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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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, 1998
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 33-90516
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NEOPHARM, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 51-0327886
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
60015
(Zip Code)
100 CORPORATE NORTH
SUITE 215
BANNOCKBURN, ILLINOIS
(Address of Principal Executive Offices) (847) 295-8678
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.0002145 PAR VALUE
(Title of class)
WARRANTS TO PURCHASE SHARES OF COMMON STOCK, $.0002145 PAR VALUE
(Title of class)
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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 aggregate market value of the Registrant's common stock held by
non-affiliates (affiliates being, for these purposes only, directors, executive
officers and holders of 5% of the registrant's stock) of the registrant, par
value $.0002145 per share, (based on the closing price of such shares on the
American Stock Exchange on March 19, 1999) was $40,926,325. As of March 19, 1999
there were 8,454,621 shares of Common Stock outstanding.
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FORM 10-K TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business......................................................................................... 3
Item 2. Properties....................................................................................... 18
Item 3. Legal Proceedings................................................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 19
Item 6. Selected Financial Data.......................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 20
Item 8. Financial Statements and Supplemental Data....................................................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............ 23
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 24
Item 11. Executive Compensation........................................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 27
Item 13. Certain Relationships and Related Transactions................................................... 29
PART IV
Item 14. Exhibits and Financial Statement Schedules....................................................... 31
Signatures....................................................................................... 33
2
PART I
ITEM 1. BUSINESS
THE COMPANY
NeoPharm is a pharmaceutical Company engaged in the research and development
of drugs for the diagnosis and treatment of various forms of cancer. Presently
the Company has several drugs which are in varying stages of development: BUdR
(Broxuridine), liposome encapsulated doxorubicin ("LED"), liposome encapsulated
paclitaxel ("LEP"), liposome encapsulated antisense oligodeoxynucleotide
("LE-AON" and with LED and LEP the "Liposome Products"), IL-13 PE38QQR ("IL-13")
and Mesothelin SS-(dsFv)-PE38 ("Mesothelin Mab"). IL-13 and Mesothelin Mab are
both Ligand Target Cytotoxins that specifically target cancer cells and leave
normal cells unaffected. See "NeoPharm Products" below.
The Company has obtained rights to its various products as a result of
agreements and relationships entered into with various third parties including
the National Cancer Institute ("NCI"), the United States Food and Drug
Administration ("FDA"), the National Institute of Health ("NIH") and Georgetown
University. See "Research and Development, Collaborative Relationships and
Licenses" below.
To date, the Company has been engaged primarily in research and development
of its developmental stage products. The Company has developed expertise in
identification, development and preparation for regulatory approval of cancer
drugs for both therapeutic and diagnostic purposes, although the Company has no
products that are currently approved for sale. The Company currently has no
marketing or sales staff and has conducted its activities primarily through
consultants and at university research facilities. The Company will need to hire
additional personnel and gain access to marketing and sales resources in order
to continue the development and commercialization of its products. See
"Marketing and Sales" below.
NeoPharm, Inc. was incorporated in Delaware under the name OncoMed, Inc. in
June 1990, and changed it's name to NeoPharm, Inc. in March, 1995. The Company's
principal offices are located at 100 Corporate North, Suite 215, Bannockburn,
Illinois 60015, and its telephone number is (847) 295-8678.
NEOPHARM PRODUCTS
The Company is currently developing six compounds which all target various
forms of cancer. Cancer is the second largest cause of death in the U.S. and
there are a large number of new cases of cancer each year. However, for some
types of cancer, there are no acceptable treatments, while for others, the
currently available treatments are limited due to severe side effects. The
Company's products under development offer either improvements to currently
available technology or new technology that improves the efficacy and reduces
the side effects. Before new drugs can be approved by the U.S. Food and Drug
Administration, they must go through several test phases, from pre-clinical
trials to Phase I to Phase II and Phase III
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trials. The products which the Company currently has under development are
detailed in the following table:
U.S. PATENT
COMPOUNDS USE OR ADVANTAGE DEVELOPMENT STATUS CANCER INDICATION POSITION
- ------------- -------------------------------------- ------------------ ------------------ ------------------
LED We believe LED allows cancer patients Phase I completed, Breast, Prostate, 2 Patents
to tolerate higher dosages of initiated Phase II Hematological
chemotherapy providing greater in June 1998
therapeutic value in a number of types
of cancer tumors.
LEP We believe LEP allows cancer patients Phase I in Ovarian, Breast, 3 Patents
to tolerate higher dosages of September 1998 Lung
chemotherapy, providing greater
therapeutic value in a number of types
of cancer tumors.
LE-AON LE-AON is an antisense drug useful in Pre-clinical Head & Neck, Lung, 2 Patents
enhancing the lethality and trials ongoing, Brain
effectiveness of radiation initiate Phase I
in the 2nd
Quarter, 1999
IL-13 IL-13 Chimeric Protein Exotoxin is a Pre-clinical Renal Cell, Brain, 2 Patents
Chimeric genetically engineered compound trials ongoing, Kaposi's Sarcoma,
Protein incorporating a highly toxic material initiate Phase I Breast
Exotoxin that destroys cells once linked to the in the
target receptor on its surface. 2(nd)Quarter, 1999
Broxine-Registered Trademark- We believe Broxine will prove useful New drug Breast, Colon, 0 Patents
in characterizing tumor cell growth in application Prostate,
nearly all solid tumors. pending before the Hematologic
FDA
Mesothelin Mesothelin Mab Phase I to be Ovarian, 5 Patents
Mab (Pending) specifically targets those tumors that initiated in 4(th) Mesotheliomas,
express Mesothelin Antigen on the Quarter, 1999 Head & Neck
surface of the cancer cells
The Company's short term goal is to use its proprietary technology to
significantly enhance the efficiency and reduce the side effects of currently
available chemotherapy compounds.
The Company's long term goal is to be a leading worldwide oncology drug
development Company. To reach our goals the Company has developed the following
strategies:
- focus its resources exclusively on the expanding cancer market;
- develop a balanced portfolio of anti-cancer drugs based on enhancing
proven compounds;
- develop novel therapeutic agents and leverage its expertise to identify
compounds it can license; and
- form strategic alliances with larger pharmaceutical and biotechnology
companies to obtain financial and marketing support for certain of its
product development activities.
4
There can be no assurance that any of the Company's products will receive
necessary regulatory approvals, be successfully commercialized and achieve
market acceptance, or that any products commercialized by the Company will not
be rendered obsolete by other developments in the field of cancer treatment. In
addition, continued development of the Company's products will require the
Company to obtain additional sources of capital and there can be no assurance
that such capital will be available when needed or on terms acceptable to the
Company.
LIPOSOME PRODUCTS. The Company's Liposome Products consist of spheres of
subcellular size composed primarily of phospholipids, certain of which are the
primary components of living cell membranes, and can be made to contain and
deliver drugs. This membrane encapsulation feature of liposomes enables the
entrapped drug to be circulated in the bloodstream in higher concentrations for
longer periods of time than the free drug. When certain drugs, including
chemotherapeutic agents, are administered in conjunction with liposomes, they
have been shown to produce fewer and less severe local and systemic side
effects. Although liposomes have been investigated and used for many years as
drug delivery systems, the difficulty in producing liposomes on a large scale,
as well as the limited shelf life of many liposomes, have limited their use in
clinical settings.
The Company's LED is currently under development in three Phase II trials.
The Company started a Phase II trial in hormone refractory prostate cancer
patients in June 1998. The Company is also starting an additional trial in
osteosarcoma (bone cancer) at higher doses of LED. These Phase II trials will be
conducted in several cancer centers in the United States. The Company has also
initiated a multi-center Phase II trial of LED in breast cancer patients who
have failed most of the chemotherapy protocols to appreciate the capacity of LED
in overcoming MDR in those patients. The Company also has a clinical trial with
LED in myeloma, a blood cancer. The Company has also initiated a Phase I
clinical study on LEP in September of 1998 for patients with lung cancer. These
trials are on-going at this time. See "Government Regulation", below.
In February, 1999, the Company signed a License Agreement with Pharmacia and
UpJohn ("P&U") to develop and commercialize LEP and LED worldwide. The Company
received a substantial up-front payment upon execution of the License Agreement
and will receive milestone payments as clinical progress occurs under the
License Agreement. The Company will also receive royalties on overseas sales and
a co-promotion profit split on sales in the United States. Pursuant to the
License Agreement, P&U will assume all further responsibility for, and the costs
associated with, the further development and testing of LED and LEP and the
obtaining of all regulatory approvals. In addition, the Company has agreed to
sell $8,000,000 of its common stock to P&U when certain Investigatory New Drug
("IND") applications are transferred to P&U in accordance with a separate Stock
Purchase Agreement at a price per share equal to 110% of the then market price
of the common stock during the sixty (60) day period preceding the transfer of
the INDs.
LIGAND TARGETED CYTOTOXINS. In October 1997, the Company entered into an
exclusive worldwide licensing agreement with the FDA and the NIH to develop and
commercialize a chimeric human protein known as "IL13-PE38QQR." This is the
fusion of receptor-binding with a derivative of Pseudomonas exotoxin (PE38QQR).
The Company also entered into a Cooperative Research and Development Agreement
("CRADA") with the FDA for the clinical and commercial development of the IL-13
as an anticancer agent. See "Research and Development, Collaborative
Relationships and Licenses" below.
Extensive research by the scientists at FDA and NCI have demonstrated that
some solid human tumors such as kidney cancer (renal cell carcinoma), brain
cancer (glioblastoma), Kaposi's sarcoma and breast carcinoma express high
numbers of IL-13 receptors on their cell surfaces. These receptors sites become
a specific target for the IL-13 chimeric protein for inducing cytotoxicity at
nanogram concentration. On the other hand, normal organs of the body are shown
to exhibit minimal receptors sites thereby sparing these organs from any toxic
effect. The Company expects to scale up the production of this
5
chimeric protein to complete preclinical studies in the second quarter of 1999
to be followed later in the year by Phase I clinical program in humans with
renal cell carcinoma and glioblastoma.
The Company also recently signed and is awaiting confirmation from the NIH
with respect to another CRADA and Licensing Agreement with the NIH for
Mesothelin Mab for head and neck cancer and mesothelioma. Like IL-13, Mesothelin
Mab targets mesothelin receptors on cancer cells and delivers a cytotoxin to
destroy the cancer cell while leaving normal cells alone. Mesothelin Mab is
expected to enter Phase I Clinical Studies in the later part of 1999.
BUDR PRODUCT. Clinical trials involving prognostic use of BUdR have
indicated that the information regarding tumor cell behavior provided by BUdR
can assist the oncologist in selecting appropriate therapeutic regimens for the
patients and enable better monitoring of the effectiveness of the chosen
therapy.
In December 1996, the Company filed an NDA with the FDA for BUdR as a
prognostic agent in the treatment of breast cancer. The Company's NDA as it
relates to BUdR as a prognostic indication in the treatment of breast cancer was
accepted for review by the FDA and was reviewed by the FDA's Oncology Advisory
Committee ("ODAC") on December 19, 1997, at which time ODAC voted not to
recommend this indication to the FDA for approval. Since the ODAC action, the
Company has met with the FDA to respond to concerns raised by ODAC for the
purpose of continuing to pursue FDA approval. Based on these discussions the
Company is gathering additional data and reanalyzing the existing data in order
to obtain the FDA's approval of the Company's NDA. The original NDA was filed in
December, 1996. The application has already been extended once and the Company
was informed on March 31, 1998 that the time for processing the original
application has expired. The Company is continuing to work with FDA to explore
the requirements for a prognostic application.
In May 1997, the Company entered into a collaboration agreement with BioChem
Therapeutics, Inc., the wholly owned subsidiary of BioChem Pharma, under which
BioChem Pharma will develop, market and distribute BUdR in Canada after receipt
of approval from the Canadian Health Protection Branch ("HPB") of BUdR for
certain specific uses, the applications for which will be submitted by BioChem
Pharma. Upon signing the collaboration agreement, the Company received a
nonrefundable initial payment. The Company may receive additional milestone
payments based upon receipt of various approvals from the FDA and HPB.
RESEARCH AND DEVELOPMENT, COLLABORATIVE RELATIONSHIPS AND LICENSES
RESEARCH AND DEVELOPMENT. During the three year period ended December 31,
1998, the Company has expended the following amounts on research and
development: $1,611,000 for the fiscal year ended December 31, 1998, $1,412,000
for the fiscal year ended December 31, 1997 and $1,100,000 for the fiscal year
ended December 31, 1996. It is anticipated that additional research and
development will be required beyond 1999 and may necessitate the Company's
obtaining additional capital.
COLLABORATIVE RELATIONSHIPS AND LICENSES. The Company has entered into a
Clinical Trials Agreement ("CTA") with the NCI, a CRADA with the FDA, a
licensing agreement with the NIH and has licensed certain technology relating to
its Liposome Products from Georgetown University. The principal terms of the
foregoing agreements and the license are as follows:
NCI CTA. In 1992 the Company entered into a CRADA with the NCI. Under the
terms of the NCI CRADA, the Company has exclusive rights to the data generated
with respect to BUdR by NCI for certain indications contained in the CRADA
including tumors mestastic to the brain, astrocytomas, gastrointestinal cancers,
colon cancer, pancreatic cancer, lung cancer, soft tissue sarcomas, head and
neck cancer and leukemia. The NCI CRADA expired on September 13, 1998 and the
Company then entered into a CTA with the NCI effective October 29, 1998. The CTA
covers the same research that was the subject of the NCI CRADA. The CTA provides
for collaboration on the clinical development for BUdR and access to
6
related clinical data required for regulatory approval. Although BUdR is not
covered by patents or patent applications, the Company believes that its
exclusive access to the clinical data collected by NCI represent a significant
competitive advantage for the Company in the development and eventual
commercialization of BUdR.
FDA CRADA. The Company entered into a CRADA with the FDA in October 1997
covering IL-13. Pursuant to the FDA CRADA, the Company has committed to
commercialize the IL-13 chimeric protein product which it licensed from the NIH
and FDA. The FDA has agreed to collaborate on the clinical development and
commercialization of the licensed product.
The Company is committed to pay $100,000 per year for the reasonable and
necessary expenses incurred by the FDA in carrying out the FDA's
responsibilities under the FDA CRADA. The FDA CRADA has a term of four years.
During 1997 and 1998, the Company expensed $100,000 per year on research and
development costs. The term of the FDA CRADA runs to August 27, 2001.
NIH CRADA AND LICENSING AGREEMENTS. The Company has entered into an
exclusive worldwide licensing agreement with the NIH and the FDA to develop and
commercialize an IL-13 chimeric protein therapy (the "NIH License"). The NIH
License required a $75,000 non-refundable license issue payment and minimum
annual royalty payments of $10,000, which increase to $25,000 after the first
commercial sale. The NIH License also provides for milestone payments and
royalties based on future product sales. The Company is required to pay the
costs of filing and maintaining product patents on the licensed products. The
Company also recently executed and is awaiting confirmation from the NIH
regarding a second CRADA and a License Agreement with the NIH for Mesothelin
Mab, a compound similar to IL-13 (Ligand Targeted Cytotoxin). The terms and
conditions of the pending Mesothelin Mab Agreements with NIH are substantially
the same as for the NIH Agreement.
GEORGETOWN UNIVERSITY AGREEMENTS. The Company previously entered into two
license and sponsored research agreements with Georgetown University relating to
LED, LEP, and LE-AON ("the "Georgetown Licenses"). Under the Georgetown
Licenses, and in return for the sponsorship of supportive research, the Company
has exclusive licenses to manufacture and sell LED, LEP, and LE-AON. The Company
will also be obligated to pay Georgetown royalties on commercial sales of the
Liposome Products. In addition, the Company is obligated to make certain advance
royalty payments to Georgetown, which payments will be credited against future
royalties payable under the Company's agreements with Georgetown. The Georgetown
Licenses are generally not terminable by Georgetown, except in the event of
default by the Company. The Company's rights under the Georgetown Licenses with
respect to LED and LEP have recently been sublicensed to P&U. See "NeoPharm
Products-Liposome Products".
Any default and resulting termination of the Georgetown Licenses would be
materially adverse to the Company's liposome program, could require curtailment
or termination of such program and could therefore have a material adverse
effect on the Company's business, financial condition and results of operations.
Dr. Aquilur Rahman, Chief Scientific Officer of the Company, is an Adjunct
Professor of Radiology at Georgetown and Dr. Anatoly Dritschilo, a director of
the Company, is the Chairman of the Department of Radiation Medicine and Medical
Director of the Georgetown University Medical Center in Washington, D.C. See
"Certain Relationships and Related Transactions".
MARKETING AND SALES
The treatment of cancer is a highly specialized activity in which the
treating oncologist tend to be concentrated in major medical centers. The
Company's marketing strategy is designed to enable the Company to operate with a
relatively small direct sales force in the United States. As products receive
regulatory approval, the Company plans to develop a sales force of modest size
to service the over 3,500 practicing oncologists in the United States. The
Company also intends to pursue collaboration agreements with other Companies to
market the Company's products elsewhere in the world.
7
In May 1997, Neopharm entered into a collaboration agreement with BioChem
Pharma, under which BioChem Pharma will develop, market and distribute BUdR in
Canada after receipt of approval from the Canadian Health Protection Branch
("HPB") of BUdR for certain specific uses, the applications for which will be
submitted by BioChem Pharma.
The Company recently licensed its LEP and LED to P&U in February 1999. As
part of its responsibilities under the License Agreement, P&U will have
obligations to actively market and promote the LED and LEP products throughout
the world once they have been approved for commercial sale, an event that is not
expected to occur for several more years, if ever. Under the provisions of its
License Agreement with P&U, the Company has received the right to co-promote the
product within the United States. See "NeoPharm Products-Lipsome Products."
MANUFACTURING
The Company does not intend to establish its own dedicated manufacturing
facilities for the foreseeable future. Rather, the Company's manufacturing
strategy will be to develop manufacturing relationships with established
pharmaceutical manufacturers for production of BUdR, its Liposome Products,
IL-13 and Mesothelin Mab.
There are a number of FDA approved suppliers of raw materials used in the
Company's products in existence. There are also a number of facilities with FDA
Good Manufacturing Practice approval for contract manufacturing of the Company's
proposed products. The Company has a source for the manufacture of BUdR and is
in the process of arranging for sources for the manufacture of certain of its
planned Liposome Products and the IL-13 chimeric protein. The Company believes
that, in the event of the termination of its existing sources for product
supplies and manufacture, the Company will be able to enter into agreements with
other suppliers and/or manufacturers on similar terms. There can be no assurance
that there will be manufacturing capacity available to the Company at the time
the Company is ready to manufacture its products.
PATENTS AND PROPRIETARY RIGHTS
It will be the Company's policy to, where possible, file patent applications
to protect technology, inventions and improvements that are important to the
development of its business. Under its agreements with Georgetown University,
the Company has licensed rights to four United States patents and one pending
United States patent application relating to its Liposome Products under
development. Under its agreements with the NIH, the Company has licensed rights
to two United States patent relating to the IL-13 chimeric protein under
development and three United States patents and two pending United States
patents relating to the pending Mesothelin Mab agreements. BUdR is not currently
the subject of patents or patent applications, and the Company does not expect
to obtain patent protection for its BUdR product. The Company's principal
advantage with respect to the development and planned commercialization of BUdR
is its exclusive access under the CRADA to NCI's clinical data regarding the
compound.
The patent position of participants in the pharmaceutical field generally is
highly uncertain, involves complex legal and factual questions, and has recently
been the subject of much litigation. There can be no assurance that any patent
applications relating to the Company's potential products or processes will
result in patents being issued, or that the resulting patents, if any, will
provide protection against competitors who successfully challenge the Company's
patents, obtain patents that may have an adverse effect on the Company's ability
to conduct business, or are able to circumvent the Company's patent position. It
is possible that other parties have conducted or are conducting research and
could make discoveries of compounds or processes that would precede any
discoveries made by the Company, which could prevent the Company from obtaining
patent protection for these discoveries. Finally, there can be no assurance that
others will not independently develop pharmaceutical products similar to or
obsoleting those that the Company is planning to develop, or duplicate any of
the Company's products.
8
The Company's competitive position is also dependent upon unpatented trade
secrets. In an effort to protect its trade secrets, the Company has a policy of
requiring its employees, Scientific Advisory Board members, consultants and
advisors to execute proprietary information and invention assignment agreements
upon commencement of employment or consulting relationships with the Company.
These agreements provide that all confidential information of the Company
developed or made known to the individual during the course of their
relationship with the Company must be kept confidential, except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets or other
proprietary information in the event of unauthorized use or disclosure of
confidential information. Invention assignment agreements executed by Scientific
Advisory Board members, consultants and advisors may conflict with, or be
subject to, the rights of third parties with whom such individuals have
employment or consulting relationships. In addition, there can be no assurance
that others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets, that such trade secrets will not be disclosed or that the Company can
effectively protect its rights to unpatented trade secrets.
The Company may be required to obtain licenses to patents or proprietary
rights of others. No assurance can be given that any licenses required under any
such patents or proprietary rights would be made available on terms acceptable
to the Company, or at all. If the Company does not obtain such licenses, it
could encounter delays in product market introductions while it attempts to
design around such patents, or could find that the development, manufacture or
sale of products requiring such licenses could be foreclosed. Litigation may be
necessary to defend against or assert such claims of infringement, to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the scope and validity of the proprietary rights of
others. In addition, interference proceedings declared by the United States
Patent and Trademark Office may be necessary to determine the priority of
inventions with respect to patent applications of the Company or its licensors.
Litigation or interference proceedings could result in substantial costs to and
diversion of effort by, and may have a material adverse impact on, the Company.
In addition, there can be no assurance that these efforts by the Company will be
successful.
GOVERNMENT REGULATION
INTRODUCTION. Regulation by governmental authorities in the United States
and foreign countries is a significant factor in the development, manufacture
and marketing of the Company's proposed products and in its ongoing research and
product development activities. The nature and extent to which such regulation
will apply to the Company will vary depending on the nature of any products
which may be developed by the Company. It is anticipated that all of the
Company's products will require regulatory approval by governmental agencies
prior to commercialization. In particular, human therapeutic and some diagnostic
products are subject to rigorous preclinical and clinical testing and other
approval procedures of the FDA and similar regulatory authorities in foreign
countries. Various Federal statutes and regulations also govern or influence
testing, manufacturing, safety, labeling, storage and record-keeping related to
such products and their marketing. The process of obtaining these approvals and
the subsequent compliance with appropriate Federal statutes and regulations
require the expenditure of substantial time and financial resources. Any failure
by the Company or its collaborators to obtain, or any delay in obtaining,
regulatory approval could adversely affect the marketing of any products
developed by the Company, its ability to receive product revenues and its
liquidity and capital resources.
FDA APPROVAL PROCESS. Prior to commencement of clinical studies involving
human beings, preclinical testing of new pharmaceutical products is generally
conducted on animals in the laboratory to evaluate the potential efficacy and
the safety of the product. The results of these studies are submitted to the FDA
as a part of an investigational new drug ("IND") application, which must become
effective before clinical testing in humans can begin. Typically, clinical
evaluation involves a time consuming and costly three-phase process. In Phase I,
clinical trials are conducted with a small number of subjects to determine the
early
9
safety profile, the pattern of drug distribution and metabolism. In Phase II,
clinical trials are conducted with groups of patients afflicted with a specific
disease in order to determine preliminary efficacy, optimal dosages and expanded
evidence of safety. In Phase III, large-scale, multi-center, comparative trials
are conducted with patients afflicted with a target disease in order to provide
enough data to demonstrate the efficacy and safety required by the FDA. The FDA
closely monitors the progress of each of the three phases of clinical testing
and may, at its discretion, re-evaluate, alter, suspend or terminate the testing
based upon the data which have been accumulated to that point and its assessment
of the risk/benefit ratio to the patient.
The results of the preclinical and clinical testing on a nonbiologic drug
and certain diagnostic drugs are submitted to the FDA in the form of a new drug
application ("NDA") for approval to commence commercial sales. In responding to
an NDA, the FDA may grant marketing approval, request additional information or
deny the application if the FDA determines that the application does not satisfy
its regulatory approval criteria. There can be no assurance that approvals will
be granted on a timely basis, if at all. Similar procedures are in place in
countries outside the United States.
In 1988, the FDA issued "fast-track" regulations intended to accelerate the
approval process for the development, evaluation and marketing of new
therapeutic and diagnostic products used to treat life-threatening and severely
debilitating illnesses, especially those for which no satisfactory alternative
therapies exist. "Fast-track" designation affords the Company early interaction
with the FDA in terms of protocol design and permits, although it does not
require the FDA to grant approval after completion of Phase II clinical trials
(although the FDA may require subsequent Phase III clinical trials or even
post-approval Phase IV efficacy studies). The Company believes that a number of
its product candidates may fall under these regulations, but there can be no
assurance that any of the Company's products will receive this or other similar
regulatory treatment.
In late 1992, legislation imposing FDA user fees on drug manufacturers was
enacted. Such fees will be required for each commercial marketing drug
application submitted by the Company for FDA approval, and annual product and
establishment fees will also be imposed upon approval. The revenues raised from
these fees are earmarked specifically to increase the resources of the FDA, and
by doing so, to increase the speed with which the FDA reviews and approves drug
marketing applications. Currently, the user fee for an NDA is approximately
$260,000, and the statute provides for periodic fee increases. The statute
currently provides small companies (defined as companies with less than 500
employees that are not marketing a prescription drug product) with a reduction
in the initial application fee and contains limited provisions for fee waivers.
During 1996, the Company was granted a waiver of the user fee required with the
filing of the NDA for BUdR.
WAXMAN-HATCH ACT. The Drug Price Competition and Patent Restoration Act of
1984, also known as the Waxman-Hatch Act, contains provisions pertaining to
marketing exclusivity from generic competition for most non-biological drugs and
patent restoration for most pharmaceutical products. A five-year marketing
exclusivity period is provided for new chemical entities, and a three-year
marketing exclusivity period is provided for approved drugs for which new
clinical investigations are essential to the receipt of FDA approval to market
the product. For purposes of the Waxman-Hatch Act, a new chemical entity is
defined as a drug product that contains an active moiety not previously approved
by the FDA for marketing. The five year exclusivity period would not prevent a
competitive product from being marketed based upon new preclinical and clinical
studies conducted by the competitor.
ORPHAN DRUG ACT. Under the Orphan Drug Act, the FDA may designate drug
products as orphan drugs if there is no reasonable expectation of recovery of
the costs of research and development from sales in the United States or if such
drugs are intended to treat a rare disease or condition, which is defined as a
disease or condition that affects less than 200,000 persons in the United
States. If certain conditions are met, designation as an orphan drug confers
upon the sponsor marketing exclusivity for seven years following FDA approval of
the product, meaning that the FDA cannot approve another version of the
10
"same" product for the same use during such seven year period. The market
exclusivity provision does not, however, prevent the FDA from approving a
different orphan drug for the same use or the same orphan drug for a different
use. The Orphan Drug Act has been controversial, and many legislative proposals
have from time to time been introduced in Congress to modify various aspects of
the Orphan Drug Act, particularly the market exclusivity provisions. There can
be no assurance that new legislation will not be introduced in the future that
may adversely impact the availability or attractiveness of orphan drug status
for any of the Company's products.
OTHER REGULATIONS. The Company is also subject to various Federal, state
and local laws, regulations and recommendations relating to safe working
conditions, laboratory manufacturing practices and the use and disposal of
hazardous or potentially hazardous substances, including radioactive compounds
and infectious disease agents, used in connection with the Company's research
work. The extent of government regulation that might result from future
legislation or administrative action cannot be predicted accurately. The Company
has not made and does not anticipate making material capital expenditures with
respect to the protection of the environment.
COMPETITION
Competition in the discovery and development of methods for treating cancer
is intense. Numerous pharmaceutical, biotechnology and medical companies and
academic and research institutions in the United States and elsewhere are
engaged in the discovery, development, marketing and sale of products for the
treatment of cancer. These include surgical approaches, new pharmaceutical
products and new biologically derived products. The Company expects to encounter
significant competition for the principal pharmaceutical products it plans to
develop. Companies that complete clinical trials, obtain regulatory approvals
and commence commercial sales of their products before their competitors may
achieve a significant competitive advantage. A number of pharmaceutical
companies are developing new products for the treatment of the same diseases
being targeted by the Company. In some instances, the Company's competitors
already have products in clinical trials. In addition, certain pharmaceutical
companies are currently marketing drugs for the treatment of the same diseases
being targeted by the Company, and may also be developing new drugs to address
these disorders.
The Company believes that its competitive success will be based on its
ability to create and maintain scientifically advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other protection for its products, obtain required regulatory approvals, obtain
orphan drug status for certain products and manufacture and successfully market
its products either independently or through outside parties. Many of the
Company's competitors have substantially greater financial, clinical testing,
regulatory compliance, manufacturing, marketing, human and other resources. In
addition, the Company will continue to seek licenses with respect to key
technologies related to its fields of interest and may face competition with
respect to such efforts.
HUMAN RESOURCES
As of March 16, 1999, the Company had six full time employees, and one
part-time employee. The Company currently has consulting agreements with eight
consultants. None of the Company's employees and consultants are represented by
a collective bargaining arrangement, and the Company believes its relationship
with its employees and consultants is satisfactory. The Company intends to
continue to retain consultants and to add personnel in as the business strategy
is implemented.
SCIENTIFIC ADVISORY BOARD
The Company has assembled a seven-member Scientific Advisory Board. The
members of the Scientific Advisory Board together provide expertise in areas of
scientific and medical interest to the Company. The Company has entered into
agreements with the Scientific Advisors providing that all
11
inventions made by the Advisors when working for the Company will belong to the
Company; however, most of the members of the Company's Scientific Advisory Board
are employed on a full-time basis by academic or research institutions. The
members of the Scientific Advisory Board are permitted to share information
among themselves regarding the projects that they are working on with the
Company. As of March 16, 1999, the Company had granted options to acquire an
aggregate of 68,324 shares its Common Stock to members of the Scientific
Advisory Board, and pays a retainer to compensate its Scientific Advisory Board
members.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements in this Annual Report on Form 10-K under the caption "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as oral statements that may be made by the Company or
officers, directors or employees of the Company acting on the Company's behalf,
that are not historical fact constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause the actual results of the Company (sometimes
referred to as "we" or "us")to be materially different from the historical
results or from any results expressed or implied by such forward-looking
statements. Such factors include, among others, the following:
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO JUDGE US. We are a
development stage Company and our history of operations consists primarily of
the development of our products and the sponsorship of research and clinical
trials. Therefore, we have only a limited history upon which you may judge our
performance and prospects.
WE LACK SIGNIFICANT REVENUES AND ANTICIPATE CONTINUING LOSSES. We have
incurred significant losses since inception. At December 31, 1998 and December
31, 1997, we had accumulated losses since inception of approximately $9,932,000
and $8,358,000 respectively. We may incur substantial additional operating
losses for at least the next several years as our research and development
efforts expand. We have only generated limited amounts of revenue from our
license fees and we cannot predict when or if we will be able to develop other
sources of revenue or when or if our operations will become profitable, even if
we are able to commercialize some of our products.
OUR PRODUCTS ARE IN THE EARLY STAGE OF DEVELOPMENT AND WE DON'T KNOW IF THEY
WILL BE SUCCESSFULLY DEVELOPED. Our research and development programs are at
various states of development, ranging from the pre-clinical stage, to Phase I
and Phase II clinical trials to a pending new drug application. We will need to
conduct substantial additional research and development in order to develop our
products, and we don't know whether our research and development will lead to
the development of commercially viable products that are shown to be safe and
effective in clinical trials. Our proposed products will also require clinical
testing, regulatory approval and substantial additional investment prior to
commercialization. Our proposed products are subject to the risks of failure
inherent in the development of pharmaceutical products. These risks include the
following:
- some of our products may be found to be unsafe or ineffective, or may fail
to receive the necessary regulatory clearances in a timely fashion, if at
all;
- our products, if safe and effective, may be difficult to manufacture on a
large scale or may be uneconomical to market;
- the proprietary rights of competitors may prevent us from marketing some
of our products; and
- competitors and other researchers may market more effective or less costly
products for treatment of the same diseases.
12
As a result, we do not know whether we will successfully develop any of our
products, receive the required governmental regulatory approvals on a timely
basis, become commercially viable or achieve market acceptance. Also, we have
only limited experience in conducting clinical trials and other aspects of the
regulatory process.
We have experienced delays in our testing and development schedules and our
expected testing and development schedules may not be met. Delays in our testing
and development schedules could have a material adverse effect on our business,
financial condition and results of operations.
WE ARE DEPENDENT UPON DEVELOPING WORKING RELATIONSHIPS WITH OTHERS IN ORDER
TO DEVELOP OUR PRODUCT. In order to successfully develop our products, we must
develop and maintain strategic and collaborative relationships with government
agencies, research institutions, public and private universities and hospitals.
Our failure to develop and maintain any of the following strategic and
collaborative relationships could have a material adverse effect on our
business, financial condition and results of operations:
- Our Broxine-Registered Trademark- product was the subject of a cooperative
research and development agreement with the National Cancer Institute
which gave us exclusive rights to data generated by the National Cancer
Institute for certain cancer indications. That agreement expired on
September 13, 1998 and was replaced by a clinical trials agreement which
became effective October 29, 1998. Because our
Broxine-Registered Trademark- product is not covered by patents or patent
applications, our exclusive access to the data collected by the National
Cancer Institute is of significant importance to us for the conduct of
clinical trials and is a principal advantage over others.
- Our IL-13 product is the subject of a cooperative research and development
agreement with the FDA that extends through October 2001 and provides us
with rights to the development of IL-13 with the FDA and to the data
generated during the term of this agreement. This agreement may be
terminated by either party upon sixty days advance notice without cause.
Termination of this agreement would materially adversely affect our
development program and could require curtailment or termination of that
program.
- We have also entered into two license and sponsored research agreements
with Georgetown University relating to our liposomal products. These
licenses are generally not terminable by Georgetown University except in
the event of a default by us. Any such default and resulting termination
of the licenses would be materially adverse to our liposome program and
could require curtailment or termination of that program, and could
adversely effect the sublicense agreements that we have entered into with
Pharmacia & Upjohn Company for two of our liposome compounds.
WE REQUIRE SUBSTANTIAL FUNDS AND WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN
THE FUTURE. We require substantial funds to conduct research and development,
pre-clinical and clinical testing and to manufacture and market our proposed
products. Our fixed commitments, including consulting fees, rent, payments under
license agreements and other contractual commitments are substantial and are
likely to increase. Our cash requirements may vary materially from those now
planned. We may seek to satisfy our future funding requirements through
additional public or private offerings of securities, with collaborative
arrangements with corporate partners or from other sources.
Additional financing may not be available when we need it or be on terms
acceptable to us. If adequate financing is not available, we may be required to
delay, scale back or eliminate certain of our research and development programs,
to relinquish rights to some of our technologies, therapeutic and diagnostic
agents, product candidates or products, or to license third parties to
commercialize products or technologies that we would otherwise seek to develop
ourself. If additional capital is raised through the sale of equity or debt
securities, the percentage ownership of our existing stockholders will be
reduced and such securities may have rights, preferences or privileges superior
to those of our current stockholders.
13
WE DO NOT HAVE MANUFACTURING, MARKETING, OR SALES RESOURCES. We currently
do not have internal manufacturing, marketing or sales resources. Since we focus
on research and development and have limited resources, we do not anticipate
spending a significant amount of cash to acquire resources and develop
capabilities in these areas. Our manufacturing strategy will be to develop
manufacturing relationships with established pharmaceutical manufacturers for
the production of products. We can give no assurance that we will be able to
enter into manufacturing agreements on commercially reasonable terms, if at all.
WE DO NOT HAVE CLINICAL TESTING OR REGULATORY CAPABILITY. We currently do
not have internal clinical testing or regulatory capability. If we develop
compounds with commercial potential, we will have to hire additional personnel
skilled in the clinical testing and the regulatory compliance processes. We may
not successfully complete clinical testing of, obtain regulatory approval for,
or manufacture or market any product we may develop, either independently or
pursuant to manufacturing or marketing arrangements. Should we seek to enter
into third-party arrangements, we cannot give any assurance that such
arrangements can be successfully negotiated on commercially reasonable terms, if
at all.
WE MAY NOT BE ABLE TO PROTECT OUR PATENTS AND PROPRIETARY
INFORMATION. Because of the substantial length of time and expense associated
with bringing new products through development and regulatory approval to the
marketplace, patent and trade secret protection for new technologies, products
and processes is very important to us. We have obtained licenses to ten United
States patent applications and have sixteen other issued or allowed patent
applications outside the United States. With respect to these patents, however,
no assurance can be given that:
- any patents under any pending applications or on future patent
applications will be issued;
- the scope of any patent protection will exclude competitors or provide
competitive advantages to us;
- any of our patents that may be issued will be held valid if subsequently
challenged;
- others will not claim rights in or ownership to the patents and other
proprietary rights held by us;
- others will not independently develop substantially equivalent proprietary
information or otherwise obtain access to our know-how; or
- others may be issued patents that require licensing and the payment of
significant fees or royalties by us.
Further, we may incur substantial costs in defending ourselves in suits that
may be brought against us claiming infringement of the patent rights of others,
in asserting our patent rights in a suit against another party, or in
participating in interference proceedings declared by the United States Patent
and Trademark Office for the purpose of determining the priority of invention in
connection with our patent applications or those of others. If we lose, we may
be forced to seek licenses, which may not be available on commercially
reasonable terms, if at all, or subject us to significant liabilities to a third
party and could, therefore, have a material adverse effect on us.
Our Broxine-Registered Trademark- product is not currently the subject of
patents or patent applications and we do not expect to obtain patent protection
for this product. The lack of patent protection could have a material adverse
effect on our business, financial condition and results of operations.
Finally, we also rely on trade secrets, know-how and technological advantage
to protect the technology we develop. Although we use confidentiality agreements
and employee proprietary information and invention assignment agreements to
protect our trade secrets and other unpatented know-how, these agreements may be
breached by the other party thereto or may otherwise be of limited effectiveness
or enforceability.
CERTAIN OF OUR EXECUTIVE OFFICERS HAVE RELATIONSHIPS WITH OTHER ENTITIES AND
HAVE CONFLICTS OF INTEREST. Messrs. John N. Kapoor, Mahendra Shah and Kevin M.
Harris, who each hold executive positions with us,
14
are also associated with EJ Financial Enterprises, Inc., a healthcare investment
firm which is wholly owned by John N. Kapoor. On July 1, 1994, we entered into a
consulting agreement with EJ Financial. The consulting agreement provides that
we will pay EJ Financial $125,000 per year (paid quarterly) for certain business
and financial services, including having certain officers of EJ Financial serve
as officers of ours without pay. EJ Financial is involved in the management of
healthcare companies in various fields, and Messrs. Kapoor, Shah and Harris are
involved in various capacities with the management and operation of these
companies. The John N. Kapoor Trust, dated September 20, 1989, the beneficiary
of which is Dr. John Kapoor, is a principal shareholder of each of these
companies as well as us. The John N. Kapoor Trust and other entities controlled
by John N. Kapoor beneficially own shares of our common stock, representing
approximately 24% of our outstanding shares of common stock.
Mr. Harris, our Chief Financial Officer, is also the Director of Taxes and
Planning of EJ Financial. Accordingly, Mr. Harris will not devote all of his
working hours to our affairs. In addition, EJ Financial is involved with other
companies in the oncology field. Although these companies are pursuing different
therapeutic approaches for the treatment of cancer, discoveries made by one or
more of these companies could render our products less competitive or obsolete.
WE PREVIOUSLY ENTERED INTO A LINE OF CREDIT WITH A TRUST WHOSE BENEFICIARY
IS OUR PRINCIPAL SHAREHOLDER. On September 30, 1998, the John N. Kapoor Trust
entered into a line of credit agreement with us (the "Line of Credit") pursuant
to which we could borrow up to $3,000,000 at a rate of interest equal to 2% over
the "prime rate" announced from time to time by The Northern Trust Bank of
Chicago. Loans under the credit agreement were secured by a continuing security
agreement which provided the Trust with a security interest in our assets. The
Line of Credit was terminated by its terms in February 1999.
MEMBERS OF OUR SCIENTIFIC ADVISORY BOARD COMMIT ONLY A PORTION OF THEIR TIME
TO OUR BUSINESS AND RESEARCH ACTIVITIES AND WE MAY NOT HAVE RIGHTS TO THEIR
INVENTIONS OR DISCOVERIES. Members of our scientific advisory board are employed
on a full-time basis by academic or research institutions. These individuals
will devote only a portion of their time to our business and research
activities. Except for work performed specifically for and at our direction, the
inventions or processes discovered by our consultants and scientific advisors
will not become our property but will be the intellectual property of other
institutions with which they may have an affiliation. If this happens, we would
have to obtain licenses to such technology from such institutions. In addition,
invention assignment agreements executed by scientific advisory board members
and consultants in connection with their relationships with us may be subject to
the rights of their primary employers or other third parties with whom such
individuals have consulting relationships.
OUR BUSINESS IS DEPENDENT UPON COMPLIANCE WITH GOVERNMENTAL REGULATIONS AND
OBTAINING APPROVALS BY GOVERNMENTAL AGENCIES. Governmental authorities in the
United States and other countries regulate our research, testing, manufacturing,
labeling, distribution, marketing and advertising activities. The FDA and
comparable agencies in foreign countries impose substantial requirements on our
ability to introduce pharmaceutical products through lengthy and detailed
laboratory and clinical testing procedures, sampling procedures, sampling
activities and other costly and time consuming procedures. Our proprietary
products may require substantial clinical trials and FDA review as new drugs.
We cannot predict with certainty if or when we might submit for regulatory
review our products currently under development. Once we submit our potential
products for review, we don't know whether the FDA or other regulatory agencies
will grant approvals for any of our pharmaceutical products on a timely basis or
at all. A delay in obtaining or failure to obtain these approvals may adversely
affect our business. If we fail to comply with regulatory requirements, we could
be subjected to regulatory or judicial enforcement actions, including product
recalls or seizures, injunctions, civil penalties, criminal prosecution,
refusals to approve new products, withdrawal of approvals, and product liability
exposure. Sales of our products outside the United States will be subject to
regulatory requirements governing clinical trials and marketing approval. These
requirements vary widely from country to country and could delay the
introduction of our products in those countries.
15
THE DEMAND FOR OUR PRODUCTS MAY BE ADVERSELY AFFECTED BY HEALTH CARE REFORM
AND POTENTIAL LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. The continuing effort of
governmental and third-party payors to contain or reduce the costs of health
care may reduce our revenues and profitability. We cannot predict the effect
that health care reforms may have on our business, and it is possible that any
reforms will hurt our business. In addition, in both the United States and
elsewhere, sales of prescription pharmaceuticals are dependent in part on the
availability of reimbursement to the consumer from third-party payors, such as
government and private insurance plans. Third-party payors are increasingly
challenging the prices charged for medical products and services. We cannot be
certain that our current and proposed products will be considered cost-effective
and that reimbursement to the consumer will be available or will be sufficient
to allow us to sell products on a competitive basis.
WE ARE SUBJECT TO REGULATIONS REGARDING HAZARDOUS MATERIALS AND
ENVIRONMENTAL MATTERS. We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
hazardous materials and certain waste products. We currently maintain a supply
of several hazardous materials at our facilities. While we currently outsource
our research and development programs involving the controlled use of
biohazardous materials, if we conduct such programs, we might be required to
incur significant cost to comply with environmental laws and regulations. In the
event of an accident, we could be held liable for any damages that result, and
such liability could exceed our resources.
WE DON'T HAVE PRODUCT LIABILITY INSURANCE AT THIS TIME. We currently do not
have any product liability insurance and our business exposes us to potential
product liability risks which are inherent in the testing, manufacturing and
marketing of human therapeutic products. Although we plan to obtain product
liability insurance when and if our products become commercially available,
there can be no assurance that we will be able to obtain or maintain this
insurance on acceptable terms or that any insurance we obtain will provide us
with adequate coverage against potential liabilities. Claims or losses in excess
of any liability insurance coverage we obtain could have a material adverse
effect on our business and prospects.
WE MAY BE AFFECTED BY LITIGATION INVOLVING OUR CHAIRMAN. John N. Kapoor,
our chairman and principal stockholder, was previously the chairman and
president of Lyphomed Inc. Fujisawa Pharmaceutical Co. Ltd. was a major
stockholder of Lyphomed from the mid-1980s until 1990, at which time Fujisawa
completed a tender offer for the remaining shares of Lyphomed, including the
shares held by Dr. Kapoor. Fujisawa filed suit in federal district court in
Illinois against Dr. Kapoor alleging that between 1980 and 1986, Lyphomed filed
a large number of allegedly fraudulent new drug applications with the FDA, and
that Dr. Kapoor's failure to disclose these violations to Fujisawa constituted a
violation of federal securities laws and the Racketeer Influenced and Corrupt
Organizations Act. Fujisawa also alleged state common-law claims of constructive
trust, fraud, breach of fiduciary duties and breach of warranty against Dr.
Kapoor. In addition to substantial monetary relief in excess of $100,000,000
(which amount could be trebled under RICO), Fujisawa also seeks a constructive
trust on the assets of Dr. Kapoor, which may include Dr. Kapoor's shares of our
common stock or rights to acquire shares of our common stock.
Dr. Kapoor has vigorously defended himself against all these allegations. In
the federal lawsuit, Dr. Kapoor's motion for summary judgement was granted by
the trial court. However, the Seventh Circuit Court of Appeals subsequently
reversed, in part, the trial court's decision, reinstating the RICO claims
against Dr. Kapoor. Dr. Kapoor's subsequent motion for summary judgment was
denied and the matter has been referred to a special master for mediation
discussions. It is anticipated that in the absence of resolution of the matter,
a trial would be held in late 1999 or early in 2000. Fujisawa's claims under
state law against Dr. Kapoor are also pending. A related suit filed by Dr.
Kapoor in Delaware Chancery Court seeking to require Lyphomed to advance to Dr.
Kapoor the cost of his defense to all of Fujisawa's lawsuits was decided in Dr.
Kapoor's favor and that decision was subsequently affirmed by the Delaware
Supreme Court. Finally, a countersuit filed by Dr. Kapoor against Fujisawa in
the Circuit Court of Cook County for breach of contract was dismissed without
prejudice with the court determining that the proper forum for such an action
was as part of the pending federal lawsuit. The decision of the lower court was
affirmed on appeal and Dr. Kapoor has filed a counterclaim for breach of
contract as part of the federal court action.
16
If a decision is made in favor of Fujisawa, Fujisawa may acquire the right
to control Dr. Kapoor's shares of our common stock, which comprise 24% of our
common stock. This decision could have a material adverse effect on us.
SHARES ELIGIBLE FOR FUTURE SALE COULD ADVERSELY AFFECT OUR STOCK PRICE. If
our stockholders sell substantial amounts of our common stock, including shares
issued upon the exercise of outstanding options and warrants, in the public
market, the market price of our common stock could fall. These sales might also
make it more difficult to sell our equity or equity related securities in the
future at a time and price that we deem appropriate. Of the 8,454,621 shares of
common stock outstanding as of March 19, 1999, 3,792,746 shares are freely
transferable without restriction or further registration under the Securities
Act. The remaining 4,661,875 shares are "restricted securities," and may only be
sold pursuant to a registration statement under the Securities Act or an
applicable exemption from registration thereunder.
WE ARE CONTROLLED BY OUR OFFICERS AND DIRECTORS. As of March 19, 1999, our
directors and officers beneficially owned a total of 60.79% of the outstanding
shares of our common stock. Accordingly, our officers and directors, if acting
together, have the ability to elect a majority of our directors and otherwise
control our operations.
WE MAY REDEEM THE REDEEMABLE WARRANTS. Since July 25, 1997, the redeemable
warrants have been subject to redemption by us at $0.01 per redeemable warrant
on thirty (30) days' prior written notice to the redeemable warrantholders. We
can only redeem the warrants if the average closing sale price of our common
stock as reported on the American Stock Exchange equals or exceeds $5.60 per
share for twenty (20) trading days within a period of thirty (30) consecutive
trading days ending on the fifth trading day prior to the date of the notice of
redemption. If we redeem the redeemable warrants, holders of the redeemable
warrants will lose their rights to purchase shares of our common stock issuable
upon the exercise of the redeemable warrants.
Upon receipt of a notice of redemption, holders would be required to:
- exercise the redeemable warrants and pay the exercise price at a time when
it may be disadvantageous for them to do so;
- sell the redeemable warrants at the current market price, if any, when
they might otherwise wish to hold the redeemable warrants; or
- accept the redemption price which is likely to be substantially less than
the market value of the redeemable warrants at the time of redemption.
Since November 4, 1998, our common stock has traded above $5.60. As a
result, we may redeem the redeemable warrants, if we wish. We are currently
evaluating the merits of calling the redeemable warrants.
HOLDERS OF REDEEMABLE WARRANTS MAY BE RESTRICTED FROM SELLING THE SHARES OF
OUR COMMON STOCK UNDERLYING THE REDEEMABLE WARRANTS. The redeemable warrants are
not exercisable unless, at the time of the exercise, we have a current
prospectus covering the shares of common stock issuable upon exercise of the
redeemable warrants, and such shares have been registered, qualified or deemed
to be exempt under the securities laws of the state of residence of the
exercising holder of the redeemable warrants. We do not intend to qualify the
redeemable warrants for exercise in the states in which the holders reside. As a
result, holders of the redeemable warrants may be deprived of value. Although we
have agreed to use our best efforts to keep a registration statement covering
the shares of common stock issuable upon exercise of the redeemable warrants
effective for the term of the redeemable warrants, if we fail to do so for any
reason, your ability to resell the shares underlying the redeemable warrants
will be materially adversely effected.
Purchasers may buy redeemable warrants in the aftermarket or may move to
jurisdictions in which the shares underlying the redeemable warrants are not
registered or qualified during the period that the
17
redeemable warrants are exercisable. If this happens, we can't issue shares to
those persons desiring to exercise their redeemable warrants, and holders of
redeemable warrants would have no choice but to attempt to sell the redeemable
warrants in a jurisdiction where such sale is permissible or allow the
redeemable warrants to expire unexercised.
THE YEAR 2000 RISK MAY ADVERSELY AFFECT US. Many currently installed
computer systems and software products are coded to accept only two digit
entries in the date code field. As a result, software that records only the last
two digits of the calendar year may not be able to distinguish whether "00"
means 1900 or 2000. This may result in software failures or the creation of
erroneous results. We believe that our products and internal systems are
currently year 2000 compliant. We are confirming our year 2000 compliance by
obtaining representations by third party vendors of their products' year 2000
compliance, as well as specific testing of our products. The failure of products
or systems maintained by third parties or our products and systems to be year
2000 complaint could cause us to incur significant expenses to remedy any
problems, or seriously damage our business. We have not incurred significant
costs to date complying with year 2000 requirements, and we do not believe that
we will incur significant costs for such purposes in the foreseeable future.
ITEM 2. PROPERTIES
The Company's administrative offices are located in approximately 1330
square feet of subleased office space in Bannockburn, Illinois. This subleased
space is provided to the Company at a market rate rent by Option Care, Inc, an
affiliate of the Company's Chairman and principal shareholder, John N. Kapoor.
Until moving to the Bannockburn location in November of 1997, the Company
occupied office space in Lake Forest, Illinois. This space was provided as part
of a consulting agreement with EJ Financial. (See Note 8--"Transactions with
Related Parties" in Notes to Financial Statements).
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation or other legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1998.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
From January 25, 1996 until December 2, 1996 the Company's Common Stock was
quoted on the Nasdaq Stock Market's SmallCap Market under the trading symbol
NPRM. Beginning on December 2, 1996, and continuing through the date of this
report, the Common Stock has been traded on the American Stock Exchange ("AMEX")
under the symbol NEO.
1997 HIGH LOW
- ---------------------------------------------------------------------------------------------------- ----- ---
First Quarter....................................................................................... 9 5/8 6 3/8
Second Quarter...................................................................................... 7 1/2 3 1/16
Third Quarter....................................................................................... 5 1/2 3 5/8
Fourth Quarter...................................................................................... 9 3 3/4
1998 HIGH LOW
- --------------------------------------------------------------------------------------------------- --------- ---------
First Quarter...................................................................................... 5 3/4 3 3/4
Second Quarter..................................................................................... 4 15/16 2 15/16
Third Quarter...................................................................................... 4 1/2 2
Fourth Quarter..................................................................................... 13 1/4 3 5/8
As of March 19, 1999, there were 63 holders of record of the Common Stock,
and the Company estimates that as of such date there were more than 400
beneficial holders of the Common Stock. The Company has never paid a cash
dividend on its Common Stock and has no present intention of paying cash
dividends in the foreseeable future. Any determination in the future to pay
dividends will depend on the Company's financial condition, capital
requirements, results of operations, contractual limitations and other factors
deemed relevant by the Board of Directors.
19
ITEM 6. SELECTED FINANCIAL DATA
INCEPTION
FOR THE YEARS ENDED (JUNE 15,1990)
DECEMBER 31, THROUGH
------------------------------------------------------------------------- DECEMBER 31,
1994 1995 1996 1997 1998 1998
------------- ------------- ------------- ------------- ------------- --------------
Statement of Operations
Data:
Revenues....................... $ -- $ -- $ -- $ 550,000 $ -- $ 550,000
Operating expenses:
Research and development....... 813,761 1,068,683 1,099,631 1,411,692 1,611,343 7,085,874
General and administrative..... 107,286 244,901 956,924 1,370,486 1,691,132 4,837,984
------------- ------------- ------------- ------------- ------------- --------------
Loss from operations........... (921,047) (1,313,584) (2,056,555) (2,232,178) (3,302,475) (11,373,858)
Interest income................ $ -- $ -- $ 238,275 $ 210,501 $ 88,752 $ 537,528
Interest expense............... (162,620) (356,043) (47,365) -- -- (735,606)
------------- ------------- ------------- ------------- ------------- --------------
Interest income
(expense)--net............... (162,620) (356,043) 190,910 210,501 88,752 (198,078)
------------- ------------- ------------- ------------- ------------- --------------
Loss Before Income Taxes....... $ (1,083,667) $ (1,669,627) $ (1,865,645) $ (2,021,677) $ (3,213,723) $ (11,571,936)
Income Taxes................... -- -- -- -- (1,640,000) (1,640,000)
------------- ------------- ------------- ------------- ------------- --------------
Net Loss....................... $ (1,083,667) $ (1,669,627) $ (1,865,645) $ (2,021,677) $ (1,573,723) $ (9,931,936)
------------- ------------- ------------- ------------- ------------- --------------
------------- ------------- ------------- ------------- ------------- --------------
Basic and Diluted
Net loss per share............. $ (.32) $ (.36) $ (.24) $ (.25) $ (.19)
------------- ------------- ------------- ------------- -------------
DECEMBER 31,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------- ------------- ------------- -------------
Balance Sheet Data:
Cash.................................. $ 9,205 $ 671 $ 4,479,041 $ 2,776,697 $ 40,681
Working capital (deficit)............. (2,137,037) (4,553,057) 4,013,010 2,348,904 1,077,255
Total assets.......................... 112,988 495,891 4,492,208 2,854,499 1,781,548
Line of credit with bank.............. 656,452 2,007,652 -- -- --
Loan payable to principal
stockholder......................... 1,500,000 1,500,000 -- -- --
Deficit accumulated during the
development stage................... (2,801,264) -- (1,865,645) (3,887,322) (5,461,045)
Total stockholders' equity (deficit).. (2,691,773) (4,361,392) 4,026,177 2,374,072 1,178,122
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since the Company's inception in June 1990, NeoPharm has devoted its
resources primarily to fund research and product development programs. The
Company has been unprofitable since inception and has had no revenues from the
sale of products. The Company expects to continue to incur losses as it expands
its research and development activities and sponsorship of clinical trials. As
of December 31, 1998, the Company's accumulated deficit was approximately $5.5
million.
20
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Company had no operating revenues during the three fiscal years ended
December 31, 1998 except for a $550,000 payment received from BioChem Pharma in
1997 as part of a licensing and distribution agreement. Interest income for 1998
totaled $88,752. The Company completed its initial public offering in January
1996. Cash in excess of funds needed to retire debt, pay for issuance costs or
pay outstanding payables was invested in short term investments.
The Company incurred research and development expenses of approximately
$1,611,000 in 1998 as compared to approximately $1,412,000 in 1997 and
$1,100,000 in 1996. The increase in 1998 research and development expenses is
primarily due to the increased research activity and the addition of two new
employees related to the Company's Liposome Products. 1998, 1997 and 1996
expenses include payments made by the Company to Georgetown and the NCI pursuant
to the Company's license and sponsored research agreements with Georgetown, its
CRADA with the NCI, payments to U.S. Food and Drug Administration pursuant to
the CRADA, and the NIH pursuant to its license agreement. The Company expects
research and development spending to increase over the next several years. See
"Item 1--Research and Development, Collaborative Relationships and Licenses."
General and administrative expenses increased to approximately $1,691,000 in
1998 from approximately $1,370,000 in 1997. The increase was primarily the
result of increased professional fees of $103,000, executive recruitment costs
of $81,000, increased public relations costs of $29,000, increased insurance
costs of $9,000, increased space costs of $35,000 and an increase in other
miscellaneous expenses of $64,000. General and administrative expenses for 1997
compared to 1996 increased approximately $413,000. This increase was primarily
the result of increased professional fees of $103,000 related to corporate
public filings, increased personel costs and compensation expense related to
non-employee stock options of $144,000 executive relocation expenses of $76,000,
increased travel costs of $37,000 and on increase of miscellaneous office
expense of $53,000.
The Company incurred zero interest expense in both 1998 and 1997. Interest
expense for 1997 compared to 1996 decreased approximately $47,000. The Company
had outstanding debt for a portion of 1996. Proceeds from the initial public
offering, completed in January, 1996, were used to retire both the debt owed to
the principal shareholder and the line of credit provided by Harris Bank and
Trust N.A. The principal stockholder converted the principal of and interest on
the loan into shares of Common Stock and Warrants at the initial public offering
price. Interest expense totaled approximately $356,000 in 1995. The proceeds of
borrowings were used to fund the Company's operations during the period from
1994 to 1996. See "Item 13--Certain Relationships and Related Transactions" and
Note 3 of Notes to the Financial Statements.
INCEPTION TO DECEMBER 31, 1998
The Company was taxed as an S Corporation from inception through October 11,
1995 when the S Corporation status was voluntarily terminated. Because the
Company was taxed as an S Corporation, all of its net losses from inception
through October 11, 1995 were passed through to its stockholders. Accordingly,
the Company did not accumulate operating loss carry forwards prior to October
11, 1995. The deficit accumulated while under S Corporation status was
reclassified to Additional Paid-In Capital in 1995. The Company has begun
accruing net operating loss carry forwards.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company has approximately $41 thousand dollars in
cash and cash equivalents and net working capital of approximately $1.1 million.
On October 22, 1998, the Company established a $3,000,000 line of credit (the
"Line of Credit") with the John N. Kapoor Trust dtd. 9/20/89, an
21
entity affiliated with the Company's Chairman. Interest on borrowings on the
Line of Credit were accrued at the rate of 2% over the prime rate of the
Northern Trust Bank. The accrued interest and outstanding principal were repaid
on January 29, 1999 and the line of Credit terminated upon the signing of the
Pharmacia and Upjohn licensing agreement in February 1999. The Company believes
that cash and cash equivalents should be adequate to fund operations for the
next 12 months. However, management can offer no assurances that additional
funding will not be required during that period.
The Company's assets at December 31, 1998 were $1,781,548 compared to
$2,854,499 at December 31, 1997. This decrease in assets was primarily due to a
reduction of cash and cash equivalents of approximately $2,736,000 as a result
of cash used in operating activities of approximately $2,716,000, cash used to
purchase equipment and furniture of approximately $102,000 and cash provided by
issuance of stock of approximately $82,000.
The Company's liabilities at December 31, 1998 increased to approximately
$603,000 from approximately $480,000 at December 31, 1997.
All of the products currently being developed by the Company will require
approval by the FDA before they can be sold commercially in the United States.
The results of the preclinical and clinical testing on a nonbiologic drug and
certain diagnostic drugs are submitted to the FDA in the form of an NDA for
approval to commence commercial sales. In responding to an NDA, the FDA may
grant marketing approval, request additional information or deny the application
if the FDA determines that the application does not satisfy its regulatory
approval criteria.
The Company may seek to satisfy its future funding requirements through
public or private offerings of securities, with collaborative or other
arrangements with corporate partners or from other sources. Additional financing
may not be available when needed or on terms acceptable to the Company. If
adequate financing is not available, the Company may be required to delay, scale
back or eliminate certain of its research and development programs, to
relinquish rights to certain of its technologies, therapeutic and diagnostic
agents, product candidates or products, or to license third parties to
commercialize products or technologies that the Company would otherwise seek to
develop itself.
THE YEAR 2000 ISSUE
The year 2000 problem is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The Company has conducted a review of its computer
systems and management believes that the Year 2000 issue will not materially
impact the Company.
The Company is in the process of identifying and assessing potential
operating and software problems related to the year 2000 issue both internally
and externally. It is the Company's intention to complete the identification
phase by June 30, 1999 and take any required corrective action by September 30,
1999.
The Company has completed an internal review of its hardware and software
used in its operations and has assessed the Year 2000 readiness. Based on this
review, the Company has not identified any material Year 2000 issues. The cost
of this review is expected to be less than $5,000.
Additionally, the Company is in the process of communicating with its
significant vendors, service providers and collaboration partners to determine
if such parties are Year 2000 compliant or have effective plans in place to
address the Year 2000 issue and to determine the extent of the Company's
vulnerability to the failure of third parties to remedy such issues. Based upon
the responses that the Company receives from these third parties, the Company
will assess its risks and develop appropriate contingency plans as needed.
22
The Company does not expect the impact of the Year 2000 to have a material
adverse impact on the Company's business or results of operations. However, no
assurance can be given that any required changes to the Company's software or
operating systems can be made in a timely fashion or that unanticipated or
undiscovered Year 2000 problems will not arise that could have a material
adverse effect on the Company's business and results of operations. In addition,
there can be no assurance that Year 2000 non-compliance by any of the Company's
significant vendors, service providers or collaboration partners will not have a
material adverse effect on the Company's business or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements and Supplementary Data are incorporated herein by
reference to the Company's Financial Statements included as Exhibit 1. The
information is contained as follows:
PAGE
-----
Report of Arthur Andersen LLP, Independent Public Accountants.............................................. 35
Balance Sheets............................................................................................. 36
Statements of Operations................................................................................... 37
Statements of Stockholders' Equity (Deficit)............................................................... 38
Statements of Cash Flows................................................................................... 41
Notes to Financial Statements.............................................................................. 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
POSITION
HELD
NAME AGE POSITION SINCE
- ------------------------------------------------ --- ------------------------------------------------ -----------
John N. Kapoor, Ph.D.(2)........................ 55 Director, Chairman of the Board 1990
Aquilur Rahman, Ph.D............................ 56 Director, Chief Scientific Officer 1990
Anatoly Dritschilo, M.D.(1)(2).................. 54 Director 1990
James M. Hussey (3)............................. 39 President, Chief Executive Officer, and Director 1998
Erick E. Hanson(1).............................. 52 Director 1997
Mahendra G. Shah, Ph.D.......................... 54 Vice President, Corporate and Business 1991
Development
Sander A. Flaum................................. 57 Director 1998
Kevin Harris.................................... 38 Chief Financial Officer 1998
Lewis Strauss, M.D.............................. 48 Vice President- Chief Medical Officer 1998
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Mr. Hussey assumed the positions of President, Chief Executive Officer and
Director of the Company on March 16, 1998. He replaced Dr. William C. Govier
who served as President, Chief Executive Officer and Director of the Company
until retiring on January 16, 1998.
All directors hold office until the next annual meeting of the stockholders
and until their successors are duly elected. Officers are appointed to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.
John N. Kapoor, Ph.D., Chairman of the Board of Directors, has been a
director of the Company since July 1990. Prior to forming the Company, Dr.
Kapoor formed EJ Financial Enterprises, Inc., a health care consulting and
investment Company, in March 1990, of which Dr. Kapoor is currently President.
Dr. Kapoor is presently Chairman of Option Care, Inc., a provider of home health
care services; Chairman of Unimed Pharmaceuticals, Inc., a developer and
marketer of pharmaceuticals for cancer, endocrine disorders and infectious
diseases; and Chairman of Akorn, Inc., a manufacturer, distributor, and marketer
of generic ophthalmic products. Dr. Kapoor received his Ph.D. in medicinal
chemistry from the State University of New York in 1970 and a B.S. in pharmacy
from Bombay University in India.
Aquilur Rahman, Ph.D., joined the Company as Chief Scientific Officer and as
a member of the Board of Directors in July 1990. Dr. Rahman joined the Company
on a full time basis in March 1996. Dr. Rahman is currently adjunct professor of
radiology and was an associate professor of pathology and pharmacology at
Georgetown University until March 1996. Dr. Rahman has more than 15 years of
research experience in developing methods of chemotherapy treatment for cancer.
Dr. Rahman received his Masters of Science in Biochemistry from the University
of Dacca (Bangladesh) in 1964 and his Ph.D. in Pharmaceutics from the University
of Strathclyde (Glasgow, U.K.) in 1972.
Anatoly Dritschilo, M.D., joined the Company as a Member of the Board of
Directors in July 1990. Since August 1979, Dr. Dritschilo has been Chairman of
the Department of Radiation Medicine and
24
Medical Director of the Georgetown University Medical Center in Washington, D.C.
Dr. Dritschilo received his B.S. in Chemical Engineering from the University of
Pennsylvania, his M.S. in Engineering in 1969 from Newark College of
Engineering, and his M.D. in 1973 from the College of Medicine of New Jersey.
James M. Hussey joined the Company in March 1998 as its President, Chief
Executive Officer, and a member of the Board of Directors. Mr. Hussey was
previously the Chief Executive Officer of Physicians Quality Care, a managed
care organization from 1994 to January, 1998. Previous to that, Mr. Hussey held
several positions with Bristol-Myers Squibb from 1984 to 1994, most recently as
the General Manager Midwest Integrated Regional Business Unit. Mr. Hussey
received a B.S. from the College of Pharmacy at Butler University and an M.B.A.
from the University of Illinois.
Erick E. Hanson, joined the Company as a Director in April 1997. Mr. Hanson
is currently President of Hanson and Associates, a consulting firm working with
venture capital companies. Previously, Mr. Hanson served as President and Chief
Executive Officer of OptionCare, Inc., a provider of home health care services.
Prior to joining OptionCare, Inc. Mr. Hanson held a variety of positions with
Caremark, Inc., including from 1991-1995, Vice President Sales and Marketing.
Mr. Hanson served as President and Chief Operating Officer of Clinical Partners,
Inc. in Boston, MA, from 1989-1991 and prior to 1989 was associated with Blue
Cross and Blue Shield of Indiana for over twenty years. Mr. Hanson presently
serves on the Board of Directors for Condell Medical Centers.
Sander A. Flaum, joined the Company as a Director in July 1998. Mr. Flaum is
President and Chief Executive Officer of Robert A. Becker EURO/RSCG, a marketing
and advertising company. Prior to becoming President of Robert A. Becker, Mr.
Flaum was Executive Vice President of Kleinter Advertising and prior to that
served as Marketing Director of Lederle Laboratories, a division of American
Cyanamid where he was employed from 1965-1984.
Mahendra G. Shah, Ph.D., has served as Vice President of Corporate and
Business Development of the Company since October 1991. Dr. Shah is also a Vice
President of EJ Financial Enterprises, Inc., a position he has held since
October 1991. Prior to joining the Company, Dr. Shah was the Senior Director of
New Business Development with Fujisawa USA from January 1987 to October 1991.
Dr. Shah received his M.S. in 1978 and Ph.D. in 1984 in Industrial Pharmacy from
St. John's University and an M.S. in 1969 and a B.S. in 1967 in Pharmaceutical
Chemistry from Gujarat University in India.
Kevin M. Harris has served as Chief Financial Officer and Secretary of the
Company since June 1998. Mr. Harris is also Director of Taxes and Planning at
E.J. Financial Enterprises, Inc. a health care consulting and investment
Company. Prior to joining E.J. Financial Enterprises in 1997, Mr. Harris was
Vice-President of Finance of Duo-Fast Corporation. Previously, Mr. Harris worked
eleven years in public accounting, including six years with Arthur Andersen &
Company. Mr. Harris received a B.Sc. in accounting from Illinois State
University in 1983 and a M.S. from DePaul University in 1988. Mr. Harris is a
Certified Public Accountant and a Certified Financial Planner.
Lewis Strauss, M.D., joined the Company as Chief Medical Officer, in April,
1998. After completing his medical training at Cornell Medical College and his
pediatric residency at The John Hopkins School of Medicine in Baltimore, Dr.
Strauss served as a Pediatric Oncologist at John Hopkins Oncology Center
(1980-1991) and at Northwestern University (1991-1997).
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of the copies of such reports furnished to the
Company or written representations that no other reports were required, the
Company believes that during the 1998 fiscal year, all filing requirements
applicable to its officers, directors and greater that 10% beneficial owners
were complied with, with the exception that (i) the Initial Statement Of
Beneficial Ownership Of Securities on Form 3, required to be filed by each of
James M. Hussey, President and Chief Executive Officer of the
25
Company, Dr. Louis C. Strauss, Chief Medical Officer for the Company and Sander
A. Flaum, Director of the Company, were not filed within 10 days of each of
those individuals assuming their respective offices, (ii) Dr. Dritschilo did not
timely file a Form 4 report relating to transfers which has been made for estate
planning purposes, and (iii) Mr. Harris did not timely file a Form 4 report
regarding his initial acquisition of shares. Each of the aforementioned
individuals has now made the required filings.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the total compensation for services rendered
to the Company for the fiscal year ended December 31, 1998, by those persons
holding the position of Chief Executive Officer and for each executive officer
who received more than $100,000 in salary and bonus in 1998.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------------------------------- -----------------------
ANNUAL RESTRICTED
COMPENSATION OTHER ANNUAL STOCK
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS($) COMPENSATION($) AWARD($) OPTIONS(#)
- ---------------------------------- ----------- ---------- ------------- ---------------- ---------- -----------
William C. Govier................. 1998 $ 5,800 $ 0 $ 0 $ 0 0
Chief Executive Officer and 1997 $ 138,600 $ 0 $ 0 $ 0 0
President (1) 1996 121,000 $ 39,600 $ 0 $ 0 0
James M. Hussey................... 1998 $ 197,900 $ 90,000 $ 7100 $ 187,500 400,000(4)
Chief Executive Officer and
President (1)
Aquilur Rahman.................... 1998 $ 178,000 $ 54,000 $ 9600 $ 0 0
Chief Scientific Officer 1997 $ 167,000 $ 51,000 0 0 50,000(3)
1996 $ 144,100 $ 45,000 0 0 0
Lewis Straus M.D.................. 1998 $ 110,000 $ 16,800 $ 20,000 $ 35,000 20,000(5)
Chief Medical Officer (2)
- ------------------------
(1) Dr. Grovier resigned as President, Chief Executive Officer and a Director
effective January 18, 1998. Effective March 16, 1998, Mr. James M. Hussey
succeeded Dr. Govier as President and Chief Executive Officer and was
appointed to fill the vacancy in the Board of Directors created by Dr.
Govier's departure.
(2) Dr. Stauss joined the Company as Chief Medical Officer on April 6, 1998.
(3) The stock options became exercisable for 50% of the covered shares on August
13, 1997 and the remaining shares became exercisable August 15, 1998 in
accordance with the terms of the 1995 Stock Option Plan.
(4) The stock options became exercisable for 25% of the covered shares on
January 16, 1999 and will become exercisable with respect to an additional
25% on each anniversary of such date
(5) The stock options become exercisable for 25% of the covered shares on April
6, 1999. And will become exercisable with respect to an additional 25% on
each anniversary of such date.
26
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to grants of options
to purchase Common Stock granted to the Named Executive Officers during the
fiscal year ended December 31, 1998:
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
VALUE AS ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
GRANTED TO EXERCISE FOR OPTION TERM
GRANTED EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME OPTIONS (#) FISCAL YEAR SHARE DATE 5% 10%
- ------------------------------------------ ----------- --------------- ----------- ----------- ------------ ------------
James M. Hussey........................... 400,000 71.81% $ 4.75 1/16/08 $ 1,194,900 $ 3,028,111
Lewis Strauss............................. 20,000 3.59% $ 3.75 4/06/08 $ 47,167 $ 119,531
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR, AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to stock options
exercised during the fiscal year ended December 31, 1998, and the value at
December 31, 1998 of unexercised stock options held by our executive officers:
FISCAL YEAR END OPTION VALUES
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AT FISCAL OPTIONS IN-THE
YEAR-END MONEY
SHARES EXERCISABLE/ AT FISCAL YEAR-END
ACQUIRED ON REALIZED UNEXERCISEABLE EXERCISABLE/
NAME EXERCISE (#) VALUE($) (#) UNEXERCISEABLE($)*
- ------------------------------------------------- ----------------- --------------- ----------------- ------------------
William C. Govier................................ 0 0 0/0 $ 0/$0
James M. Hussey.................................. 0 0 0/400,000 $ 0/$2,950,000
Aquilur Rahman................................... 0 0 50,000/0 $ 0/$256,250
Lewis Strauss.................................... 0 0 0/20,000 $ 0/$167,500
- ------------------------
* Represents the fair market value at December 31, 1998, of the common stock
underlying the options minus the exercise price.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of March 19, 1999 for (i) all people
that beneficially own more than 5% of the Company's outstanding common stock,
(ii) all directors, (iii) all executive officers and (iv) all executive officers
and directors as a group. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Percentage of beneficial
ownership is based on 8,454,621 shares of common stock outstanding as of March
19, 1999, plus 559,004 shares subject to warrants and options that are
considered to be beneficially owned by certain of the persons listed. Shares of
common stock subject to options or warrants
27
exercisable or convertible within 60 days of March 19, 1999 are deemed
outstanding for computing the percentage of the person or group holding such
options or warrants.
AMOUNT AND NATURE OF
PERCENTAGE OF PERCENTAGE OF
BENEFICIAL SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNERSHIP(3) OWNED
- ----------------------------------------------------------------------- --------------------- -------------------
John N. Kapoor......................................................... 2,146,957(1) 23.82%
EJ Financial Enterprises, Inc.
225 E. Deerpath, Suite 250
Lake Forest, IL 60045
John N. Kapoor 1994-A.................................................. 1,550,453(2) 17.20%
Annuity Trust
225 E. Deerpath, Suite 250
Lake Forest,IL 60045
Aquilur Rahman......................................................... 915,540 10.16%
100 Corporate North, Suite 215
Bannockburn, IL 60015
Anatoly Dritschilo..................................................... 259,136 2.87%
100 Corporate North, Suite 215
Bannockburn, IL 60015
James M. Hussey........................................................ 166,373 1.85%
100 Corporate North, Suite 215
Bannockburn, IL 60015
Erick E. Hanson........................................................ 2,000 .02%
100 Corporate North, Suite 212
Bannockburn, IL 60015
Sander Flaum........................................................... 2,000 .02%
100 Corporate North, Suite 215
Bannockburn, IL 60015
William C. Govier...................................................... 233,134 2.59%
225 E. Deerpath, Suite 250
Lake Forest,IL 60045
Mahendra Shah.......................................................... 187,106 2.08%
225 E. Deerpath, Suite 250
Lake Forest,IL 60045
Kevin M. Harris........................................................ 600 .01%
225 E. Deerpath, Suite 250
Lake Forest,IL 60045
Lewis Strauss.......................................................... 15,862 .18%
100 Corporate North, Suite 215
Bannockburn, IL 60015
All officers and a directors as group (10 persons)..................... 5,479,161 60.79%
- ------------------------
(1) Includes 620,059 shares held by John N. Kapoor Trust, dtd 9/20/89, of which
Dr. Kapoor is the sole trustee and sole beneficiary and 904,812 shares held
by EJ Financial/NEO Management, L.P. (the
28
"Limited Partnership") of which John N. Kapoor is the Managing General
Partner. The address of the John N. Kapoor Trust and the Limited Partnership
is 225 East Deerpath, Suite 250, Lake Forest, Illinois 60045. The John N.
Kapoor Trust also owns warrants to purchase 287,004 shares of common stock,
which are assumed to have been exercised for purposes of disclosing the
ownership indicated. The amount shown also includes 300,000 shares of common
stock which are held by the John N. Kapoor Charitable Trust of which Dr.
Kapoor and his spouse are co-trustees. Dr. Kapoor disclaims beneficial
ownership of the shares held by the charitable trust.
(2) The sole trustee of the John N. Kapoor 1994-A Annuity Trust is Editha
Kapoor, Dr. Kapoor's spouse. Mrs. Kapoor also serves as trustee for four
trusts which have been established for their children and which collectively
own 310,848 shares. In addition, Ms. Kapoor serves as co-trustee with Dr.
Kapoor of the John N. Kapoor Charitable Trust which shares are not included
in the reported shares.
(3) Does not include shares held by family members of officers or directors, or
trusts established for the family members of officers or director, provided
that such officers or directors do not have or share voting or investment
power with such family members or trusts and such officers or directors have
disclaimed beneficial ownership over such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November, 1997 the Company relocated its principal corporate office to
space subleased from Option Care, Inc. Mr. Hanson, a director of the Company,
was formerly President, CEO and a Director of Option Care. In addition, Dr.
Kapoor, Chairman of the Company's Board of Directors, is a director and
principal shareholder of Option Care. Dr. Kapoor holds 57.5% of the outstanding
shares of Option Care, Inc. The sublease was negotiated at arms length. The
Company expensed approximately $38,700 for rent under the Option Care sublease
during 1998.
On July 1, 1994, the Company entered into a Consulting Agreement with EJ
Financial Enterprises, Inc. ("EJ Financial"). The Consulting Agreement provides
that the Company will pay EJ Financial $125,000 per year (paid quarterly) for
certain business and financial services, including having certain officers of EJ
Financial serve as officers of the Company. Dr. John Kapoor, the Company's
Chairman of the Board is the president and a director of EJ Financial. Dr.
Mahendra Shah, Vice President of the Company, is also a Vice President of EJ
Financial. Mr. Kevin Harris, Chief Financial Officer of the Company, is Director
of Taxes and Planning of EJ Financial. Dr. Kapoor, Dr. Shah and Kevin Harris are
paid by EJ Financial. They do not receive compensation from the Company. These
charges reflect the increased need for EJ Financial's services in connection
with the operation of NeoPharm as a publicly-held Company. Unless terminated by
the parties, the management services agreement with EJ Financial automatically
renews in June of each year for a one year term.
On October 22, 1998, the Company established a $3,000,000 line of credit
(the "Line of Credit") with the John N. Kapoor Trust dtd 9/20/89 (the "Trust")
the sole trustee and sole beneficiary of which is John N. Kapoor, the Company's
Chairman. Interest on borrowings on the Line of Credit accrued at the rate of 2%
over the prime rate charged by the Northern Trust Bank. The accrued interest and
outstanding principal became due and payable at the earlier of October 1, 2001
or the date on which the Company completed a public or private offering of debt
or equity securities or a licensing agreement for its products. There were no
borrowings on the Line of Credit during 1998 and borrowings of $250,000 in 1999.
The Line of Credit was terminated in February 1999 as a result of the Company
entering in a license agreement with Pharmacia & Upjohn and the Line of Credit
was thereupon repaid in the amount of $250,000 of principal and $1,100 of
interest.
Dr. Aquilur Rahman, Chief Scientific Officer and a Director of the Company,
was formerly an associate professor of pathology and pharmacology at Georgetown
University. Dr. Anthony Dritschilo, a Director of the Company, is currently
chairman of the Department of Radiation Medicine and Medical Director of the
Georgetown Medical Center in Washington, D.C. As a result of their respective
positions
29
with Georgetown University both Dr. Rahman and Dr. Dritschilo entered into
agreements with Georgetown relating to the ownership of inventions and other
intellectual property developed while in Georgetown's employ. As part of their
agreements with Georgetown University, Dr. Rahman and Dritschilo have advised
the Company that Georgetown University will share with each of them payments
which Georgetown receives from the Company under the License Agreements between
the Company and Georgetown. While there were no royalty or other payments to
Georgetown University by the Company in 1998, as a result of the Company
entering into a License Agreement with Pharmacia & Upjohn in February 1999, a
payment of $800,000 was recently made to Georgetown University and, assuming
regulatory approval is obtained in the future for the Company's LED and LEP
compounds, additional royalty payments, which could be substantial, would be
made by the Company to Georgetown in the future which the Company understands
Georgetown would then share with the foregoing named individuals.
In connection with the Company's initial public offering, the Company
adopted a policy whereby any further transaction between the Company and its
officers, directors, principal shareholders and any affiliates of the foregoing
persons will be on terms no less favorable to the Company than could reasonably
be obtained in arm's length transactions with independent third parties, and
that any such transactions also be approved by a majority of the Company's
disinterested outside directors.
30
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
3.1 Certificate of Incorporation, as amended filed with the Commission as Exhibit 3.1 to
the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated
by reference.
3.2 Bylaws of the Registrant, as amended filed with the Commission as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (File No. 33- 90516), is incorporated by
reference.
4.1 Specimen Common Stock Certificate filed with the Commission as Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (File No. 33- 90516), is incorporated by
reference.
4.2 Specimen Warrant Certificate filed with the Commission as Exhibit 4.2 to the
Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by
reference.
4.3 Form of Representative's Warrant Agreement between the Registrant and the
Representative, including form of Representative's Warrant filed with the Commission
as Exhibit 4.3 to the Company's Registration Statement on Form S-1 (File No.
33-90516), is incorporated by reference.
4.4 Form of Warrant Agreement between the Registrant, the Representative and Harris Trust
and Savings Bank, including form of Warrant filed with the Commission as Exhibit 4.4
to the Company's Registration Statement on Form S-1 (File No. 33-90516), is
incorporated by reference.
10.1 1995 Stock Option Plan, with forms of Incentive and Nonstatutory Stock Option
Agreements filed with the Commission as Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (File No. 33-90516), is incorporated by reference.
10.2 1995 Director Option Plan, with form of Director Stock Option Agreement filed with
the Commission as Exhibit 10.2 to the Company's Registration Statement on Form S-1
(File No. 33-90516), is incorporated by reference.