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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
OR
[_] Transition report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 0-21699
VIROPHARMA INCORPORATED
(Exact name of registrant as specified in our charter)
Delaware 94-2347624
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
405 Eagleview Boulevard 19341
(Zip Code)
Exton, Pennsylvania
(Address of principal executive offices)
Registrant's telephone number, including area code: 610-458-7300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.002
6% Convertible Subordinated Notes due 2007
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The approximate aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $372,289,871 as of March 1,
2001, based upon the closing sale price per share of the Common Stock as
quoted on the Nasdaq National Market. This amount excludes 3,244,390 shares of
the registrant's voting stock held by directors, officers and stockholders
with representatives on the board of directors whose ownership exceeds ten
percent of the registrant's Common Stock outstanding at March 1, 2001.
Exclusion of shares held by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to direct or cause
the direction of the management or policies of the registrant, or that such
person is controlled by or under common control with the registrant.
The number of shares of the registrant's Common Stock outstanding as of
March 1, 2001 was 16,210,474.
DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement for the registrant's 2001 Annual
Meeting of Stockholders to be held on June 11, 2001 are incorporated by
reference in Part III of this Annual Report on Form 10-K.
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VIROPHARMA INCORPORATED
FORM 10-K ANNUAL REPORT
For Fiscal Year Ended December 31, 2000
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 1
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Market for the Registrant's Common Equity and Related
Item 5. Stockholder Matters 27
Item 6. Selected Financial Data 28
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations 29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 32
Item 8. Financial Statements and Supplementary Data 32
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure 32
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners and Management 33
Item 13. Certain Relationships and Related Transactions 33
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
Item 14. 8-K 34
Index to Financial Statements and Schedules F-1
"ViroPharma", "ViroPharma" plus the design and "Picovir" are trademarks and
service marks of ViroPharma. We have obtained trademark registration in the
United States for the marks in connection with certain services. We have
pending applications to register the trademarks and service marks, in the
United States and in various countries throughout the world. All other brand
names or trademarks appearing in this Annual Report on Form 10-K are the
property of others.
PART I
Business
ITEM 1. BUSINESS
We are a pharmaceutical company dedicated to the commercialization,
development and discovery of new antiviral medicines. We have focused our
current product development and discovery activities on a number of
ribonucleic acid, or RNA, virus diseases, including:
. viral respiratory infection, or VRI, often referred to as the common
cold;
. hepatitis C; and
. respiratory syncytial virus disease, or RSV disease.
In March 2001, we announced the preliminary analysis of data from our two
pivotal clinical studies of Picovir(TM) (pleconaril) in adult patients
suffering from viral respiratory infection (VRI) due to picornaviruses. In
April 2000, we reported our preliminary analysis of data from three Phase III
clinical studies of pleconaril, one in VRI in adults and one each in viral
meningitis in adults and children.
We commenced a Phase II clinical program with our hepatitis C product
candidate in collaboration with American Home Products Corporation in November
2000, and a Phase I clinical program with our RSV product candidate in October
2000. We have additional proprietary compounds in research for the treatment
of hepatitis C and RSV disease.
We believe that our antiviral drug discovery and development technologies
and expertise have potential applicability to a broad range of diseases caused
by RNA viruses. RNA viruses are responsible for the majority of human viral
diseases, causing illnesses ranging from acute and chronic ailments to fatal
infections.
We were incorporated in Delaware in September 1994 and commenced operations
in December 1994. Our executive offices and research facility are located at
405 Eagleview Boulevard, Exton, PA 19341, our telephone number is 610-458-7300
and our website is at www.viropharma.com.
Diseases Caused By Viruses
Viruses are intracellular parasites that require a living host cell within
which to reproduce. Infection by viruses, and their ensuing replication, can
lead to disease. Viral epidemics, pandemics, acute outbreaks and chronic viral
diseases continue to cause an enormous amount of human suffering and death.
There are three fundamental classes of viruses:
. deoxyribonucleic acid, or DNA, viruses, which use DNA as their
genetic material and replicate their DNA in a manner similar to human
cells;
. retroviruses, which reproduce by first converting their RNA into DNA
in infected cells, then converting this DNA back into RNA; and
. RNA viruses, which have the unique ability to directly reproduce
their RNA to create new RNA virus offspring through a process known
as RNA replication. This ability to directly replicate RNA
distinguishes RNA viruses from DNA viruses, retroviruses and human
cells.
DNA viruses cause diseases such as herpes, hepatitis B and papillomas
(warts). The retrovirus HIV, or human immunodeficiency virus, causes AIDS. RNA
viruses, however, are responsible for the majority of human viral diseases,
causing a multitude of illnesses ranging from acute and chronic ailments to
fatal infections. The following is a list of selected diseases caused by RNA
viruses:
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RNA Virus Diseases
Bronchiolitis Hemorrhagic conjunctivitis RSV disease
Bronchitis Hemorrhagic fevers Rubella
Dengue fever Hepatitis A, D and E Tick fevers
Diarrhea diseases Hepatitis C Viral meningitis
Ebola fever Influenza Viral pharyngitis
Encephalitis Measles Viral respiratory infection
Hand-foot-and-mouth disease Myocarditis Yellow fever
Hantavirus pulmonary
syndrome Neonatal enteroviral disease
Otitis media Rabies
We have focused our current product development and discovery activities on
the italicized diseases.
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Product Pipeline
We are focusing our current product discovery and development activities on
a number of RNA virus diseases affecting children and adults, including VRI,
hepatitis C and RSV disease. The following chart sets forth these target
disease indications and the status of our product candidates:
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Disease Indication Product Candidate Development Status
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Viral respiratory infec- Picovir(TM) (pleconaril)
tion Two Phase III trials in adults completed
One Phase II safety study in pediatrics ongoing
One Phase II family prophylaxis study ongoing
Initial Phase III trial in adults completed
Two Phase II trials in adolescents/adults completed
Phase II trial in adolescents/adults with asthma completed
Phase II challenge study completed
High risk picornavirus Picovir(TM)
diseases Open label compassionate use ongoing
Hepatitis C VP 50406 Phase II trials ongoing
RSV disease VP 14637 Phase I trials ongoing
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Picovir(TM) (pleconaril)
We currently are developing our most advanced product candidate, Picovir(TM)
(pleconaril), for the treatment of common diseases caused by picornaviruses.
Picornaviruses are a large, very prevalent group of RNA viruses that are
responsible for a significant portion of human disease caused by RNA viruses.
Picornaviruses, particularly enteroviruses and rhinoviruses, are the
predominant cause of VRI, myocarditis, encephalitis, viral meningitis, and
neonatal enteroviral disease, as well as viral exacerbations of underlying
conditions in individuals with asthma and chronic obstructive pulmonary
disease. Immunocompromised patients, including transplant patients, also are
extremely susceptible to severe disease caused by picornavirus infections.
Picovir(TM) is a proprietary, orally-administered small molecule inhibitor
of picornaviruses that was discovered by scientists who founded or are
currently with ViroPharma. In preclinical studies, Picovir(TM) has been
demonstrated to inhibit picornavirus replication in vitro by a novel, virus-
specific mode of action. Picovir(TM) works by inhibiting the function of the
viral protein coat, also known as the viral capsid, which is essential for
virus infectivity and transmission. Preclinical studies have shown that
Picovir(TM) integrates within the picornavirus capsid at a specific site that
is common to a majority of picornaviruses and disrupts several stages of the
virus infection cycle.
We have developed liquid, solid, suspension and intranasal formulations of
Picovir(TM). The solid formulation was used in our recently completed pivotal
studies of Picovir(TM) for the treatment of VRI in adults. The suspension
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formulation is being used in our VRI trials for children. The liquid
formulation is being used in our compassionate use program.
Viral Respiratory Infection.
In March 2001, we announced the preliminary analysis of data from our two
pivotal clinical studies of Picovir(TM) (pleconaril) in adult patients
suffering from VRI due to picornaviruses. Symptoms of VRI include nasal
discharge (rhinorrhea), nasal obstruction and congestion, sneezing, sore or
"scratchy" throat, cough and shortness of breath. In these studies:
. patients were randomized to receive 400 mg of pleconaril or placebo
three times daily for five days;
. in the combined enrollment of 2,096 patients, 65% of patients had a
VRI caused by a picornavirus, the leading cause of the common cold;
. the primary endpoint in these studies was time to complete resolution
of rhinorrhea and reduction in all other evaluated disease symptoms
to absent or mild for 48 hours; and
. the primary analysis population in these studies was patients with a
VRI caused by a picornavirus, as determined by research assays based
on PCR (polymerase chain reaction) technology.
The results from our preliminary analysis of data from these studies were as
follows:
. In the primary analysis population in both studies picornavirus-
infected patients treated with pleconaril experienced a statistically
significant reduction in the primary endpoint when compared to
placebo (6.2 days versus 7.7 days, p = 0.001; and 6.6 days versus 7.2
days, p = 0.037, respectively).
. In all randomized patients in both studies, pleconaril treated
patients experienced a reduction in the primary endpoint when
compared to placebo. In one study, the reduction was statistically
significant (6.2 days versus 7.1 days, p = 0.015; and 6.4 days versus
6.9 days, p = 0.201, respectively).
. In a combined analysis of both studies, picornavirus-infected and all
randomized patients treated with pleconaril experienced statistically
significant reductions in the primary endpoint when compared to
placebo (for picornavirus-infected patients: 6.3 days versus 7.3
days, p = <0.001; for all randomized patients: 6.3 days versus 7.0
days, p = 0.009).
. Pleconaril-treated patients in the primary analysis population
experienced clinically meaningful and statistically significant
reductions in several secondary endpoints, including a reduction in
viral shedding early in the treatment period, a decrease in symptom
severity and a reduction in the time to a patient's assessment of
having "no cold."
We also are conducting a Phase II safety study with pleconaril in the
pediatric population, and a Phase II family prophylaxis study. Currently,
there are no antiviral pharmaceuticals for the treatment of VRI.
In April 2000, we reported our preliminary analysis of data from our initial
Phase III clinical trial for pleconaril for the treatment of VRI.
Specifically, we reported that:
. the time to resolution of illness, as measured by the primary
endpoint (absence of runny nose and reduction of other symptoms), was
reduced from 9.4 days to 7.7 days (p = 0.07) in picornavirus-infected
patients receiving pleconaril compared to placebo-treated patients;
. a greater treatment benefit was seen in picornavirus-infected
patients receiving pleconaril who did not take concomitant cold
medications, where illness duration was reduced from 9.0 days to 6.75
days (p = 0.033);
. objective assessments of VRI illness in all picornavirus-infected
patients, such as mucus production as measured by facial tissue use
(p = 0.03) and sleep disturbance (p = 0.029), were substantially
reduced;
. reductions in cold medication use, middle ear pressure and virus
shedding were also seen in these patients; and
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. in all randomized patients, generally less pronounced treatment
benefits were seen in this study.
Viral Meningitis.
In April 2000, we reported our preliminary analysis of data from two
separate Phase III clinical trials for viral meningitis, the first in
adolescents and adults and the second in pediatric patients. In both studies,
time to complete resolution of headache was the primary endpoint.
Specifically, we reported that:
. in the adult study, a significant effect of pleconaril was not
observed in the primary endpoint for all randomized patients with
confirmed picornavirus infection;
. in adult patients with the most severe disease, the time to complete
resolution of headache, the primary endpoint in the study, was
reduced by 3 days (10 days in the placebo group to 7 days in the
pleconaril-treated group, p = 0.039);
. the time to return to work or school also was reduced by 3 days in
these patients (10 days in the placebo group to 7 days in the
pleconaril-treated group, p = 0.015); and
. in the pediatric study, we reported that the duration of illness
observed was considerably shorter than noted in the previous study of
this patient group. Many children showed resolution of headache
symptoms following lumbar puncture on study day one. As a result, a
significant effect of pleconaril was not observed.
We intend to focus our near-term clinical development efforts and resources
for pleconaril on the viral respiratory infection disease indication. As a
result of this near-term clinical focus, we do not currently intend to conduct
further clinical studies of pleconaril for the treatment of viral meningitis.
High Risk Patients.
Since August 1996, we have made Picovir(TM) (pleconaril) available on an
open label basis for patients with life-threatening or seriously disabling
diseases caused by picornaviruses. As of January 1, 2001, a total of 269
patients have been treated for a variety of life-threatening illnesses,
including chronic meningoencephalitis in patients with immune deficiency,
myocarditis, neonatal enteroviral disease, poliomyelitis syndromes,
enterovirus infections after bone marrow transplantation, rhinovirus
pneumonia, encephalitis, post-polio syndrome, chronic fatigue, enteroviral
infection in patients with immune deficiency and enteroviral gastroenteritis
in patients with immune deficiency. Many of these high risk patients receiving
a short course of Picovir(TM) treatment have experienced a sustained clinical
benefit and clearance of the virus. Although data from the compassionate use
of Picovir(TM) in these patients will be included in our New Drug Application
for VRI, these data are typically not sufficient to support an independent
label indication.
Hepatitis C
In November 2000, we commenced Phase II clinical studies on product
candidate VP50406 for the treatment of hepatitis C due to the hepatitis C
virus, commonly known as HCV. VP50406 is a proprietary, orally bioavailable
small molecule that has been demonstrated to inhibit RNA replication of HCV in
vitro. This compound is the lead compound in a chemical series discovered and
developed by ViroPharma. We are conducting these Phase II studies as part of
our collaboration with American Home Products Corporation under a
collaboration and license agreement that we entered into with American Home
Products Corporation in December 1999. As part of that collaboration, we also
are continuing with the development of several additional potent, selective
and chemically distinct compounds that inhibit several key HCV-encoded
activities that are essential to viral RNA replication.
HCV is recognized as a major cause of chronic hepatitis worldwide.
Approximately 85% of persons infected with HCV develop chronic hepatitis, of
which 20% progress to liver cirrhosis. Chronic HCV infection can also lead to
the development of hepatocellular carcinoma and liver failure.
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RSV Diseases
In October 2000, we initiated Phase I clinical trials with product candidate
VP14637 for the treatment of disease caused by respiratory syncytial virus, or
RSV. These initial trails are designed to evaluate the safety and
pharmacokinetic profile of the compound in healthy human volunteers. VP14637
is a proprietary, small molecule that has been demonstrated to inhibit RSV
replication in vitro. This compound is the lead compound in a chemical series
discovered and developed by ViroPharma. We also are continuing discovery and
development activities of additional compounds that have selective activity
against RSV.
RSV is a major viral respiratory tract pathogen that often causes pneumonia
and bronchiolitis. Infants and young children with underlying conditions such
as prematurity, congenital heart disease, bronchopulmonary dysplasia and
various congenital or acquired immunodeficiency syndromes (such as asthma or
immunodeficiency resulting from bone marrow transplants) are at greatest risk
of serious RSV morbidity and mortality. RSV is also a major cause of morbidity
and mortality in the elderly. Certain patient groups are particularly at risk
for suffering from serious and life-threatening complications arising from RSV
infections. These groups include:
. Bone marrow transplant patients;
. Chronic obstructed pulmonary disease patients (including bronchitis
and emphysema); and
. Asthmatic patients.
Treating RNA Virus Diseases
The RNA Virus Replication Process
Important to the successful discovery and development of antiviral
pharmaceuticals is the ability to analyze the virus in a laboratory setting
and to dissect the molecular and biochemical events critical to virus
replication. The manipulation of RNA viruses and, in particular, the virus's
RNA genome, requires special techniques and skills. Historically, technical
limitations have hampered investigation of RNA virus replication.
Consequently, the scientific community's understanding of the molecular events
of RNA virus replication is incomplete. However, significant recent
advancements in biological and molecular technologies related to the
manipulation of RNA and RNA viruses have enabled us to pursue the discovery
and development of effective treatments for RNA virus diseases.
We believe that the process of viral RNA uncoating and replication
represents an attractive target for the therapeutic intervention in disease
caused by RNA viruses. For RNA viruses to cause disease, they must replicate.
Inhibiting RNA virus replication can prevent, limit or stop disease. In
addition to thwarting disease, the direct inhibition of viral RNA uncoating
and replication should reduce generation of drug-resistant virus offspring and
decrease virus transmission from infected individuals to healthy persons. RNA
replication is a complicated process involving several viral proteins that
must act together in a coordinated fashion. Due to the nature of this process,
changes or mutations in these proteins are not readily tolerated.
Consequently, viral proteins required for RNA replication are not only
specific to the virus, they are among the least variable proteins of the
virus. This is in contrast to the highly variable viral surface proteins
generally involved in immune responses to virus infections. This invariability
of the viral proteins responsible for viral RNA replication represents an
important attribute in their selection as molecular targets for antiviral
product discovery and development.
The ViroPharma Approach
While the RNA uncoating and replication process is common among all RNA
viruses, the detailed molecular and biochemical mechanisms involved currently
are not fully understood. However, we have used our experience in RNA
virology, RNA virus uncoating and RNA replication, along with recent advances
in biological, molecular and informatics technologies, to gain an
understanding of several aspects of the RNA virus uncoating and replication
process. ViroPharma scientists have elucidated fundamental processes involved
in virus uncoating and have used this knowledge to design compounds to inhibit
these processes. These scientists have
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also succeeded in discovering essential virus enzyme activities that are
critical to RNA replication. They have further characterized RNA virus
replication activities and have used the resulting information to develop
novel drug screening assays. Our assays are optimized for high sensitivity and
specificity and are validated for reproducibility. These assays are automated
using state-of-the-art robotics technologies to facilitate the high throughput
screening of large chemical libraries. Using our novel assays, we have
discovered proprietary small molecule compounds that inhibit the targeted
virus-specific activities.
Once active compounds are identified, we advance such compounds to clinical
product candidates through a process of chemical optimization. This process
involves the rapid generation of an expanded chemical analog series based on
the initial active compounds and utilizes an array of technologies including
computer-assisted pharmacophore modeling and drug design techniques, two-
dimensional and three-dimensional structure and substructure chemical database
searches and conventional medicinal chemistry, combinatorial chemistry and
automated high capacity chemical synthetic methods. We then evaluate analog
series in various biochemical and biological assays that assess compound
selectivity, potency, bioavailability and safety. Importantly, we chemically
optimize active compounds for these four key parameters in parallel, not
sequentially. We believe that our combination of chemical and biological
technologies and our parallel compound optimization process allows us to
accelerate product discovery and development. The generation of large numbers
of specific chemical analogs by our scientists also enables us to rapidly
expand our valuable chemical library in a manner that is biased toward
inhibitors of enzymes and activities essential to RNA virus replication. We
believe that this library provides a significant advantage in our efforts to
discover novel inhibitors for additional RNA virus diseases.
Manufacturing
We currently do not have commercial manufacturing capabilities, and do not
intend to develop such capabilities for any product in the near future. Our
commercialization plans are to rely on the infrastructure of third parties for
the manufacture and distribution of Picovir(TM) (pleconaril) and our other
product candidates.
Picovir(TM) drug substance is prepared from readily available materials
using reliable processes. Both Picovir(TM) and the technology used to
manufacture it are proprietary and covered by the patents and patent
applications licensed to us by Sanofi-Synthelabo. We have entered into
agreements with PCAS for process development and to manufacture supplies of
bulk Picovir(TM) used in our clinical trials to date. We also entered into an
agreement with an alternative supplier to manufacture pilot batches of
Picovir(TM). We believe that the terms of each of these agreements are
comparable to the terms of similar agreements for similar products entered
into by third parties.
Under development agreements with Patheon, Inc., we have developed liquid,
solid, suspension and intranasal formulations of Picovir(TM). The tablet
formulation was used in our recently completed Phase III studies of
Picovir(TM) for treatment of VRI in adults. We are using a suspension
formulation in our pediatric trials of Picovir(TM) and a liquid formulation in
our compassionate use program. We anticipate that our current supply of
Picovir(TM) drug substance and drug product, together with the bulk drug
substance and drug product that we will receive from our suppliers, will be
sufficient to complete our formulation development activities and our ongoing
clinical trials.
We currently are negotiating commercial supply agreements for Picovir(TM)
drug substance with primary and alternative bulk drug manufacturers, with
micronizers and with final product manufacturers that we have identified to
date. It is not yet clear what the final terms of these agreements will be,
although we expect that they will be comparable to the terms of similar
agreements for similar products entered into by third parties. There can be no
assurance that we will be successful in entering into commercial supply
agreements for Picovir(TM) drug substance and products, or that any such
manufacturing arrangements will be available on terms acceptable to us.
We require in our manufacturing and processing agreements that all third-
party contract manufacturers and processors produce Picovir(TM) drug substance
and product in accordance with the FDA's current Good
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Manufacturing Practices. We maintain confidentiality agreements with potential
and existing manufacturers in order to protect our proprietary rights related
to Picovir(TM).
For the preparation of compounds other than Picovir(TM) for preclinical
research and for the manufacture of limited quantities of drug substances for
clinical development, we use both in-house capabilities, and contract with
third-party manufacturers. We intend to rely solely on third-party
manufacturers to manufacture larger quantities of drug substance for clinical
development and to manufacture final drug products for both clinical
development and commercial sale.
Marketing and Sales
Under our agreement with Sanofi-Synthelabo, we have the exclusive right to
market and sell Picovir(TM) for all picornavirus indications in the United
States and Canada. We are continuing our market research on the multiple
disease indications for which we are developing Picovir(TM). Our marketing
plans include a focus on medical education, including the use of thought
leaders in peer-to-peer presentations at appropriate medical meetings. In
addition, we have an extensive medical and scientific publications plan in
place.
We currently do not have a sales staff. To penetrate the VRI marketplace, we
intend to identify a strategic partner to help us market Picovir(TM) for the
treatment of VRI to the primary care marketplace. We expect to hire an
internal sales force to assist a strategic partner in marketing Picovir(TM).
The success and commercialization of our other potential products will be
dependent, in part, upon our ability to enter into additional collaborative
agreements for other potential products. There can be no assurance that we
will be successful in developing a sales force, entering into collaborative
arrangements, penetrating the markets for any proposed products or achieving
market acceptance of our products. There can be no assurance that any such
marketing arrangements will be available on terms acceptable to us, if at all,
that such third parties would perform adequately their obligations as
expected, or that any revenue would be derived from such arrangements.
Strategic Relationships
Sanofi-Synthelabo
Picovir(TM) was discovered by scientists at Sterling Winthrop, Inc., now
Sanofi-Synthelabo, several of whom are now ViroPharma employees. In our
agreement with Sanofi-Synthelabo, originally entered into in December 1995 and
amended and restated in February 2001, we received exclusive rights under
patents owned by Sanofi-Synthelabo to develop and market all products relating
to Picovir(TM) and related compounds for use in picornavirus disease
indications in the United States and Canada, as well as a right of first
refusal for any other indications in the United States and Canada. Our rights
include rights to use all of Sanofi-Synthelabo's patents, know-how and
trademarks relating to Picovir(TM) for those indications in the United States
and Canada, as well as rights to a series of patents and patent applications
covering compounds that are either related to Picovir(TM) or that have other
antiviral activity. Picovir(TM), which is currently in clinical trials, is
covered by one of the licensed United States patents, which expires in 2012,
and one of the licensed Canadian patent applications. We will be dependent on
Sanofi-Synthelabo to prosecute and maintain certain of these patents and
patent applications and may be dependent on Sanofi-Synthelabo to protect such
patent rights. We have the right to sublicense our rights under the agreement,
which under certain circumstances requires Sanofi-Synthelabo's consent, such
consent not to be unreasonably withheld.
Under our agreement with Sanofi-Synthelabo, until the expiration or
termination of the agreement, we must make royalty payments on any sales of
products developed under the agreement in the United States and Canada, which
royalty payments will be reduced upon the expiration of the last patent on
Picovir(TM) or any related drug. We are entitled to royalties from Sanofi-
Synthelabo on sales of products by Sanofi-Synthelabo outside the United States
and Canada. The royalty rates applicable to our sales of Picovir(TM) in the
United States and Canada, and the royalty rate applicable to Sanofi-
Synthelabo's sales of Picovir(TM) in the rest of the world, will accrue at
lower rates after selection of a co-promotion partner under the terms of our
amended and restated agreement. No further
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milestone payments are due to Sanofi-Synthelabo, and we are not required to
fund the cost of development in Europe, under the amended and restated
agreement. Sanofi-Synthelabo will make a milestone payment to us upon
submission of Picovir(TM) for regulatory approval in Japan.
Our patent licenses under the amended and restated agreement with Sanofi-
Synthelabo terminate on the later of expiration of the last patent licensed to
us under the agreement or ten years following our first sale of a product
containing a compound licensed to us under the agreement in the United States
or Canada, or earlier under certain circumstances. Our right to use the
trademarks continue beyond patent expiry. In the event that our rights to use
Sanofi-Synthelabo's patents and trademarks terminate, under certain
circumstances the agreement may restrict our ability to market Picovir(TM) and
compete with Sanofi-Synthelabo. In addition, Sanofi-Synthelabo has the right
to terminate the agreement if we are subject to a change of control that would
materially and adversely affect the development, manufacturing and marketing
of the products under the agreement. The term automatically renews for
successive five-year terms unless either party gives six months' prior written
notice of termination. We also have the right to manufacture, or contract with
third parties to manufacture, any drug product derived from the Picovir(TM)
drug substance. In connection with the expansion of our patent rights under
the amendment and restatement of our agreement in February 2001, we issued to
Sanofi 750,000 shares of our common stock.
American Home Products Corporation
In December 1999, we entered into a collaboration and license agreement with
American Home Products Corporation to jointly develop products for use in
treating hepatitis C due to the hepatitis C virus in humans. Under the
agreement, we licensed to American Home Products worldwide rights under
patents and know-how owned by us or created under the agreement. We have the
right to co-promote these products in the United States and Canada and
American Home Products will promote the products elsewhere in the world.
During the initial research phase of the agreement, the two parties will work
exclusively with each other on the development of small molecule compounds
directed against certain HCV targets. For the entire term of the agreement the
two parties will work exclusively with each other on any promising compounds.
Under the agreement, American Home Products has the right to manufacture any
commercial products developed under the agreement.
American Home Products paid us $5.0 million on the effective date of the
agreement, and is obligated to make milestone payments to us, and purchase
additional shares of our common stock at a premium to the market price, upon
the achievement of certain development milestones. American Home Products has
purchased an aggregate of 200,993 shares of our Common Stock through February
16, 2001 for $6,000,000 upon the achievement of two milestones. The remaining
milestone events generally include successful completion of steps in the
clinical development of an HCV product and the submission for, and receipt of,
marketing approval for the product in the United States and abroad. These
milestones, however, may never be attained. American Home Products Corporation
will provide significant financial support for the development of an HCV
therapeutic compound.
Until the expiration or termination of the agreement, any profits from the
sale of products developed under the agreement and sold in the United States
and Canada will be shared equally between us and American Home Products,
subject to adjustment under certain circumstances. For sales of these products
outside the United States and Canada, American Home Products will make royalty
payments to us. These royalty payments will be reduced upon the expiration of
the last of our patents covering those products.
The collaborative research component of our agreement with American Home
Products has an initial term of three years after the effective date of the
agreement, unless extended by mutual agreement. Our agreement with American
Home Products terminates, country-by-country, in the United States and Canada,
if the parties are no longer co-promoting any product developed under the
agreement, and outside the United States and Canada, when American Home
Products is no longer obligated to pay us royalties on sales of products
developed under the agreement.
8
Battelle Memorial Institute
In November 1999, we entered into a product development and
commercialization agreement with Battelle Memorial Institute in connection
with our RSV program. Under this agreement, we received, subject to certain
conditions, certain exclusive rights to use patents and know-how owned or
controlled by Battelle or developed under the agreement covering Battelle's
hand-held, inhalation device for the delivery of compounds to treat RSV.
We will pay Battelle for development activities that it will perform on our
behalf on a fee-for-service basis. Battelle also is entitled to milestone
payments upon achievement of certain events relating to clinical development
and regulatory approval. We will pay Battelle royalties on net sales of
products, subject to certain minimum amounts due. Royalties will be reduced
for sales in any country in which no issued patent protects the Battelle
device. We will be responsible for the costs of all commercial supplies of the
device.
Patents and Proprietary Technology
We believe that patent protection and trade secret protection are important
to our business and that our future will depend, in part, on our ability to
maintain our technology licenses, maintain trade secret protection, obtain
patents and operate without infringing the proprietary rights of others both
in the United States and abroad. We currently have received three issued
United States patents covering compounds, compositions and methods for
treating hepatitis C, one issued United States patent covering methods for
treating pestivirus disease (a disease caused by viruses related to HCV) and
four issued United States patents for compounds, compositions or methods for
treating influenza. We have three pending United States patent applications
covering compounds and methods for treating RSV diseases and influenza, and
intermediates and processes of making anti-RSV compounds. We have four United
States patent applications covering compounds and methods for treating
hepatitis C and related virus diseases, as well as compounds active against
pestivirus diseases. We have two pending United States patent applications
covering technology and methods for identifying inhibitors of HCV. We also
have filed patent applications under the Patent Cooperation Treaty, or PCT.
These patent applications cover compounds and methods for treating hepatitis C
and related virus diseases, pestivirus diseases, RSV diseases and influenza
and technology, compositions and methods for identifying inhibitors of HCV. We
intend to seek patent protection on these inventions in countries having
significant market potential around the world on the basis of our PCT filings.
As patent applications in the United States are maintained in secrecy until
patents issue and as publication of discoveries in the scientific or patent
literature often lags behind the actual discoveries, we cannot be certain that
we or our licensors were the first to make the inventions covered by each of
these pending patent applications or that we or our licensors were the first
to file patent applications for such inventions. Furthermore, the patent
positions of biotechnology and pharmaceutical companies are highly uncertain
and involve complex legal and factual questions, and, therefore, the breadth
of claims allowed in biotechnology and pharmaceutical patents or their
enforceability cannot be predicted. We cannot be sure that any patents will
issue from any of these patent applications or, should any patents issue, that
we will be provided with adequate protection against potentially competitive
products. Furthermore, we cannot be sure that should patents issue, they will
be of commercial value to us, or that private parties, including competitors,
will not successfully challenge these patents or circumvent our patent
position in the United States or abroad. In the absence of adequate patent
protection, our business may be adversely affected by competitors who develop
comparable technology or products.
Pursuant to the terms of the Uruguay Round Agreements Act, patents filed on
or after June 8, 1995 have a term of twenty years from the date of filing,
irrespective of the period of time it may take for the patent to ultimately
issue. This may shorten the period of patent protection afforded to our
products as patent applications in the biopharmaceutical sector often take
considerable time to issue. Under the Drug Price Competition and Patent Term
Restoration Act of 1984, a sponsor may obtain marketing exclusivity for a
period of time following Food and Drug Administration approval of certain drug
applications, regardless of patent status, if the drug is a new chemical
entity or if new clinical studies were used to support the marketing
application for the drug. Pursuant to the FDA Modernization Act of 1997, this
period of exclusivity can be extended if the applicant
9
performs certain studies in pediatric patients. This marketing exclusivity
prevents a third party from obtaining FDA approval for a similar or identical
drug under an Abbreviated New Drug Application or a "505(b)(2)" New Drug
Application.
The Drug Price Competition and Patent Term Restoration Act of 1984 also
allows a patent owner to obtain an extension of applicable patent terms for a
period equal to one-half the period of time elapsed between the filing of an
Investigational New Drug Application and the filing of the corresponding New
Drug Application plus the period of time between the filing of the New Drug
Application and FDA approval, with a five year maximum patent extension. We
cannot be sure that we will be able to take advantage of either the patent
term extension or marketing exclusivity provisions of this law.
In order to protect the confidentiality of our technology, including trade
secrets and know-how and other proprietary technical and business information,
we require all of our employees, consultants, advisors and collaborators to
enter into confidentiality agreements that prohibit the use or disclosure of
confidential information. The agreements also oblige our employees,
consultants, advisors and collaborators to assign to us ideas, developments,
discoveries and inventions made by such persons in connection with their work
with us. We cannot be sure that these agreements will maintain
confidentiality, will prevent disclosure, or will protect our proprietary
information or intellectual property, or that others will not independently
develop substantially equivalent proprietary information or intellectual
property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with those being developed by us. Therefore, our product candidates may give
rise to claims that they infringe the patents or proprietary rights of other
parties existing now and in the future. Furthermore, to the extent that we, or
our consultants or research collaborators, use intellectual property owned by
others in work performed for us, disputes may also arise as to the rights in
such intellectual property or in related or resulting know-how and inventions.
An adverse claim could subject us to significant liabilities to such other
parties and/or require disputed rights to be licensed from such other parties.
A license required under any such patents or proprietary rights may not be
available to us, or may not be available on acceptable terms. If we do not
obtain such licenses, we may encounter delays in product market introductions,
or may find that we are prevented from the development, manufacture or sale of
products requiring such licenses. In addition, we could incur substantial
costs in defending ourselves in legal proceedings instituted before the United
States Patent and Trademark Office or in a suit brought against us by a
private party based on such patents or proprietary rights, or in a suit by us
asserting our patent or proprietary rights against another party, even if the
outcome is not adverse to us.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements on the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, distribution, record keeping, approval and
promotion of our products. All of our products will require regulatory
approval before commercialization. In particular, therapeutic products for
human use are subject to rigorous preclinical and clinical testing and other
requirements of the Federal Food, Drug, and Cosmetic Act, implemented by the
FDA, as well as similar statutory and regulatory requirements of foreign
countries. Obtaining these marketing approvals and subsequently complying with
ongoing statutory and regulatory requirements is costly and time consuming.
Any failure by us or our collaborators, licensors or licensees to obtain, or
any delay in obtaining, regulatory approval or in complying with other
requirements, could adversely affect the commercialization of products then
being developed by us and our ability to receive product or royalty revenues.
10
The steps required before a new drug product may be distributed commercially
in the United States generally include:
. conducting appropriate preclinical laboratory evaluations of the
product's chemistry, formulation and stability, and animal studies to
assess the potential safety and efficacy of the product;
. 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;
. making the Investigational New Drug Application effective after the
resolution of any safety or regulatory concerns of FDA;
. 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 drug product candidate for
the intended use, typically in the following three sequential, or
slightly overlapping stages:
. Phase I: The drug is initially introduced into healthy human
subjects or patients and tested for safety, dose tolerance,
absorption, metabolism, distribution and excretion;
. Phase II: The drug is studied in patients to identify possible
adverse effects and safety risks, to determine dose tolerance and
the optimal dosage, and to collect initial efficacy data;
. Phase III: The drug 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;
. submitting the results of preliminary research, preclinical studies,
and clinical studies as well as chemistry, manufacturing and controls
information on the drug to the FDA in a New Drug Application, or NDA;
and
. obtaining FDA approval of the New Drug Application prior to any
commercial sale or shipment of the drug product.
This process can take a number of years and typically requires substantial
financial resources. The results of preclinical studies and initial clinical
trials are not necessarily predictive of the results from large-scale clinical
trials, and all 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, drug supply, or financial
support, or because of unforeseen adverse effects. The FDA has issued
regulations intended to accelerate the approval process for the development,
evaluation and marketing of new therapeutic products intended to treat life-
threatening or severely debilitating diseases, especially where no alternative
therapies exist. If applicable, these provisions may shorten the traditional
product development process in the United States. Similarly, products that
represent a substantial improvement over existing therapies may be eligible
for priority review with a target review and approval time of six months.
Nonetheless, even if a product is eligible for these programs, or for priority
review, approval may be denied or delayed by FDA or additional trials may be
required. As a condition of approval FDA also can require further testing of
the product and monitoring of the effect of commercialized products, and the
agency has the power to prevent or limit further marketing of a product based
on the results of these post-marketing programs. Upon approval, a drug product
may be marketed only in those dosage forms and for those indications approved
in the New Drug Application, although information may be distributed about
off-label indications in certain circumstances and physicians are permitted to
prescribe drugs for such off-label uses.
In addition to obtaining FDA approval for each indication to be treated with
each product, each domestic drug product manufacturing establishment must
register with the FDA, list its drug products with the FDA, comply with
current Good Manufacturing Practices and pass inspections by the FDA.
Moreover, the submission of applications for approval may require additional
time to complete manufacturing stability studies. Foreign establishments
manufacturing drug products for distribution in the United States also must
list their products with the FDA and comply with current Good Manufacturing
Practices. They also are subject to periodic inspection by the FDA or by local
authorities under agreement with the FDA.
11
Any products manufactured or distributed by us pursuant to FDA approvals are
subject to extensive continuing regulation by the FDA, including record-
keeping requirements and a requirement to analyze and report adverse
experiences with the drug. In addition to continued compliance with standard
regulatory requirements, the FDA also may require post-marketing testing and
surveillance to monitor the safety and efficacy of the marketed product.
Product approvals may be withdrawn if compliance with regulatory requirements
is not maintained or if problems concerning safety or efficacy of the product
are discovered following approval.
The Federal Food, Drug, and Cosmetic Act also mandates that drug products be
manufactured consistent with current Good Manufacturing Practices. In
complying with the FDA's regulations on current Good Manufacturing Practices,
manufacturers must continue to spend time, money and effort in production,
recordkeeping, quality control, and auditing to ensure that the marketed
product meets applicable specifications and other requirements. The FDA
periodically inspects drug product manufacturing facilities to ensure
compliance with current Good Manufacturing Practices. 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. We
currently rely on, and intend to continue to rely on, third parties to
manufacture our compounds and products. Such third parties will be required to
comply with current Good Manufacturing Practices.
Even after FDA approval has been obtained, and often as a condition to
expedited approval, further studies, including post-marketing studies, may be
required. Results of post-marketing studies may limit or expand the further
marketing of the products. If we propose any modifications to the product,
including changes in indication, manufacturing process, manufacturing facility
or labeling, we may need to submit a New Drug Application supplement to the
FDA.
Products manufactured in the United States 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 product manufacture and marketing. Such
requirements can vary significantly from country to country. As part of our
strategic relationships our collaborators may be responsible for the foreign
regulatory approval process of our products, 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, including
radioactive compounds and infectious disease agents, 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 which might result from future
legislation or administrative action cannot be accurately predicted. In this
regard, although the Food and Drug Administration Modernization Act of 1997
modified and created requirements and standards under the Federal Food, Drug,
and Cosmetic Act with the intent of facilitating product development and
marketing, the FDA is still in the process of developing regulations
implementing the Food and Drug Administration Modernization Act of 1997.
Consequently, the actual effect of these developments on our business is
uncertain and unpredictable.
Moreover, we anticipate that Congress, state legislatures and the private
sector will continue to review and assess controls on health care spending.
Any such proposed or actual changes could cause us or our collaborators to
limit or eliminate spending on development projects and may otherwise affect
us. We cannot predict the likelihood, nature, or extent of adverse
governmental regulation that might result from future legislative or
administrative action, either in the United States or abroad. Additionally, in
both domestic and foreign markets, sales of our proposed products will depend,
in part, upon the availability of reimbursement from third-party
12
payors, such as government health administration authorities, managed care
providers, private health insurers and other organizations. Significant
uncertainty often exists as to the reimbursement status of newly approved
health care products. In addition, third-party payors are increasingly
challenging the price and cost effectiveness of medical products and services.
There can be no assurance that our proposed products will be considered cost-
effective or that adequate third-party reimbursement will be available to
enable us to maintain price levels sufficient to realize an appropriate return
on our investment in product research and development.
Competition
The pharmaceutical and biopharmaceutical industries are intensely
competitive and are characterized by rapid technological progress. Certain
pharmaceutical and biopharmaceutical companies and academic and research
organizations currently engage in, or have engaged in, efforts related to the
discovery and development of new antiviral medicines. Significant levels of
research in chemistry and biotechnology occur in universities and other
nonprofit research institutions. These entities have become increasingly
active in seeking patent protection and licensing revenues for their research
results. They also compete with us in recruiting skilled scientific talent.
Antiviral therapeutics for certain RNA virus diseases are currently
available. For example:
. zenamivir and oseltamivir phosphate are used to treat influenza due
to influenza A and B viruses;
. amantadine and rimantadine are used to treat influenza A virus
infections;
. ribavirin is used to treat serious respiratory disease caused by RSV;
and
. interferon, alone or in combination with ribavirin, is used to treat
hepatitis C.
In addition, several immunoglobulin products are used to treat or prevent
some RNA virus diseases. We believe, however, that based on the
characteristics of existing treatments, there is a clear need for new agents
with superior therapeutic efficacy to treat these viral diseases.
In addition to approved products, other companies are developing treatments
for RNA virus diseases, including compounds in clinical development for
influenza, rhinovirus, RSV and HCV infections. Moreover, there are compounds
in preclinical studies for influenza, rhinovirus, RSV and HCV infections. Our
ability to compete successfully will be based on our ability to:
. create and maintain scientifically advanced technology;
. develop proprietary products;
. attract and retain scientific personnel;
. obtain patent or other protection for our products;
. obtain required regulatory approvals; and
. manufacture and successfully market our products either alone or
through outside parties.
Some of our competitors have substantially greater financial, research and
development, manufacturing, marketing and human resources and greater
experience in product discovery, development, clinical trial management, FDA
regulatory review, manufacturing and marketing than we do.
Human Resources
As of January 31, 2001, we had 149 full-time employees, including 25 persons
with Ph.D. or M.D. degrees. 106 of these employees are engaged in research and
development activities at our laboratory facility in Exton, Pennsylvania. A
significant number of our management and professional employees have had prior
experience with pharmaceutical, biotechnology or medical products companies.
None of our employees is covered by collective bargaining agreements. We
believe that our relations with our employees are good.
13
Risk Factors
Our disclosure and analysis in this report contains some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," and other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to present or anticipated scientific progress,
development and regulatory approval of potential pharmaceutical products,
future revenues, capital expenditures, research and development expenditures,
future financings and collaborations, personnel, manufacturing requirements
and capabilities, and other statements regarding matters that are not
historical facts or statements of current condition.
Any or all of our forward-looking statements in this report may turn out to
be wrong. They can be affected by inaccurate assumptions we might make or by
known or unknown risks and uncertainties. Many factors mentioned in the
discussion below will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future
results may vary materially. The risks described below are not the only ones
facing our company. Additional risks not presently known to us or that we
currently deem immaterial may also impair our business operations. We do not
intend to update our forward-looking statements to reflect future events or
developments.
We depend heavily on the success of our lead product candidate, Picovir(TM)
(pleconaril), which is still in clinical trials and may never be approved for
commercial use. If we are unable to commercialize Picovir(TM), our business
and results of operations will be harmed.
We have invested a significant portion of our time and financial resources
since our inception in the development of Picovir(TM) (pleconaril) and
anticipate that for the foreseeable future our ability to achieve
profitability will be solely dependent on its successful commercialization. In
March 2001, we announced the preliminary analysis of the results from two
Phase III clinical trials of Picovir(TM) for viral respiratory infection due
to picornaviruses in adults. If we are unable to file a new drug application,
or NDA, to the U.S. Food and Drug Administration, or FDA, for Picovir(TM)
based on these results, or if our NDA for Picovir(TM) is not approved by FDA,
our stock price and results of operations will be materially and adversely
affected. Many factors could negatively affect the success of our efforts to
develop and commercialize Picovir(TM), including:
. significant delays in completing clinical trials for indications
other than adult VRI and analyzing the results of those trials;
. significant increases in the costs of our clinical trials;
. negative, inconclusive or otherwise unfavorable results from our
clinical trials;
. an inability to obtain, or delay in obtaining, regulatory approval
for the commercialization of Picovir(TM);
. an inability to obtain, or delay in obtaining, regulatory approval
for the use of the name Picovir(TM) as the brand name for pleconaril;
. an inability to enter into, or a delay in entering into, agreements
with third parties for the manufacture Picovir(TM) in commercial
quantities on acceptable terms, or at all; and
. an inability to manufacture acceptable validation batches of
Picovir(TM), or to manufacture Picovir(TM) in commercial quantities
at acceptable cost;
. a failure to achieve market acceptance of Picovir(TM).
If we are unable to commercialize Picovir(TM), our business and results of
operations will be harmed.
14
We have incurred losses since inception and anticipate that we will incur
continued losses for the foreseeable future. We do not have a current source
of product revenue and may never be profitable.
We are a development stage company with no current source of product
revenue. We have incurred losses in each year since our inception in 1994. As
of December 31, 2000, we had an accumulated deficit of approximately $119.7
million. We do not know when or if we will achieve product revenue. We expect
to incur such losses at an increasing rate over at least the next several
years, primarily due to expected increases in our research and development
expenses, further clinical trials of our most advanced product candidate,
Picovir(TM), and milestone payments that may be payable under the terms of our
agreement with Battelle Memorial Institute in connection with our RSV program.
Also, we expect to incur expenses related to our marketing and market research
activities for Picovir(TM), our development of a marketing and sales staff and
building the requisite infrastructure, and further research and development
related to other product candidates. Our ability to achieve profitability is
dependent on a number of factors, including our ability to develop and obtain
regulatory approvals for our product candidates, successfully commercialize
those product candidates, which may include entering into collaborative
agreements for product development and commercialization, and secure contract
manufacturing and distribution and logistics services. We do not know when or
if we will complete our product development efforts, receive regulatory
approval of any of our product candidates or successfully commercialize any
approved products. As a result, we are unable to predict the extent of any
future losses or the time required to achieve profitability, if at all.
Our long term success depends upon our ability to develop additional drug
product candidates. If our drug discovery and development programs are not
successful, our business and results of operations will be harmed.
We are performing clinical research on product candidates for the treatment
of hepatitis C and RSV diseases. We also are optimizing back-up candidates and
seeking to discover additional product candidates for the treatment of these
and other RNA virus diseases. Drug discovery and research for RNA virus
diseases is a new and challenging area. We cannot be certain that our efforts
in this regard will lead to commercially viable products. Moreover, we have
not submitted Investigational New Drug Applications, or INDs, for those
products not yet in clinical development, which are required before we can
begin clinical trials on the products in the United States. We are not sure
that FDA will permit us to proceed with ongoing clinical trials for our
hepatitis C and RSV product candidates, or that we will submit INDs for
additional products for the treatment of hepatitis C and RSV. We may abandon
further development efforts before the products complete or enter clinical
trials. We do not know what the final cost to manufacture these products in
commercial quantities will be, or the dose required to treat patients and
consequently, what the total cost of goods for a treatment regimen will be. We
do not know whether any of these early-stage development products ultimately
will be shown to be safe and effective. Moreover, governmental authorities may
enact new legislation or regulations that could limit or restrict our
development efforts. If we are unable to successfully discover new product
candidates or develop our early-stage product candidates, our business and
results of operations will be harmed.
None of our product candidates is approved for commercial use. If our product
candidates do not receive regulatory approval, or if we are unable to maintain
regulatory compliance, we will be limited in our ability to commercialize
these products, and our business and results of operations will be harmed.
We have not received regulatory approval to commercialize Picovir(TM) or any
of our other product candidates. We need to submit a marketing application to
FDA for Picovir(TM), and we will need to complete preclinical and clinical
testing of each of our other product candidates before submitting marketing
applications. Negative, inconclusive or inconsistent clinical trial results
could prevent regulatory approval, increase the cost and timing of regulatory
approval or cause us to perform additional studies or to file for a narrower
indication than we currently plan. FDA recently enacted new regulations
requiring the development and submission of pediatric use data for new drug
products. Our failure to obtain this data, or to obtain a deferral of, or
exemption from, this requirement could adversely affect our chances of
receiving regulatory approval, or could result in regulatory or legal
enforcement actions.
15
The development of any of our product candidates is subject to many risks,
including the risk that:
. the product candidate is found to be ineffective or unsafe;
. the clinical test results for a product candidate delay or prevent
regulatory approval;
. the product candidate cannot be developed into a commercially viable
product;
. the product candidate is difficult or costly to manufacture;
. the product candidate later is discovered to cause adverse effects
that prevent widespread use, require withdrawal from the market, or
serve as the basis for product liability claims;
. third party competitors hold proprietary rights that preclude us from
marketing the product; and
. third party competitors market a more clinically effective or more
cost-effective product.
Even if we believe that clinical data demonstrate the safety and efficacy of
our product, regulators may disagree with us, which could delay, limit or
prevent the approval of our product candidates. As a result, we may not obtain
the labeling claims we believe are necessary or desirable for the promotion of
those products. In addition, regulatory approval may take longer than we
expect as a result of a number of factors, including failure to qualify for
priority review of our application. All statutes and regulations governing the
approval of our product candidates are subject to change in the future. These
changes may increase the time or cost of regulatory approval, limit approval,
or prevent it completely.
Even if we receive regulatory approval for our product candidates, the later
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions, including withdrawal of the product from
the market. Approval of a product candidate may be conditioned upon certain
limitations and restrictions as to the drug's use, or upon the conduct of
further studies, and may be subject to continuous review. After approval of a
product, we will have significant ongoing regulatory compliance obligations,
and if we fail to comply with these requirements, we could be subject to
penalties, including:
. warning letters;
. fines;
. product recalls;
. withdrawal of regulatory approval;
. operating restrictions;
. disgorgement of profits;
. injunctions; and
. criminal prosecution.
If we are unable to commercialize our products as anticipated, our business
and results of operations will be harmed.
Our license with Sanofi-Synthelabo makes Sanofi-Synthelabo responsible for
seeking regulatory approval for and marketing Picovir(TM) outside the United
States and Canada. If Sanofi-Synthelabo fails to diligently and successfully
pursue these activities, our business and results of operations may be harmed.
We will need to conduct clinical studies of all of our product candidates.
These studies are costly, time consuming and unpredictable. Any unanticipated
costs or delays in our clinical studies could harm our business, financial
condition and results of operations.
While we recently completed two Phase III trials for treatment of VRI due to
picornaviruses in adults with our lead candidate, Picovir(TM), we expect to
conduct more studies with Picovir(TM) in additional patient populations and in
other indications. We also have other product candidates for treatment of
hepatitis C and RSV disease in
16
clinical development. We must complete significant research and development,
laboratory testing, and clinical testing on these product candidates before we
submit marketing applications in the United States and abroad. These studies
and trials can be very costly and time-consuming. In addition, we rely on
third party contract research organizations to perform significant aspects of
our studies and clinical trials, introducing additional sources of risk into
our program.
The rate of completion of clinical trials depends upon many factors,
including the rate of enrollment of patients. The acute nature of our disease
targets, the fact that some of these diseases have peak incidence rates during
certain times of the year, and the difficulties in anticipating where disease
outbreaks will occur, may affect patient enrollment in our clinical trials. If
we are unable to accrue sufficient clinical patients during the appropriate
period, we may need to delay our clinical trials and incur significant
additional costs. In addition FDA or Institutional Review Boards may require
us to delay, restrict, or discontinue our clinical trials on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk. We may desire or be required to conduct additional
clinical trials of Picovir(TM) prior to commercialization. In addition, we may
be unable to submit a New Drug Application to the FDA within the timeframe we
currently expect. Once submitted, a New Drug Application must be approved by
FDA before we can commercialize the product described in the application.
The cost of human clinical trials varies dramatically based on a number of
factors, including:
. the order and timing of clinical indications pursued;
. the extent of development and financial support from corporate
collaborators;
. the number of patients required for enrollment;
. the difficulty of obtaining clinical supplies of the product
candidate; and
. the difficulty in obtaining sufficient patient populations and
clinicians.
All statutes and regulations governing the conduct of clinical trials are
subject to change in the future, which could affect the cost of our clinical
trials. Any unanticipated costs or delays in our clinical studies could harm
our business, financial condition and results of operations.
Even if we obtain positive preclinical or clinical trial results in initial
studies, future clinical trial results may not be similarly positive. As a
result, ongoing and contemplated clinical testing, if permitted by
governmental authorities, may not demonstrate that a product candidate is safe
and effective in the patient population and for the disease indications for
which we believe it will be commercially advantageous to market the product.
The failure of our clinical trials to demonstrate the safety and efficacy of
our desired indications could harm our business, financial condition and
results of operations.
We do not have any marketing or sales experience and will need to develop
marketing and sales capabilities to successfully commercialize our product
candidates. If we are unable to do so, our business and results of operations
will be harmed.
We currently are developing a marketing staff and do not have a sales staff.
We will need both to successfully commercialize any of our product candidates,
including Picovir(TM). We intend to develop our own marketing and sales
staffs, and enter into a co-promotion partnership, to market Picovir(TM) for
the treatment of VRI. The development of a marketing and sales capability will
require significant expenditures, management resources and time. We may be
unable to build such a sales force, the cost of establishing such a sales
force may exceed any product revenues, or our marketing and sales efforts may
be unsuccessful. We may not be able to find a suitable sales and marketing
partner for VRI. If we are unable to successfully establish a sales and
marketing capability in a timely manner or find suitable sales and marketing
partners, our business and results of operations will be harmed. Even if we
are able to develop a sales force or find a suitable marketing partner, we may
not successfully penetrate the markets for any of our proposed products.
17
We currently depend and will in the future depend on third parties to
manufacture our products and product candidates, including Picovir(TM). If
these manufacturers fail to meet our requirements and the requirements of
regulatory authorities, our business, financial condition and results of
operations will be harmed.
We do not have the internal capability to manufacture commercial quantities
of pharmaceutical products following the FDA's current Good Manufacturing
Practices. We currently are negotiating commercial supply and processing
agreements for Picovir(TM) drug substance with primary and alternative
manufacturers, with a micronizer and with a final product manufacturer that we
have identified to date. It is not yet clear what the final terms of these
agreements will be, although we expect that they will be comparable to the
terms of similar agreements for similar products. There can be no assurance
that we will be successful in entering into commercial supply and processing
agreements for Picovir(TM) drug substance and products, or that any such
manufacturing arrangements will be available on terms acceptable to us.
If we are unable to enter into supply and processing contracts with any of
these manufacturers or processors, there may be additional cost and delay in
the commercialization of Picovir(TM). Moreover, other than the production of
pilot and validation batches, no manufacturer has delivered commercial
quantities of Picovir(TM) bulk drug substance or drug product to us yet, and
we cannot be certain that they will be able to deliver such commercial
quantities on a timely basis. As a result, even if we are able to enter into
supply and processing contracts with any of these manufacturers or processors,
but such manufacturers or processors are unable to satisfy our requirements,
there may be additional cost and delay in the commercialization of
Picovir(TM). If we are required to find an additional or alternative source of
supply, there may be additional cost and delay in the commercialization of
Picovir(TM). Additionally, the FDA inspects all commercial manufacturing sites
before approving an NDA for a drug manufactured at those sites. If any of our
manufacturers or processors fails to pass this FDA inspection, the approval
and eventual commercialization may be delayed.
In addition to the oral solid formulation of Picovir(TM) used in our
recently completed Phase III trials in adult VRI, we are using an oral
suspension formulation in our clinical trials of Picovir(TM) for the treatment
of VRI in children. We are using a liquid formulation of Picovir(TM) in our
compassionate use program. We have also developed an intranasal formulation of
Picovir(TM). A delay in manufacturing validation batches, or a failure to
negotiate agreements with manufacturers, will delay the development and
commercialization of these additional formulations and could harm our
business, financial condition and results of operations. The intranasal
formulation of Picovir(TM) has not been used in any of our clinical trials to
date.
Any contract manufacturers that we use must adhere to the FDA's regulations
on current Good Manufacturing Practices, which are enforced by the FDA through
its facilities inspection program. These facilities must pass a plant
inspection before the FDA will issue an approval of the product. The
manufacture of product at these facilities will be subject to strict quality
control, testing and recordkeeping requirements. Moreover, while we may choose
to manufacture products in the future, we have no experience in the
manufacture of pharmaceutical products for clinical trials or commercial
purposes. If we decide to manufacture products, we would be subject to the
regulatory requirements described above. In addition, we would require
substantial additional capital and would be subject to delays or difficulties
encountered in manufacturing pharmaceutical products. No matter who
manufacturers the product, we will be subject to continuing obligations
regarding the submission of safety reports and other post-market information.
If we encounter delays or difficulties with contract manufacturers,
packagers or distributors, market introduction and subsequent sales of our
products could be delayed. If we change the source or location of supply or
modify the manufacturing process, regulatory authorities will require us to
demonstrate that the product produced by the new source or from the modified
process is equivalent to the product used in any clinical trials that we had
conducted.
18
We may not be able to enter into alternative supply arrangements at
commercially acceptable rates, if at all. Moreover, the manufacturers utilized
by us may not provide quantities of product sufficient to meet our
specifications or our delivery, cost and other requirements.
We license patented technology and other proprietary rights from Sanofi-
Synthelabo, including rights to Picovir(TM). If Sanofi-Synthelabo does not
protect our rights under our license agreement with it or does not reasonably
consent to our sublicense of rights to Picovir(TM), or if this license
agreement is terminated, our business and results of operations would be
harmed.
We have licensed from Sanofi-Synthelabo the exclusive United States and
Canadian rights to certain antiviral agents for use in picornavirus
indications, which are the subject of patents and related Canadian patent
applications owned by Sanofi-Synthelabo, certain of which cover both
Picovir(TM) and technology used to manufacture Picovir(TM). We depend on
Sanofi-Synthelabo to prosecute and maintain certain of these patents and
patent applications and protect such patent rights. Failure by Sanofi-
Synthelabo to prosecute or maintain such patents or patent applications and
protect such patent rights could harm our business. Under certain
circumstances, our ability to sublicense our rights under this license
agreement is subject to Sanofi-Synthelabo's consent, which is not to be
unreasonably withheld. Under our license agreement, Sanofi-Synthelabo also has
exclusive rights to market and sell products covered by these patents and
patent applications in countries other than the United States and Canada,
although we would receive royalties from Sanofi-Synthelabo on such sales. If
Sanofi-Synthelabo does not successfully market and sell products outside of
the United States and Canada, our business and future results of operations
may be harmed. If our license agreement with Sanofi-Synthelabo is terminated,
our business and results of operations would be harmed.
We depend on collaborations with third parties, which may reduce our product
revenues or restrict our ability to commercialize products.
We have entered into, and may in the future enter into, sales and marketing,
distribution, manufacturing, development, licensing and other strategic
arrangements with third parties. For example, in December 1999, we entered
into an agreement with American Home Products Corporation to develop jointly
products for use in treating the effects of hepatitis C virus in humans. Under
this Agreement, we licensed to them worldwide rights under patents and know-
how owned by us or created under the agreement. In November 1999, we entered
into a product development and commercialization agreement with Battelle
Memorial Institute in connection with our RSV program. We are currently
engaged in additional discussions relating to other arrangements. We cannot be
sure that we will be able to enter into any such arrangements with third
parties on terms acceptable to us or at all. Third party arrangements may
require us to grant certain rights to third parties, including exclusive
marketing rights to one or more products, or may have other terms that are
burdensome to us, and may involve the acquisition of our equity securities.
Our ultimate success may depend upon the success of our collaborators. We
have obtained, and intend to obtain in the future, licensed rights to certain
proprietary technologies and compounds from other entities, individuals and
research institutions, for which we may be obligated to pay license fees, make
milestone payments and pay royalties. We may be unable to enter into
collaborative licensing or other arrangements that we need to develop and
commercialize our drug candidates. Moreover, we may not realize the
contemplated benefits from such collaborative licensing or other arrangements.
These arrangements may place responsibility on our collaborative partners for
preclinical testing, human clinical trials, the preparation and submission of
applications for regulatory approval, or for marketing, sales and distribution
support for product commercialization. We cannot be certain that any of these
parties will fulfill their obligations in a manner consistent with our best
interests. These arrangements may also require us to transfer certain material
rights or issue our equity securities to corporate partners, licensees and
others. Any license or sublicense of our commercial rights may reduce our
product revenue. Moreover, we may not derive any revenues or profits from
these arrangements. In addition, our current strategic arrangements may not
continue and we may be unable to enter into future collaborations.
Collaborators may also pursue alternative technologies or drug candidates,
either on their own or in collaboration with others, that are in direct
competition with us.
19
We depend on patents and proprietary rights, which may offer only limited
protection against potential infringement. If we are unable to protect our
patents and proprietary rights, our business, financial condition and results
of operations will be harmed.
The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and
processes. 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 in other countries. Litigation or other legal
proceedings may be necessary to defend against claims of infringement, to
enforce our patents, or to protect our trade secrets, and could result in
substantial cost to us and diversion of our efforts. We intend to file
applications as appropriate for patents covering the composition of matter of
our drug candidates, the proprietary processes for producing such
compositions, and the uses of our drug candidates. We own eight issued United
States patents and have nine pending United States patent applications. We
also have filed international patent applications in order to pursue patent
protection in major foreign countries.
We also rely on trade secrets, know-how and continuing technological
advancements to protect our proprietary technology. We have entered into
confidentiality agreements with our employees, consultants, advisors and
collaborators. However, these parties may not honor these agreements and we
may not be able to successfully protect our rights to unpatented trade secrets
and know-how. Others may independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade
secrets and know-how.
Many of our scientific and management personnel were previously employed by
competing companies. As a result, such companies may allege trade secret
violations and similar claims against us.
To facilitate development of our proprietary technology base, we may need to
obtain licenses to patents or other proprietary rights from other parties. If
we are unable to obtain such licenses, our product development efforts may be
delayed.
We may collaborate with universities and governmental research organizations
which, as a result, may acquire certain rights to any inventions or technical
information derived from such collaboration.
We may incur substantial costs in asserting any patent rights and in
defending suits against us related to intellectual property rights. Such
disputes could substantially delay our product development or
commercialization activities. The United States Patent and Trademark Office or
a private party could institute an interference proceeding relating to our
patents or patent applications. An opposition or revocation proceeding could
be instituted in the patent offices of foreign jurisdictions. An adverse
decision in any such proceeding could result in the loss of our rights to a
patent or invention.
Any of our future products, including Picovir(TM), may not be accepted by the
market, which would harm our business and results of operations.
Even if approved by the FDA and other regulatory authorities, our product
candidates may not achieve market acceptance and we may not receive revenues
from these products as anticipated. The degree of market acceptance will
depend upon a number of factors, including:
. the receipt and timing of regulatory approvals;
. the availability of third-party reimbursement; and
. the establishment and demonstration in the medical community of the
clinical safety, efficacy and cost-effectiveness of drug candidates,
as well as their advantages over existing technologies and
therapeutics, if any.
We may not be able to successfully manufacture and market our products even
if they perform successfully in clinical trials. Furthermore, physicians or
the medical community in general may not accept and utilize any of our
products.
20
We may not receive third party reimbursement for any of our future products,
which may harm our results of operations.
Our future revenues, profitability and access to capital will be affected by
the continuing efforts of governmental and private third-party payors to
contain or reduce the costs of health care through various means. We expect a
number of federal, state and foreign proposals to control the cost of drugs
through governmental regulation. We are unsure of the form that any health
care reform legislation may take or what actions federal, state, foreign, and
private payors may take in response to the proposed reforms. Therefore, we
cannot predict the effect of any implemented reform on our business.
Our ability to commercialize our products successfully will depend, in part,
on the extent to which reimbursement for the cost of such products and related
treatments will be available from government health administration
authorities, such as Medicare and Medicaid in the United States, private
health insurers and other organizations. Significant uncertainty exists as to
the reimbursement status of newly approved health care products, particularly
for indications for which there is no current effective treatment or for which
medical care typically is not sought. Adequate third-party coverage may not be
available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product research and development. If
adequate coverage and reimbursement levels are not provided by government and
third-party payors for use of our products, our products may fail to achieve
market acceptance and our results of operations will be harmed.
We need substantial additional funding and may not have access to capital. If
we are unable to raise capital when needed, we may need to delay, reduce or
eliminate research and development programs or our commercialization efforts,
which would harm our business.
We will need to raise substantial additional funds to continue our business
activities and fund our debt service obligations. We have incurred losses from
operations since inception and we expect to incur additional operating losses
at an increasing rate over at least the next several years. We expect this
increase to result from further research and development activities, further
clinical trials, development of marketing and sales capabilities and building
the requisite infrastructure, and milestone payments related to our RSV
product candidates. We believe that we may require additional capital by 2003.
However, our actual capital requirements will depend upon numerous factors,
including:
. the development of commercialization activities and arrangements;
. the progress of our research and development programs;
. the progress of preclinical and clinical testing;
. the time and cost involved in obtaining regulatory approvals;
. the cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights;
. the effect of competing technological and market developments;
. the effect of changes and developments in our existing collaborative,
licensing and other relationships; and
. the terms of any new collaborative, licensing and other arrangements
that we may establish.
We may be unable to raise sufficient funds to complete our development,
marketing and sales activities for Picovir(TM) or any of our other product
candidates. Potential funding sources include:
. public and private securities offerings;
. debt financing, such as bank loans; and
. collaborative, licensing and other arrangements with third parties.
21
We may not be able to find sufficient debt or equity funding on acceptable
terms. If we cannot, we may need to delay, reduce or eliminate research and
development programs. The sale by us of additional equity securities or the
expectation that we will sell additional equity securities may have an adverse
effect on the price of our common stock. In addition, collaborative
arrangements may require us to grant product development programs or licenses
to third parties for products that we might otherwise seek to develop or
commercialize ourselves.
We face intense competition, which could harm our business and results of
operations.
There are many entities, both public and private, including well-known,
large pharmaceutical companies, chemical companies, biotechnology companies
and research institutions, engaged in developing pharmaceuticals for
applications similar to those targeted by us. Developments by these or other
entities may render our products under development non-competitive or
obsolete. Many of these companies have substantially greater resources and
experience than we have. Accordingly, our competitors may succeed in obtaining
regulatory approval for products more rapidly and more effectively than we do.
Competitors may succeed in developing products that are more effective and
less costly than any that we develop and also may prove to be more successful
in the manufacture and marketing of products.
We may not be able to keep pace with technological changes in the
biopharmaceutical industry, which may prevent us from commercializing our
product candidates.
Our business is characterized by extensive research efforts and rapid
technological progress. New developments in molecular biology, medicinal
chemistry and other fields of biology and chemistry are expected to continue
at a rapid pace in both industry and academia. Research and discoveries by
others may render some or all of our programs or drug candidates non-
competitive or obsolete.
Our business strategy is based, in part, upon the application of our
technology platform to discover and develop pharmaceutical products for the
treatment of infectious human diseases. This strategy is subject to the risks
inherent in the development of new products using new and emerging
technologies and approaches. There are no approved drugs on the market for the
treatment of certain of the disease indications being targeted by us.
Unforeseen problems may develop with our technologies or applications. We
may not be able to successfully address technological challenges that we
encounter in our research and development programs and may not ultimately
develop commercially feasible products.
We depend on key personnel and may not be able to retain these employees or
recruit additional qualified personnel, which would harm our business.
Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical and managerial personnel. Our
anticipated growth and expansion into new areas and activities will require
additional expertise and the addition of new qualified personnel. For example,
we intend to recruit sales and marketing personnel to support the
commercialization of Picovir(TM). We will face intense competition in
recruiting these persons. We may not be able to attract and retain qualified
personnel to develop our sales and marketing forces. There is intense
competition for qualified personnel in the pharmaceutical field. Therefore, we
may not be able to attract and retain the qualified personnel necessary for
the development of our business. Furthermore, we have not entered into non-
competition agreements with our key employees. The loss of the services of
existing personnel, as well as the failure to recruit additional key
scientific, technical and managerial personnel in a timely manner would harm
our research and development programs and our business. We do not maintain key
man life insurance on any of our employees.
We may be subject to product liability claims, which may harm our business,
financial condition and results of operations regardless of the outcome.
The administration of drugs to humans, whether in clinical trials or after
marketing clearance is obtained, can result in product liability claims.
Product liability claims can be expensive, difficult to defend and may result
22
in large judgments or settlements against us. In addition, third party
collaborators and licensees may not protect us from product liability claims.
Although we maintain product liability insurance, claims could exceed the
coverage obtained. A successful product liability claim in excess of our
insurance coverage could harm our business, financial condition and results of
operations. In addition, any successful claim may prevent us from obtaining
adequate product liability insurance in the future on commercially desirable
terms. Even if a claim is not successful, defending such a claim may be time-
consuming and expensive.
The rights that have been and may in the future be granted to holders of our
common or preferred stock may adversely affect the rights of other
stockholders and may discourage a takeover.
Pursuant to our certificate of incorporation, our board of directors has the
authority, without further action by the holders of our common stock, to issue
5,000,000 shares of preferred stock from time to time in such series and with
such preferences and rights as it may designate. As of March 1, 2001, we have
issued 2,300,000 shares of series A convertible participating preferred stock
and we have reserved for issuance 200,000 shares of series A junior
participating preferred stock. Thus, we may issue an additional 2,500,000
shares of preferred stock. The preferences and rights of any such additional
preferred stock may be superior to those of the holders of our common stock.
For example, the holders of preferred stock may be given a preference in
payment upon our liquidation, or for the payment or accumulation of dividends
before any distributions are made to the holders of our common stock.
On May 5, 1999, we completed the sale of 2,300,000 shares of series A
convertible participating preferred stock to PSV, LP (formerly Perseus-Soros
BioPharmaceutical Fund, L.P.). This preferred stock is convertible into shares
of common stock on a one-for-one basis (subject to adjustment) by PSV at any
time and by us under certain conditions. There is a 5% annual dividend,
payable quarterly, associated with this preferred stock. We may choose to
permanently defer payment of any dividend, in which case the dividend is added
to the liquidation value and increases the conversion ratio of the preferred
stock into common stock. Holders of the preferred stock have liquidation
rights equal to their original investment, subject to adjustment. Such holders
also have preemptive rights with respect to proposed private placements of our
common stock or other equity securities for cash, other than issuances under
our equity compensation or stock option plans and issuances pursuant to our
stockholder rights plan, at a price below $6.20 per share (with adjustment for
any stock dividend, stock split or other subdivision of stock, or any
combination or reclassification of stock).
In September 1998, our board of directors adopted a plan that grants each
holder of our common stock the right to purchase shares of our series A junior
participating preferred stock. This plan is designed to help insure that all
our stockholders receive fair value for their shares of common stock in the
event of a proposed takeover of ViroPharma, and to guard against the use of
partial tender offers or other coercive tactics to gain control of ViroPharma
without offering fair value to the holders of our common stock. The plan is
likely to discourage a merger or tender offer involving our securities that is
not approved by our board of directors by increasing the cost of effecting any
such transaction and, accordingly, could have an adverse impact on holders of
our stock who might want to vote in favor of such a merger or participate in
such a tender offer.
While we have no present intention to authorize or issue any additional
series of preferred stock, any such authorization or issuance, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could also have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock. The
preferred stock may have other rights, including economic rights senior to
those of our common stock, and, as a result, an issuance of additional
preferred stock could adversely affect the market value of our common stock.
23
We have significant indebtedness and we may not be able to meet our
obligations.
We are highly leveraged and have significant debt service requirements. In
March 2000, we issued $180,000,000 of convertible subordinated notes due in
March 2007. This increased indebtedness will impact us by:
. significantly increasing our interest expense and related debt
service costs; and
. making it more difficult to obtain additional financing.
Currently, we are not generating sufficient cash flow from operations to
satisfy the annual debt service payments that will be required as a result of
the consummation of this offering. This may require us to use a portion of the
proceeds of this offering to pay interest or borrow additional funds or sell
additional equity to meet our debt service obligations. If we are unable to
satisfy our debt service requirements, substantial liquidity problems could
result, which would negatively impact our future prospects.
Our ability to meet our debt service obligations and to reduce our total
indebtedness depends on our future operating performance and on economic,
financial, competitive, regulatory and other factors affecting our operations.
Many of these factors are beyond our control and our future operating
performance could be adversely affected by some or all of these factors. We
historically have been unable to generate sufficient cash flow from operations
to meet our operating needs and have relied on equity, debt and capital lease
financings to fund our operations.
We are subject to environmental risks which may adversely affect our business.
Our research and development processes involve the controlled use of
hazardous, infectious and radioactive materials. We are subject to stringent
federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacture, storage, air emission, effluent discharge,
handling and disposal of certain materials and wastes. We may be required to
incur significant costs to comply with environmental laws, rules, regulations
and policies. In addition, our business may be adversely affected by current
or future environmental laws, rules, regulations and policies or by any
releases or discharges of materials that could be hazardous.
We utilize radioactive and other materials that could be hazardous to human
health, safety or the environment. We store these materials and various wastes
resulting from their use at our facility pending ultimate use and disposal.
Although we believe that our safety procedures for handling and disposing of
such materials comply with federal, state and local laws, rules, regulations
and policies, the risk of accidental injury or contamination from these
materials cannot be entirely eliminated. If such an accident occurs, we could
be held liable for any resulting damages, and any such liability could exceed
our resources. We do not maintain a separate insurance policy for these types
of risks.
ITEM 2. PROPERTIES
Our corporate facilities located in Exton, Pennsylvania currently occupy
approximately 70,900 square feet. We are expanding by 15,600 square feet and
we expect to have this expansion completed in the first half of 2002. The
lease, which will expire in 2008, has two 5-year renewal options, monthly base
rent and additional provisions for allocation of direct expense charges for
utilities, maintenance, insurance and property taxes.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
Executive Officers of the Registrant
The following is a list of our executive officers, including their ages, as of
December 31, 2000:
Name Age Position
---- --- --------
Michel de Rosen.............. 50 President and Chief Executive Officer
Marc S. Collett, Ph.D. ...... 49 Vice President, Discovery Research
Ellen C. Cooper, M.D. ....... 50 Vice President, Clinical and Regulatory
Affairs
Thomas F. Doyle.............. 40 Vice President, General Counsel and Secretary
Martin J. Driscoll........... 41 Vice President, Commercial Operations and
Business Development
Jeffrey R. Hincks, Ph.D. .... 43 Vice President, Preclinical Development
Mark A. McKinlay, Ph.D. ..... 49 Vice President, Research & Development
Vincent J. Milano............ 37 Vice President, Chief Financial Officer and
Treasurer
Michel de Rosen has served as President and Chief Executive Officer of the
company since August 2000, and as a director since May 2000. Prior joining
ViroPharma, Mr. de Rosen held several key positions in Rhone-Poulenc Pharma
and Rhone-Poulenc Rorer (now Aventis), including Chairman and Chief Executive
Officer until December 1999. Mr. de Rosen began his career at the French
Ministry of Finance and has served in several leading government positions
with the French Ministry and the French Secretary of Defense. Michel holds an
MBA from the Ecole des Hautes Etudes Commerciales in France.
Marc S. Collett, Ph.D., a co-founder of ViroPharma, has served as Vice
President, Discovery Research of ViroPharma since our commencement of
operations in December 1994. From 1993 until 1994, he served as Senior
Director, Viral Therapeutics at PathoGenesis Corporation, a biotechnology
company. Prior to joining PathoGenesis Corporation, Dr. Collett served as
Director, Virology & Antibody Engineering and Director, Biochemical Virology
at MedImmune, Inc., a biotechnology company, where he was employed from 1988
to 1993. Dr. Collett received his Ph.D. from the University of Michigan.
Ellen C. Cooper, M.D., has served as Vice President of Clinical and
Regulatory Affairs of ViroPharma since August 2000. Prior to joining the
company, Dr. Cooper was a pharmaceutical consultant providing guidance in drug
development, clinical trials design and analysis, and regulatory issues to a
variety of pharmaceutical companies, including ViroPharma. From 1996 to 1998,
she worked in the Office of AIDS Research at the National Institutes for
Health. From 1993 to 1996, she served as Vice President and Director, Clinical
Research and Information, at the American Foundation for AIDS Research in New
York City. From 1991 to 1993, Dr. Cooper served as Vice President and Director
of the Institute of Clinical Immunology and Infectious Disease for Syntex
Research. Earlier in her career, Dr. Cooper spent almost ten years in various
positions of increasing responsibility with the U.S. Food and Drug
Administration. During her tenure at FDA, she served as the Founding Director
of the Division of Antiviral Drug Products in the Center for Drug Evaluation
and Research. Dr. Cooper has also served as Director of Clinical Research and
Information for the American Foundation for AIDS Research, and worked in the
Office of AIDS Research at the National Institutes of Health.
Thomas F. Doyle has served as Vice President, General Counsel of ViroPharma
since November 1997, as Secretary since February 1997 and as Executive
Director, Counsel since joining ViroPharma in November 1996. From 1990 until
1996, Mr. Doyle was a corporate attorney with the law firm of Pepper, Hamilton
LLP. Mr. Doyle received his J.D. from Temple University School of Law. Prior
to attending Temple University, Mr. Doyle was a certified public accountant.
Mr. Doyle received his B.S. in accounting from Mt. St. Mary's College.
Martin J. Driscoll has served as Vice President of Commercial Operations and
Business Development of ViroPharma since November 2000. From 1983 to November
2000, Mr. Driscoll served Schering-Plough Corporation, including its
subsidiary, Key Pharmaceuticals, in several leading sales and marketing
positions. From January 1998 to November 2000, Mr. Driscoll was the vice
president of sales and marketing for Schering Primary Care, a unit of Schering
Laboratories. Earlier in his career, Mr. Driscoll was the director of managed
25
care affairs for the Western Region of Schering Laboratories, where he was
involved in managing the company's relationships with leading managed care
accounts including CIGNA, Kaiser and Blue Cross.
Jeffrey R. Hincks, Ph.D. has served as Vice President, Preclinical
Development since January 2000 and as Director, Preclinical Development since
joining ViroPharma in January 1998. From 1994 until December 1997, he served
as Principal Research Investigator, Preclinical Development at Sanofi
Pharmaceutical Research Division. Prior to joining Sanofi, from 1990 to 1994,
Dr. Hincks served as a Senior Scientist in Preclinical Development and
Toxicology at Sterling Winthrop Incorporated, a pharmaceutical company. Dr.
Hincks received his Ph.D. from Utah State University.
Mark A. McKinlay, Ph.D., a co-founder of ViroPharma, has served as Vice
President, Research & Development since our commencement of operations in
December 1994, and served as Secretary from December 1994 until February 1997.
From 1989 through 1994, Dr. McKinlay served in several positions, including
Senior Director, at Sterling Winthrop Pharmaceuticals Research Division, a
division of Sterling Winthrop Incorporated, a pharmaceutical company. Dr.
McKinlay received his Ph.D. from Renssalear Polytechnic Institute.
Vincent J. Milano has served as Vice President, Chief Financial Officer of
ViroPharma since November 1997, as Vice President, Finance & Administration
since February 1997, as Treasurer since July 1996, and as Executive Director,
Finance & Administration from April 1996 until February 1997. From 1985 until
1996, Mr. Milano was with KPMG LLP, independent certified public accountants,
where he was Senior Manager since 1991. Mr. Milano is a certified public
accountant. Mr. Milano received his B.S. in accounting from Rider College.
26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company's Common Stock is traded on the National Market segment of The
Nasdaq Stock Market under the symbol "VPHM." We commenced trading on The
Nasdaq Stock Market on November 19, 1996. The following table sets forth the
high and low sale prices as quoted on The Nasdaq Stock Market for each quarter
of 1999 and 2000 and through March 1, 2001.
High Low
-------- ------
Year ended December 31, 1999
First Quarter............................................ $ 13.00 $ 5.00
Second Quarter........................................... $ 9.31 $ 6.13
Third Quarter............................................ $ 29.44 $ 7.68
Fourth Quarter........................................... $ 47.00 $18.50
Year ended December 31, 2000
First Quarter............................................ $111.625 $28.88
Second Quarter........................................... $ 75.50 $10.75
Third Quarter............................................ $ 34.88 $15.31
Fourth Quarter........................................... $ 26.25 $13.50
First Quarter 2001 (through March 1, 2000)............... $ 28.75 $12.75
Holders and Dividends
There were approximately 430 record holders of the Company's Common Stock as
of March 1, 2001. We have never declared or paid any cash dividends on our
common stock. There is a 5% annual dividend, payable quarterly, associated
with our series A convertible participating preferred stock. We may choose to
permanently defer any quarterly payment, in which case the amount of payment
is added to the liquidation value and increases the conversion ratio of the
preferred stock into common stock. Alternatively, we may choose to pay the
dividend in cash. We paid a cash dividend for the quarters ended March 31,
June 30, September 30 and December 31, 2000 in the amount of $181,838 per
quarter on our series A convertible participating preferred stock. Any future
determination to pay dividends will be at the discretion of our board of
directors and will be dependent on then existing conditions, including our
financial condition, results of operations, contractual restrictions, capital
requirements, business and other factors our board of directors deems
relevant. In addition, our business loan agreements restrict our ability to
declare and pay cash dividends. We are obligated to pay any cash dividends
paid to common stockholders to the holders of our series A convertible
participating preferred stock on an as converted basis.
Recent Sales of Unregistered Securities
On October 2, 2000 and October 23, 2000, we sold to American Home Products
Corporation 96,059 shares and 104,934 shares, respectively, of ViroPharma's
common stock as a result of progress made under the companies' hepatitis C
virus collaborati