INKINE PHARMACEUTICAL CO INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
	Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

	For the fiscal year ended December 31, 2004

	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 000-24972

INKINE PHARMACEUTICAL COMPANY, INC.

(Exact name of registrant as specified in its charter.)

New York		13-3754005

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1787 Sentry Parkway West Building 18, Suite 440 Blue Bell, Pennsylvania		19422

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (215) 283-6850

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 checked box

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. checked box

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES checked box

The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $194,159,000. 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, 2004. 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 March 8, 2005 was 49,092,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the registrant’s 2005 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 annual report on Form 10-K.

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INKINE PHARMACEUTICAL COMPANY, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

			Page References

PART I

	ITEM 1.	BUSINESS	1
	ITEM 2.	PROPERTIES	16
	ITEM 3.	LEGAL PROCEEDINGS	16
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	16

PART II

	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	17
	ITEM 6.	SELECTED FINANCIAL DATA	18
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
	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	27
	ITEM 9B.	OTHER INFORMATION	27

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 AND FINANCIAL STATEMENT SCHEDULES	29

SIGNATURES			31

TABLE OF CONTENTS TO FINANCIAL STATEMENTS			F-1

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PART I

ITEM 1.

BUSINESS.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements included in this report relate to our beliefs regarding litigation exposure, our settlement and our agreement with the undisclosed third-party, our strategy with respect to in-licensing or acquiring additional pharmaceutical products or businesses, the timing and types of clinical trials we will need to conduct for our products and product candidates, our reimbursement strategy, our expectation for pending patent applications and patent protection, our expectations and plans regarding marketing of our products outside of the United States, our expectations for gross profits of and expenditures related to Visicol for 2004, the adequacy of our financial resources, our capital expenditures for 2004, our planned marketing and sales efforts in 2005, our product development expenses, our investment portfolio and market risk exposure, our planned expansion of our warehouse space and associated increase in rent and other statements regarding matters that are not historical facts. These statements often include words such as “may,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. These statements are based on assumptions that we have made in light of our industry experience as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. These factors include but are not limited to:

	•	our limited history of profitability;

	•	our dependence on Visicol;

	•	our ability to manage rapid growth;

	•	the high cost and uncertainties relating to clinical trials;

	•	market conditions and technological innovation;

	•	the unpredictability of the duration and results of clinical trials and regulatory review;

	•	other risks and uncertainties discussed under the caption “Certain Risks Related to Our Business” and elsewhere in this report; and

	•	other risks and uncertainties as may be detailed from time to time in our public announcements and filings with the Securities and Exchange Commission, or SEC.

You should keep in mind that any forward-looking statement made by us in this report speaks only as of the date of this report. 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 “Certain Risks Related to Our Business.” New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this report after the date of this report. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this report or elsewhere might not occur.

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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 expected time lines to commercialization. We currently market and sell two pharmaceutical products, VisicolÒ, and IB-StatÒ. We are also studying Visicol for the treatment of constipation. These products are described below in the “Marketed Products” section. In addition to our marketed products, we are studying INKP-102 as a next generation purgative product. This product candidate is 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 2005 and also sets forth the current development status of our products and product candidate in each targeted therapeutic indication:

Product	Therapeutic Indications		Development Status

Visicol	•	Colon cleansing prior to colonoscopy	FDA approved; marketed product

	•	Constipation	Post marketing study completed Phase IV completed Phase II expected to commence in the first half of 2005

INKP-102 (next generation purgative)	•	Colon cleansing prior to colonoscopy	Phase II completed Phase III completed, NDA submission expected in the first half of 2005

IB-Stat	•	Symptoms associated with IBS	Marketed product
	•	Reduction of bowel motility during certain diagnostic procedures

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, 2005 Cancer Facts and Figures, colorectal cancer is the third most common cancer in the United States, with approximately 145,290 new cases and 56,290 deaths expected in 2005. Additionally, 90% of cases diagnosed are in patients over 50. 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%. However, only 39% of colorectal cancers are diagnosed at this stage, mostly due to the low rates of screening.

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 before age 50, 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.

Based on IMS Health data, we estimate that approximately 3.4 million prescriptions were filled for purgative preparations during 2004. 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 Centers for Disease Control and Prevention study, in 2001,

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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 United States contain either polyethylene glycol salt solution (PEG) or sodium phosphate. There are five dominant prescription products which use PEG: Halflytely®, NuLYTELY® and Golytely® which are manufactured by Braintree Laboratories, Inc., and Colyte® and TrilyteÔ, which are manufactured by Schwarz Pharma, Inc. These products require the ingestion of two to four liters 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 approximately one liter 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 a frequently prescribed liquid PEG bowel preparation, and that patients tolerate Visicol better than a frequently prescribed liquid PEG bowel preparation. Study patients taking Visicol reported significantly less nausea, vomiting and bloating compared to patients taking the 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.

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.

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. Lastly, during 2003 we developed and filed a provisional patent application with the U.S. Patent and Trademark office for a 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 MCC-free 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 over 1,200,000 times since its introduction in 2001.

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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 2004 was approximately $1.0 billion, of which approximately $300 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 $120 million for the twelve months ending September 30, 2004. We believe that Visicol, administered in smaller doses than for bowel preparation, may prove to be an effective laxative that may compare favorably to existing products.

During 2004, we completed a Phase IV study of Visicol tablets in patients with functional constipation or constipation predominant Irritable Bowel Syndrome (IBS). The study demonstrated nearly 100% effectiveness in increasing the number of bowel movements per week while significantly reducing the associated symptoms of constipation. The results showed that the lowest dose of Visicol studied was well tolerated and produced a rapid and sustained laxative effect in patients with chronic constipation. We intend to use doses in the range of two to eight tablets in a Phase II placebo controlled study.

IB-Stat (brand of hyoscyamine sulfate oral spray) is used for the treatment of symptoms associated with 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 illness 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

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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 (ImodiumÒ) can be used for diarrhea-predominant symptoms.

RESEARCH AND DEVELOPMENT

We are currently developing one pharmaceutical product candidate 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 candidate would be protected for a significant period beyond the 2013 patent expiration of our current product, Visicol. Clinical batches of this new product candidate have been manufactured and formulated to yield smaller tablets that may be easier to ingest. Additionally, the new product candidate does not contain any MCC. We have conducted clinical studies using alternative dosing regimens that utilize fewer tablets and less liquid volume than Visicol. During 2004, we completed a Phase II and enrollment of a Phase III clinical trial for INKP-102’s use as a purgative. The FDA had previously reviewed the Phase III study protocol under the Agency’s “Special Protocol Assessment” procedure, and indicated to us in a formal fashion that a single Phase III study together with a single Phase II study and a Phase I study in healthy volunteers could support the approval of INKP-102. We intend to complete the Phase I and III studies and apply for FDA approval of this new product candidate during the first half of 2005.

Colirest. Preliminary analysis of interim efficacy data from 65 patients in a Phase IIb Crohn’s disease study demonstrated a numerical trend favoring high dose therapy over placebo, but not to the extent that we believe would warrant the additional costs associated with seeking a marketing partner to further the development of Colirest. We have returned our Colirest patents to the Licensor.

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 been 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, whether or not they are derivatives of Visicol. In November 2004, we filed a U.S. patent application for a new generation purgative product (INKP-102). This 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.

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MANUFACTURING

We do not have the resources, facilities or capabilities to manufacture any of our products or product candidate. 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 candidate in accordance with regulatory standards.

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 manufacturers is increased, and we may have to obtain a license from such contract manufacturers 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 site 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. These manufacturers have not 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 packaging 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 AND 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 AND 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

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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.

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 one-year non-exclusive 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 promoted Sigma-Tau’s VSL#3® in the second sales position behind Visicol. During 2004, we received approximately $1.38 million during the first eleven months of the one-year agreement. This agreement expired on January 31, 2005.

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.

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.

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

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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 that compete in two very competitive segments of the pharmaceutical industry. Our products and product candidate include: (i) purgative and laxative agents for cleansing the colon or relieving constipation, which includes Visicol and, if approved, INKP-102; and (ii) antispasmodics, which include IB-Stat. We are likely to encounter significant competition with respect to Visicol, INKP-102, if approved, and IB-Stat, including such competitors as:

	•	Braintree Laboratories, Inc., Schwarz Pharma Inc., C.B. Fleet Company, Inc. and Novartis Pharmaceuticals Corporation with respect to Visicol and INKP-102, and

	•	Schwarz Pharma Inc., Eli Lily and Company and Bedford Laboratories with respect to IB-Stat.

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, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act electronically with the SEC. 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.

We maintain a web site on the World Wide Web at http://www.inkine.com. We make available free of charge through the Investor Relations/Corporate Governance section of our web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. We include our web site address in this Annual Report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our web site. The material on our web site is not part of our Annual Report on Form 10-K. You may also obtain a free copy of these reports and amendments by contacting our corporate offices, by calling investor relations at (215) 283-6850 or by sending an e-mail message to info@inkine.com.

EMPLOYEES

As of December 31, 2004, we had 62 full-time employees. No employees are covered by collective bargaining agreements, and we consider relations with our employees to be good.

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CERTAIN RISKS RELATED TO OUR BUSINESS

You should carefully consider the risks described below, in addition to the other information contained in this report, before making any investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations.

Risks related to our operations

We have achieved profitability for the twelve-months ended December 31, 2004. 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 from our inception on July 1, 1993 through December 31, 2003. We achieved profitability and positive cash flow from operations for the first time for the year ended December 31, 2004. Visicol, INKP-102 and IB-Stat 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 and the sale of newly acquired or developed products. 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 and 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 in the United States. Our prospects over the next three to five years are substantially dependent on the successful commercialization of Visicol and INKP-102. We expect to engage in expensive advertising, educational programs and other means to market our current and 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. Since the May 2002 re-launch of Visicol in the United States, we have grown from 13 employees on May 31, 2002 to approximately 62 on December 31, 2004. 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

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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.

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 candidate 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 candidate.

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 candidate may interfere with the commercialization of our products and the development of our product candidate.

If we do not develop and maintain relationships with manufacturers, then we may not successfully manufacture and sell our products.

We do not possess the capabilities, resources or facilities to manufacture Visicol, INKP-102 or IB-Stat. We must contract with manufacturers to produce Visicol, INKP-102 and IB-Stat according to government regulations. Our future development and delivery of our marketed products and our product candidate depends

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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 candidate. 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 2005. 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.

We are currently working with Wellspring Pharmaceutical Corporation (Wellspring) to manufacture and package INKP-102 in a manner that meets FDA requirements. The FDA has not yet approved the manufacturing processes and facility for packaging at Wellspring. If the FDA does not approve the manufacturing processes and facility for packaging at Wellspring we will not be able to market and sell INKP-102.

If the owners of technology licensed to us terminate our license agreement, then these owners could prevent us from developing, manufacturing or selling the product covered by this license.

Our license with the ALW Partnership, entered into February 1997, which covers Visicol and INKP-102, may be terminated by the licensor if we fail to pay, commencing in February 2003, minimum royalties of $100,000 per year whether or not any sales have occurred. In addition, our rights under the ALW License will no longer be exclusive, and the minimum royalty payment will no longer be due (although decreased actual royalty payments will be due) if there is no valid or enforceable patent on Visicol, INKP-102 or any other product under the ALW 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.

	•	Braintree Laboratories, Inc., Schwarz Pharma Inc., C.B. Fleet Company, Inc. and Novartis Pharmaceuticals Corporation with respect to Visicol and INKP-102, and

	•	Schwarz Pharma Inc., Eli Lily and Company and Bedford Laboratories with respect to IB-Stat.

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Most of these entities have substantially greater financial, technical, manufacturing, sales, marketing, distribution and other resources. 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 2004, we filed a 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 patent will issue.

IB-Stat is not patentable.

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.

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 and INKP-102. 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.

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

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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.