ESPERION THERAPEUTICS INC/MI - 10-K Annual Report

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.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). x Yes o No

The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant as of June 28, 2002, computed by reference to the closing price on The Nasdaq National Market® on such date, was approximately $151,512,467.

The number of outstanding shares of the registrant’s common stock, as of March 1, 2003, was 29,401,966.

Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated by reference into Part III and certain documents are incorporated by reference into Part IV.

The information contained in this report includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by words such as “hope,” “may,” “believe,” “anticipate,” “plan,” “expect,” “require,” “intend,” “assume” and similar expressions. We caution readers that forward-looking statements speak only as of the date of this filing, reflect management’s current expectations, estimations and projections and involve certain factors, such as risks and uncertainties, that may cause our actual results, performance or achievements to be far different from those suggested by our forward-looking statements. These factors include, but are not limited to, risks associated with: our ability to successfully execute our business strategies, including entering into any strategic partnerships or other transactions; the progress and cost of development of our product candidates; the extent and timing of market acceptance of new products developed by us or by our competitors; dependence on third parties to conduct clinical trials for our product candidates; the extent and timing of regulatory approval, as desired or required, for our product candidates; dependence on licensing arrangements and other strategic relationships with third parties; clinical trials; manufacturing; dependence on patents and proprietary rights; procurement, maintenance, enforcement and defense of our patents and proprietary rights; competitive conditions in the industry; business cycles affecting the markets in which any of our future products may be sold; extraordinary events and transactions; seeking and consummating business acquisitions, including the diversion of management attention to the assimilation of the operations and personnel of any acquired business; the timing and extent of our financing needs and our access to funding, including through the equity market; fluctuations in foreign exchange rates; and economic conditions generally or in various geographic areas. All of the foregoing factors are difficult to forecast. These risks and uncertainties are discussed below in the section entitled Factors Affecting our Future Prospects. We do not intend to update any of these factors or to publicly announce the results of any revisions to any of these forward-looking statements other than as required under the federal securities laws.

Esperion Therapeutics, Inc. is a biopharmaceutical company dedicated to the discovery and development of HDL-targeted therapies for the treatment of cardiovascular disease. We have focused our initial drug discovery and development activities on a novel class of drugs to treat acute and chronic cardiovascular disease. We intend to commercialize a novel class of drugs that focus on a new treatment approach that we call “HDL Therapy,” which is based upon our understanding of high density lipoprotein, or HDL, function. Through HDL Therapy, we intend to exploit, with a portfolio of product candidates, the beneficial properties of HDL in cardiovascular disease.

We are currently developing four product candidates, including three biopharmaceuticals: ETC-588, or LUV; ETC-216, or AIM; and ETC-642, or RLT Peptide; and one oral small molecule, now designated ETC-1001 (previously designated ESP 31015). The biopharmaceuticals are currently being developed for the acute treatment of high-risk atherosclerosis, such as acute coronary syndromes, while the small molecule will target chronic treatment of risk factors associated with cardiovascular disease. Each of these product candidates, as explained in detail under “Our Products in Development,” is designed to enhance the naturally occurring processes in the body that remove excess cholesterol from artery walls and other tissues. The current development status of our three biopharmaceutical product candidates, which are in the clinical phase of development, and our small molecule product candidate is as follows:


	•	ETC-588 (Phase II): We continue to enroll patients in two Phase II clinical trials for ETC-588. These two trials were initiated in 2002: one trial in patients with carotid atherosclerosis and the other trial in patients with acute coronary syndromes.


	•	ETC-216 (Phase II): We completed enrollment in March 2003 for a Phase II clinical trial for ETC-216. This study was initiated in late 2001 in patients with acute coronary syndromes.

	•	ETC-642 (Phase I): A Phase I clinical trial was completed for ETC-642 in 2002 in patients with stable cardiovascular disease. A second Phase I clinical trial for ETC-642 was initiated in 2002 in patients with stable cardiovascular disease.

	•	ETC-1001 (Pre-clinical): We plan to initiate our first clinical trial for ETC-1001 in the second quarter of 2003, pending United States Food and Drug Administration, or FDA, acceptance of an Investigational New Drug, or IND, application for this product candidate.

We expect to continue clinical testing of the three biopharmaceutical product candidates throughout 2003.

Our product development to date has used in vitro assays, testing procedures performed outside the body, animal models and human clinical testing. Clinical and pre-clinical studies suggest that our product candidates increase HDL-cholesterol, or HDL-C, or its function, and enhance the removal of excess cholesterol and other lipids from artery walls and other tissues. Preliminary results in early clinical trials indicate that ETC-588, ETC-642 and ETC-216 increase the mobilization of cholesterol, or the removal of cholesterol from arteries and other tissues and delivery of cholesterol to the liver, as evidenced by measurements of the amount of cholesterol in the blood both before and after administration. Third-party published reports of preliminary human clinical studies of compounds that are similar in function and composition to some of our product candidates suggest that these compounds may increase elimination of cholesterol from the body by enhancing the efficiency of the reverse lipid transport, or RLT, pathway. We believe that the therapies that we are developing could enhance the naturally occurring processes in the body for the removal of excess cholesterol and other lipids from artery walls. We believe that this removal of excess cholesterol from the body will lead to improvements in vascular structure by stabilizing vulnerable plaque, which could ultimately lead to a reduction in clinical events resulting from cardiovascular disease, including atherosclerosis. Our clinical development plans are focused on planning and conducting clinical trials to assess the benefit of treatment with our product candidates.

We are also pursuing the discovery and development of orally active organic small molecules designed to increase HDL-C levels and/or enhance the function of HDL to stimulate the RLT pathway, as well as decrease LDL cholesterol, or LDL-C, and triglycerides, another type of lipid, or fat. We believe that some of these small molecules may also possess anti-diabetic and anti-obesity properties. We have implemented several strategies to develop potential small molecule product candidates based on well-known mechanisms by which HDL is produced in the body. One strategy has yielded several classes of active molecules. We believe that our drug discovery technologies and scientific and drug development expertise have potential applicability to the discovery and development of therapies for a broad range of cardiovascular diseases, including treatments for coronary heart disease, peripheral arterial disease (atherosclerosis occurring in arteries near the body’s extremities) and stroke.

We were incorporated in Delaware and commenced operations in July 1998. We became a public company in August 2000 and our common stock trades on The Nasdaq National Market under the symbol “ESPR.” Our executive offices and primary research facility are located at 3621 South State Street, 695 KMS Place, Ann Arbor, Michigan 48108, our telephone number is (734) 332-0506 and our website is www.esperion.com.

The cardiovascular system is comprised of the heart and blood vessels and delivers oxygen and other nutrients to the tissues and organs of the body, such as the brain, kidneys and lungs; in addition, it is able to remove waste products. The heart propels blood through a network of arteries and veins. The kidneys regulate the blood volume, and the lungs put oxygen in the blood and remove carbon dioxide. To accomplish these tasks, the cardiovascular system must maintain adequate blood flow, which can be dramatically reduced by the excessive deposit of a type of lipid, or fat, called “cholesterol” within artery walls in vulnerable plaque.

Cholesterol is essential for cells to function normally. Our bodies obtain cholesterol both through the foods we eat and by manufacturing cholesterol inside some of our cells and organs. Cholesterol either remains within the cell or is transported by the blood to various organs. The major carriers for cholesterol in the blood are lipoproteins, which are particles composed of fat and protein, including low density lipoprotein, or LDL, and high density lipoprotein, or HDL. LDL delivers cholesterol to organs where it can be used to produce hormones, maintain healthy cells or be transformed into natural products that assist in the digestion of other lipids. HDL removes excess cholesterol from arteries and tissues and transports it to the liver for elimination from the body.

The RLT pathway consists of a four-step process responsible for removing excess cholesterol and other lipids from artery walls and other tissues and transporting them to the liver for elimination from the body. The first step is the removal of cholesterol from artery walls and other tissues by HDL in a process called “cholesterol removal.” In the second step, cholesterol is converted to a new form that is more tightly associated with HDL as it is carried in the blood; this process is called “cholesterol conversion.” The third step is the transport and delivery of that converted cholesterol to the liver in a process known as “cholesterol transport.” The final step is the transformation and discarding of cholesterol by the liver in a process called “cholesterol elimination.” We believe our product candidates have the potential to enhance the effectiveness of these four steps in the RLT pathway in humans.

In a healthy human body, there is a balance between the delivery and removal of cholesterol. Over time, however, an imbalance can occur in our bodies in which there is too much cholesterol delivery by LDL and too little removal by HDL. When people have a high level of LDL-C, and a low level of HDL-C, the imbalance results in more cholesterol being deposited in artery walls than being removed. This imbalance can also be exaggerated by, among other factors, age, gender, high blood pressure, smoking, diabetes, obesity, genetic factors, physical inactivity and consumption of a high-fat diet. The excess cholesterol carried in the blood in LDL particles can be deposited throughout the body, but frequently ends up in artery walls, especially those in the heart. As a consequence, repeated deposits of cholesterol, called plaque, form and can narrow or block the arteries, possibly leading to a heart attack or stroke. The plaque can also accumulate in artery walls leaving them vulnerable to rupture, which could also lead to a heart attack.

According to the American Heart Association, cardiovascular disease is the number one killer of American men and women. It is estimated that in 2003, the direct and indirect annual cost of cardiovascular disease will be $350 billion, of which an estimated $37 billion will be spent on drug therapy. The most prominent form of cardiovascular disease is atherosclerosis, a systemic disease that includes the buildup of plaque in artery walls limiting blood flow to the heart, brain, other vital organs and extremities. Atherosclerosis can result in heart attacks, chest pain and a variety of other complications, and is responsible for over half of all deaths from cardiovascular disease.

Physicians recognize high LDL-C and low HDL-C levels as independent risk factors for cardiovascular disease. In addition, high HDL-C levels generally are associated with reduced risk of cardiovascular disease. Clinical studies have suggested that:


	•	Low levels of HDL-C are a risk factor for coronary heart disease. The first study suggesting that people with low HDL-C had increased risk of atherosclerotic cardiovascular disease was reported in 1951. Since that time, a number of studies have confirmed that a low HDL-C level is an independent risk factor for coronary heart disease.

	•	Increasing HDL-C reduces risk of coronary heart disease. The Helsinki Heart Study, completed in 1987, suggested that increasing HDL-C levels reduced the risk of coronary heart disease in individuals at risk due to low HDL-C, high LDL-C, and high triglycerides, another type of lipid.


	•	Increasing HDL-C levels reduces the risk of death from coronary artery disease, heart attack or stroke. The Veterans Affairs Cooperative Studies Program High Density Lipoprotein Cholesterol Intervention Trial, completed in 1999, suggested that men with coronary artery disease who took a lipid regulating drug for five years experienced on average a 6% increase in HDL-C, resulting in a 24% risk reduction in death due to coronary artery disease, heart attack or stroke.

	•	Low levels of HDL-C translate to a low survival rate following coronary artery bypass surgery. A 20-year study completed by The Cleveland Clinic Foundation in 1999 suggested that people with low HDL-C levels have a lower survival rate following coronary artery bypass surgery.

In addition, published pre-clinical studies by third parties suggest other protective properties of HDL, such as reducing inflammation in arteries and reducing cholesterol deposits in artery walls.

Treatments are either short-term solutions, termed “acute”, or long-term solutions, termed “chronic.” Acute treatments are reserved for more life-threatening cardiovascular conditions, such as a heart attack, a condition where there is a shortage of oxygen-rich blood available to the heart. In contrast, chronic treatments are used to prevent cardiovascular disease from worsening and having to resort to acute treatments. Current acute treatments may include costly invasive procedures, while chronic treatments are usually in tablet or pill form. Chronic treatments have focused more on “stable” atherosclerosis and have been successful at showing clinical benefit over long periods of time (i.e., months or years). We believe that current trends indicate a growing interest in finding successful treatments for “unstable” acute coronary syndromes and that achieve clinical benefits in short periods of time (i.e., days or weeks) rather than months or years.

Acute treatments are required when blood flow to the heart is severely restricted and the patient is at immediate risk for further complications. Two of the most common invasive procedures used to restore blood flow are coronary artery bypass surgery, or CABG, and percutaneous coronary intervention (PCI) (i.e., balloon angioplasty, with or without stents). In bypass surgery, a cardiovascular surgeon opens the patient’s chest cavity to expose the heart and redirects blood flow around the blocked arteries by grafting a healthy vessel removed from another location in the patient. In PCI, a cardiovascular surgeon inserts a long, thin flexible tube with an inflatable balloon at its end through a leg artery and advances the tube to the heart to position it in the artery at the point of blockage. The balloon is then inflated and this pushes aside the plaque that caused the blockage, usually resulting in a reopening of the artery to allow greater blood flow. Frequently, a cardiologist reinforces the newly opened artery with a wire-mesh cylinder called a stent. More recently, drug-coated stents have been introduced to prevent restenosis (re-closure of the artery). In addition, patients with acute coronary syndromes may be prescribed agents, as recommended in the American College of Cardiology and American Heart Association guidelines for the treatment of acute coronary syndromes, including aspirin, clopidogrel, heparin, nitrates, gpIIb/IIIa inhibitors, beta-blockers, fibrinolytic therapy, statins and ACE inhibitors. Despite these many treatments and/or procedures, a short-term risk for recurrent clinical events still exists.

The primary benefit of successful acute treatments is the immediate restoration of oxygen-rich blood flow to the heart. However, the major drawbacks are that:


	•	These invasive procedures, by their nature, involve a risk of complications, including death.

	•	There is significant recovery time after coronary artery bypass surgery.

	•	These invasive procedures are very costly. According to the American Heart Association, it is estimated that in 2000, 519,000 coronary artery bypass surgeries were performed on 314,000 patients in the United States with an average cost of about $45,000. In 2000, approximately 561,000 PCI procedures were performed in the United States. The average cost of a PCI is $20,000 and more when a stent is used.


	•	Many patients are not eligible for these invasive procedures due to their medical and/or treatment history and physical condition.

	•	These invasive procedures are localized and treat only one segment of a diseased artery at a time, and, since atherosclerosis affects the entire cardiovascular system, many additional vulnerable arteries are left untreated after using these procedures.

The initial recommendation for a patient with elevated LDL-C, a well-known risk factor for cardiovascular disease, is frequently a change in lifestyle involving exercise combined with a low-fat, low-cholesterol diet. If a patient’s cholesterol level does not improve, then the patient’s physician moves to the next step of treatment to achieve acceptable levels of cholesterol in the blood.

Chronic treatments for cardiovascular disease have the goal of preventing or limiting progression of the disease to reduce risk of heart disease, disability or death. Physicians frequently will prescribe a statin that lowers the level of LDL-C in the blood by inhibiting cholesterol production in the liver. Statins can also modestly lower triglycerides, another type of lipid, and have the ability to slightly raise HDL-C. Recent studies have shown that statins reduce the risk of illness or death from cardiovascular disease by approximately 30%. In clinical studies, statins have been shown to reduce the rate of progression of atherosclerosis in a majority of patients. However, statins have not been consistent in demonstrating regression of atherosclerotic disease.


	•	Develop a portfolio of novel drug candidates focused on enhancing reverse lipid transport (RLT) utilizing the beneficial properties of HDL. Based on our understanding of the RLT pathway, we are developing a portfolio of product candidates that we believe could provide a broad spectrum of treatment options for patients with cardiovascular disease. These product candidates are focused on improving HDL function in the RLT pathway and removing excess cholesterol from artery walls and other tissues. Our portfolio currently consists of three distinct types of HDL therapies: HDL mimetics (ETC-216 and ETC-642), “cholesterol sponges” (ETC-588) and oral small molecules that stimulate the RLT pathway (ETC-1001). Each of these therapies is described in more detail in the section below entitled Our Products in Development.

	•	Leverage experienced scientific, drug discovery and drug development expertise. We are managed by an experienced group of scientists with significant expertise in drug discovery. Roger S. Newton, Ph.D., President and Chief Executive Officer of Esperion, was the co-discoverer, chairman of the discovery team and a member of the development team for the drug atorvastatin (Lipitor®). In 2002, sales of Lipitor exceeded $7.9 billion and approximately 44 million prescriptions were written for atorvastatin worldwide. Other members of our management team have participated in the discovery, clinical development and/or commercialization of many other high profile therapies, including Lopid®, Pravachol®, Glucophage® and Plavix®. We employ inventors of two of our product candidates currently in clinical development (ETC-588 and ETC-642). In addition, since our inception, we have discovered HDL elevating/lipid regulating agents.

	•	Optimize clinical and regulatory strategies. We believe that by initially focusing on the development of biopharmaceutical product candidates for acute treatments, we can achieve an abbreviated development time, as compared to what would be expected with chronic treatments. This may result in a faster time to market, which will benefit patients with cardiovascular disease. We are performing clinical trials with our biopharmaceutical product candidates to assess efficacy for well-defined cardiovascular endpoints in the treatment of acute coronary events. Concurrently, we are discovering and developing small molecules that we intend to use as a chronic therapy to complement statins and other chronic treatments.


	•	Retain co-development and co-promotion rights to our product candidates. Our goal is to retain a portion of the development and marketing rights to our product candidates. By completing the pre-clinical and early clinical development work independently and with contract research organizations, we hope to negotiate favorable terms with prospective partners. We intend to enter into strategic collaborations with established pharmaceutical companies on one or more individual product candidates to enhance the value of each program by broadening the commercial potential for each product candidate and by utilizing additional clinical and regulatory resources to maximize each product candidate’s potential.

Our initial product development efforts are focused on developing novel classes of drugs designed to treat both acute and chronic cardiovascular disease using HDL Therapy. Our product candidates are designed to enhance HDL function and the four steps of the RLT pathway. Our product development to date has used in vitro assays, testing procedures performed outside the body, animal models and human clinical testing. We currently have three product candidates actively in the clinical phase of development. We expect to continue clinical testing of these three product candidates during 2003, and are preparing to bring an additional product candidate, ETC-1001, into clinical development during 2003.

Our human clinical trials may not commence or proceed as anticipated and we may not be able to demonstrate the same levels of safety, efficacy or other results in clinical trials that have been suggested in our pre-clinical or early clinical trials, or in studies by third parties with material similar to ours.

We are developing ETC-588 (large unilamellar vesicles, or LUV), currently as a treatment for acute coronary syndromes. LUV are spherical particles composed of a naturally occurring phospholipid that upon infusion into humans would remain in the circulation to serve as a “sponge” for cholesterol. We believe the interaction between LUV and HDL already in the body results in the enhanced removal of cholesterol from atherosclerotic lesions. We believe that LUV have a high capacity to transport cholesterol to the liver for elimination from the body.

Two third party pre-clinical animal studies were published involving the administration of material similar to ETC-588. These studies showed the removal of cholesterol from arteries and the regression of atherosclerosis, thereby helping arteries regain their flexibility and function. None of the studies were conducted by us or on our behalf.

In 2000, Phase I single and multiple dose tolerance studies of ETC-588 in healthy volunteers were completed. Analysis of data from those studies indicates dose-dependent cholesterol mobilization.

The first Phase II study of ETC-588 was a double-blind, randomized, placebo-controlled, multiple-dose study designed to determine the optimal dose and dosing schedule and effect of ETC-588 in 36 patients with stable cardiovascular disease and HDL-C less than or equal to 45 milligrams per deciliter (indicating a low level of HDL-C). Patients were administered one of three dose strengths (50, 100 or 200 milligrams per kilogram) or placebo every four or seven days. Patients in the 100 and 200 mg/kg dose groups each received seven doses, while the 50 mg/kg dose groups received fourteen doses. The results of this study indicated that ETC-588 was safe and well-tolerated at all dose levels and dose regimens. Based on the data from this study, an optimal dosing schedule of every seven days has been defined for future study of ETC-588. Patients administered ETC-588 also showed evidence of dose-related cholesterol mobilization, as measured by the amount of cholesterol in the blood before and after treatment.

In addition, we conducted a sub-study in a small group of patients in this Phase II trial using magnetic resonance imaging (MRI) technology to assess its feasibility as an appropriate imaging modality. Based on the information gathered from this sub-study, this technology is being utilized in a second Phase II study of ETC-588 to assess a primary endpoint of changes in plaque volume. This second Phase II trial began enrolling in the second quarter of 2002 to, among other things, use MRI technology to assess the changes in plaque

volume within the carotid arteries. Patients are given eight weekly doses of ETC-588, or placebo, in this study utilizing a dose of 200 mg/kg for treated patients. Each patient will have MRIs taken prior to treatment, after four weeks of treatment, after eight weeks of treatment and three months following treatment. These serial MRI readings should allow us to examine how ETC-588 is impacting the plaque, if at all, as well as how well the benefits of therapy might persist three months after treatment. Additional efficacy endpoints are also being studied. Enrollment in this trial is continuing.

In the fourth quarter of 2002, we initiated a third Phase II study, in which enrollment is continuing. The objective of this third Phase II study is to evaluate the safety and tolerability of ETC-588 in 150 patients with acute coronary syndromes, one of the patient populations we intend to target in our Phase III clinical trials. Patients in this trial are treated with eight weekly doses of ETC-588. The trial is a double-blind, randomized, placebo-controlled study with three groups of 50 patients each. The patients will receive either a fixed weekly dose of eight grams, a fixed weekly dose of fifteen grams or placebo.

We are developing ETC-216 (apolipoprotein A-I Milano/phospholipid complex, or AIM), for the treatment of patients with acute coronary syndromes. The clinical use of ETC-216 as a human recombinant protein complexed to phospholipid is to mimic naturally-occurring HDL and/or enhance its function. AIM is a variant form of apolipoprotein A-I, the major protein component of HDL. AIM is naturally present in a small group of Northern Italians with paradoxically low rates of cardiovascular disease despite low HDL-C levels, who tend to show a lower risk of cardiovascular disease, presumably due to enhanced reverse lipid transport.

We believe that infusion of ETC-216 in humans will enhance the RLT pathway. Published third party reports in 1998, 1999 and 2001 have shown that, in animal models, material similar to ETC-216 reduced atherosclerotic lesions and their lipid content and prevented inflammation and clotting. A 1999 report of in vitro tests showed that material similar to ETC-216 increased cholesterol removal. The 2001 report demonstrated rapid removal of lipid and decreased macrophage immunoreactive staining in atherosclerotic lesions within or at 48 hours after treatment. Also, published third party reports in 1994 and 1995 showed that material similar to ETC-216 inhibited restenosis following balloon angioplasty in two animal models. None of these studies were conducted for us or on our behalf.

We completed and reported data from a Phase I single-dose clinical trial of ETC-216 conducted in Europe in the first quarter of 2001. Consistent with our pre-clinical studies, an infusion of ETC-216 in participants in this study resulted in increased cholesterol mobilization. This study also demonstrated ETC-216 was safe at all doses, there were no serious adverse events observed, and that it was well tolerated. We initiated a multiple-dose, multi-center Phase II clinical study in patients with acute coronary syndromes in the fourth quarter of 2001. The purpose of this study is to provide evidence that ETC-216 is effective in regressing coronary atherosclerosis by measuring changes in plaque size utilizing intravascular ultrasound (IVUS). The trial is a randomized, double-blind study that is evaluating the efficacy and safety of ETC-216 at two different dose levels (15 mg/ kg and 45 mg/ kg) of intravenous infusions, compared to placebo, administered every seventh day with a maximum of five doses. The study will evaluate up to fifty patients with acute coronary syndromes, who are scheduled to undergo coronary angiography and/ or angioplasty. The primary endpoint is the effect of ETC-216 on plaque size of one targeted coronary artery, which will be measured by atheroma volume through the use of IVUS. In IVUS, a tiny ultrasound probe is inserted into a coronary artery to directly image atherosclerotic plaques. In this trial, an IVUS image is taken before the first dose is administered and within one week of the final dose. Enrollment was completed in March 2003 and we expect to present initial results in mid-2003.

We acquired exclusive worldwide rights for AIM from Pharmacia in July 1998. Under our license agreement with Pharmacia, at the completion of Phase II clinical trials, Pharmacia has the exclusive right of election to co-develop and the exclusive right to market products that include AIM as an active ingredient in countries outside of the United States and Canada. In addition, upon our pursuing a co-development and co-promotion arrangement in the United States and Canada, Pharmacia has the right of first negotiation.

We are developing ETC-642 (RLT Peptide) currently for the treatment of patients with acute coronary syndromes. The peptide component of ETC-642 is a 22-amino acid peptide that mimics the biological properties of apolipoprotein A-I to promote cholesterol removal from artery walls and other tissues and enhance reverse lipid transport. ETC-642 is a complex of peptide and phospholipids that mimics the functions of HDL. In our pre-clinical studies, we have shown that ETC-642 increases HDL-C and enhances cholesterol mobilization. Because of these properties, we believe that administration of ETC-642 may enhance reverse lipid transport.

The patent applications that were filed in 1997 for the technology relating to series of RLT peptides describe experiments of the compounds in vitro and in vivo, including in human blood samples. These experiments showed that RLT peptides similar to ETC-642 interact with and activate important enzymes in the RLT pathway and stimulate cholesterol removal. The results of a pre-clinical animal model study described in the patents showed that the administration of an RLT peptide complexed to phospholipids similar to ETC-642 increased HDL-C levels in the blood. This study was not conducted for us or on our behalf. We exclusively license from the inventors the patents and patent applications covering the technology relating to these RLT peptides and our RLT Peptide.

Our goal is to establish that intravenous infusions of ETC-642 are safe and result in the removal of cholesterol from the walls of arteries, thus stabilizing vulnerable atherosclerotic plaques and preventing cardiovascular events, such as heart attacks, in clinical trials.

During 2001, we initiated a Phase I clinical study of ETC-642 in patients with existing cardiovascular disease. The Phase I clinical trial was a single-dose study in patients with stable atherosclerosis designed to determine the safety, tolerability, pharmacokinetic and cholesterol mobilization properties of ETC-642. We completed this Phase I study in the first half of 2002 and results indicate that ETC-642 was safe and well-tolerated at all dose levels tested. In addition, results were consistent with pre-clinical studies in showing evidence of rapid cholesterol mobilization, as well as evidence of increases in HDL-cholesterol levels. We initiated an additional single-dose, Phase I study in the second half of 2002 in the same patient population studied in the earlier trial to determine the maximum tolerated dose. Following the completion of this additional Phase I trial and review of the combined data from these two trials, we expect to conduct a multiple-dose study in patients beginning in the second half of 2003 to examine dosing regimens and certain efficacy parameters.

We are pursuing the discovery and development of oral small organic molecules that increase HDL-C levels and/or enhance the RLT pathway, as well as decrease LDL-C and triglycerides. Pre-clinical models suggest that some of these molecules may also possess anti-diabetic and anti-obesity properties. We have implemented several strategies to develop these product candidates. One strategy has led to the discovery of several classes of active molecules.

Our pre-clinical studies demonstrated that several classes of molecules elevate HDL-C in animal models. In these studies we have observed that these molecules can also regulate lipid production in liver cells of rats, hamsters and humans, and inhibit diet-induced atherosclerosis progression in an animal model. Our goal is to develop orally active molecules for the treatment of patients with lipid disorders.

We have identified a lead orally active small molecule product candidate that we have now designated ETC-1001 because we have chosen to submit it for clinical development (it was formerly designated ESP 31015). Upon completion of certain pre-clinical and toxicology studies, we intend to file an Investigational New Drug application, or IND, in 2003, and begin Phase I clinical testing on ETC-1001 in the first half of 2003. We are conducting additional testing and pre-clinical research on other small molecule candidates for potential clinical development in the future.

We have suspended development of ETC-276 (ProApolipoprotein A-I, or ProApoA-I), as an acute treatment for the improved blood flow to the arteries of the heart, brain and body. The decision to suspend development of this compound was made in the first half of 2002 and was based on the limited scope of the intellectual property position on this compound, the limited patent life remaining and complexities involved in developing a commercially viable manufacturing process for this compound.

We have devoted substantially all of our resources since we began our operations in May 1998 to the research and development of pharmaceutical product candidates for cardiovascular disease. Our research and development expenses were $22.0 million, $21.5 million, $22.6 million, and $94.0 million in 2002, 2001, 2000 and the period from inception to December 31, 2002, respectively. Research and development expenses include both external and internal costs related to the research and development activities for our existing product candidates as well as discovery efforts on potential new product candidates. External costs include costs related to manufacturing, process development, clinical trials, toxicology or pharmacology studies performed by third parties, milestone payments under certain license agreements and other related expenses. Internal costs include all payroll and related costs attributable to research and development activities, as well as an allocation of overhead expenses that we incur.

We have implemented strategies in discovery, research and development that we believe will generate a pipeline of new drugs for the treatment of lipid disorders and related complications. These strategies include an intensive effort to identify orally active small molecules.

Small molecule discovery efforts, focused on lipid disorders, are aimed at identifying drugs that increase HDL-C levels and/or enhance their function to stimulate the RLT pathway. We have implemented approaches to identify drugs that stimulate pathways, which we believe will result in the synthesis of more HDL or the rapid replenishment of HDL components.

We believe that the clinical development plan for our biopharmaceutical product candidates can be achieved by the following:


	•	Phase I. Demonstrate the safety and tolerability of our product candidates in healthy volunteers or stable patients. In addition, we begin to look at dose levels and dosing regimens; that is, how much drug should be administered and how often. Finally, in Phase I, we look for evidence of increased cholesterol mobilization in humans. Mobilization can be measured easily using various clinical chemistry tests such as the level of cholesterol in the blood both before and after treatment. By showing increased cholesterol mobilization in the blood, we can speculate that our drug candidates are effectively pulling excess cholesterol from artery walls and other tissues.

	•	Phase II. Continue to monitor safety and tolerability of our product candidates in different patient populations. We will attempt to identify the optimal dose and dosing regimen including the number of treatments and length of time between treatments. Finally, we will examine efficacy parameters including changes in vascular structure and function. This can be accomplished through the use of various imaging techniques such as MRI or IVUS to examine changes in plaque volume and/or composition. These measurements can provide evidence as to whether our product candidates are having an impact on reducing the plaque in the walls of the arteries. These imaging techniques are used to take measurements both pre- and post-treatment to determine if and how much of the plaque is being removed or stabilized.

	•	Phase III. During Phase III, we believe that we will need to show evidence of clinical benefit and establish effectiveness of our product candidates through improvements in cardiovascular clinical outcomes such as morbidity, mortality, heart attacks, strokes, hospitalizations, revascularizations and other clinical events. By comparing clinical events in patients receiving our product candidates versus


		patients who do not receive our product candidates, we can determine if there is clinical benefit from our therapies above the current standard of care. Because we are targeting acute treatments with our biopharmaceuticals, we need to show an impact on clinical events in a relatively short period of time following treatment.

For our small molecules, the clinical development will focus more on improving the lipid profile of patients by increasing HDL-C and improving HDL function as well as having secondary effects of reducing LDL-C and triglycerides. Since the small molecules are designed for chronic treatment and as a possible complement to statin drugs, which currently account for approximately 90% of the lipid regulation market, we expect that these trials would follow a much more traditional lipid regulation clinical development path, including well-established endpoints.

We currently have no sales or distribution capabilities. In order to successfully commercialize any of our product candidates, we must either internally develop full sales, marketing and distribution capabilities or make arrangements with third parties to perform these services. We may sell, market and distribute some products directly and rely on relationships with third parties to sell, market and distribute other products. To market any of our products directly, we must develop a marketing and sales force with technical expertise and with supporting distribution capabilities. Since 2000, we have had a senior member of our management team working to develop commercialization strategies and conduct market research for our product candidates.

Inex Pharmaceuticals Corporation, the licensor and/or owner of some of the ETC-588 technology, and the group of inventors who are the licensors of the ETC-642 technology have granted us exclusive rights to market ETC-588 and ETC-642. We acquired exclusive worldwide rights for ETC-216, our other in-licensed product candidate, from Pharmacia in July 1998. Under this agreement, at the completion of Phase II clinical trials, Pharmacia has the exclusive right of election to co-develop and the exclusive right to market products that include AIM as an active ingredient in countries outside of the United States and Canada. In addition, upon pursuing a co-development and co-promotion arrangement in the United States and Canada, Pharmacia has the right of first negotiation.

We are currently pursuing corporate collaborations for our biopharmaceuticals and we believe the preferred partnering deal would consist of a co-development and co-promotion relationship in North America with one or more companies that have established distribution systems and direct sales forces. In international markets, we intend initially to seek strategic relationships pursuant to which the partner would develop, market, sell and distribute our product candidates. We have also recently initiated discussions with potential partners for our oral small molecule program. In that case, we are pursuing a research and development collaboration.

We currently rely, and will continue to rely for at least the next few years, on contract manufacturers to produce sufficient quantities of our product candidates for use in our pre-clinical and clinical trials and ultimately for commercial purposes. We also rely, and intend to continue to rely, on third parties to provide the components of these product candidates, such as proteins, peptides, phospholipids, bulk chemical materials and active pharmaceutical ingredients.

There is currently a limited supply of some of the components needed to manufacture our product candidates. In particular, the production capacity available in the world for the proteins contained in ETC-216 is limited. In addition, the process for producing protein for ETC-216 will need to be enhanced to meet late-stage clinical trials supply and large-scale commercial production requirements for ETC-216. We believe, however, that if ETC-216 is shown to be efficacious in the current Phase II trial, we would focus on partnering opportunities that would leverage a prospective partner’s manufacturing expertise in helping us to develop a more efficient manufacturing process for this product candidate. Other partnering objectives may include

pursuing partners with expertise in alternative delivery regimes for ETC-216. In this regard, pre-clinical data suggests that certain alternative delivery regimes for ETC-216 could have potential clinical benefit using significantly less ETC-216. Furthermore, the contract manufacturers that we have identified and worked with to date only have limited experience at manufacturing, formulating, analyzing, filling and finishing our product candidates in quantities sufficient for conducting clinical trials or for commercialization. There are companies throughout the world that have begun to make investments in additional capacity through the construction of new facilities or renovation of existing facilities; however, these facilities will take time to construct, require significant capital investment and must comply with regulatory specifications.

We do not have any direct or indirect experience in the commercial-scale manufacturing of ETC-588, ETC-216, ETC-642 or ETC-1001. Each of these product candidates has a unique manufacturing process and will require engineering and manufacturing expertise to scale up our current batch production methods to commercial scale manufacturing. Our product candidates will need to be manufactured in facilities and using processes that comply with current Good Manufacturing Practices, or cGMP, requirements and other similar regulations, including those from outside the United States. It takes a substantial period of time to produce proteins, peptides, and certain small molecules in compliance with such regulations. For example, the process for manufacturing proteins and formulating them into protein/lipid complexes is complicated. If we are unable to establish and maintain relationships with third parties for manufacturing sufficient quantities of our product candidates and their components that meet our planned time and cost parameters, the development and timing of our clinical trials and commercialization strategy may be adversely affected.

Our ability to protect and use our intellectual property rights in the development and commercialization of our product candidates is crucial to our continued success. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets, or other proprietary information or know-how. We currently rely on a combination of issued patents and pending patent applications, some of which we license and some of which have been assigned to us, proprietary information, trade secrets and know-how to protect our interests in developing and commercializing our product candidates and technologies.

In connection with the agreements described below, we may be obligated to make various milestone payments, which could amount to $28.3 million, and future royalty payments, pursuant to formulas in the agreements, in the future. At the present time, it is uncertain as to whether we will be required to make any of these additional payments.

With respect to our LUV technology, we have a patent estate currently comprised of 10 issued U.S. patents, 1 European patent validated in 13 European countries, 6 pending U.S. patent applications and 2 international patent applications that are the basis of 10 pending foreign patent applications. Some of these patents and patent applications are licensed and/or sublicensed to us by Inex Pharmaceuticals Corp., or Inex, which either owns them or licenses them from the University of British Columbia. The other patents and patent applications are owned by us, some of which were acquired when we acquired Talaria Therapeutics, Inc., or Talaria, in September 2000. Collectively, the patents and pending applications claim the use of unilamellar liposomes for the treatment of atherosclerosis, a dosage form containing liposomes, methods and compositions for use in the treatment of disease, including atherosclerosis and other disorders such as angina, using those liposomes, methods of producing liposomes and methods of treating diseases with liposomes using specific dosing regimens. The U.S. patents expire no earlier than 2014 and the European patents expire in 2011.

We paid Inex $250,000 at the time we entered into the license agreement with Inex for certain LUV technology in March 1999. Our license agreement with Inex, as amended, requires us to make payments to Inex as milestones are achieved and to pay Inex royalties on sales of any products that are covered by the licensed patents or developed using the licensed technology. The first milestone payment of $100,000 was paid

to Inex in the first quarter of 2001, based upon enrollment of our first patient in a Phase II clinical trial. Additional milestone payments will be paid to Inex if and when we achieve future development milestones as defined in the agreement, up to an aggregate amount of $6.2 million. Under our license agreement with Inex, as amended, we are also required to pay Inex royalties on sales of products that are covered by the LUV technology that we acquired from Talaria. This license continues until the later of ten years from the first commercial sale of a product covered by this license or the last expiration date of any patent rights covered by this license, unless earlier terminated by a party in accordance with the terms of the license.

Our merger agreement with Talaria required us to issue 813,008 shares of common stock to former Talaria stockholders and requires us to pay: (i) up to $6.3 million in cash and/or common stock based on the achievement of four development milestones; and (ii) royalties in cash and/or common stock based on net annual sales in North America of LUV products. The combined milestone payments and royalties are subject to a maximum aggregate ceiling of $20.0 million. The first milestone was achieved in the first quarter of 2001 upon the enrollment of our first patient in a Phase II clinical trial. This milestone was paid in 2001 through the issuance of 58,626 shares of common stock. Of the initial 813,008 shares of common stock that were issued under the merger agreement, 10,127 shares were retired in 2001 in satisfaction of an indemnity obligation of the former Talaria stockholders under the merger agreement and related documents. Of the total shares of common stock paid to Talaria, 11,622 shares remain escrowed until no later than November 21, 2004 in order to satisfy maximum potential indemnity obligations by the former Talaria stockholders to us.

In June 1998, we acquired exclusive, worldwide rights to AIM from Pharmacia Corporation, subject to Pharmacia’s exclusive right of election to co-develop and exclusive right to market AIM in countries other than the United States and Canada upon our completion of Phase II clinical trials. In addition, upon our pursuing a co-development and co-promotion arrangement in the United States and Canada with a third party, Pharmacia has the right of first negotiation to co-develop and co-promote in the United States and Canada. This license expires on the latter of 2018 or upon the last of the Pharmacia patents to expire, unless terminated earlier by either party in accordance with the terms of the license. Under our license agreement with Pharmacia, we acquired what is now seven issued U.S. patents, one allowed U.S. patent application, one pending U.S. patent application, two European patents and other related corresponding foreign patents and patent applications, covering various aspects of AIM, pending in other countries where we believe the market potential for ETC-216 is significant, including most of the European countries and some Asian countries, including Japan. These patents and patent applications claim methods and materials for producing AIM in bacteria and yeast, methods for purification and methods for treating atherosclerosis and other forms of cardiovascular disease with AIM. The issued U.S. patents expire no earlier than 2015, the corresponding foreign patents expire no earlier than 2012 and the two European patents expire in 2007 and 2010 We also own one pending U.S. patent application and have joint ownership with Cedars Sinai Medical Center of one additional pending U.S. patent application, both of which claim additional uses for AIM.

We paid Pharmacia $750,000 at the time we entered into our license agreement in June 1998. Our license agreement with Pharmacia requires us to make payments to Pharmacia as milestones are achieved, and to pay Pharmacia royalties on sales of products that are covered by the Pharmacia patents or developed using the Pharmacia technology. The first milestone payment of $1.0 million will be paid in cash or by issuance of a promissory note to Pharmacia if and when we have completed clinical trials showing preliminary safety and initial proof-of-concept (which may include the Phase II study that we expect to report on in 2003). We believe that this would mean clinical trials that show statistically significant results in safety and efficacy, allowing us to better define the details of any potential Phase III pivotal trials.

If Pharmacia exercises its exclusive right to co-develop and market AIM in countries other than the United States and Canada, we will make additional milestone payments, up to an aggregate of $2.5 million, to Pharmacia. In this case, we will be entitled to royalties on sales of AIM outside the United States and Canada, and Pharmacia would be entitled to royalties on sales within the United States and Canada. If Pharmacia does not exercise its right to co-develop and market AIM in countries other than the United States and Canada, we will make additional milestone payments, up to an aggregate of $13.5 million, to Pharmacia starting if and

when we enroll the first patient in the first Phase III clinical trial for an AIM product in the United States as well as royalties on sales of AIM worldwide. If the milestone payments are greater than 10% of our cash reserves at the time payment is required, we may make these payments to Pharmacia by issuing a promissory note in lieu of cash.

Under an agreement entered into in September 1999, we exclusively licensed RLT Peptide technology from the group of its inventors. This now includes nine issued U.S. patents,, two allowed U.S. patent applications, nine pending U.S. patent applications and corresponding foreign patents and pending patent applications. The RLT Peptide technology relates to peptides and proteins that have activity equal to or greater than, ApoA-I. The issued U.S. patents and corresponding foreign patents expire in 2017. The U.S. and foreign patents and patent applications and are directed to peptides having ApoA-I activity, pharmaceutical compositions thereof, methods for their use, drug forms containing the peptides, pharmaceutical dosage forms of the peptides, methods for preparing the dosage forms and nucleotide sequences encoding the peptides.

We paid the inventors of our RLT Peptide technology an initial license fee of $50,000 in January 2000. Our license agreement with the inventors requires us to make payments to them as milestones are achieved, and to pay them royalties on sales of any products that are covered by the inventors’ patents or developed using the inventors’ technology. The first milestone payment of $50,000 was paid to the inventors in 2001. Additional milestone payments, up to an aggregate of $2.1 million, will be paid to the inventors if and when we achieve future development milestones as defined in the agreement with the inventors. This license continues until ten years from the date of license execution or the last to expire of any of the inventors’ patents, unless terminated earlier by a party in accordance with the terms of the license.

We are also researching and developing small organic molecules that increase HDL-C levels and/or enhance the RLT pathway, as well as decrease LDL-C and triglycerides. These molecules may also possess anti-diabetic and anti-obesity properties. We have three issued U.S. patents, 11 pending U.S. patent applications and corresponding pending foreign applications directed to classes of compounds and specific compounds that increase HDL-C levels and/or enhance the RLT pathway, compositions comprising these compounds, methods of the preparation of these compounds and methods for the use of these compounds. We are also pursuing, and will continue to pursue, patent protection for other classes of compounds that increase HDL-C levels and/or enhance the RLT pathway, which have been or will be identified in our laboratories. We had identified a lead candidate from this class of compounds in 2001 — now designated ETC-1001 — for which we intend to file an IND and begin Phase I clinical testing in 2003.

The U.S. Food and Drug Administration, or FDA, and comparable regulatory agencies in state and local jurisdictions and in countries outside of the United States impose substantial requirements on the pre-clinical and clinical development, manufacture and marketing of pharmaceutical product candidates. These agencies and other federal, state and local governmental entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record-keeping, approval and promotion of our product candidates. All of our product candidates will require regulatory approval before commercialization. In particular, therapeutic product candidates for human use are subject to rigorous pre-clinical and clinical testing and other requirements of the Federal Food, Drug, and Cosmetic Act, or FDC Act, and Public Health Service Act, or PHSA, implemented by the FDA, as set forth in the Code of Federal Regulations, as well as similar statutory and regulatory requirements of countries outside the United States. Obtaining these marketing approvals and subsequently complying with ongoing statutory and regulatory requirements is costly and time-consuming. Any failure or delay by us or our suppliers, CROs, collaborators, licensors or licensees in obtaining regulatory approvals or in complying with other requirements could adversely affect the commercialization of our product candidates and our ability to receive any product or royalty revenues.

The steps required before a new drug product candidate may be distributed commercially in the U.S. generally include:


	•	conducting appropriate pre-clinical laboratory evaluations of the product candidate’s chemistry, formulation and stability, and pre-clinical studies to assess the potential safety and efficacy of the product candidate;

	•	submitting the results of these evaluations and tests to the FDA, along with manufacturing information and analytical data, in an Investigational New Drug application, or IND;

	•	initiating clinical trials under the IND after the IND becomes effective;

	•	obtaining approval of Institutional Review Boards, or IRBs, to introduce the drug into humans in clinical studies;

	•	conducting adequate and well-controlled human clinical trials that establish the safety and efficacy of the product candidate for the intended use, typically in the following three sequential, or slightly overlapping, stages:


	Phase I: The product candidate is initially introduced into healthy human subjects or patients and tested for safety, dose tolerance, absorption, distribution, metabolism and excretion;

	Phase II: The product candidate is studied in patients to identify possible adverse effects and safety risks, to establish the dose response relationship in the target population, to determine dosage tolerance and the optimal dosage, and to collect initial efficacy data; and

	Phase III: The product candidate is studied in an expanded patient population at multiple clinical study sites, to confirm efficacy and safety at the optimized dose, by measuring a primary endpoint established at the outset of the study; agreement is reached with the FDA, in advance, on the clinical development program, including patient numbers and clinical endpoints required for marketing approval. Proposed label claims are also discussed with the FDA in advance of NDA submission;


	•	submitting the results of preliminary research, pre-clinical studies, and clinical trials as well as chemistry, manufacturing and control information on the product candidate to the FDA in a New Drug Application, or NDA or Biologics Licensing Application, “BLA”; and

	•	obtaining FDA approval of the NDA or BLA and final product labeling prior to any commercial sale or shipment of the product candidate.

Each NDA or BLA must be accompanied by a user fee, pursuant to the requirements of the Prescription Drug User Fee Act (PDUFA) and its amendments. According to the FDA, through September 30, 2003 the user fee for an application requiring clinical data, such as a full NDA or BLA, is $533,400. The FDA adjusts the PDUFA user fees on an annual basis. PDUFA also imposes an annual product fee for prescription drugs and biologics (currently $32,400), and an annual establishment fee (currently $202,900) on facilities used to manufacture prescription drugs and biologics. We are not at the stage of development with our product candidates where we would have a Drug Registration Number and, therefore, we are not yet subject to these fees.

This process can take a number of years and requires substantial financial resources. There are no assurances that NDAs or BLAs for the product candidates will be filed, accepted or approved. The results of pre-clinical studies and initial clinical trials are not necessarily predictive of the results of these specific formulations or the results of large-scale clinical trials, and clinical trials may be subject to additional costs, delays or modifications due to a number of factors, including the difficulty in obtaining enough patients, clinical investigators, product candidate supply, or financial support. The FDA may also require testing and surveillance programs to monitor the effect of approved product candidates that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product candidate based on the results of these post-marketing programs. Upon approval, a product candidate may be marketed only in those dosage forms and for those indications approved in the NDA or BLA.

In addition to obtaining FDA approval for each product candidate, the manufacturing establishments for each product must register with the FDA, list products with the FDA, comply with the applicable FDA cGMP regulations and permit and pass manufacturing plant inspections by the FDA. Moreover, the submission of applications for approval may be delayed because of the need for additional time to complete the required manufacturing stability studies. Companies from outside the United States that manufacture products for distribution in the United States also must list their products with the FDA and comply with cGMPs. They are also subject to periodic inspection by the FDA or by local authorities under agreement with the FDA.

Under the FDC Act and related statutes, developers of new drugs are afforded certain limited protections against competition from generic drug companies. Under the 1984 Drug Price Competition and Patent Term Restoration Act, drug companies can have certain product patents extended to counter balance, in part, the duration of the FDA’s review of their marketing applications. This Act also provides for marketing exclusivity (i.e., protection from generic competition regardless of any available patent protection) for products for which clinical investigations are necessary to support FDA approval of a marketing application. Also, the recently enacted Best Pharmaceuticals for Children Act permits under certain circumstances an additional six months of marketing exclusivity (“pediatric exclusivity”) if the applicant files reports of investigations studying use of the drugs in the pediatric population. The pediatric exclusivity provision is scheduled to sunset on October 1, 2007 and there are no assurances that it will be reauthorized.

Any product candidates that we manufacture or distribute pursuant to FDA approvals are subject to extensive continuing regulation by the FDA, including record-keeping requirements and reporting adverse experiences with the product candidate. In addition to continued compliance with standard regulatory requirements, the FDA may also require further studies, including post-marketing studies and surveillance to monitor the safety and efficacy of the marketed product candidate. Results of post-marketing studies may limit or expand the further marketing of the products. Product candidate approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product candidate are discovered following approval. In addition, if any modifications to a product are proposed, including changes in indication, manufacturing process, manufacturing facility or labeling, a supplement to its NDA may be required to be submitted to the FDA and approved.

The FDC Act also mandates that product candidates be manufactured consistent with cGMP. In complying with the FDA’s regulations on cGMP, manufacturers must continue to spend time, money and effort in production, recordkeeping, quality control, and auditing to ensure that the marketed product candidate meets applicable specifications and other requirements. The FDA periodically inspects manufacturing facilities to ensure compliance with cGMP. Failure to comply subjects the manufacturer to possible FDA action, such as warning letters, suspension of manufacturing, seizure of the product, voluntary recall of a product or injunctive action, as well as possible civil penalties, such as fines. We currently rely on, and intend to continue to rely on, third parties to manufacture our compounds and product candidates. These third parties are required to comply with cGMP.

Many of our current third-party manufacturers are located outside of the U.S., resulting in the possibility of difficulties in importing our product candidates and/or their components into the U.S., as a result of, among other things, FDA import inspections, incomplete or inaccurate import documentations, or defective packaging.

Any products manufactured in the U.S. for distribution abroad will be subject to FDA regulations regarding export, as well as to the requirements of the country to which they are shipped. These latter requirements are likely to cover the conduct of clinical trials, the submission of marketing applications, and all aspects of manufacturing and marketing. Such requirements vary from country to country. As part of our strategic relationships, our collaborators may be responsible for the foreign regulatory approval process for our product candidates, although we may be legally liable for noncompliance.

We are also subject to various federal, state and local laws, rules, regulations and policies relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances used in connection with our research work.

Although we believe that our safety procedures for handling and disposing of such materials comply with current federal, state and local laws, rules, regulations and policies, the risk of accidental injury or contamination from these materials cannot be entirely eliminated.

The extent of government regulation that might result from future legislation or administrative action cannot be accurately predicted. In this regard, although the FDA Modernization Act of 1997 modified and created requirements and standards under the FDC Act with the intent of facilitating product candidate development and marketing, the FDA is still in the process of developing regulations implementing the FDA Modernization Act of 1997. Consequently, the actual effect of these developments on our business is uncertain and unpredictable.

The healthcare industry is changing rapidly as the public, government, medical professionals and the pharmaceutical industry examine ways to broaden medical coverage while controlling health care costs. Potential approaches that may affect us include managed care initiatives, pharmaceutical buying groups, formulary requirements, various proposals to offer an expanded Medicare prescription benefit, and efforts to regulate the prices of pharmaceuticals, which would include drugs for cardiovascular disease. We are unable to predict when any proposed healthcare reforms will be implemented, if ever, or the effect of any implemented reforms on our business.

The pharmaceutical and biopharmaceutical industries are intensely competitive and are characterized by rapid and significant technological progress. Our competitors include large fully-integrated pharmaceutical companies, biopharmaceutical companies, biotechnology companies, universities and public and private research institutions that currently engage in, have engaged in or may engage in efforts related to the discovery and development of new pharmaceuticals and biopharmaceuticals, some of which are competitive with our own programs and efforts. Almost all of these entities have substantially greater research and development capabilities and/or financial, scientific, manufacturing, marketing and sales resources than we do, as well as more experience in research and development, clinical trials, regulatory matters, manufacturing, marketing and sales.

We are aware of companies that are developing technologies for the acute treatment of cardiovascular disease, such as atherosclerosis, that may compete with our product candidates for acute treatments. However, these technologies are dealing with a local treatment of cardiovascular disease rather than a systemic therapy such as with our biopharmaceuticals. Other companies with substantially greater research and development resources may attempt to develop products that are competitive with our product candidates for the acute treatment of cardiovascular disease or seek approval for drugs in later stages of development that have similar effects on cardiovascular disease as our acute treatments.

We are also aware of companies that are developing products for the chronic treatment of cardiovascular disease that may compete with our oral small molecule program for HDL elevation and lipid regulation. Other companies with substantially greater research and development resources are developing products that are competitive with our product candidates and will seek approval for drugs in later stages of development that have similar effects as our product candidates. Some examples of these lipid regulating therapies include cholesterol absorption inhibitors (one was recently approved by the FDA), ACAT inhibitors (Phase III development), CETP inhibitors and vaccines (Phase II development), and nuclear receptor agonists, or PPARs (Phase II/ III development).

If regulatory approvals for our product candidates are received, any such products may compete with several classes of existing drugs for the treatment of cardiovascular disease, some of which are available in generic form. For example, drugs currently available for the treatment of cardiovascular disease include fibrates, statins and niacin, all of which are available in pill or tablet, as compared to the intravenous administration method we intend to use for our biopharmaceuticals. There are also surgical treatments such as coronary artery bypass surgery and PCI that may be competitive with our products. For those patients, however, who do not respond adequately to existing therapies and remain symptomatic despite treatment with

Our product candidates are still under development, and it is not possible to predict our competitive position in the future. However, we think that the principal competitive factors in the markets for ETC-588, ETC-216, ETC-642, and ETC-1001 are among the following:


	•	safety and efficacy profile;

	•	product price and degree of reimbursement;

	•	ease of administration;

	•	rapidity of effect;

	•	duration and frequency of treatment;

	•	product supply;

	•	enforceability of patent and other proprietary rights; and

	•	marketing and sales capability.


	•	attract qualified personnel;

	•	attract parties for acquisitions, joint ventures or other collaborations;

	•	license the proprietary technology that is competitive with the technology we are practicing; and

	•	attract funding.

As of December 31, 2002, we had 65 full-time employees. Of these employees, 41 were engaged in research, pre-clinical and clinical development, regulatory affairs and/or manufacturing activities and 24 were engaged in general and administrative activities.

Our website address is www.esperion.com. Through the investor relations page on our website, www.esperion.com/investorrelations, we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after we file such reports with the U.S. Securities and Exchange Commission, or the SEC.

We are a developmental stage biopharmaceutical company with a history of losses, and, even if our product candidates are approved and commercialized, we may never be profitable.

We have devoted substantially all of our resources since we began our operations in July 1998 to the research and development of product candidates for cardiovascular disease. We have incurred substantial losses since we began our operations. As of December 31, 2002, we had a cumulative net loss of approximately $94.0 million. These losses have resulted principally from costs incurred in our research and development programs, from our general and administrative expenses and from acquisition-related costs from our September 2000 acquisition of Talaria Therapeutics, Inc. To date, we have not generated revenue from product sales or royalties, and we do not expect to achieve any revenue from product sales or royalties until we receive regulatory approval and begin commercialization of our product candidates. We are not certain of when, if ever, that will occur. We expect to incur significant additional operating losses for at least the next several years and until we generate sufficient revenue to offset expenses. Research and development costs

relating to our product candidates will continue to increase. Manufacturing, sales and marketing costs will increase as we prepare for the commercialization of our product candidates.

All of our current product candidates are in early stages of development, and we face the risks of failure inherent in developing drugs based on new technologies. In addition, three of our product candidates were in-licensed from third parties. We have limited in-house experience with these product candidates as well as with product candidates discovered and owned by us. Our product candidates are not expected to be commercially available for several years, if at all.

All of our current product candidates are designed to treat cardiovascular disease by exploiting the beneficial properties of HDL. We may defer or cease development of one or more of our product candidates if a product candidate does not show favorable clinical results, if we are unable to cost effectively manufacture a product candidate, if we decide to concentrate our resources on more promising product candidates, or for any other reason. Decisions regarding the selection of product candidates for development and the timing of the development of our product candidates may accelerate the pre-clinical or clinical testing of one or more product candidates while delaying or ceasing progress of one or more product candidates.

All of our product candidates must be tested and submitted to the FDA and other regulatory agencies for approval before we can sell them, and even if the FDA approves our product candidates, that approval may be limited.

Our product candidates must satisfy rigorous standards of safety and efficacy before they can be approved for commercial use by the FDA and international regulatory authorities. We will need to conduct significant additional research, including additional pre-clinical testing involving animals and clinical trials involving humans, before we can file applications for product approval.

Many of the product candidates in the pharmaceutical and biopharmaceutical industries do not successfully complete pre-clinical testing and clinical trials. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful. For example, a number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials and in interim analyses. In addition, delays or rejections may be encountered based upon additional government regulations, including any changes in FDA policy, during the process of product development, clinical trials and regulatory approvals.

In order to receive FDA approval or approval from international regulatory authorities to market a product, we must demonstrate through human clinical trials that the product candidate is safe and effective for the treatment of a specific condition. Even if we believe the clinical trials demonstrate safety and efficacy of a product, the FDA and international regulatory authorities may not accept our assessment of the results and may require us to conduct additional advanced clinical trials. Approval of a product by comparable regulatory authorities is necessary in foreign countries prior to the commencement of marketing of the product in those countries, whether or not FDA approval has been obtained. The approval procedure varies among countries and can involve additional testing. The time required may differ from that required for FDA approval. Although there are some procedures for unified filings for some European countries with the sponsorship of the country that first granted marketing approval, in general, each country has its own procedures and requirements, many of which are time consuming and expensive.

We do not know whether planned clinical trials will begin on time or will be completed on schedule or at all. If we experience significant delays in testing or approvals, or if we need to perform more or larger clinical trials than planned, our product development costs will increase. Any of our future clinical studies might be delayed or halted because the drug is not safe and effective, or physicians think that the drug is not safe or effective; patients experience severe and/or unexpected side effects during treatment; patients die during a clinical study because their disease is too advanced or they experience medical problems that are not related to the drug being studied; patients do not enroll in the studies at the rate we expect; or drug supplies are not sufficient to treat the patients in the studies.

Our clinical studies may also be limited by, delayed or halted because of the nature of the clinical study; the size of the


x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended: December 31, 2002, OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Delaware		38-3419139
(State of incorporation)		(I.R.S. Employer Identification No.)


PART I
	Item 1. Business
PART II
	Item 6. Selected Consolidated Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures about Market Risk
	Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Items 10, 11, 12 and 13. Directors and Executive Officers of the Registrant; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management; Certain Relationships and Related Transactions
	Item 14. Controls and Procedures
PART IV
	Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
Second Amendment to Commercial Sublease Agreement
Lease Extension - Third Renewal Term
Employment Arrangement Between Roger S. Newton
Employment Arrangement Bet. Timothy M. Mayleben
Employement Arrangement Between Brian R. Krause
Employment Arrangment Between Jean-Louis Dasseux
Employment Arrangement Between Frank Thomas
Subsidiaries
Consent of PricewaterhouseCoopers LLP
Certification Pursuant to Section 906
Certification Pursuant to Section 906


		Page

	PART I
Item 1.	Business		1
Item 2.	Properties		26
Item 3.	Legal Proceedings		27
Item 4.	Submission of Matters to a Vote of Security Holders		27
	PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		28
Item 6.	Selected Consolidated Financial Data		29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		38
Item 8.	Financial Statements and Supplementary Data		39
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		63
	PART III
Item 10.	Directors and Executive Officers of the Registrant		63
Item 11.	Executive Compensation		63
Item 12.	Security Ownership of Certain Beneficial Owners and Management		63
Item 13.	Certain Relationships and Related Transactions		63
Item 14.	Controls and Procedures		63
	PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		64
SIGNATURES			69

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	ETC-1001 (formerly designated ESP 31015) and other HDL Elevating/ Lipid Regulating Agents


	ETC-216 (AIM)


	Other