65
patients enrolled in a Phase IIb study in Crohn's disease that we began in 2001.
Once enrollment reaches our interim goal of 75 patients, and if data are
positive, we will seek a marketing partner who will share in the remaining
development costs associated with obtaining FDA approval for Colirest.
PROPRIETARY RIGHTS
Rights to Visicol were obtained through our agreement with the ALW Partnership
pursuant to which we obtained an exclusive worldwide license, in perpetuity
(subject to expiration of underlying patents and rights of termination in the
event of breach by a party), to develop, use, market, sell, manufacture, have
manufactured and sub-license, in the field of colonic purgatives or laxatives,
the Field of Use, Visicol along with ALW Partnership's body of proprietary
technical information, trade secrets and related know-how. A U.S. patent
Non-Aqueous Colonic Purgative Formulations (covering any solid form of
administration of sodium phosphate for use as a colonic cleansing agent or as a
laxative) was issued in April 1997. Patents covering the use of Visicol to
induce purgation of the colon have granted in Europe and Canada. In December
2000, the U.S. Patent and Trademark Office issued to us a patent for numerous
other solid-dose colonic cleansing agents. A similar patent has also been
granted to us in Canada. Our rights under the ALW License automatically extend
to improvements developed by us and/or the ALW Partnership that are derivative
of Visicol. In addition, we have a right of first refusal with respect to any
new products which relate to the Field of Use but which are not derivative of
Visicol. In November 2003, we filed a provisional U.S. patent application for a
new generation purgative product (INKP-102). The invention covers several highly
soluble colonic purgative formulations in solid dosage forms that can be used to
soften stool, promote laxation and/or induce complete purgation.
Certain rights to Colirest are owned by the University of Pennsylvania, pursuant
to which we have obtained an exclusive worldwide license for the term of the
patents covered, to make, have made, use, sell and to exploit all patent and
other rights under this license. In April 2003, the U.S. Patent and Trademark
Office issued a patent covering the treatment of inflammatory bowel conditions,
including ulcerative colitis and Crohn's disease with Colirest. This patent also
provides us patent protection for the use of Colirest in treating patients with
proctitis, microscopic colitis, allergic eosinophilic gastroenteritis, food
allergies, drug induced esophagitis, celiac disease, recurrent polyps and
hemorrhoids. Additionally, the patent covers Colirest in a variety of delivery
forms such as tablet, enema, suppository, foam, gel, ointment and suspension.
In addition, certain rights to Hematrol(TM) are owned by the University of
Pennsylvaniafor pursuant to which we have obtained an exclusive worldwide
license. Hematrol, is a compound related to Colirest that we previously were
developing for the treatment of idiopathic thrombocytopenic purpura. In order to
focus our efforts on gastrointestinal products, we have ceased internal efforts
to further develop Hematrol and are currently looking to sublicense Hematrol to
a hematology focused pharmaceutical company.
MANUFACTURING
We do not have the resources, facilities or capabilities to manufacture any of
our products or product candidates. We have no current plans to establish a
manufacturing facility. We expect that we will be dependent to a significant
extent on contract manufacturers for commercial scale manufacturing of our
products or product candidates in accordance with regulatory standards.
6
Contract manufacturers may utilize their own technology, technology developed by
us, or technology acquired or licensed from third parties. When contract
manufacturers develop proprietary process technology and have ownership of the
Drug Master File (DMF), our reliance on such contract manufacturer is increased,
and we may have to obtain a license from such contract manufacturer to have our
products manufactured by another party. Technology transfer from the original
contract manufacturer may be required. Any such technology transfer may also
require transfer of requisite data for regulatory purposes, including
information contained in a proprietary DMF held by a contract manufacturer. FDA
approval of the new manufacturer and manufacturing sight would also be required.
We have contracted with Mallinckrodt, Inc., a commercial supplier of
pharmaceutical chemicals, to supply us with active pharmaceutical ingredients of
monobasic and dibasic sodium phosphate, which comprises a significant portion of
the Visicol tablets in a manner that meets FDA requirements. We have contracted
with Pharmaceutical Manufacturing Research Services, Inc. (PMRS), a
manufacturing development company, to supply commercial quantities of Visicol
tablets in a manner that meets FDA requirements. The FDA has approved the
manufacturing processes of Mallinckrodt and PMRS.
We have contracted with an appropriate secondary manufacturer of Visicol and an
appropriate manufacturer to produce INKP-102 and Colirest. None of these
manufacturers has yet been approved by the FDA. We have contracted with Cardinal
Health Packaging Services and Fisher Clinical Services, Inc. to package Visicol
on our behalf. These facilities have been FDA approved for the packaging of
Visicol. We have contracted with Morton Grove Pharmaceuticals, Inc. to
manufacture IB-Stat. Morton Grove's manufacturing facility has been inspected by
the FDA.
MARKETING & SALES
We have a pharmaceutical marketing, sales and distribution organization. Our
sales efforts are focused on physicians in private practice or at major medical
centers in the United States. In general, our products are sold largely to
wholesalers and large drug store chains. We utilize common pharmaceutical
company marketing techniques, including sales representatives calling on
individual physicians and pharmacies, advertisements, professional symposia,
direct mail, public relations and other methods. We intend to market and sell
our products outside of the United States through licensing and distribution
relationships.
COLLABORATIVE ARRANGEMENTS; RESEARCH AND LICENSE AGREEMENTS
Collaborations may allow us to leverage our scientific and financial resources
and gain access to markets and technologies that would not otherwise be
available to us. In the long term, development and marketing arrangements with
established companies in the markets in which potential products will compete
may allow our products more efficient access to intended markets and may,
accordingly, conserve our resources. We expect that we will enter into
development and marketing arrangements for some of the products we may develop.
From time to time, we hold discussions with various potential partners.
We entered into an agreement in February 2001 with Morton Grove Pharmaceuticals,
Inc. to develop and manufacture IB-Stat, an oral hyoscyamine spray for the
treatment of symptoms associated with IBS and other diagnostic uses. We began
shipping IB-Stat to customers in June 2002. Under our agreement, Morton Grove
developed and continues to supply the product, and we market and sell IB-Stat
through our commercial operations. At this time, we do not intend to conduct any
preclinical or clinical studies on this product.
We entered into a license agreement in September 2001 with Zeria Pharmaceutical
Company, Ltd. of Tokyo, Japan to develop, manufacture, market and sell Visicol
for use in Japan. Under the agreement, Zeria will develop Visicol as a bowel
cleansing agent. As compensation for the license granted to Zeria, we received
an up-front license fee of $500,000 and will receive an additional $2,000,000 in
fixed license fees upon reaching certain development milestones. In addition, we
will receive royalty payments based on net sales of Visicol in Japan. Zeria is
responsible for all development costs.
7
In July 2002, we granted ZaBeCor Pharmaceutical Company the exclusive right to
develop, manufacture, market and sell products and technologies covered by our
patents relating to inflammatory disease. ZaBeCor shall pay us a royalty based
on net sales of all products discovered or developed by ZaBeCor or its partners.
ZaBeCor will be responsible for all development costs. We, however, have
retained all rights to Colirest.
We entered into a license agreement in May 2003 with Paladin Labs Inc. of
Montreal, Canada to register, sell, market and distribute Visicol for use in
Canada. As consideration for the license, Paladin has paid an up-front license
fee, with additional royalties due to us based on future net sales of Visicol.
Paladin will be responsible for all costs to sell, market and distribute Visicol
in Canada.
In December 2003, we entered into a non-exclusive co-promotion agreement with
Sigma-Tau Pharmaceuticals, Inc., a subsidiary of Sigma-Tau International SA of
Rome, Italy. Under the agreement, our U.S. gastrointestinal sales force will
promote Sigma-Tau's VSL#3(R) in the second sales position behind Visicol. VSL#3
is a probiotic that is effective in treating certain gastrointestinal disorders,
including pouchitis, an inflammation of the small bowel reservoir (or pouch).
Pouchitis is the most frequent long-term complication following colon removal
and pouch creation surgery for ulcerative colitis. Under the co-promotion
agreement, we could receive up to $1.5 million over the one-year term based on
the completion of 15,000 second position quarterly sales calls for a total of
60,000 second position calls.
We entered into a license agreement in January 2004 with Pharmatel Pty Ltd. of
Sydney, Australia to register, sell, market and distribute Visicol for use in
Australia and New Zealand. As consideration for the license, Pharmatel has paid
an up-front license fee, with additional royalties due to us based on future net
sales of Visicol. Pharmatel will be responsible for all costs to sell, market
and distribute Visicol in Australia and New Zealand.
We have rights under license agreements to several patents and patent
applications under which we expect to owe milestone payments and royalties on
sales of certain of our product candidates. Additionally, certain of these
agreements also provide that if we elect not to pursue the commercial
development of any licensed technology, or do not adhere to an acceptable
schedule of commercialization, then our exclusive rights to such technology
would terminate.
GOVERNMENT REGULATION
The production and marketing of our products and our research and development
activities are subject to regulation by numerous governmental authorities in the
United States and other countries. In the United States, biological products,
drugs and diagnostic products are subject to rigorous review by the FDA. The
Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other
federal statutes and regulations govern or influence the testing, manufacture,
safety, efficacy, labeling, storage, recordkeeping, approval, advertising and
promotion of such products. Noncompliance with applicable requirements can
result in fines, recall or seizure of products, refusal of the government to
approve product and/or license applications or to allow us to enter into
government supply contracts, the withdrawal of previously approved applications
and criminal prosecution.
In order to obtain FDA approval of a new drug product, we must submit proof of
safety and efficacy. Such proof entails extensive and time-consuming preclinical
and clinical testing. The results of preclinical studies are submitted to the
FDA as part of an investigational new drug application (IND). Preclinical
studies involve laboratory evaluation of product characteristics and animal
studies to assess the efficacy and safety of the product. Once the IND is
reviewed, human clinical trials may be conducted. Human clinical trials are
typically conducted in three sequential phases, but the phases may overlap.
Phase I trials consist of testing the product in a small number of patients or
healthy volunteer subjects primarily for safety at one or more doses. During
Phase II, in addition to safety, the efficacy of the product is evaluated in a
patient population somewhat larger than Phase I trials. Phase III trials
typically involve additional testing for safety and clinical efficacy in an
expanded population at geographically dispersed test sites. A clinical plan, or
"protocol," accompanied by the approval of the Institutional Review Board
reviewing and monitoring the trials, must be submitted to the FDA prior to
commencement of each clinical trial. Various reports must be submitted to the
FDA during the course of the trials, and the FDA may order the temporary or
permanent discontinuation of a clinical trial at any time.
8
The results of the clinical trials are submitted to the FDA as part of a New
Drug Application (NDA). Following extensive review of an NDA, the FDA may grant
marketing approval, require additional testing or information, or deny the
application. Sales of a new drug may commence following FDA approval of an NDA
and satisfactory completion of a pre-approval review of the manufacturing
facility and pertinent production records. If there are any modifications to the
drug, including any changes in indication, manufacturing process, labeling or
manufacturing facility, an NDA supplement may be required by the FDA.
The FDA may also require post-marketing testing and surveillance to monitor the
effects of approved products or place conditions on any approvals that could
restrict the commercial applications of such products. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained. Continued
compliance with all FDA requirements and conditions in an approved application,
including those concerning product specification, manufacturing process,
validation, labeling, promotional material, recordkeeping and reporting
requirements, is necessary for all products. Failure to comply could lead to
product recall or other FDA-initiated actions, which could delay further
marketing until the products are brought into compliance. Even after any
approval by the FDA and foreign regulatory authorities, products may later
exhibit adverse effects that could prevent their widespread use or necessitate
their withdrawal from the market.
Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval by comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing in those countries. The time required to obtain such approval may be
longer or shorter than that required for FDA approval.
COMPETITION
We have products and product candidates that compete in three very competitive
segments of the pharmaceutical industry. These products and product candidates
include: (i) purgative and laxative agents for cleansing the colon or relieving
constipation, which includes Visicol and INKP-102; (ii) antispasmodics, which
include IB-Stat; and (iii) products which treat patients with IBD which include
our product candidate Colirest. We are likely to encounter significant
competition with respect to Visicol, INKP-102, IB-Stat and Colirest, including,
but not limited to, competition from: (a) Braintree Laboratories, Inc., Schwarz
Pharma Inc., C.B. Fleet Company, Inc. and Novartis Pharmaceuticals Corporation
with respect to Visicol and INKP-102; (b) Schwarz Pharma Inc., Eli Lily and
Company and Bedford Laboratories with respect to IB-Stat; and (c) AstraZeneca
plc, Salix Pharmaceuticals, IDEC Pharmaceuticals Corporation, Procter & Gamble
Pharmaceuticals, Solvay S.A., Centocor, Inc. (Johnson & Johnson) and Shire
Pharmaceuticals Group plc with respect to Colirest. Most of these entities have
substantially greater financial, technical, manufacturing, sales, marketing,
distribution and other resources. We may also face competition from companies
using different or advanced technologies that could render our products
obsolete.
AVAILABLE INFORMATION
We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 electronically with the Securities and Exchange Commission.
The public may read or copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. The address of that site is
http://www.sec.gov.
You may obtain a free copy of our annual reports on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K and amendments to those reports on
the day of filing with the SEC on our website on the World Wide Web at
http://www.inkine.com or by contacting Edward Smith, Senior Director of Finance
and Corporate Controller at our corporate offices by calling (215) 283-6850 or
sending an e-mail message to esmith@inkine.com.
9
OTHER FACTORS TO BE CONSIDERED
Risks related to our business
We have achieved profitability for only two quarters to date. If we do not
maintain our profitability or if we incur losses in the future, then the value
of our common stock is likely to fall.
Our first sale of Visicol occurred in January 2001 and our first sale of IB-Stat
occurred in June 2002. We have a significant accumulated deficit and have
incurred losses and negative cash flow from operations in each year since
inception on July 1, 1993. We achieved profitability and positive cash flow from
operations each of the quarters in the second half of 2003. Visicol, INKP-102,
IB-Stat and Colirest are in various stages of marketing or development and
require significant research, development and testing. Visicol provides
substantially all of our revenues. Our continued success and growth is primarily
dependent on the performance of Visicol. If we are unsuccessful in achieving
increased revenues through the sale of Visicol or through the sale of newly
acquired or developed products, we will not be able to operate profitably in the
future. Our common stock is likely to decrease in value if we fail to maintain
profits or if the market believes that we are unable to maintain profits.
Our success and revenue currently depend on Visicol; if we do not continue to
successfully market Visicol, our revenue might not grow, which could cause our
stock price to decline.
We market sodium phosphate tablets in the United States under the brand name
Visicol, and if approved by the FDA, we intend to market INKP-102 and co-market
Colirest in the United States. Our prospects over the next three to five years
are substantially dependent on the successful commercialization of these
compounds. We expect to engage in expensive advertising, educational programs
and other means to market our future products. The degree of market acceptance
of our products among physicians, patients, healthcare payors and the medical
community will depend upon a number of factors including:
> demonstration of their clinical efficacy and safety;
> successful introduction for new indications;
> their cost effectiveness;
> their potential advantages over alternative treatment methods;
> the marketing and distribution support they receive; and
> reimbursement policies of government and third-party payors.
Virtually all of our revenue to date has come from Visicol. Our ability to
increase revenue in the future will depend in part on our success in
in-licensing or acquiring additional pharmaceutical products. We currently
intend to in-license or acquire pharmaceutical products that have been developed
beyond the initial discovery phase and for which late-stage human clinical data
is already available or that have already received regulatory approval. These
kinds of pharmaceutical products might not be available to us on attractive
terms or at all. To the extent we acquire rights to additional products, we
might incur significant additional expense in connection with the development
and, if approved by the FDA, marketing of these products.
Failure to manage our growth could increase our expenses faster than our
revenue.
We have experienced significant growth in the number of our employees and the
scope of our operations. In support of the May 2002 re-launch of Visicol in the
United States, we have grown from 13 employees on May 31, 2002 to approximately
60 on December 31, 2003. This growth has placed a significant strain on our
management and operations. Our continued growth might place further strains on
our management and operations. Our ability to manage growth effectively will
depend upon our ability to broaden our management team and our ability to
attract, hire and retain skilled employees. Our success will also depend on the
ability of our officers and key employees to continue to implement and improve
our operational, management information and financial control systems and to
expand, train and manage our employee base.
10
If we make any acquisitions, we will incur a variety of costs and might never
successfully integrate the acquired product or business into ours.
We might attempt to acquire products or businesses that we believe are a
strategic complement to our business model. We might encounter operating
difficulties and expenditures relating to integrating an acquired product or
business. These acquisitions might require significant management attention that
would otherwise be available for ongoing development of our business. In
addition, we might never realize the anticipated benefits of any acquisition. We
might also make dilutive issuances of equity securities, incur debt or
experience a decrease in cash available for our operations, or incur contingent
liabilities and/or amortization expenses relating to goodwill and other
intangible assets, in connection with future acquisitions.
If third-party payors do not provide coverage or reimburse patients for our
products, then some patients may be unable or unwilling to purchase our products
and we will achieve less revenue from product sales.
Successful sales of our products in the United States and other countries depend
on the availability of adequate reimbursement from the government, managed care
organizations and private insurance plans. Pharmaceutical companies often rely
on reimbursement from third parties as the basis for the sales of their
products. In the pharmaceutical industry, unlike other consumer product
industries, insurance companies, including managed care organizations, often pay
drug stores directly for part of the cost of covered pharmaceutical products. In
fact, the majority of prescription drugs prescribed to patients are ultimately
paid for at the retail level by these organizations and not by the patient.
These organizations provide for reimbursement only after considering a number of
factors, including product features such as safety, medical necessity, cost and
the experimental nature of the product. We plan to spend significant amounts of
time and other resources to obtain reimbursement for our products. The
organizations that provide reimbursement routinely limit reimbursement and
attempt to exert significant pressure on medical suppliers to provide rebates to
help offset the cost of covered medication. Visicol and IB-Stat are premium
priced compared to their competitors and we have not specifically contracted
with any third party to date to give rebates for their use. We do not know what
impact, if any at all, this will have on the coverage of Visicol or IB-Stat by
these third party payors, particularly if Visicol continues to gain market
share, thus increasing the cost to third party payors.
If we do not have adequate insurance for product liability claims, then we may
be subject to significant expenses relating to these claims.
We are subject to significant product liability risks relating to the sale,
manufacturing and further testing of the products on the market and the ones we
are developing. These risks include:
> our products could cause undesirable side effects or injury;
> our product candidates could cause undesirable side effects or
injury during clinical trials; and
> we may agree to reimburse others that incur liability relating
to our products and product candidates.
We currently maintain insurance for product liability claims in the amount of
$10,000,000 per occurrence and $10,000,000 in the aggregate. We have no way of
knowing if these amounts will be adequate to cover any product liability claims
filed against us. If we do not or cannot maintain adequate insurance coverage,
we may incur a significant liability if a product liability claim arises.
Moreover, actual or alleged undesirable side effects or injuries related to our
products or product candidates may interfere with the commercialization of our
products and the development of our product candidates.
If we do not develop and maintain relationships with manufacturers, then we may
not successfully manufacture and sell our products.
11
We do not possess the capabilities, resources or facilities to manufacture
Visicol, IB-Stat and any of our product candidates. We must contract with
manufacturers to produce Visicol, IB-Stat and our product candidates according
to government regulations. Our future development and delivery of our marketed
products and our product candidates depends on the timely, profitable and
competitive performance of these manufacturers. A limited number of
manufacturers exist which are capable of manufacturing our marketed products and
our product candidates. We may fail to contract with the necessary manufacturers
or we may contract with manufacturers on terms that may not be entirely
acceptable to us. Our manufacturers must obtain FDA approval for their
manufacturing processes, and we have no control over this approval process.
We have contracted with Mallinckrodt, Inc. to supply us with active
pharmaceutical ingredients for Visicol. A significant portion of the Visicol
tablet is monobasic and dibasic sodium phosphate. Mallinckrodt has agreed to
supply these ingredients in a manner that meets FDA requirements. The FDA has
approved the manufacturing process for these active ingredients, but the Drug
Master File for the sodium phosphate is only for one location at Mallinckrodt.
If this location were to shut down for any reason, a delay in the delivery of
our active pharmaceutical ingredients would occur and could impact future sales
of Visicol. We are currently working towards submitting a Drug Master File with
the FDA for another Mallinckrodt facility in order to minimize this risk.
We have contracted with Pharmaceutical Manufacturing Research Services, Inc.
(PMRS), a manufacturing development company, to supply commercial quantities of
Visicol in a manner that meets FDA requirements. Our contract with PMRS will
expire at the end of 2004, subject to renewal for successive one year periods
unless terminated by either party. The FDA has approved the manufacturing
processes of PMRS. Any failure by PMRS to maintain compliance with FDA standards
could result in its loss of "approved status" and could significantly harm our
business since we do not have an approved secondary manufacturer for Visicol. We
are currently working with an appropriate secondary manufacturer of Visicol to
obtain FDA approval.
We have contracted with Cardinal Health Packaging Services to package Visicol in
a manner that meets FDA requirements. The FDA has approved this facility for the
packaging of Visicol. In the event that Cardinal Health Packaging Services were
unable to package Visicol for us, the FDA has also approved Fisher Clinical
Services, Inc. for packaging of Visicol.
If the owners of technology licensed to us terminate any of our license
agreements, then these owners could prevent us from developing, manufacturing or
selling the product covered by this license.
We have acquired the worldwide exclusive right to market Visicol, INKP-102 and
Colirest under various license agreements. Each of the owners of the technology
licensed to us may terminate the license prior to its expiration date under
certain circumstances, including our failure to comply with commitments related
to the development of the products specified in the licenses. For example, one
of our licensing agreements requires us to spend specific amounts for research
and development of our product. If we do not comply with the terms of this
agreement, the owner of the licensed technology could demand the return of all
rights to the licensed technology, and force us to cease developing,
manufacturing or selling the product covered by that license.
If we cannot develop and market our products as rapidly or cost-effectively as
our competitors, then we will not be able to maintain our operations at a
profit.
We have products and product candidates that compete in three very competitive
segments of the pharmaceutical industry. These products and product candidates
include: (i) purgative and laxative agents for cleansing the colon or relieving
constipation, which includes Visicol and INKP-102; (ii) antispasmodics, which
include IB-Stat; and (iii) products which treat patients with IBD which include
our product candidate Colirest. We are likely to encounter significant
competition with respect to Visicol, INKP-102, IB-Stat and Colirest, including,
but not limited to, competition from: (a) Braintree Laboratories, Inc., Schwarz
Pharma Inc., C.B. Fleet Company, Inc. and Novartis Pharmaceuticals Corporation
with respect to Visicol and INKP-102; (b) Schwarz Pharma Inc., Eli Lily and
Company and Bedford Laboratories with respect to IB-Stat; and (c) AstraZeneca
plc, Salix Pharmaceuticals, IDEC Pharmaceuticals Corporation, Procter & Gamble
Pharmaceuticals, Solvay S.A., Centocor, Inc. (Johnson & Johnson) and Shire
Pharmaceuticals Group plc with respect to Colirest.
12
The financial strength of competitors is particularly important in the
pharmaceutical industry, where technological innovations occur rapidly. These
technological innovations can dramatically affect the price and effectiveness of
a product line and can render a competing product line obsolete. Our competitors
that have strong financial resources may develop competitive products that are
cheaper and more effective than our products. These competitive products may
render our products unmarketable or non-competitive. Even if our competitors do
not develop better and more cost effective products, they may manufacture and
market their products more successfully than us. Therefore, our competitors may
capture all or a large segment of our market, severely restricting our ability
to maintain a profitable level of product sales.
If we are unable to protect our intellectual property, then our competitors may
develop similar products that could render our products obsolete.
Our success depends, in part, on our ability to develop and maintain a strong
patent position for our products and technologies both in the United States and
other countries. As with most biotechnology and pharmaceutical companies, our
patent position is highly uncertain and involves complex legal and factual
questions. Without patent and other protections, other companies could offer
substantially identical products for sale without incurring the sizeable
development and testing costs that we have incurred. Our ability to recoup these
expenditures and realize profits upon sale of product could be diminished.
In 1997, the U.S. Patent and Trademark Office issued a patent covering the use
of Visicol for inducing purgation of the colon. Patents claiming the use of
Visicol to induce purgation of the colon have been granted in Europe and Canada.
In December 2000, the U.S. Patent and Trademark Office issued to us a patent for
numerous solid-dose colonic purgative agents. A similar patent has also been
granted in Canada.
In 2003, we filed a provisional U.S. patent application for a new generation of
purgative products. The invention covers several highly soluble colonic
purgative formulations in solid dosage forms that can be used to soften stool,
promote laxation and/or induce complete purgation. There is no assurance that
this provisional patent will issue.
IB-Stat is not patentable.
In 2003, the U.S. Patent and Trademark Office issued a patent covering the
treatment of inflammatory bowel conditions, including ulcerative colitis and
Crohn's disease with Colirest.
We have pending foreign applications, and intend to apply for additional foreign
patents. Competitors could challenge or develop around the patents, or the scope
of the patents may not be adequate to protect the patented product from
competitors. The commercial success of our products will also depend upon our
ability to make sure the products do not infringe on patents issued to
competitors.
Our employees or scientific consultants may develop inventions or processes
independently that may be related to our products. These employees or
consultants could claim ownership of these inventions or processes, and these
claims could succeed. We may need to enter into protracted and costly litigation
to enforce or determine the scope of our proprietary rights.
Certain academic institutions have funded the development of some of our
patented technologies. Although we have acquired the rights to use this
technology, these agencies or institutions may have rights to the technology or
inventions, including rights to the royalty-free use, but not sale, of the
invention or technology for their own purposes.
Claims by others that we infringe their intellectual property could be costly to
us.
Our patent or other proprietary rights related to our products might conflict
with the current or future intellectual property rights of others. We have not
conducted a search to determine if there are any other patents that could cover
Visicol, INKP-102 and Colirest. Litigation or patent interference proceedings,
either of which could result in substantial cost to us, might be necessary to
defend any patents to which we have rights and our other proprietary rights or
to determine the scope and validity of other parties' proprietary rights. The
defense of patent and intellectual property claims is both costly and
time-consuming, even if the outcome is favorable to us. Any adverse outcome
could subject us to significant liabilities to third parties, require disputed
rights to be licensed from third parties or require us to cease selling our
product. We might not be able to obtain a license to any third-party technology
that we require to conduct our business, or, if obtainable, that technology
might not be available at a reasonable cost.
13
Our actual financial results might vary from what we anticipate.
Our actual financial results might vary from what we anticipate, and these
variations could be material. Our annual and quarterly reports contain various
forecasts. These forecasts reflect numerous assumptions concerning our
anticipated future performance and with respect to the prevailing market and
economic conditions that are beyond our control and which might not turn out to
have been correct. Although we believe that the assumptions underlying the
projections are reasonable, actual results could be materially different. Our
revenues and expenses are subject to numerous risks and uncertainties. Financial
results that are weaker than expectations may cause a significant and sudden
decline in our stock price.
Risks related to regulatory matters
Regulatory approval of our products is time-consuming, expensive and uncertain,
and could result in unexpectedly high expenses and delay our ability to sell our
products.
Development, manufacture and marketing of our products are subject to extensive
regulation by governmental authorities in the United States and other countries.
This regulation could require us to incur significant unexpected expenses or
delay or limit our ability to sell our products. Our clinical studies of Visicol
for constipation, INKP-102 for colon cleansing prior to colonoscopy, Colirest
for the treatment IBD or any other product might be delayed or halted for
various reasons, including:
> the drug is not effective;
> patients experience severe side effects during treatment;
> patients do not enroll in the studies at the rate we expect;
> drug supplies are not sufficient to treat the patients in the
studies;
> we decide to modify the drug during testing; or
> we do not have adequate funds to continue the testing.
If the FDA approves new indications for Visicol, its approval will be limited to
those indications for which the product has been shown to be safe and effective,
as demonstrated to the FDA's satisfaction through clinical studies. Approval
might entail ongoing requirements for post-marketing studies. Even if we obtain
regulatory approval, labeling and promotional activities are subject to
continual scrutiny by the FDA and state regulatory agencies and, in some
circumstances, the Federal Trade Commission. FDA enforcement policy prohibits
the marketing of approved products for unapproved, or off-label, uses. Marketing
an approved product for a new use requires a separate approval by the FDA. These
regulations and the FDA's interpretation of them might impair our ability to
effectively market our products.
If we do not maintain required approvals from the government, then we may not
successfully manufacture, market or sell our marketed products.
FDA manufacturing approval
The FDA requires pharmaceutical companies to include detailed manufacturing
information in an NDA. The FDA has mandated that all manufacturing facilities
and processes comply with good manufacturing practices, commonly known as GMP.
GMP is a body of federal regulations and guidelines that govern the manufacture
of drugs for human use. For example, all manufacturers must pass manufacturing
plant inspections and provide records of detailed manufacturing processes. Among
other things, drug manufacturers must demonstrate that:
> the drug product can be consistently manufactured at the same
quality standard;
> the drug product is stable over time; and
> the level of chemical impurities in the drug product is under a
designated level.
14
The FDA has inspected the manufacturing facilities for Visicol and IB-Stat. The
FDA may still, however, prevent us from continuing to market Visicol or IB-Stat
if we:
> do not continue to consistently manufacture appropriate amounts
of Visicol and IB-Stat; or
> cannot continue to repeat the manufacturing process used to
manufacture the validation batches of Visicol.
We currently have only one approved manufacturer of Visicol and one manufacturer
for IB-Stat. We have, however, initiated the process to obtain a qualified
secondary manufacturer of Visicol.
FDA oversight after product approval
After the FDA approves a product, the FDA continues to regulate the product. In
particular, the FDA may require post-marketing testing and surveillance to
monitor the effects of our marketed products or may require drug label changes,
which could hinder the marketability of our marketed products. In addition, the
FDA may place conditions on our marketed products that could restrict the sale
or use of our products.
Both Visicol and IB-Stat are products used in highly competitive diagnostic and
disease indications where substitution of competitive products is common.
Although both products have a good safety profile and history, any negative
change in our safety labeling could adversely affect the sale of our products.
The FDA could prevent us from marketing IB-Stat.
IB-Stat is the combination of a marketed drug (hyoscyamine sulfate) and a widely
used delivery system. Hyoscyamine sulfate was a marketed product prior to 1962.
Although we have not obtained FDA approval for IB-Stat, the FDA allows products
that were marketed prior to 1962 to continue to be marketed without an approved
NDA. There is no guarantee that the FDA will continue to allow hyoscyamine
sulfate or many other pre-1962 marketed products to continue to be marketed. In
addition, the FDA could determine that hyoscyamine sulfate is unsafe or that
additional data needs to be submitted to the FDA in order to determine the
drug's safety and efficacy. The FDA could also determine that IB-Stat is not
similar enough to the pre-1962 marketed hyoscyamine sulfate, and as a result
cannot be marketed without an FDA approved NDA.
If we do not obtain required approvals from the government, then we may not
successfully market or sell our product candidates.
The FDA requires multiple stages of tests, known as Phase I, II and III clinical
trials, on most pharmaceutical products. In addition, the FDA must confirm that
drug manufacturers comply with applicable federal regulations. The process to
obtain government approvals of a pharmaceutical product takes many years and
requires substantial resources.
The FDA may delay or halt the clinical development of our product candidates at
any stage, or may deny us approval to market a product. If the FDA takes any of
these adverse actions, we may delay or stop the development of a product or may
be unable to sell the product. We do not believe we are subject to risks that
are materially different than other pharmaceutical companies seeking FDA
approval. The process of obtaining FDA approval is expensive, time-consuming and
often filled with unexpected hurdles. Even if we receive approval of a product
candidate, the FDA may limit and restrict the drug's use and may subject our
products to continuous review. If we fail to comply with any applicable
regulatory requirement, the FDA could impose penalties on us, including:
15
> warning letters;
> fines;
> withdrawal of regulatory approval;
> product recalls and suspensions;
> operating restrictions; injunctions; and/or
> civil penalties and criminal prosecution.
Certain of the foregoing penalties could have an immediate negative financial
impact on our business, significantly harm our reputation, have a material
adverse effect on our business operations and significantly reduce our future
sales and profits.
We are developing INKP-102 as a compound for colon cleansing prior to
colonoscopy. We have reached an agreement with the FDA on the design of our
Phase II study. If results of the Phase II study are supportive, than only one
Phase III study would be required for the approval of INKP-102. We may never
receive FDA approval for INKP-102 and without FDA approval, we cannot market or
sell INKP-102.
We are developing Colirest as a compound for the treatment of IBD. IBD is an
autoimmune disease that causes inflammation and ulceration of the bowel. IBD
includes both Crohn's disease and ulcerative colitis. In September 2000, we
announced positive results of our Phase II study on Crohn's disease and in
December 2000, we announced positive results of our Phase II study in ulcerative
colitis. We have reached an agreement with the FDA for the advancement of
Colirest to a pivotal Phase IIb dose ranging study for Crohn's disease. We are
currently enrolling patients in this study. We may never receive FDA approval
for Colirest and without FDA approval, we cannot market or sell Colirest.
Risks related to our common stock outstanding
If the holders of our outstanding options and warrants exercise them and
subsequently sell the common stock they receive upon exercise, then the market
price of the common stock may drop.
At December 31, 2003, we had approximately 8,671,000 options and warrants
outstanding. Options and warrants give the holder the right to purchase shares
of our common stock in the future for a predetermined price which may or may not
be below the current market value of our common stock at the time the option or
warrant is exercised. In addition, as of December 31, 2003, we had an additional
989,000 options available for issuance pursuant to our option plans. To date,
option and warrant holders have exercised approximately 10,283,000 options and
warrants in the aggregate at prices ranging from $.50 to $5.56. The exercise of
these outstanding warrants and options and the sale of the related shares may
cause our common stock price to drop.
If our common stock continues to be volatile and thinly traded, then our
shareholders may not be able to sell their shares when desired.
The market price of our common stock, similar to other public pharmaceutical or
biotechnology companies, has been volatile and may remain volatile for the
foreseeable future. Our shareholders may not sell their shares when they desire
because the stock price is highly volatile and the stock is not widely traded.
For example, as of December 31, 2003, the number of our shares theoretically
available for sale in any one day is approximately 48,494,000 shares and our
average daily trading volume for the year ended December 31, 2003 was
approximately 313,000 shares. If our stock continues to trade thinly, our
shareholders may not be able to sell their shares when desired.
EMPLOYEES
As of December 31, 2003, we had 57 full-time employees. No employees are covered
by collective bargaining agreements, and we consider relations with our
employees to be good.
16
ITEM 2. PROPERTIES.
We occupy an aggregate of approximately 8,000 square feet of space in Blue Bell,
Pennsylvania, which is used as office space. We lease this space pursuant to a
lease expiring in November 2005, which provides for minimum annual rent payments
of approximately $200,000 for the remaining term of the lease. We lease
approximately 1,600 square feet, in Norristown, Pennsylvania, which is used as
warehouse space. We lease this space pursuant to a lease expiring in March 2005,
which provides for minimum annual rent payments of approximately $18,000 for the
remaining term of the lease.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Our common stock currently trades on the NASDAQ Small Cap Market under the
symbol "INKP." The quarterly range of high and low closing sales prices of our
common stock, as reported on the Nasdaq Stock Market, are shown below. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Year Ended December 31, 2003 High Low
---------------------------- ---- ---
1st Quarter............................... $1.90 $1.37
2nd Quarter............................... $3.50 $1.77
3rd Quarter............................... $4.68 $2.98
4th Quarter............................... $5.85 $4.08
Year Ended December 31, 2002 High Low
---------------------------- ---- ---
1st Quarter............................... $1.87 $1.28
2nd Quarter............................... $1.75 $0.85
3rd Quarter............................... $1.36 $0.63
4th Quarter............................... $2.45 $1.06
Dividends
We have not paid any cash dividends since our inception and do not anticipate
paying any cash dividends in the foreseeable future. It is the present policy of
the Board of Directors to retain all earnings, if any, to finance the
development of our business.
Number of Holders of Common Stock
At February 12, 2004 there were approximately 550 shareholders of record and
approximately 30,000 beneficial holders of our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
Number of securities Number of securities
to be issued upon Weighted-average remaining available for
upon exercise of exercise price of future issuance under
Plan category outstanding options outstanding options equity compensation plans
- ----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by security holders:
1993 Equity Compensation Plan 795,000 $ 1.84 86,000
1997 Consultant Stock Option Plan 913,000 $ 1.43 740,000
1999 Equity Compensation Plan 3,072,000 $ 2.91 163,000
Equity compensation plans not approved by security
holders:
Options issued to an officer pursuant to a written
agreement* 1,147,000 $ 0.90 ---
--------- -------
Total 5,927,000 $ 2.14 989,000
========= =======
_____________________________
* In addition to the shares of common stock issuable upon exercise of
options granted under our stock option plans, 1,147,000 shares of
common stock are issuable upon exercise of outstanding options
granted to an officer in 1997 pursuant to a written agreement. The
exercise price for these options was set by the Board of Directors,
or a committee designated by the Board, based upon an evaluation of
the fair market value of our common stock on the date of grant. The
options vest over three years, and expire ten years from the date
of grant.
18
Pursuant to the terms of the November 6, 1997 acquisition of the receptor based
technologies from which Colirest is derived, we could be required to pay an
aggregate of 720,000 shares of common stock upon the achievement of certain
milestones and targets.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected financial data. The selected
financial data is derived from, and is qualified by reference to, our financial
statements accompanying this report (amounts expressed in thousands, except per
share amounts).
Six-Months
Ended
Years Ended December 31, December 31, Years Ended June 30,
----------------------------------------- -------------- ---------------------
2003 2002 2001 2000 2000 2000 1999
---- ---- ---- ---- ---- ---- ----
Statement of Operations Data: (unaudited)
- -----------------------------
Product revenue....................... $14,383 $ 7,488 $ 4,338 $ --- $ --- $ --- $ ---
Other revenue......................... 49 64 523 --- --- --- ---
------- ------- ------- ------- ----- ------- --------
Revenue............................ 14,432 7,552 4,861 --- --- --- ---
Cost of goods sold.................... (2,242) (1,724) (1,881) --- --- --- ---
------- ------- ------- ------- ----- ------- --------
Gross profit....................... 12,190 5,828 2,980 --- --- --- ---
Costs and expenses:
Research and development............ 1,822 3,259 5,361 9,397 7,060 5,731 6,565
Sales and marketing................. 5,873 6,003 8,944 1,457 1,457 --- ---
General and administrative.......... 2,585 2,249 3,689 5,509 3,900 3,506 3,593
Separation agreement and
accelerated vesting of options..
vesting of options.............. --- --- --- --- --- 835 ---
------- ------- ------- ------- ----- ------- --------
Income (loss) from operations..... 1,910 (5,683) (15,014) (16,363) (12,417) (10,072) (10,158)
Interest income....................... 51 116 475 726 471 399 525
Interest and other expense............ (665) (877) (645) (47) (9) (39) ---
Debt conversion inducement, non-cash
accretion and non-cash premium...... (2,822) (3,916) (74) --- --- --- ---
------- ------- ------- ------- ----- ------- --------
Net loss............................ (1,526) (10,360) (15,258) (15,684) (11,955) (9,712) (9,633)
======= ======= ======= ======= ======= ====== ======
Net loss per share - basic and
diluted......................... (0.04) (0.30) (0.45) (0.50) (0.36) (0.36) (0.42)
======= ======= ======= ======= ======= ====== ======
Weighted average shares
outstanding-basic and diluted... 42,839 34,965 34,285 31,586 33,254 27,300 22,762
As of December 31, As of June 30,
--------------------------------------------------------- -----------------
2003 2002 2001 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ----
Balance Sheet Data: (unaudited)
- -------------------
Cash and investments............ $ 10,442 $ 12,151 $ 12,166 $ 11,520 $ 6,041 $ 16,025 $ 6,862
Working capital................. 10,451 5,122 6,908 9,865 4,521 14,542 5,513
Total assets.................... 13,297 14,079 13,865 13,400 6,403 16,435 7,162
Convertible notes............... --- 11,657 9,801 --- --- --- ---
Accumulated deficit............. (71,926) (70,400) (60,040) (44,782) (29,098) (32,827) (23,115)
Shareholders' equity (deficit).. 10,629 (6,211) (1,887) 11,025 4,878 14,874 5,713
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains, in addition to historical information, statements with
regard to our expectations as to financial results and other aspects of our
business that involve risks and uncertainties and may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements reflect management's current views and are based on
certain assumptions. Actual results could differ materially from those currently
anticipated as a result of a number of factors, including, but not limited to,
the risks and uncertainties discussed under the caption "Other Factors to be
Considered" in Part I of this report. Given these uncertainties, current or
prospective investors are cautioned not to place undue reliance on any such
forward-looking statements. Furthermore, we disclaim any obligation or intent to
update any such factors or forward-looking statements to reflect future events
or developments.
OVERVIEW
We are a specialty pharmaceutical company focused on acquiring, developing and
commercializing pharmaceutical products for use to diagnose and treat
gastrointestinal disorders. Our development strategy has been to acquire
late-stage drug candidates with short time lines to commercialization. We
currently market and sell two pharmaceutical products, Visicol and IB-Stat. We
are also studying Visicol for the treatment of constipation and for use prior to
certain pre-operative gastrointestinal, gynecological and urological surgical
procedures. In addition to our marketed products, we are studying INKP-102 as a
new generation purgative product and Colirest for the treatment of patients with
IBD.
The following table outlines our current product pipeline from which we have
focused the majority of our research, development, marketing and sales efforts
since inception and also sets forth the current development status of our
products and product candidates in each targeted therapeutic indication:
- --------------------------------------------------------------------------------------------------------------------
Product Therapeutic Indications Development Status
- --------------------------------------------------------------------------------------------------------------------
Visicol Colon cleansing prior to FDA approved; marketed product
colonoscopy
------------------------------------------ --------------------------------------
Constipation Post marketing study completed
Phase IV on-going
------------------------------------------ --------------------------------------
Pre-operative colonic surgical Phase IV will commence during the
procedures first half of 2004
- --------------------------- ------------------------------------------ --------------------------------------
INKP-102 Colon cleansing prior to colonoscopy Phase II will commence during the
(next generation purgative) first half of 2004
- --------------------------- ------------------------------------------ --------------------------------------
IB-Stat Symptoms associated with IBS Marketed product
Reduction of bowel motility during
certain diagnostic procedures
- --------------------------- ------------------------------------------ --------------------------------------
Colirest Crohn's disease and ulcerative colitis, Phase II Crohn's disease complete
collectively Inflammatory Bowel Phase II ulcerative colitis complete
Disease (IBD) Phase IIb Crohn's disease on-going
- --------------------------- ------------------------------------------ --------------------------------------
In September 2000, we received notification that our flagship product, Visicol,
was approved for marketing as a preparation for colonoscopy. Following this
notification, we immediately commenced marketing and sales efforts and in
January 2001, we began shipping Visicol to our customers. During 2001,
gastroenterologists reported the visualization MCC in some patients receiving
Visicol tablets. MCC is a commonly used, inert, but highly insoluble substance
that binds and fills Visicol tablets. The presence of MCC may lengthen the
colonoscopy procedure and therefore deterred some gastroenterologists from
prescribing Visicol. As a result 2001 revenues were adversely affected.
We adopted three strategies for overcoming the issue of MCC visualization during
colonoscopy. First, in October 2001, we conducted a Phase IV clinical study,
which showed that Visicol's efficacy at a reduced dosing regimen (20% and 30%
less tablets and clear liquid volume) was comparable to the labeled dose, with
significantly reduced MCC visualization. Secondly, in March 2002, the FDA
approved a supplemental new drug application (SNDA), for a new formulation of
Visicol containing approximately 50% less MCC. In May 2002, we began shipping
this new formulation to customers, and since that time, we have become the
fastest growing bowel preparation for use in patients undergoing colonoscopy.
Lastly, during 2003 we developed and filed a provisional patent application with
the U.S. Patent and Trademark office for an MCC-free new generation purgative
tablet (INKP-102).
20
Revenues
We derive substantially all of our revenues from the sale of Visicol in the
United States. We do not anticipate any material revenue in the near term from
sales outside of the United States. Our revenues in any period are primarily a
function of the number of Visicol tablets prescribed. At this time, Visicol is
prescribed as a bowel preparation prior to colonoscopy. Colonoscopy in many
cases is an elective procedure, used to screen the inner lining of the colon for
cancerous polyps. There has historically been a seasonal trend in the U.S.
market based on holiday schedules and vacation patterns. Our sales may fluctuate
on a quarterly basis based on such seasonal fluctuations.
Our revenues are affected by a number of factors, including our ability to:
> influence physician prescribing habits;
> manage purchasing practices of our customers, which include
wholesalers and large retail chains;
> train, equip and manage our sales professionals;
> deliver our marketing message to target demographics; and
> introduce Visicol's use for new indications.
Expenses
Our expenses are primarily related to:
> costs of goods sold;
> research and development;
> sales and marketing; and
> general and administrative.
Our cost of goods sold consists of the costs to procure raw materials,
manufacture pharmaceutical agents and package drug into commercial quantities.
In addition to product costs, our cost of goods sold also includes royalties on
in-licensed products and expenses to operate our distribution center.
Research and development costs primarily include costs to study future drug
candidates and product enhancements, run clinical trials, monitor drug safety,
maintain compliance with regulatory authorities, and develop manufacturing
techniques.
Sales and marketing costs include the costs to train, manage and operate our
gastrointestinal sales force along with developing marketing messages and
campaigns to targeted physicians, patients and organizations to increase
awareness of our products and their related indications.
General and administrative expenses include overhead costs associated with
running a publicly traded specialty pharmaceutical company with commercial
products and research initiatives, including but not limited to insurance costs,
legal fees, accounting fees, and investor relations costs.
21
CRITICAL ACCOUNTING POLICIES AND PRACTICES
In "Cautionary Advice Regarding Disclosures about Critical Accounting Policies"
(SEC Release No.33-8040, December 12, 2001), the SEC advised companies to
provide more information about a company's most critical accounting policies,
i.e., the specific accounting policies that have the most impact on a company's
results and require the most difficult, subjective or complex judgments by
management. We have identified the following accounting policies that may
constitute "critical accounting policies," under the guidance provided by the
release.
Revenue recognition
Revenue from sales of Visicol is recognized when, pursuant to Staff Accounting
Bulletin No. 104, "Revenue Recognition," all four of the following criteria are
met: (i) we have persuasive evidence that an arrangement exists, (ii) the price
is fixed and determinable, (iii) title has passed and (iv) collection is
reasonably assured. Product demand from our customers during a given period may
not correlate with prescription demand for the product in that period. As a
result, we periodically evaluate inventory positions in the distribution
channel. If we believe these levels are too high based on prescription demand,
we may not accept purchase orders from or may not ship additional product to our
customers until these levels are reduced. Provisions for sales discounts, and
estimates for chargebacks, rebates and product returns are established as a
reduction of product sales revenues at the time such revenues are recognized. We
establish these revenue reductions as our best estimate at the time of sale
based on historical experience, adjusted to reflect known changes in the factors
that impact such reserves. For IB-Stat, we recognize revenue based on
prescription data, net of estimated cash discounts. This practice will continue
until such time data becomes available that indicates that the product has
achieved adequate market acceptance and future product returns can be reasonably
estimated.
Stock-based compensation
It is our policy, which is consistent with most public company policies, to
apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," to account for our stock option plans rather than Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure." Had we applied SFAS No. 148, our net loss for each
of the years ended December 31, 2003, 2002 and 2001 would have been greater.
Product returns
It is our policy to estimate and record an allowance for future product returns
in connection with our sales of Visicol. We have applied a return rate to our
unit sales to provide this allowance under our product return policy. This
return rate is calculated based on actual return experience and our monitoring
of distribution channels taking into account the expiration dating of Visicol.
The product return rate is periodically updated to reflect actual experience and
changes to other factors affecting future product returns.
Deferred taxes
In assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable income during the period in
which those temporary differences become deductible. We consider the scheduled
reversal of deferred tax liabilities, projected future taxable income and
projections for future taxable income over the periods in which the deferred tax
asset items are deductible. The Tax Reform Act of 1986 contains provisions that
may limit the net operating loss (NOL) and research and experimentation credit
carryforwards available to be used in any given year upon the occurrence of
certain events, including significant changes in ownership interest. Generally,
a change in ownership of a company of greater than 50% within a three-year
period results in an annual limitation on that company's ability to utilize its
NOL carryforwards and tax credits from the tax periods prior to the ownership
change. The rules providing for the definition of an ownership change are
complex and we must perform a study to determine if we have undergone a change
in ownership. We believe that we have undergone an ownership change and are
subject to an annual limitation on the use of our NOL carryforwards pursuant to
these provisions. At December 31, 2003, we have concluded that a full valuation
allowance is necessary for deferred tax assets given that we have only been
profitable for two quarters.
22
RESULTS OF OPERATIONS
Year ended December 31, 2003 compared to year ended December 31, 2002
We incurred losses of $1,526,000 or $0.04 per share and $10,360,000 or $0.30 per
share for the years ended December 31, 2003 and 2002, respectively. Losses
during the year ended December 31, 2003 were largely the result of charges
arising from the conversion of our previously outstanding June 2005 convertible
notes. During the year ended December 31, 2003, we incurred $2,822,000 in debt
conversion inducement, non-cash accretion and non-cash premium charges as
compared to $3,916,000 during the year ended December 31, 2002 for charges
related to the our previously outstanding June 2003 convertible notes. At
December 31, 2003, we had no convertible notes outstanding. Our income from
operations was $1,910,000 for the year ended December 31, 2003, compared to a
loss from operations of $5,683,000 for the same period a year ago. The increase
in operating income is largely the result of increased product revenue along
with decreased operating expenditures.
Product revenue was $14,383,000 and $7,488,000 for the years ended December 31,
2003 and 2002, respectively. Prescription levels for our lead product, Visicol,
continue to increase, resulting in increased orders from wholesalers and large
retail chains. Visicol prescriptions were approximately 364,000 for the year
ended December 31, 2003, compared to 223,000 for the year ended December 31,
2002. We believe the increased prescription levels have been fueled by increased
market awareness and acceptance of Visicol.
Our gross profit was $12,190,000 and $5,828,000 for the years ended December 31,
2003 and 2002, respectively. Our gross profit for product revenue was 84% for
the year ended December 31, 2003, compared to 77% for the same period a year
ago. Increases in gross profit and gross profit as a percent of sales for
product revenue were the result of increased order volume, increased sales price
per unit, decreased manufacturing and packaging costs per unit, and decreased
distribution costs for Visicol. Included in cost of goods sold were both
distribution and royalty costs totaling $665,000 and $379,000, respectively.
Distribution cost included expenses related to warehousing, tracking and
shipping of product to our customers. Royalty cost represented amounts due to
the inventor of Visicol based on product sales.
We incurred research and development expenses of $1,822,000 and $3,259,000 for
the years ended December 31, 2003 and 2002, respectively. The significant
reductions were the result of lower development costs associated with Visicol,
the internalization of the management of the ongoing Colirest clinical trial,
partially offset by development costs associated with our next generation
purgative, for which we intend to initiate clinical studies in 2004. During
2003, we spent approximately $436,000, $165,000 and $353,000 on Visicol,
INKP-102 and Colirest, respectively, compared to $534,000 and $1,916,000 on
Visicol and Colirest, respectively, during 2002. We also spent approximately
$868,000 and $734,000 during 2003 and 2002, respectively, related to payroll and
other indirect costs related to our research and development initiatives.
Sales and marketing costs of $5,873,000 and $6,003,000 were incurred for the
years ended December 31, 2003 and 2002, respectively. During 2003, sales and
marketing costs included expenses associated with our sales force, which
consisted of 38 sales representatives and four district managers at December 31,
2003, along with marketing campaigns related to Visicol. We had 30 sales
representatives and two district managers at December 31, 2002. During 2002, we
also incurred approximately $2,600,000 in expenses related to our former
co-promotion agreement with Procter & Gamble Pharmaceuticals.
General and administrative expenses were $2,585,000 and $2,249,000 for the years
ended December 31, 2003 and 2002, respectively. The increase was the result of
increased overhead costs associated with supporting our growing sales volume,
head count and market capitalization.
The $65,000 decrease in interest income was the result of decreased average cash
and investment balances and decreased interest rates for the year ended December
31, 2003 compared to the same period a year ago. The $212,000 decrease in
interest and other expense was the result of the conversion our convertible
notes in June 2003 along with decreased average borrowings and interest rates on
our line of credit.
23
Year ended December 31, 2002 compared to year ended December 31, 2001
We incurred losses of $10,360,000 and $15,258,000 for the years ended December
31, 2002 and 2001, respectively. The basic and diluted per share loss was $0.30
and $0.45 per share for the years ended December 31, 2002 and 2001,
respectively. Operating losses were $5,683,000 and $15,014,000 for the years
ended December 31, 2002 and 2001, respectively.
Product revenue was $7,488,000 and $4,338,000 for the years ended December 31,
2002 and 2001, respectively. Prescription levels increased, resulting in
increased orders from wholesalers and large retail chains. We believe the
increased prescription levels were fueled by increased market awareness and
acceptance of our new Visicol formulation, launched in May 2002.
Our gross profit was $5,828,000 and $2,980,000 for the years ended December 31,
2002 and 2001, respectively. Included in cost of goods sold were both
distribution and royalty costs totaling $379,000 and $359,000, respectively.
Distribution cost included expenses related to warehousing, tracking and
shipping of product to our customers. Royalty cost represented amounts due to
the inventor of Visicol based on product sales.
We incurred research and development expenses of $3,259,000 and $5,361,000 for
the years ended December 31, 2002 and 2001, respectively. The significant
reductions were the result of less development costs associated with the new
Visicol formulation and the internalization of the management of the ongoing
Colirest clinical trial.
Sales and marketing costs of $6,003,000 and $8,944,000 were incurred for the
years ended December 31, 2002 and 2001, respectively. During 2002, we incurred
approximately $2,600,000 in expenses related to our former co-promotion
agreement with Procter & Gamble Pharmaceuticals, $1,250,000 related to our
internal sales force and the balance of sales and marketing costs for
administrative costs in connection with our internal sales operations and
marketing activities associated with Visicol and IB-Stat. During 2001, we
incurred $4,000,000 in expenses related to our former contract sales
organization, $2,000,000 related to our co-promotion agreement with Procter &
Gamble Pharmaceuticals and the balance of sales and marketing costs for internal
sales operations and marketing activities associated with Visicol.
General and administrative expenses were $2,249,000 and $3,689,000 for the years
ended December 31, 2002 and 2001, respectively. The decrease was the result of
significant payroll reductions, reduced fees paid to outside vendors and
consultants and reduced non-cash stock-based compensation. Included in general
and administrative expenses for December 31, 2001 was amortization of deferred
compensation and performance based stock expense $1,018,000.
The $359,000 decrease in interest income was the result of decreased average
cash and investment balances for the year ended December 31, 2002 compared to
the same period a year ago. The $232,000 increase in interest and other expense
was the result of interest related to our June 2003 convertible notes.
As a result of the redemption of the June 2003 convertible notes and placement
of the June 2005 convertible notes, we incurred $3,916,000 in non-cash
accretion, financing costs and cash premium charges. These charges included the
acceleration of a redemption premium, deferred warrant cost, beneficial
conversion amortization and deferred financing fees associated with these notes.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had cash and cash equivalents of $10,442,000. The cash
and cash equivalents balance at December 31, 2003 included net proceeds from
2003 warrant and option exercises of $4,531,000.
We believe that our financial resources are adequate for our operations for at
least the next 12 months and, if we meet our sales objectives, we do not
anticipate requiring additional capital to fund our operations. However, we are
seeking additional capital to fund possible acquisition or in-licensing of
additional products; the possible acquisition of businesses related to
gastrointestinal pharmaceuticals; marketing and, if necessary, continued
development of acquired products; the development and commercialization of new
indications for Visicol; research and development related to enhancements of
existing products; and general corporate purposes, including working capital.
Our line of credit is due to expire in March 2004. While it is our intention to
renew the credit facility for an additional one-year term, we believe our
current cash balance along with our cash flows from operations are adequate to
fund our operations in the event that the line of credit were not renewed in
March 2004.
24
Our future short and long-term capital requirements will depend on numerous
factors, including continued marketplace acceptance of our products. To achieve
operating profits, we, alone or with others, must successfully market and sell
our products. In addition to continued marketplace acceptance of our products,
other factors which cannot be quantified and many of which we cannot control
will also impact our short and long-term capital requirements, including:
continued commercial costs of Visicol, continued progress in our research and
development activities, progress with pre-clinical studies and clinical trials,
prosecuting and enforcing patent claims, technological and market developments,
the ability to establish product development arrangements, the cost of
manufacturing development, effective marketing activities and arrangements, and
licensing or acquisition activity.
We are currently developing a new generation purgative (INKP-102) for cleansing
the colon prior to colonoscopy, conducting a clinical trial of Colirest in
Crohn's disease, continuing to study the use of Visicol for constipation,
commencing a study for the use of Visicol in pre-operative colonic surgical
procedures, and continuing to market and sell Visicol and IB-Stat to
distributors and drug store chains. During 2004, we expect to spend up to
$1,600,000 on INKP-102, $100,000 on the Visicol studies and Visicol product
development, $200,000 on the Colirest study, and $8,100,000 on Visicol sales and
marketing costs. These activities will be funded by our current cash balance and
future product sales. If product sales fall short of current expectations or
other factors negatively impact our cash balance, we may seek to obtain
additional funds through equity or debt financing, collaborative or other
arrangements with corporate partners, and from other sources. No assurance can
be given that necessary additional financing will be available on terms
acceptable to us, if at all. If adequate additional funds are not available when
required, we may have to delay, scale-back or eliminate certain of our research,
drug discovery or development activities or certain other aspects of our
operations and our business will be materially and adversely affected.
The following are contractual commitments at December 31, 2003 associated with
lease obligations and manufacturing supply agreements :
Contractual Commitments (1) Total 1 Year 2 Years 3 Years 4 Years
- ---------------------------------------- ----------- ----------- --------- -------- -------
Leased office space (2)................. $ 400,000 $ 219,000 $ 181,000 $ -- $ ---
Manufacturing supply agreement (3)...... 1,200,000 1,200,000 --- --- ---
----------- ----------- --------- -------- -------
Total contractual commitments........ $ 1,600,000 $ 1,419,000 $ 181,000 $ --- $ ---
=========== =========== ========= ======== =======
______________________
(1) This table does not include any milestone payments under agreements we
have entered into in relation to our licensed technology, as the timing
and likelihood of such payments are not known. Also, minimum annual
expenditures pursuant to our technology license agreements have been
excluded from this table as we expect to spend those amounts as we
progress the development of the underlying technologies. In the aggregate
these minimum annual expenditures are approximately $100,000 and typically
apply to all years prior to regulatory approval of a product incorporating
the licensed technology.
(2) In November 2000, we entered into a five-year operating lease agreement
for office space for our corporate headquarters, and in April 2002, we
entered into a two-year operating lease for warehouse space for our
distribution center, which has been extended for an additional annual
term. The above table includes minimum lease payments remaining in
connection with these lease agreements.
(3) Included are direct costs associated with our agreement with a contract
manufacturing organization in connection with the commercial production of
Visicol tablets.
25
RESEARCH AND DEVELOPMENT PROGRAMS
During 2003, we had three significant research and development projects relating
to: (i) Visicol (ii) INKP-102 and (iii) Colirest.
Visicol. We have focused our Visicol research and development on cleansing of
the colon prior to colonoscopy and are presently marketing Visicol for that
indication. In addition, we are also developing Visicol for cleansing the colon
prior to pre-operative colonic surgical procedures and for treating
constipation. The current status of these projects are as follows: (i) for
cleansing of colon prior to colonoscopy, the FDA has approved both our NDA as
well as our SNDA; (ii) for cleansing the colon prior to pre-operative colonic
surgical procedures, we intend to commence a Phase IV study during the first
half of 2004; (iii) for treating constipation, we have completed a post
marketing study and have commenced a Phase IV study that we intend to complete
during the first half of 2004. As of December 31, 2003, we have incurred total
costs of approximately $11,744,000 in connection with our Visicol research and
development. During the fiscal year ended December 31, 2003, we incurred an
aggregate of $1,822,000 in research and development expenses, approximately
$436,000 of which was attributable to Visicol.
INKP-102. During 2003, we developed a next generation purgative for cleansing
the colon prior to colonoscopy. Clinical batches of this new product have been
manufactured and formulated to yield smaller tablets that may be easier to
ingest. Additionally, the new product does not contain any MCC, which is a
common inert, but highly insoluble substance. We intend to conduct clinical
studies and apply for FDA approval of this new product using alternative dosing
regimens that utilize fewer tablets and allow for single-day administration. We
intend to complete a Phase II study and commence a Phase III study during 2004.
As of December 31, 2003, we have incurred total costs of approximately $165,000
in connection with our INKP-102 research and development. During the fiscal year
ended December 31, 2003, we incurred an aggregate of $1,822,000 in research and
development expenses, approximately $165,000 of which was attributable to
INKP-102.
Colirest. We are developing Colirest for treatment of IBD and have completed a
Phase II study of Crohn's disease and a Phase II study of ulcerative colitis. In
June 2001, we began a Colirest clinical Phase IIb study of Crohn's disease. We
anticipate an interim analysis by late 2004. As of December 31, 2003, we have
incurred total costs of approximately $6,837,000 in connection with the
development of Colirest and related compounds. During the fiscal year ended
December 31, 2003, we incurred an aggregate of $1,822,000 in research and
development expenses, approximately $353,000 of which was attributable to
Colirest.
Indirect Costs. In addition to the direct costs related to the development of
our technologies, we incurred indirect non-technology specific overhead costs.
These expenses include the salaries and administrative costs of managing our
research and development projects, which for the year ended December 31, 2003
equaled approximately $868,000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Standard No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149 amends
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS No. 133) and Statement of Financial
Accounting Standard No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," (SFAS No. 138) and is related to certain
derivatives embedded in other contracts and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and to certain preexisting contracts. SFAS No. 149 is to be
applied prospectively. SFAS No. 149 currently has not had an impact on our
financial position, results of operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150