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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Forthe Fiscal Year Ended Commission File No. 0-11550
December 31, 2003
PHARMOS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 36-3207413
(State or other jurisdiction of (IRS Employer Id. No.)
incorporation or organization)
99 WOOD AVENUE SOUTH, SUITE 311
ISELIN, NJ 08830
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (732) 452-9556
Securities registered pursuant to Section 12(b) of the Act:
NONE
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.03 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [x ] No [ ].
The aggregate market value of the registrant's Common Stock at June 30,
2003 held by those persons deemed to be non-affiliates was approximately
$176,106,260.
As of March 15, 2004, the Registrant had outstanding 87,913,692 shares of
its $.03 par value Common Stock.
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PART I
This Form 10-K contains "forward-looking" statements, as defined in the Private
Securities Litigation Reform Act of 1995 that are based on current expectations,
estimates and projections. Statements that are not historical facts, including
statements about our beliefs and expectations, are forward-looking statements.
These statements involve potential risks and uncertainties; therefore, actual
results may differ materially. You are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date on which they
were made. We do not undertake any obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise.
Important factors that may affect these expectations include, but are not
limited to: the risks and uncertainties associated with completing pre-clinical
and clinical trials of our compounds that demonstrate such compounds' safety and
effectiveness; manufacturing losses and risks associated therewith; obtaining
additional financing to support our operations; obtaining and maintaining
regulatory approval for such compounds and complying with other governmental
regulations applicable to our business; obtaining the raw materials necessary in
the development of such compounds; consummating and maintaining collaborative
arrangements with corporate partners for product development; achieving
milestones under collaborative arrangements with corporate partners; developing
the capacity to manufacture, market and sell our products, either directly or
with collaborative partners; developing market demand for and acceptance of such
products; competing effectively with other pharmaceutical and biotechnological
products; obtaining adequate reimbursement from third party payers; attracting
and retaining key personnel; obtaining patent protection for discoveries and
risks associated with commercial limitations imposed by patents owned or
controlled by third parties; and those other factors set forth in "Risk Factors"
in the Company's most recent Registration Statement.
We do not undertake to discuss matters relating to our ongoing clinical trials
or our regulatory strategies beyond those, which have already been made public
or discussed herein.
ITEM 1. BUSINESS
INTRODUCTION
Pharmos Corporation (the "Company" or "Pharmos") is a bio-pharmaceutical company
that discovers and develops new drugs to treat a range of neuro-inflammatory
disorders. We have a portfolio of drug candidates under development, as well as
discovery, preclinical and clinical capabilities. Prior to the sale of our
ophthalmic product line to Bausch & Lomb Incorporated ("Bausch & Lomb") in
October of 2001, we had two successful ophthalmic products on the market. To
date, our principal sources of cash have been the sale of our ophthalmic
business, revenues from our ophthalmic product line, public and private
financings and research grants.
Our main product, dexanabinol, is a synthetic non-psychotropic cannabinoid
currently in late-stage clinical development for the treatment of severe
traumatic brain injury (TBI). In mid-March 2004, the Company completed
enrollment of U.S. and international TBI patients in its pivotal, Phase III
clinical trial of dexanabinol. The Phase II trial, completed in early 2000,
demonstrated a good safety profile and showed a trend of efficacy in the
drug-treated groups versus the placebo group. The trial also demonstrated that
dexanabinol significantly inhibited the increase in intracranial pressure above
20mmHg, the level of pressure necessitating immediate treatment. In addition,
neurological recovery appeared to be accelerated in the dexanabinol treated
group, such that the percentage of dexanabinol treated patients achieving good
recovery at one month after injury was significantly higher than patients in the
placebo group.
In September 2003, the FDA granted fast track designation to dexanabinol for
treatment of severe traumatic brain injury. Fast track designation allows New
Drug Application (NDA) submission on a rolling basis as each section is
completed and requires an FDA priority review of the full NDA.
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Our development of dexanabinol for severe traumatic brain injury involves
only one pivotal clinical trial. Assuming a successful clinical trial, Pharmos
plans to submit a New Drug Application to the FDA. A requirement by the FDA for
further significant clinical testing after the completion of the current pivotal
Phase III clinical trial or a rejection of our NDA would have a material adverse
effect on Pharmos and its operations.
In March 2003, the Company initiated a double-blinded placebo controlled Phase
II trial of dexanabinol as a preventive agent against the cognitive impairment
(CI) that can follow coronary surgery involving cardiopulmonary bypass (CS-CPB).
This trial is being conducted at five leading medical centers in Israel.
Enrollment of patients undergoing CS-CPB in the trial is expected to be
completed by Q2 2004.
Pharmos is developing synthetic compounds, which preferentially activate the CB2
cannabinoid receptor. Preclinical investigations of these compounds are underway
for treatment of a wide range of neuro-inflammatory disorders, especially pain.
One compound, PRS 211.375 has been selected for advanced preclinical development
including toxicology and Absorption, Distribution, Metabolism, Excretion (ADME)
in preparation for clinical testing.
On October 9, 2001, Pharmos sold all of its rights to its ophthalmic product
line to Bausch & Lomb for cash and assumption of certain ongoing obligations.
Please refer to the description of the transaction under the heading Bausch &
Lomb.
STRATEGY
Pharmos' business is the discovery and development of new drugs to treat a range
of neuro-inflammatory disorders. We seek to enter into collaborative
relationships with established pharmaceutical companies to complete development
and commercialization of our products.
Pharmos is applying its experience in rational drug design, novel drug delivery
technology and drug development to developing products directed at several
therapeutic indications, including neuroprotective compounds for traumatic brain
injury and stroke as well as neurological, vascular and other conditions
involving inflammatory components such as pain.
PRODUCTS
PLATFORM TECHNOLOGIES
Pharmos is developing two families of compounds based on its scientific
knowledge of the medicinal activities of cannabinoids, a class of compounds with
chemical structures related to the main active component of cannabis. The
company utilizes state-of-the-art technologies to synthesize, evaluate and
develop new cannabinoid molecules that appear to exhibit enhanced therapeutic
benefit. According to Pharmos' research to date, dexanabinol has been shown to
possess minimal psychotropic properties. As part of the filing requirements with
FDA, Pharmos will study the addiction potential of dexanabinol. If the potential
of addiction is found in the animal, then additional regulatory requirements may
be imposed by the FDA and Drug Enforcement Agency (DEA). Pharmos continues to
expand its library of compounds through a hybrid methodology combining the
rational design of compounds based on knowledge of detailed molecular
requirements for drug activity with combinatorial chemistry, a technique that
utilizes randomized chemical reactions to synthesize large numbers of different
molecules. In contrast to the conventional random methods of combinatorial
chemistry, this hybrid approach leads to a larger percentage of synthesized
compounds that demonstrate activity in screening assays and increases the
potential of developing potent and selective drug candidates.
Pharmos' chemical library consists of two chemically distinct cannabinoid
platforms, tricyclic dextrocannabinoids and bicyclic cannabinoids. The two
classes of synthetic cannabinoids have different
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mechanisms of action, but there is considerable overlap in their therapeutic
potential for treating neurological, cardiovascular, autoimmune and inflammatory
disorders.
TRICYCLIC DEXTROCANNABINOIDS
The tricyclic dextrocannabinoids, for which dexanabinol is the prototype, do not
bind appreciably to either of the two known classes of cannabinoid receptors.
Therefore, the tricyclic dextrocanabinoids demonstrate minimal psychotropic and
other negative side effects that are associated with naturally occurring
cannabinoids. The biological activity of drug candidates in this family derives
from their ability to block the activation of specific NMDA mediated channels in
nerve cells and attenuating several major inflammatory mechanisms by modulating
the synthesis of pro-inflammatory factors. Both activities may reduce the amount
of sudden and programmed cell death caused by certain disorders.
Dexanabinol is currently undergoing a Phase III clinical study for the treatment
of severe head injury. In addition, it is undergoing a Phase II trial for use as
a preventive agent against the cognitive impairment (CI) that can follow
coronary surgery involving cardiopulmonary bypass (CS-CPB). Other tricyclic
dextrocannabinoids are under evaluation in preclinical models for stroke;
neuropathic pain, which results from nerve damage or dysfunction; nociceptive
pain, which is caused by activation of nerve sensors as a result of acute tissue
damage; and autoimmune disorders such as multiple sclerosis.
DEXANABINOL
Dexanabinol - Clinical Development
Pharmos has completed two Phase I studies in healthy volunteers that
demonstrated dexanabinol's safety and tolerance at doses higher than the
expected therapeutic dose. A Phase II clinical trial of dexanabinol in severe
traumatic brain injury patients was completed in early 2000. The objective of
this study was to establish the safety of intravenous dexanabinol when given to
patients within 6 hours after sustaining a severe traumatic brain injury. The
study was conducted at six neurosurgical intensive care units in Israel between
October 1996 and March 1998. A total of 100 patients were enrolled in the study;
fifty-one patients received dexanabinol and forty-nine received matching
placebo. Patients were randomized to one of three treatment arms and where
treated with dexanabinol 48mg, 150mg or 200mg. Because the study was conducted
in a dose escalating, stepwise fashion each treatment group had a matching
placebo group.
The study achieved its objective in establishing the safety of dexanabinol in
patients suffering from traumatic brain injury. There were no unexpected adverse
experiences reported in either the drug-treated or the placebo group. In
addition, the reported adverse experiences did not differ between the drug and
placebo groups in the nature or severity of the events. In this study the
mortality rate in the placebo group was 14.3 percent and 11.8 percent in the
dexanabinol group.
Although the study was not statistically powered to detect differences in
efficacy, some efficacy parameters were explored as secondary safety parameters
to ascertain if dexanabinol did not negatively effect patient outcome.
Intracranial pressure (ICP) is an important assessment of the brain's reaction
to injury. An ICP above 20mmHg is considered to be clinically significant,
necessitating immediate treatment. Dexanabinol treated patients had a lower
duration of elevated ICP (above 20mmHg) compared to the placebo group. The
Glasgow Outcome Score (GOS) showed a higher percentage of good outcome in the
dexanabinol-treated patients. During the early post-treatment period (1 month)
the effect was statistically significant, whereas the difference at 3 and 6
months was not. Similarly, the dexanabinol-treated patients scored better than
the placebo patients on the Galveston Orientation and Amnesia Test (GOAT) during
the six month follow-up period.
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The GOAT, which is a neurological test that measures awareness of surroundings
and ability to remember, demonstrated significantly better results in the
dexanabinol treated patients at 1, 3 and 6 months follow-up compared to placebo.
A manuscript describing the analysis of the first two cohorts of patients was
published by Knoller, et al. in, Critical Care Medicine 2002,Vol30:548-554.
INTERNATIONAL PHASE III CLINICAL TRIAL OF DEXANABINOL FOR SEVERE TRAUMATIC BRAIN
INJURY
In January 2001, the international Phase III pivotal trial of dexanabinol for
severe traumatic brain injury was initiated in Europe and Israel. In February
2003, the FDA accepted the Company's IND application, which allowed the Company
to commence patient enrollment in the U.S. as part of the international trial.
Over eighty centers throughout the U. S., Europe, Australia, and Israel enrolled
patients in the trial. European countries participating in the study included
Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Poland,
Spain, Switzerland, Turkey, and the U.K. Collaborations with the European Brain
Injury Consortium and the American Brain Injury Consortium, which were key to
recruitment efforts with trauma centers, will continue through trial completion
and data analysis.
In mid-March 2004, the Company completed enrollment of U.S. and international
TBI patients in its pivotal, Phase III clinical trial of dexanabinol.
Approximately six months after the completion of enrollment, Pharmos anticipates
completing the clinical trial, as the trial protocol requires periodic
examinations and testing of patients enrolled in the trials during the six
months following their initial treatment. Several months after the completion of
the last patient last follow-up visit, Pharmos plans to unblind the study and
announce the main study results.
PHASE II TRIAL OF DEXANABINOL TO PREVENT COGNITIVE IMPAIRMENT IN FOLLOWING
CORONARY SURGERY UNDER CARDIOPULMONARY BYPASS
In March 2003, the Company initiated a double-blinded placebo controlled Phase
II trial of dexanabinol as a preventive agent against the cognitive impairment
(CI) that can follow coronary surgery involving cardiopulmonary bypass (CS-CPB)
operations. This trial is being conducted at five leading medical centers in
Israel. The enrollment of CS-CPB patients in this trial is expected to be
completed in the second quarter of 2004.
BICYCLIC CANNABINOIDS
Bicyclic cannabinoids are synthetic analogs and derivatives of the tricyclic
dextrocannabinoids that have some properties that are similar to those of their
parent tricyclic molecules as well as possessing some additional properties.
As with the tricyclic dextrocannabinoids, the bicyclic cannabinoids may display
less of the unwanted psychotropic side effects seen with some natural
cannabinoids. However, the molecular activity of the bicyclics is different from
the tricyclics in that the bicyclic cannabinoids bind with high affinity to the
cannabinoid type two (CB2) receptor which is located primarily on immune and
inflammatory cells and with appreciably lower affinity to the cannabinoid type
one (CB1) receptor, located in the central nervous system. Pharmaceuticals that
preferentially activate the CB2 receptors may be important in treating various
pain syndromes as well as autoimmune, inflammatory and neuro-degenerative
disorders. Several candidates from Pharmos' bicyclic cannabinoid library have
demonstrated promise in animal models for autoimmune inflammatory disorders such
as multiple sclerosis and rheumatoid arthritis. These compounds have also
demonstrated efficacy in animal models of neuropathic and nociceptive pain. In
preclinical models these compounds have demonstrated analgesic activity
equivalent to morphine but without the unwanted opioid side effects such as
sedation and repiratory depression. The anti-inflammatory activity of these
compounds is equivalent or superior to non-steroidal anti-inflammatory drugs
(NSAIDS). One compound, PRS 211.375 is being tested in preclinical experiments
to assess its analgesic and other therapeutic potentials.
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LOTEPREDNOL ETABONATE
Loteprednol etabonate is a unique steroid that is designed to act in the eye and
alleviate inflammatory and allergic conditions, and that is quickly and
predictably reduced into inactive particles before it reaches the inner eye or
systemic circulation. This action results in improved safety by avoiding the
side effects related to exposure to most ocular steroids. In the eye, the most
unwanted side effect of steroids is the elevation of intra-ocular pressure,
which can be sight threatening. While steroids, for lack of an alternative, are
regularly used for severe inflammatory conditions of the eye, milder conditions,
such as allergies, are preferentially treated with less effective non-steroidal
agents.
On October 9, 2001, Pharmos sold all of its rights to its ophthalmic product
line to Bausch & Lomb for cash and assumption of certain ongoing obligations.
Please refer to the description of the transaction under the heading Bausch &
Lomb, below.
COMPETITION
The pharmaceutical industry is highly competitive. Pharmos competes with a
number of pharmaceutical companies that have financial, technical and marketing
resources that are significantly greater than those of Pharmos. Some companies
with established positions in the pharmaceutical industry may be better equipped
than Pharmos to develop, market and distribute products in the markets Pharmos
is seeking to enter. A significant amount of pharmaceutical research is also
being carried out at universities and other not-for-profit research
organizations. These institutions are becoming increasingly aware of the
commercial value of their findings and are becoming more active in seeking
patent protection and licensing arrangements to collect royalties for the use of
technology they have developed. They may also market competitive commercial
products on their own or through joint ventures and will compete with Pharmos in
crecuiting highly qualified scientific personnel. Further, these institutions
will compete with Pharmos in recruiting qualified patients for enrollment in
their trials.
Pharmos is pursuing areas of product development in which there is a potential
for extensive technological innovation. Pharmos' competitors may succeed in
developing products that are more effective than those of Pharmos. Rapid
technological change or developments by others may result in Pharmos' potential
products becoming obsolete or non-competitive.
We know of no products on the market or in late stage trials which would be
competitive with dexananbinol. For Bausch & Lomb's ophtahalmic product, LE-T, in
which we have a financial interest of up to $10 million market potential, there
are competing products currently on the market including Tobradex(R) from Alcon,
which is the largest selling product in its category, as well as Vexol(R) from
Alcon and Pred Forte(R) from Allergan.
COLLABORATIVE RELATIONSHIPS
Pharmos' commercial strategy is to develop products independently and, where
appropriate, in collaboration with established pharmaceutical companies and
institutions. Collaborative partners may provide financial resources, research
and manufacturing capabilities and marketing infrastructure to aid in the
commercialization of Pharmos' products in development as well as potential
future products. Depending on the availability of financial, marketing and
scientific resources, among other factors, Pharmos may license its technology or
products to others and retain profit sharing, royalty, manufacturing,
co-marketing, co-promotion or similar rights. Any such arrangements could limit
Pharmos' flexibility in pursuing alternatives for the commercialization of its
products. Due to the often unpredictable nature of the collaborative process,
Pharmos cannot be certain that it will be able to establish any additional
collaborative arrangements or that, if established, any of these relationships
will be successful.
BAUSCH & LOMB
In October 2001, Pharmos sold to Bausch & Lomb all of its rights in the U.S. and
Europe to manufacture and market Lotemax(R) and Alrex(R) and the third
loteprednol etabonate-based product, LE-T, which was submitted to the FDA for
marketing approval in September 2003.
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Pharmos received gross proceeds of approximately $25 million in cash.
Additionally Pharmos may receive up to an additional $12 million in gross
proceeds, based upon the date of FDA approval of the product and good faith
negotiations with Bausch & Lomb, and a milestone payment of up to $10 million if
actual sales during the first two years following commercialization exceed
agreed-upon forecasted amounts. Pharmos agreed to pay up to $3.75 million of the
costs of developing LE-T, of which $600,000 was deducted from the purchase price
paid by Bausch & Lomb in October 2001. In July 2003, another $1.57 million was
paid to Bausch & Lomb. As of December 31, 2003, Pharmos owes an additional $1.56
million as its share of these research and development related LE-T expenses,
which is included in accounts payable and represents the final amount Pharmos
owes Bausch & Lomb for their project development under the terms of the 2001
agreement.
Pharmos paid Dr. Nicholas Bodor, the loteprednol etabonate patent owner and
licensor, who is also a former director of and consultant to Pharmos, a total of
approximately $2.7 million from the initial proceeds of the sale of Lotemax(R)
and Alrex(R) in return for his consent to Pharmos' assignment of its rights
under the license agreement to Bausch & Lomb ($1.5 million paid at closing and
$1.2 million paid in October 2002). Pharmos will also pay Dr. Bodor 11% of our
LE-T proceeds due upon FDA approval and 14.3% of the payment we will receive in
the event that certain sales levels are exceeded in the first two years
following commencement of sales in the U.S.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
PATENTS AND PROPRIETARY RIGHTS
Proprietary protection generally has been important in the pharmaceutical
industry, and the commercial success of products incorporating Pharmos'
technologies may depend, in part, upon the ability to obtain strong patent
protection.
Some of the technologies underlying Pharmos' potential products were invented by
or are owned by various third parties, including the Hebrew University of
Jerusalem. Pharmos is the licensee of these technologies under patents held by
the applicable owner, through licenses that generally remain in effect for the
life of the applicable patent. Pharmos generally maintains, at its expense, U.S.
and foreign patent rights with respect to both the licensed technology and its
own technology and files and/or prosecutes the relevant patent applications in
the U.S. and foreign countries. Pharmos also relies upon trade secrets,
know-how, continuing technological innovations and licensing opportunities to
develop its competitive position. Pharmos' policy is to protect its technology
by, among other things, filing, or requiring the applicable licensor to file,
patent applications for technology that it considers important to the
development of its business. Pharmos intends to file additional patent
applications, when appropriate, relating to its technology, improvements to its
technology and to specific products it develops.
The patent positions of pharmaceutical firms, including Pharmos, are uncertain
and involve complex factual questions. In addition, the coverage claimed in a
patent application can be significantly reduced before or after the patent is
issued. Consequently, Pharmos does not know whether any of the pending patent
applications underlying the licensed technology will result in the issuance of
patents or, if any patents are issued, whether they will provide significant
proprietary protection or will be circumvented or invalidated. Since patent
applications in the U.S. and elsewhere publish only 18 months after priority
date, and since publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, Pharmos cannot be certain that
it or its licensors, as the case may be, were the first creators of inventions
covered by pending and issued patents or that it or its licensors, as the case
may be, were the first to file patent applications for such inventions.
Moreover, it may be necessary for Pharmos to participate in interference
proceedings declared by the U.S. Patent and Trademark Office in order to
determine priority of invention. Involvement in these proceedings could result
in substantial cost to Pharmos, even if the eventual outcomes are favorable to
Pharmos. Because the results of the judicial process are often uncertain, we
cannot be
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certain that a court of competent jurisdiction will uphold the patents, if
issued, relating to the licensed technology, or that a competitor's product will
be found to infringe those patents.
Other pharmaceutical and drug delivery companies and research and academic
institutions may have filed patent applications or received patents in Pharmos'
fields. If patents are issued to other companies that contain competitive or
conflicting claims and those claims are ultimately determined to be valid, it is
possible that Pharmos would not be able to obtain licenses to these patents at a
reasonable cost or be able to develop or obtain alternative technology.
Pharmos also relies upon trade secret protection for its confidential and
proprietary information. It is always possible that others will independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to Pharmos' trade secrets.
It is Pharmos' policy to require its employees, consultants, outside scientific
collaborators, sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting or
advisory relationships with Pharmos. These agreements generally provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with Pharmos is to be kept confidential
and not disclosed to third parties except in specific circumstances. Further,
these agreements provide for the maintenance of confidentiality following the
termination of the individual's relationship with Pharmos. In the case of
employees and certain consultants, the agreements provide that all inventions
conceived by the individual in the course of their employment or consulting
relationship shall be the exclusive property of Pharmos. Due to the vital nature
of trade secrets and the often uncertain results of the judicial process, we
cannot be sure, however, that these agreements will provide meaningful
protection or adequate remedies for Pharmos' trade secrets in the event of
unauthorized use or disclosure of such information. Pharmos' patents and
licenses underlying its potential products described herein are summarized
below.
Neuroprotective Agents. Pharmos has licensed from the Hebrew University of
- ------------------------
Jerusalem, which is the academic affiliation of the inventor, Dr. Raphael
Mechoulam, patents covering new cannabinoid compounds that have demonstrated
beneficial activity which may prevent damage or death to nerve cells resulting
from various diseases and disorders of the nervous system while appearing to be
devoid of most of the deleterious side effects usually associated with this
class of compounds. Several patents have been designed to protect this family of
compounds and their uses devised by inventors at Pharmos and the inventors at
the Hebrew University. The earliest patent applications resulted in patents
issued in 1989, and the most recent patents date from 2003. These patents cover
dexanabinol, which is under development for the treatment of head trauma,
post-operative cognitive impairment and other conditions, and new molecules
discovered by modifying the chemical structure of dexanabinol.
Anti-inflammatory and Analgesic Agents. Pharmos has also licensed from the
- ------------------------------------------
Hebrew University of Jerusalem, patents for inventions of Dr. Mechoulam covering
new compounds that have demonstrated beneficial activity, which may be effective
in treating not only neurological disorders, but also inflammatory diseases and
most importantly pain. These bicyclic compounds are expected to cause less
adverse deleterious side effects usually associated with cannabinoids. Several
patents have been designed to protect this family of compounds and their uses by
inventors at Pharmos and Hebrew University. The earliest patent applications
resulted in patents issued in 1995, and the most recent patent dates from 2003.
Selective Estrogen Receptor Modulators (SERM). Pharmos has filed patent
- --------------------------------------------------
applications in the U.S., Israel, Australia, Canada, Japan, Brazil, Korea and
the European Patent Office to protect certain derivatives of tamoxifen, a drug
approved by the FDA, and other molecules that enhance or improve the actions of
steroid hormones. In July 1997, the U.S. Patent and Trademark Office issued a
patent with claims covering the compounds themselves and their use. A second
patent issued in July 2000 claims the use of these compounds as agents to
inhibit growth of new blood vessels, a potential method of treating various
cancers. The most recent patents issued in these families are dated in 2003.
Pharmos believes that these derivatives may be superior to the parent compounds
in that they are devoid of central nervous system side effects.
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Emulsion-based Drug Delivery Systems. In the general category of SubMicron
- ----------------------------------------
Emulsion technology, Pharmos holds a license to one family of patents from the
Hebrew University of Jerusalem and has filed ten independent patent families of
applications including more than ninety patent applications that are at
different stages of prosecution. These patents and patent applications have been
devised to protect a group of formulation technologies devised by Pharmos and
the inventors as they relate to pharmaceutical and medicinal products. The
earliest patent filings for SubMicron Emulsion technology date from 1993 and the
most recent are dated in 2003. These patents cover a broad range of new
formulations, which improve the absorption of drugs that are poorly soluble in
water.
LICENSES
As discussed above, Pharmos has licensed patents covering neuroprotective agents
and certain emulsion-based drug delivery systems from the Hebrew University of
Jerusalem. Pharmos assigned its rights as licensee of Dr. Bodor's loteprednol
etabonate-based ophthalmic compounds to Bausch & Lomb in October 2001.
In December 2001, Pharmos' subsidiary Pharmos Ltd. licensed its patents related
to the oral delivery of lipophilic substances in the limited field of use of
nutraceuticals to Herbamed, Ltd., a company in Israel controlled by the Chairman
and Chief Executive Officer of Pharmos. The terms of the license agreement are
discussed in "Item 13. Certain Relationships and Related Transactions."
Site-Specific Drugs. In the general category of site-specific drugs that are
- ---------------------
active mainly in the eye and have limited systemic side effects, Pharmos
licensed several patents from Dr. Nicholas Bodor. It assigned its rights under
the Bodor license to Bausch & Lomb in October 2001 in connection with its sale
of its ophthalmic business. The earliest patents date from 1984 and the most
recent from 1996. Some of these patents cover loteprednol etabonate-based
products and its formulations.
GOVERNMENT REGULATION
FDA AND COMPARABLE AUTHORITIES IN OTHER COUNTRIES
Regulation by governmental authorities in the U.S. and other countries is a
significant factor in our ongoing research and development activities and in the
production and marketing of our products. Pharmaceutical products intended for
therapeutic use in humans are governed in the U.S. by the Federal Food, Drug and
Cosmetic Act (21 U.S.C. ss. 321 et seq.) and by FDA regulations and by
comparable agency regulations in other countries. Specifically, in order to
undertake clinical tests, to produce and market products for human therapeutic
or diagnostic use, mandatory procedures and safety standards established by the
FDA and Department of Health and Human Services in the U.S. and comparable
agencies in other countries must be implemented and followed. These standards
include protection of human research subjects.
The following is an overview of the steps that must be followed before a drug
product may be marketed lawfully in the U.S.:
(i) Preclinical studies including pharmacology, laboratory evaluation
and animal studies to test for initial safety and efficacy;
(ii) Submission to the FDA of an Investigational New Drug (IND)
Application, which must become effective before human clinical
trials may commence;
(iii) Adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug in its intended application;
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(iv) Submission to the FDA of a New Drug Application (NDA), which
application is not automatically accepted by the FDA for
consideration; and
(v) FDA approval of the New Drug Application prior to any commercial
sale or shipment of the drug.
In addition to obtaining FDA approval for each product, each drug-manufacturing
establishment must be registered or licensed by the FDA for each product sold
within the US that is manufactured at that facility. Manufacturing
establishments are subject to inspections by the FDA and by other national and
local agencies and must comply with current Good Manufacturing Practices
(cGMPs), requirements that are applicable to the manufacture of pharmaceutical
drug products and their components.
Preclinical studies include laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of the product and
its formulation. The results of the preclinical studies are submitted to the FDA
as part of an IND, and unless the FDA objects, the application will become
effective 30 days following its receipt by the FDA. If the potential of
addiction is found in the animal, then additional regulatory requirements maybe
imposed by the FDA and DEA.
Clinical trials involve the administration of the drug to healthy volunteers as
well as to patients under the supervision of a qualified "principal
investigator", who is a medical doctor. Clinical trials in humans are necessary
because effectiveness in humans may not always be gleaned from findings of
effectiveness in animals. They are conducted in accordance with protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA
as part of the application. Each clinical study is approved and monitored by an
independent Institutional Review Board (IRB) (Ethics Committee) at each clinical
site. The IRB must consider, among other things, the process of obtaining the
informed consents of each study subject, the safety of human subjects, the
possible liability of the institution conducting a clinical study, as well as
various ethical factors.
Clinical trials typically are conducted in three sequential phases, although the
phases may overlap. In Phase I, the initial introduction of the drug to humans,
the drug is tested in a small group of healthy volunteers for safety and
clinical pharmacology such as metabolism and tolerance. Phase I trials may also
yield preliminary information about the product's effectiveness and dosage
levels. Phase II involves detailed evaluation of safety and efficacy of the drug
in patients with the disease or condition being studied. It also involves a
determination of optimal dosage and identification of possible side effects in a
larger patient group. Phase III trials consist of larger scale evaluation of
safety and efficacy and usually require greater patient numbers and multiple
clinical trial sites, depending on the clinical indications for which marketing
approval is sought.
The process of completing clinical testing and obtaining FDA approval for a new
product is likely to take a number of years and require the expenditure of
substantial resources. The FDA may grant an unconditional approval of a drug for
a particular indication or may grant approval conditioned on further
post-marketing testing. The FDA also may conclude that the submission is not
adequate to support an approval and may require further clinical and preclinical
testing, re-submission of the New Drug Application, and further review. Even
after initial FDA approval has been obtained, further studies may be required to
provide additional data on safety or to gain approval for the use of a product
for clinical indications other than those for which the product was approved
initially. This could delay the NDA approval process.
The 1962 amendments to the Federal Food, Drug and Cosmetic Act required for the
first time that drug effectiveness be proven by adequate and well-controlled
clinical trials. The FDA interpretation of that requirement is that at least two
such trials are necessary to demonstrate effectiveness for approval of an NDA.
This interpretation is based on the scientific need for independent
substantiation of study results. However, Section 115 of FDAMA revised Section
505 of the Act to read, in pertinent part that "based on relevant science, ...
data from one adequate and well-controlled clinical investigation and
confirmatory evidence ... are sufficient to establish effectiveness." The FDA
has not issued comprehensive standards of testing conditions for pivotal trials.
The FDA has interpreted this language for approval based on a single
10
persuasive trial to be limited to special cases including life-threatening
diseases where no effective therapy exists. The FDA still maintains a preference
for at least two adequate and well-controlled clinical trials. Therefore,
despite the design and scale of Pharmos' trial, there are no assurances that the
FDA would approve the NDA based on a single trial. Dexanabinol has been shown to
be devoid of psychotropic properties, and Pharmos believes that the potential of
addictive properties is remote. However, because dexanabinol is a cannabinoid
the Company will conduct a test to specifically evaluate any addictive
potential. If the test shows the possibility of addiction, additional regulatory
requirements would have to be met which could delay the NDA approval process.
Pharmos' products will be subject to foreign regulatory approval before they may
be marketed abroad. Marketing beyond the US is subject to regulatory
requirements that vary widely from country to country. In the European Union,
the general trend has been towards coordination of the common standards for
clinical testing of new drugs. Centralized approval in the European Union is
coordinated through the European Medicines Evaluation Agency (EMEA). The time
required to obtain regulatory approval from comparable regulatory agencies in
each country may be longer or shorter than that required for FDA or EMEA
approval. Further, in certain markets, reimbursement may be subject to
governmentally mandated prices.
CORPORATE HISTORY
Pharmos Corporation, (formerly known as Pharmatech, Inc.), a Nevada corporation
was incorporated under the laws of the State of Nevada on December 20, 1982. On
October 29, 1992, Pharmos, the Nevada Corporation, completed a merger with a
privately held New York corporation known as Pharmos Corporation, and in 1992
acquired all of the outstanding shares of Xenon Vision, Inc., a privately held
Delaware corporation.
HUMAN RESOURCES
As of March 1, 2004, Pharmos had 59 employees (53 full-time and 6 part-time),
including 15 in the U.S. (1 part-time) and 44 in Israel (5 part-time). Of the 59
employees, 20 hold doctorate or medical degrees.
Pharmos' employees are not covered by a collective bargaining agreement. To
date, Pharmos has not experienced employment-related work stoppages and
considers its employee relations to be excellent.
PUBLIC FUNDING AND GRANTS
Pharmos' subsidiary, Pharmos Ltd., has received certain funding from the Chief
Scientist of the Israel Ministry of Industry and Trade (the Chief Scientist)
for: (1) research and development of dexanabinol; (2) SubMicron Emulsion
technology for injection and nutrition; and (3) research relating to
pilocarpine, dexamethasone and ophthalmic formulations for dry eyes. As of
December 31, 2003, the total amounts received under such grants amounted to
$10,905,358. Aggregated future royalty payments related to sales of products
developed, if any, as a result of the grants are limited to $9,203,583 based on
grants received through December 31, 2003. Pharmos will be required to pay
royalties to the Chief Scientist ranging from 3% to 5% of product sales, if any,
as a result of the research activities conducted with such funds. Aggregate
royalty payments per product are limited to the amount of funding received to
develop that product. Additionally, funding by the Chief Scientist places
certain legal restrictions on the transfer of know-how and the manufacture of
resulting products outside of Israel. See "Conditions in Israel."
Pharmos received funding of $925,780 from the Israel-U.S. Binational Industrial
Research and Development Foundation to develop Lotemax(R) and LE-T. Pharmos was
required to pay royalties to this foundation on product sales, if any, of 2.5%,
through September 1999, then 5% thereafter, as a result of the research
activities conducted with such funds. Aggregate royalty payments are limited to
150% of the amount of such funding received, linked to the exchange rate of the
U.S. dollar and the New Israeli Shekel. During October 2001, in connection with
the sale of Pharmos's existing ophthalmic business, Pharmos paid
11
the foundation royalties of approximately $1.0 million for Lotemax(R) which
concluded Pharmos' obligation to pay royalties to the foundation with respect to
Lotemax(R). Pharmos retains the contingent obligation to repay that portion of
funding it received from the foundation with respect to LE-T of $308,350.
In April 1997, Pharmos signed an agreement with the Consortium Magnet, operated
by the Office of the Chief Scientist, for developing generic technologies and
for the design and development of drug and diagnostic kits. Under such
agreement, Pharmos was entitled to a non-refundable grant amounting to
approximately 60% of the actual research and development and equipment
expenditures on approved projects. No royalty obligations were required within
the framework. As of December 31, 2003 Pharmos had received grants totaling
$1,659,549 for this program which was completed and closed.
During 2003, the Company signed an agreement with Consortium Magnet to develop a
supply of water-soluble prodrugs of lipophilic compounds that improve their
bioavailability and biopharmaceutical properties. Under such agreement the
Company is entitled to a non-refundable grant amounting to approximately 60% of
actual research and development and equipment expenditures on approved projects.
No royalty obligations are required within the framework. During 2003, Pharmos
was awarded a grant of $220,000.
CONDITIONS IN ISRAEL
A significant part of Pharmos' operations is conducted in Israel through its
wholly owned subsidiary, Pharmos Ltd., and we are directly affected by economic,
political and military conditions there.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, as well as
incidents of civil unrest. In addition, Israel and companies doing business with
Israel have, in the past, been the subject of an economic boycott. Although
Israel has entered into various agreements with certain Arab countries and the
Palestinian Authority, there has been an increase in the unrest and terrorist
activity that began in September 2000 and has continued with varying levels of
severity into 2004. We do not believe that the political and security situation
has had any material negative impact on our business to date; however, the
situation is volatile and we cannot be sure that security and political
conditions will have no such effect in the future.
Many of our employees in Israel are obligated to perform military reserve duty.
In the event of severe unrest or other conflict, individuals could be required
to serve in the military for extended periods of time. Our operations could be
disrupted by the absence for a significant period of time of some of our
employees due to military service.
Since 1997, Pharmos Ltd. has received funding from the Office of the Chief
Scientist of the Israel Ministry of Industry and Trade relating to various
technologies for the design and development of drugs and diagnostic kits. This
funding prohibits the transfer or license of know-how and the manufacture of
resulting products outside of Israel without the permission of the Chief
Scientist. Although we believe that the Chief Scientist does not unreasonably
withhold this permission if the request is based upon commercially justified
circumstances and any royalty obligations to the Chief Scientist are
sufficiently assured, the matter is solely within his discretion and we cannot
be sure that such consent, if requested, would be granted upon terms
satisfactory to us or granted at all. Without such consent, we would be unable
to manufacture any products developed by this research outside of Israel, which
may greatly restrict any potential revenues from such products.
AVAILABILITY OF SEC FILINGS
All reports filed by the Company with the SEC are available free of charge via
EDGAR through the SEC website at www.sec.gov. In addition, the public may read
and copy materials filed by the Company with the SEC at the SEC's public
reference room located at 450 Fifth St., N.W., Washington, D.C., 20549. The
12
company also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual
Report at no charge available through its website at www.pharmoscorp.com as soon
as reasonably practicable after filing electronically such material with the
SEC. Copies are also available, without charge, from Pharmos Corporation, 99
Wood Avenue South, Suite 311, Iselin, NJ, 08830.
ITEM 2. PROPERTIES
Pharmos is headquartered in Iselin, New Jersey, where it leases its executive
offices and maintains clinical, regulatory and business development staff.
Pharmos also leases facilities used in the operation of its research,
development, pilot manufacturing and administrative activities in Rehovot,
Israel. These facilities have been improved to meet the special requirements
necessary for the operation of Pharmos' research and development activities. In
the opinion of the management, these facilities are sufficient to meet the
current and anticipated future requirements of Pharmos. In addition, management
believes that it has sufficient ability to renew its present leases related to
these facilities or obtain suitable replacement facilities. The monthly lease
obligations for our office space in 2004 are $17,433 for Iselin, New Jersey and
$23,735 for Rehovot, Israel. The approximate square footage for Iselin, New
Jersey and Rehovot, Israel are 10,403 and 21,600, respectively.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "PARS." The following table sets forth the range of high and low bid
prices per share for the Common Stock as reported on the NASDAQ National Market
System and the Nasdaq SmallCap Market during the periods indicated.
YEAR ENDED DECEMBER 31, 2003 HIGH LOW
- ---------------------------- ------- -------
1st Quarter............................... $1.25 $0.76
2nd Quarter............................... 2.65 0.50
3rd Quarter............................... 2.95 1.46
4th Quarter............................... 5.02 2.35
YEAR ENDED DECEMBER 31, 2002 HIGH LOW
- ---------------------------- ------- -------
1st Quarter .............................. $2.55 $1.68
2nd Quarter .............................. 1.73 0.89
3rd Quarter .............................. 1.55 0.73
4th Quarter .............................. 1.38 1.01
The high and low bid prices for the Common Stock during the first quarter of
2004 (through March 12, 2004) were $4.98 and $3.50, respectively. The closing
price on March 12, 2004 was $4.21.
The foregoing represents inter-dealer prices, without retail mark-up, mark-down
or commission, and may not necessarily represent actual transactions.
On February 23, 2004, there were approximately 489 record holders of the Common
Stock of the Company and approximately 23,560 beneficial owners of the Common
Stock of the Company, based upon the number of shares of Common Stock held in
"street name".
The Company has paid no dividends on its Common Stock and does not expect to pay
cash dividends in the foreseeable future. The Company is not under any
contractual restriction as to its present or future ability to pay dividends.
The Company currently intends to retain any future earnings to finance the
growth and development of its business.
14
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Revenues -- -- $ 4,298,441 $ 5,098,504 $ 3,279,397
Cost of Goods Sold
(exclusive of depreciation & amortization) -- -- 1,268,589 1,875,955 994,617
Operating expenses $(16,034,146) $(16,858,414) (13,789,291) (9,969,879) (6,999,136)
Other (expense), income, net $ ( 2,679,517) $ (426,409) 15,579,261 (1,236,872) 96,166
Income (Loss) Before Income
Taxes (18,713,663) (17,284,823) 4,819,822* (7,984,202)** (4,618190)
Net (Loss) Income (18,485,865) (17,069,600) 5,045,855 (7,984,202) (4,618,190)
Dividend embedded in
convertible preferred stock -- -- -- -- --
Preferred Stock dividends -- -- -- -- (22,253)
------------ ------------ ------------ ------------ ------------
Net income (loss) applicable to
common shareholders $(18,485,865) $(17,069,600) $ 5,045,855* $ (7,984,202)** $ (4,640,443)
============ ============ ============ ============ ============
Net income (loss) per share applicable
to common shareholders - basic $ (0.27) $ (0.30) $ 0.09 $ (0.15) $ (0.11)
============ ============ ============ ============ ============
Net income (loss) per share applicable
to common shareholders - diluted $ (0.27) $ (0.30) $ 0.09 $ (0.15) $ (0.11)
============ ============ ============ ============ ============
Total assets $ 69,008,071 $ 24,686,682 $ 44,262,991 $ 30,783,109 $ 7,791,294
============ ============ ============ ============ ============
Long term obligations $ 4,783,339 $ 10,000 $ 5,847,951 $ 7,680,872 $ 1,277,565
============ ============ ============ ============ ============
Cash dividends declared -- -- -- -- --
Average shares outstanding - basic 67,397,175 56,520,041 54,678,932 52,109,589 42,725,157
Average shares outstanding - diluted 67,397,175 56,520,041 55,298,063 52,109,589 42,725,157
- ----------
* includes a $16.3 million gain on sale of the ophthalmic product line in
October 2001
** includes a beneficial conversion charge of $1.8 million.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis of our financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. We have based these forward-looking statements on our current
expectations and projections of future events. Such statements reflect our
current views with respect to future events and are subject to unknown risks,
uncertainty and other factors that may cause results to differ materially from
those contemplated in such forward looking statements. In addition, the
following discussion should be read in conjunction with the audited consolidated
financial statements and the related notes thereto included elsewhere in this
report.
Through the end of the third quarter of 2001, the Company generated revenues
from product sales but continues to be dependent upon external financing,
interest income, and research and development contracts to pursue its intended
business activities. The Company had not been profitable from inception through
2000, was not profitable in 2003 and 2002, and has incurred a cumulative net
loss of $121.0 million through December 31, 2003. In 2001, the Company recorded
a profit due the sale of its ophthalmic product line to Bausch & Lomb. Losses
have resulted principally from costs incurred in research activities aimed at
identifying and developing the Company's product candidates, clinical research
studies, the write-off of purchased research and development, and general and
administrative expenses. The Company expects to incur additional losses over the
next several years as the Company's research and development and clinical trial
programs continue. The Company's ability to achieve profitability, if ever, is
dependent on its ability to develop and obtain regulatory approvals for its
product candidates, to enter into agreements for product development and
commercialization with strategic corporate partners and contract to develop or
acquire the capacity to manufacture and sell its products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
CRITICAL ACCOUNTING POLICIES
The Company considers certain accounting policies related to the tax valuation
allowance and asset impairments to be critical policies due to the estimation
process involved in each.
IMPAIRMENT OF LONG-LIVED ASSETS
We review long-lived assets for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not
be fully recoverable or that the useful lives of these assets are no longer
appropriate. Each impairment test is based on a comparison of the undiscounted
cash flow to the recorded value of the asset. Subsequent impairment assessments
could result in future impairment charges. Any impairment charge would result in
the reduction in the carrying value of long-lived assets and would reduce our
operating results in the period in which the charge arose.
TAX VALUATION ALLOWANCE
The Company has assessed the future taxable income and has determined that a
100% deferred tax valuation allowance is deemed necessary. In the event the
Company were to determine that it would be able to realize its deferred tax
asset, an adjustment to the deferred tax asset would increase income in the
period such determination is made.
RESULTS OF OPERATIONS
Years Ended December 31, 2003 and 2002
Due to the sale of the Company's ophthalmic product line to Bausch & Lomb in
October 2001, the Company recorded no product sales revenue and cost of sales
during 2003 and 2002. Bausch & Lomb was the Company's marketing partner for its
ophthalmic product line.
16
Total operating expenses decreased by $824,268 or 5%, from $16,858,414 in 2002
to $16,034,146 in 2003. The decrease in operating expense is primarily due to a
reduction in consulting and professional fees. During 2002, the Company was
preparing for the IND application with the FDA, which was ultimately allowed in
February 2003. During 2003, the Company increased expenditures related to the
development of dexanabinol for the treatment of traumatic brain injury and to
increased activity in the Company's cannabinoid program to treat various central
nervous system and inflammation-based conditions.
The Company considers major research & development projects to be those projects
that have reached at least Phase II level of clinical development. The Company's
major product is the development of dexanabinol for the treatment of traumatic
brain injury, which is currently involved in Phase III testing in the U.S.,
Europe, Australia and Israel, and the cognitive impairment that can result from
coronary surgery involving cardiopulmonary bypass operations. During 2003, the
gross cost of the traumatic brain injury project was $10.6 million. Total costs
since the traumatic brain injury project entered Phase II development in 1996
through December 31, 2003 were $35.4 million. In mid-March 2004, the Company
completed enrollment of U.S. and international TBI patients. The principal costs
of completing the project include collection and evaluation of the data,
production of the drug substance and drug product, commercial scale-up, and
management of the project. The primary uncertainties in the completion of the
project are the results of the study upon its conclusion, and the Company's
ability to produce or secure production of finished drug product under current
Good Manufacturing Practice conditions for sale in countries in which marketing
approval has been obtained, as well as the resources required to generate sales
in such countries. Should the uncertainties delay completion of the project on
the current timetable, the Company may experience additional costs that cannot
be accurately estimated. If the Phase III trial of dexanabinol for the treatment
of traumatic brain injury is successfully completed, the Company may begin to
earn revenues upon marketing approval as early as 2006; however, should our
product candidate experience setbacks or should a product fail to achieve FDA or
other regulatory approvals or fail to generate commercial sales, it would have a
material adverse affect on our business.
In addition, during 2003, the Company initiated a Phase II trial of dexanabinol
as a preventive agent against the cognitive impairment (CI) that can follow
coronary surgery involving cardiopulmonary bypass (CS-CPB) that was approved by
Israel's Ministry of Health. Enrollment of patients undergoing CS-CPB in the
trial are expected to be completed by Q2 2004. Gross expenses directly related
to this project were $866,000 for the twelve months ended December 31, 2003.
Gross expenses for other research & development projects in earlier stages of
development for the twelve months of 2003 and 2002 were $3,433,498 and
$3,324,882, respectively. Research and development expenses, net of grants, for
2003 and 2002 were $11,632,959 and $12,337,840, respectively. The company
received from the Office of the Chief Scientist of Israel's Ministry of Industry
and Trade grant money of $3,295,819 and $2,755,882 during 2003 and 2002,
respectively, which reduced the research and development expenses.
Selling, general and administrative expenses decreased by $82,180 or 2%, from
$3,828,750 in 2002 to $3,746,570 in 2003. The decrease is due to a reduction in
consultant fees, investor relations and professional fees, which offset higher
salaries and benefits, travel and board of director costs.
Depreciation and amortization expenses decreased by $37,207, or 5%, from
$691,824 in 2002 to $654,617 in 2003. The decrease is due to some fixed assets
becoming fully depreciated.
Other expense, net of interest and other expenses, increased by $2,253,108 from
$426,409 in 2002 to $2,679,517 in 2003. The warrants issued in the March 2003
private placement offering are subject to the requirements under EITF 00-19 and
thus are currently being accounted for as a liability. The value of the warrants
are being marked to market each reporting period until exercised or expiration.
The charge associated with these warrants amounted to approximately $1.8
million. Additionally, in accordance with Emerging Issues Task Force Issue No.
98-5, Accounting for Convertible Securities with Beneficial
17
Conversion Features or Contingently Adjustable Conversion Ratios ("BCF"), the
Company recorded a charge of $1.8 million which was fully amortized at December
31, 2000 in connection with the issuance of convertible debt with a favorable
conversion feature. In accordance with EITF 00-27, a net credit of $786,000 was
recorded as interest income during the first quarter of 2003 to reverse the BCF
previously recorded which was associated with the remaining balance of the
September 2000 Convertible Debenture offering with a face amount of $3.5 million
which was not converted. The lower average cash balance during 2003 resulted in
a decrease in interest income of $268,987. Interest expense increased by
$942,358 due to the $21 million financing of Convertible Debentures completed in
September 2003.
During 2003, the Company recognized royalties of a non-material amount per the
licensing agreement with Herbamed, Ltd, a company controlled by Dr. Haim Aviv,
the Company's CEO.
Years Ended December 31, 2002 and 2001
There were no product sales or cost of goods sold for the twelve months ended
December 31, 2002. Revenue totaled $4,298,441 and cost of goods sold totaled
$1,268,589 for the twelve months ended December 31, 2001. The decrease in both
product sales, license fee income, and cost of goods sold is due to the sale of
the Company's ophthalmic product line to Bausch & Lomb in October 2001. Bausch &
Lomb was the Company's marketing partner for its ophthalmic product line.
Total operating expenses increased by $3,069,123 or 22%, from $13,789,291 in
2001 to $16,858,414 in 2002. The increase in operating expenses is primarily due
to increased research and development expenses as the Company increased
expenditures related to the development of dexanabinol for the treatment of
traumatic brain injury and to increased activity in the Company's cannabinoid
program to treat various central nervous system and inflammation-based
conditions.
The Company considers major research & development projects to be those projects
that have reached at least Phase II level of clinical development. The Company's
major product is the development of dexanabinol for the treatment of traumatic
brain injury, which is currently involved in Phase III testing in the U.S.,
Europe, Australia and Israel, and the cognitive impairment that can follow
coronary surgery under cardiopulmonary bypass operations. During 2002, the gross
cost of the traumatic brain injury project was $10.0 million. Total costs since
the traumatic brain injury project entered Phase II development in 1996 through
December 31, 2002 were $24.8 million.
In addition, during 2002, the Company received approval from Israel's Ministry
of Health to commence a Phase IIa trial of dexanabinol as a preventive agent
against the cognitive impairment (CI) that can follow coronary surgery involving
cardiopulmonary bypass (CS-CPB). Expenses directly related to this project were
not material for the twelve months ended December 31, 2002.
Expenses for other research & development projects in earlier stages of
development for the twelve months of 2002 and 2001 were $3,324,882 and
$3,464,781, respectively. Research and development expenses, net of grants, for
2002 and 2001 were $12,337,840 and $9,349,025, respectively. The company
received from the Office of the Chief Scientist of Israel's Ministry of Industry
and Trade grant money of $2,755,882 and $1,336,566 during 2002 and 2001,
respectively, which reduced the research and development expenses.
Selling, general and administrative expenses increased by $162,457 or 4%, from
$3,666,293 in 2001 to $3,828,750 in 2002. The increase is due to higher
professional fees, consultants, and investor relations while offset by a
reduction in the overhead allocation.
Depreciation and amortization expenses decreased by $82,149, or 11%, from
$773,973 in 2001 to $691,824 in 2002. The decrease is primarily due to
amortization of the remaining balance of intangible assets in 2001. This
increase was netted against an increase in depreciation expense related to
laboratory equipment purchases.
Other income (expense), net of interest and other expenses, decreased by
$16,005,670 from income of
18
$15,579,261 in 2001 to expense of $426,409 in 2002. The change is primarily due
to a one-time gain of $16.3 million from the sale of the Company's ophthalmic
product line to Bausch & Lomb that occurred in October 2001. The reported gain
includes charges of $3.75 million representing the Company's maximum liability
for the completion of the clinical development of LE-T, the final product
resulting from the ophthalmic marketing relationship with Bausch & Lomb. Should
LE-T gain FDA approval, the Company will receive additional gross proceeds up to
a maximum of $12 million depending on the date of FDA approval and up to an
additional $10 million based upon the achievement of certain sales goals. Also,
the decrease was attributable to the lower debt payable at December 31, 2002
resulting from (i) the conversion from debt to equity in the first quarter of
2002 of $2.6 million of our Convertible Debentures issued in 2000, and (ii) the
repayment of $2 million of the Convertible Debentures in the first quarter of
2002. This conversion and repayment resulted in lower interest expense. Interest
income decreased by $445,005, which was primarily due to a lower average cash
balance in 2002 than in 2001 combined with the decrease in interest rates.
LIQUIDITY AND CAPITAL RESOURCES
While the Company recorded revenues since 1998 until the third quarter of 2001
from the sale of its approved products, it has incurred cumulative operating
losses since its inception and had an accumulated deficit of $121.0 million at
December 31, 2003. The Company has financed its operations with public and
private offerings of securities, advances and other funding pursuant to a
marketing agreement with Bausch & Lomb, research contracts, license fees,
royalties and sales, the sale of a portion of our New Jersey State Net Operating
Losses carryforwards, and interest income. Should the Company be unable to raise
adequate financing in the future, long-term projects will need to be scaled back
or discontinued.
The Company had working capital of $42.0 million as of December 31, 2003.
Included in the current assets of $62.8 million is $49.4 million of cash and
cash equivalents, and $11.2 million in restricted cash. As part of the September
2003 financing, the Company received a total of $16.0 million of restricted cash
held in escrow, which will remain in escrow until either the Company's
convertible debentures are converted into common shares of the Company by the
investor or by the Company, or such funds are repaid by the Company or are used
to fund acquisition(s) approved by the investors.
In October 2001, Bausch & Lomb purchased all rights to the Company's loteprednol
etabonate (LE) ophthalmic product line for cash and assumption of certain
ongoing obligations. The Company received gross proceeds of approximately $25
million in cash for its rights to Lotemax(R) and Alrex(R), prescription products
that are made and marketed by Bausch & Lomb under a 1995 Marketing Agreement
with the Company; in addition, Bausch & Lomb also acquired future extensions of
LE formulations including LE-T, a product that was submitted to the FDA for
marketing approval in September 2003. The Company had no product sales beginning
in the fourth quarter of 2001. Upon FDA approval, Bausch & Lomb will pay the
Company up to an additional maximum gross proceeds of $12 million, with the
actual payment price based on the date of FDA approval of this new combination
therapy. An additional milestone payment of up to $10 million could be paid to
the Company to the extent sales of the new product exceed an agreed-upon
forecast in the first two years. The Company has a passive role as a member of a
joint committee overseeing the development of LE-T and has an obligation to
Bausch & Lomb to fund up to a maximum of $3.75 million of the LE-T development
cost, of which $600,000 was deducted from the purchase price paid by Bausch &
Lomb to Pharmos in October 2001. As a result of this transaction, the Company
recorded a net gain of $16.3 million during the fourth quarter of 2001. In July
2003, the Company paid Bausch & Lomb $1.57 million of its liability for the LE-T
development. As of December 31, 2003, Pharmos owes an additional $1.56 million
as its share of these research and development related LE-T expenses. This
amount is included as part of accounts payable at December 31, 2003, and
represents the maximum amount Pharmos owes Bausch & Lomb. The Company incurred
transaction and royalty costs of approximately $2 million. The Company also
compensated the LE patent owner approximately $2.7 million ($1.5 million paid
upon closing and $1.2 million paid in October 2002) from the proceeds of the
sale of Lotemax and Alrex in return for his consent to the Company's assignment
of its rights under the license agreement to
19
Bausch & Lomb. Additionally, the patent owner will receive 11% of the proceeds
payable to the Company following FDA approval of LE-T, as well as 14.3% of its
milestone payment, if any.
In September 2000, the Company completed a private placement of Convertible
Debentures, common stock and warrants to purchase shares of common stock with
institutional investors, generating gross proceeds of $11 million. The
Convertible Debentures, which generated gross proceeds of $8 million, were due
in February 2002 and carried a 6% interest payable semiannually in cash or
common stock. In connection with the Convertible Debenture, the institutional
investors also received warrants for the purchase of 276,259 common shares with
a relative fair value of $725,000. The Convertible Debentures were convertible
into common shares of the Company at the conversion price of $3.83 per share (or
2,088,775 common shares) and were convertible beginning October 31, 2000. Under
certain limited anti-dilutive conditions, the conversion price may change. Until
converted into common stock or the outstanding principal is repaid, the terms of
the Convertible Debentures required the Company to deposit $4 million in an
escrow account. The escrowed capital is shown as Restricted Cash on the
Company's balance sheet at December 31, 2002 and was released to the Company in
proportion to the amount of Convertible Debentures converted into common shares
or upon the repayment of the debt. The issuance costs related to the Private
Placement of approximately $1.4 million were capitalized and amortized over the
life of the debt.
In December 2001, the holders of the Convertible Debentures and the Company
agreed to modify the repayment and conversion terms. The holders of $5.8 million
convertible debt (book value on December 31, 2001, including accrued interest)
extended the maturity date to June 2003 in exchange for a reduction in the
conversion price from $3.83 to $2.63 for half of the outstanding balance and $
2.15 for the other half of the outstanding balance. The convertible debt with a
maturity date of June 2003 was convertible beginning December 31, 2001. The
holder of the remaining outstanding debt of $1.9 million (including accrued
interest) changed the maturity date from February 28, 2002 to January 31, 2002
in exchange for lowering the conversion price for the other holders. As the
modification was not significant in accordance with EITF 96-19 the change in the
fair value between the original convertible debt and the modified convertible
debt was accreted over the remaining term of the convertible debt with a
corresponding charge into interest expense.
Emerging Issues Task Force Issue No. 98-5, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios, require the Company to compute the Beneficial Conversion Feature ("BCF")
of the convertible debt from the private placement of September 2000. The BCF
must be capitalized and amortized from the closing date until the earliest date
that the investors have the right to convert the debt into common shares. The
BCF was computed at approximately $1.8 million, all of which was amortized and
included as interest expense in the year ending December 31, 2000. Additionally,
the discount on the Convertible Debenture of approximately $800,000 was fully
amortized by December 31, 2001.
During 2001, the Company paid $589,819 and issued 182,964 shares of the common
stock of the Company to the investors in the convertible debenture. The payment
of cash and stock was the option chosen by the Company and represents
adjustments to the pricing based upon the Company's stock price during the
adjustment period. Under the terms of the agreements, no further adjustments are
due.
One investor in the September 2000 private placement had an option, in the form
of a warrant, to purchase an additional $2 million of common shares for a period
of one year provided that the future purchase price is greater than the initial
closing price of $3.65 per share. During the third quarter of 2001, the investor
exercised this option and, accordingly, the Company issued 542,299 shares to the
investor. The Private Placement provided certain conditions under which the
number of shares issued for this option could be adjusted and, accordingly, the
Company issued 281,659 shares to the investor in the fourth quarter of 2001 as
an adjustment to the warrant.
On March 4, 2003, the Company raised $4.3 million from the placement of common
stock and warrants. The private placement offering was completed by issuing
5,058,827 shares of common stock at a price of
20
$0.85 per share and approximately 1.1 million warrants at an exercise price of
$1.25 per share. Additionally, the remaining balance of the September 2000
Convertible Debenture offering was redeemed for cash. The original face amount
of $3.5 million was redeemed for approximately $4.0 million, which included
accrued and unpaid interest. According to EITF 00-19, the issued warrants meet
the requirements of and are being accounted for as a liability since registered
shares must be delivered upon settlement. The Company calculated the initial
value of the warrants, including the placement agent warrants, being
approximately $394,000 under the Black-Scholes option-pricing method
(assumption: volatility 75%, risk free rate 2.88% and zero dividend yield). The
value of the warrants is being marked to market each reporting period as a
derivative loss until exercised or expiration and amounted to $823,029 at
December 31, 2003. Upon exercise of each of the warrants, the related liability
is removed by recording an adjustment to additional paid-in-capital. A total of
$936,156 was recorded as a credit to additional paid-in-capital in 2003 as a
result of exercises and the recording of the initial value of the warrants.
On May 30, 2003, the Company completed a private placement to sell common shares
and warrants to ten investors, generating total gross proceeds of $8.0 million.
The Company filed a registration statement with the Securities and Exchange
Commission to permit resales of the common stock issued. The private placement
offering was completed by issuing 9,411,765 shares of common stock at a price of
$0.85 per share (representing an approximate 20% discount to a ten-day trailing
average of the closing price of the stock ending May 28, 2003) and 3,573,529
warrants at an exercise price of $1.40 per share, which includes 441,177
placement agent warrants. Issuance costs of approximately $525,000 in cash and
$240,000 for the value of the placement agent warrants were recorded as a debit
to additional paid in capital.
On September 26, 2003, the Company completed a private placement of convertible
debentures and warrants to six institutional investors, generating total gross
proceeds of $21.0 million. Five million dollars of the proceeds will be used for
working capital purposes, and $16.0 million will be available to fund
acquisitions upon the approval of the investors. The convertible debentures are
convertible into common stock of the Company at a fixed price of $4.04, 205%
above the closing bid price of the stock for the five days preceding the closing
date. The debentures, which bear an interest rate of 4%, will be redeemed in 13
substantially equal monthly increments beginning March 31, 2004. Amounts
converted into shares of Pharmos common stock will reduce the monthly redemption
amount in inverse order of maturity. The $16.0 million earmarked for acquisition
activity will be held in escrow until used or repaid. In connection with the
financing, the Company also issued 5,514,705 three-year warrants (including
514,705 placement agent warrants) to purchase 5,514,705 shares of common stock
at an exercise price of $2.04 per share. The issuance costs related to the
convertible debentures of approximately $1,229,000 in cash and $434,000 for the
value of the placement agent warrants were capitalized and are being amortized
over the life of the debt. The Company calculated the value of the warrants at
the date of the transaction, including the placement agent warrants, being
approximately $4,652,877 under the Black-Scholes option-pricing method
(assumption: volatility 75%, risk free rate 1.59% and zero dividend yield). The
Company allocated the $21.0 million in gross proceeds between the convertible
debentures and the warrants based on their fair values. The Company is reporting
the debt discount as a direct reduction to the face amount of the debt in
accordance with APB 21. The discount will accrete over the life of the
outstanding debentures. The issuance costs allocated to the convertible
debentures are being deferred and amortized to interest expense over the life of
the debt. APB 21 also requires the Company to allocate the warrant costs between
the convertible debentures and the transaction warrants. The issuance costs
allocated to the warrants were recorded as a debit to additional paid in
capital. During the first quarter of 2004, one of the investors from the
September 2003 Convertible Debentures private placement converted a total of $2
million plus interest. The Company issued 497,662 shares of common stock. As
part of the escrow agreement, approximately $1,524,000 of restricted cash is
available to be released to the Company.
The financing also addressed a possible concern Nasdaq raised informally
relating to a possible violation of one of Nasdaq's corporate governance rules.
Specifically, Nasdaq expressed a concern that the May 2003 private placement,
when aggregated with Pharmos' March 2003 registered private placement, would
have resulted in the possible issuance of more than 20% of Pharmos' outstanding
securities at a price less than the applicable fair market value for such
shares. Completion of the $21.0 million convertible debt financing
21
had the effect of resolving any such Nasdaq concerns.
In December 2003, the Company completed a public offering. Pharmos sold
10,500,000 common shares at a purchase price of $2.75 per share for gross
proceeds of $28,875,000. The stock was offered in a firm commitment underwriting
pursuant to an existing shelf registration statement. The net proceeds of this
offering to Pharmos were approximately $26.9 million. During January 2004, the
underwriters exercised their over-allotment option in full to purchase an
aggregate of 1,575,000 shares of Pharmos' common stock at a purchase price of
$2.75 per share, less the underwriting discount. Total net proceeds from the
offering, including $4.07 million from the exercise of the over-allotment
option, were approximately $31.0 million.
In 2003, and 2002, the Company sold $2,096,487, and $5,561,838, respectively, of
our State Net Operating Loss carryforwards under the State of New Jersey's
Technology Business Tax Certificate Transfer Program (the "Program"). The
Program allows qualified technology and biotechnology businesses in New Jersey
to sell unused amounts of net operating loss carryforwards and defined research
and development tax credits for cash. The proceeds from the sale in 2003 and
2002 were $227,798 and $215,223, respectively and such amounts were recorded as
a tax benefit in the statements of operations. The State renews the Program
annually and limits the aggregate proceeds to $10,000,000. We cannot be certain
if we will be able to sell any of our remaining or future carryforwards under
the Program.
COMMITMENTS AND LONG TERM OBLIGATIONS
As of December 31, 2003, we had the following contractual commitments and long
term obligations:
2004 2005 2006 2007 THEREAFTER TOTAL
----------- ----------- --------- --------- --------- -----------
Operating Lease
Obligations $ 377,736 $ 81,375 $ 57,978 $ 12,212 $ -- $ 529,301
Other Long-Term
Obligations 16,153,846 4,846,154 -- -- -- 21,000,000
R&D commitments 928,130 -- -- -- -- 928,130
----------- ----------- --------- --------- --------- -----------
Grand total $17,459,712 $ 4,927,529 $ 57,978 $ 12,212 $ -- $22,457,431
On September 26, 2003, the Company completed a private placement of convertible
debentures and warrants with six institutional investors, generating total gross
proceeds of $21.0 million. The convertible debentures are convertible into
common stock of the Company at a fixed price of $4.04, 205% above the closing
bid price of the stock for the five days preceding the closing date. The
debentures, which bear an interest rate of 4%, will be redeemed in 13 equal
monthly increments beginning March 31, 2004.
The R&D commitments represent scheduled professional fee payments for clinical
services relating to the Phase III clinical study of dexanabinol for severe
traumatic brain injury. One of the clinical service based agreements, if fully
executed, currently totals $10.9 million and is not committed beyond 2004.
Through December 31, 2003, the Company has recorded $9.0 million as an expense.
The Company has entered into various employment agreements. The terms of these
employment agreements include one-year renewable terms and do not represent long
term commitments of the Company.
Management believes that cash and cash equivalents of $49.4 million as of
December 31, 2003, will be sufficient to support the Company's continuing
operations beyond December 2004. The Company is continuing to actively pursue
various funding options, including additional equity offerings, strategic
corporate alliances, business combinations and the establishment of product
related research and development limited partnerships, to obtain additional
financing to continue the development of its products and bring them to
commercial markets.
22
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We assessed our vulnerability to certain market risks, including interest rate
risk associated with financial instruments included in cash and cash
equivalents, restricted cash, and convertible debentures. Due to the short-term
nature of the cash and cash equivalent investments, restricted cash, and the
fixed interest rate on the convertible debt, we have determined that the risks
associated with interest rate fluctuations related to these financial
instruments do not pose a material risk to us.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item 8 is included following the "Index to
Financial Statements" contained in this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this annual Report on Form 10-K. Based on
this evaluation, our principal executive officer and principal financial officer
concluded that these disclosure controls and procedures are effective and
designed to ensure that the information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the requisite time periods.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or internal
control over financial reporting will prevent all errors and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the system are met
and cannot detect all deviations. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud or deviations, if any within the
company have been detected. While we believe that our disclosure controls and
procedures have been effective, in light of the foregoing, we intend to continue
to examine and refine our disclosure control and procedures to monitor ongoing
developments in this area.
CHANGES IN INTERNAL CONTROLS
There was no change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) identified in connection with the evaluation of our internal control
performed during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors, officers and key employees of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Haim Aviv, Ph.D 64 Chairman, Chief Executive Officer,
Chief Scientist and Director
Gad Riesenfeld, Ph.D 60 President, Chief Operating Officer
Robert W. Cook 48 Executive Vice President and
Chief Financial Officer
David Schlachet ** 58 Director
Mony Ben Dor 58 Director
Georges Anthony Marcel, M.D., Ph.D ** 63 Director
Elkan R. Gamzu, Ph.D ** 61 Director
Lawrence F. Marshall, M.D. 60 Director
** Members of the Audit Committee
Haim Aviv, Ph.D., is Chairman, Chief Executive Officer, Chief Scientist and a
Director of the Company. In 1990, he co-founded Pharmos Corporation, a New York
corporation ("Old Pharmos"), which merged into the Company in October 1992 (the
"Merger"). Dr. Aviv also served as Chairman, Chief Executive Officer, Chief
Scientist and a Director of Old Pharmos prior to the Merger. Dr. Aviv was the
co-founder in 1980 of Bio-Technology General Corp. ("BTG"), a publicly-traded
company engaged in the development of products using recombinant DNA, its
General Manager and Chief Scientist from 1980 to 1985, and a Director and Senior
Scientific Consultant until August 1993. Prior to that time, Dr. Aviv was a
professor of molecular biology at the Weizmann Institute of Science. Dr. Aviv is
the principal stockholder of Avitek Ltd. Dr. Aviv is also an officer and/or
significant stockholder of several privately held Israeli biopharmaceutical and
venture capital companies. Dr. Aviv is a member of the Board of Directors of Ben
Gurion University at Beer-Sheva, Israel and Yeda Ltd. the commercial arm of the
Weizmann Institute, Rehovot, Israel. Dr. Aviv holds a Ph.D. degree from the
Weizmann Institute of Science.
Gad Riesenfeld, Ph.D., was named President and Secretary in February 1997, and
has served as Chief Operating Officer since March 1995. He served as Executive
Vice President from December 1994 to February 1997, Vice President of Corporate
Development and General Manager of Florida Operations from October 1992 to
December 1994, and was employed by Pharmos from March 1992 until the Merger.
Prior thereto, he was engaged in a variety of Pharmaceutical and Biotechnology
business activities relating to the development and commercialization of
intellectual property, primarily in the pharmaceutical and medical fields. From
March 1990 through May 1991 Dr. Riesenfeld was a Managing Director of Kamapharm
Ltd., a private company specializing in human blood products. Prior thereto,
from May 1986, he was Managing Director of Galisar Ltd., a pharmaceutical
company involved in extracorporeal blood therapy. Dr. Riesenfeld holds a Ph.D.
degree from the Hebrew University of Jerusalem and held a scientist position, as
a post doctorate, at the Cedars Sinai Medical Center in Los Angeles, California.
Robert W. Cook was elected Vice President Finance and Chief Financial Officer of
Pharmos in January 1998 and became Executive Vice President in February 2001.
From May 1995 until his appointment as the Company's Chief Financial Officer, he
was a vice president in GE Capital's commercial finance subsidiary, based in New
York. From 1977 until 1995, Mr. Cook held a variety of corporate finance and
capital markets positions at The Chase Manhattan Bank, both in the U.S. and in
several overseas locations. He was named a managing director of Chase in January
1986. Mr. Cook holds a degree in international finance from The American
University, Washington, D.C.
24
David Schlachet, a Director of the Company from December 1994, served as the
Chairman of Elite Industries Ltd. from July 1997 until June 2000. From January
1996 to June 1997, Mr. Schlachet served as the Vice President of the Strauss
Group and Chief Executive Officer of Strauss Holdings Ltd, one of Israel's
largest privately owned food manufacturers. He was Vice President of Finance and
Administration at the Weizmann Institute of Science in Rehovot, Israel from 1990
to December 1995, and was responsible for the Institute's administration and
financial activities, including personnel, budget and finance, funding,
investments, acquisitions and collaboration with the industrial and business
communities. From 1989 to 1990, Mr. Schlachet was President and Chief Executive
Officer of YEDA Research and Development Co. Ltd., a marketing and licensing
company at the Weizmann Institute of Science. Mr. Schlachet is a member of the
Board of Directors of Harel Capital Markets (Israeli broker, underwriter and
asset management firm), Israel Discount Bank Ltd., Hapoalim Capital Markets Ltd,
Teldor Ltd. (software and computer company), Proseed Ltd., a Venture Capital
investment company, Compugen Ltd. and Taya Investment Company Ltd. Mr. Schlachet
also serves as the Managing Partner in Biocom, a V.C. Fund in the field of Life
Science.
Mony Ben Dor, a director of the Company since September 1997, has been managing
partner of Biocom, a V.C Fund in the field of Life Science since April 2000.
Prior to that he was Vice President of the Israel Corporation Ltd. from May
1997, and Chairman of two publicly traded subsidiaries: H.L. Finance and Leasing
and Albany Bonded International Trade. He was also a Director of a number of
subsidiary companies such as Israel Chemicals Ltd., Zim Shipping Lines, and
Tower Semi Conductors. From 1992-1997 Mr. Ben Dor was Vice President of Business
Development for Clal Industries Limited, which is one of the leading investment
groups in Israel. He was actively involved in the acquisition of companies
including a portfolio of pharmaceutical companies, Pharmaceutical Resources
Inc., Finetech Ltd., BioDar Ltd., to name a few. He served as a director
representing Clal Industries in all of the acquired companies as well as other
companies of Clal Industries. Prior to his position at Clal Industries, Mr. Ben
Dor served as Business Executive at the Eisenberg Group of companies.
Georges Anthony Marcel, M.D., Ph.D., a Director of the Company since September
1998, is President and Chairman of TMC Development S.A., a biopharmaceutical
consulting firm based in Paris, France. Prior to founding TMC Development in
1992, Dr. Marcel held a number of senior executive positions in the
pharmaceutical industry, including Chief Executive Officer of Amgen's French
subsidiary, Vice President of Marketing for Rhone-Poulenc Sante and Director of
Development for Roussel-Uclaf. Dr. Marcel is a member of the Board of Directors
of Hybridon, Inc., and of the Scientific Advisory Board of the Swiss Corporation
TECAN Ltd. Dr. Marcel teaches biotechnology industrial issues and European
regulatory affairs at the Faculties of Pharmacy of Paris and Lille as well as at
Versailles Law School. Dr. Marcel is also a member of the Gene Therapy Advisory
Committee at the French Medicines Agency.
Elkan R. Gamzu, Ph.D., a Director of the Company since February 2000, is a
consultant to the biotechnology and pharmaceutical industries and a Principal of
the due diligence company BioPharmAnanlysis, LLC. Prior to becoming a
consultant, Dr. Gamzu held a number of senior executive positions in the
biotechnology and pharmaceutical industries, including President and Chief
Executive Officer of Cambridge Neuroscience, Inc. from 1994 until 1998. Dr.
Gamzu also served as President and Chief Operating Officer and Vice President of
Development for Cambridge Neuroscience, Inc. from 1989 to 1994. Previously, Dr.
Gamzu held a variety of senior positions with Warner-Lambert and Hoffmann-La
Roche, Inc. In 2001 and 2002, Dr. Gamzu was part-time Interim VP, Development
Product Leadership for Millennium Pharmaceuticals, Inc. Dr. Gamzu is a member of
the Board of Directors of three other biotechnology companies: the publicly
traded XTL Biopharmaceuticals Ltd. and the privately held biotechnology
companies Neurotech S.A. of Paris, France and Hypnion, Inc. of Worcester, MA.
Dr. Gamzu recently was appointed the Chairman of the Board of Directors of
NeuroHealing Pharmaceuticals Incorporated.
Lawrence F. Marshall, M.D., a Director of the Company since June 2002, an
internationally recognized neurosurgeon and opinion leader in the field, is
currently Professor and Chair of the Division of Neurological Surgery at the
University of California, San Diego Medical Center. Dr. Marshall's 30-year
career as a scientist and neurosurgeon has been at the forefront in the search
for new and better treatment
25
measures to improve patient outcome. He has been principal investigator or
co-investigator in over two dozen preclinical and clinical trials primarily
relating to head and spinal cord injury, including projects funded by the
National Institutes of Health, the Insurance Institute for Highway Safety, and
several large pharmaceutical companies. Results of research undertaken by Dr.
Marshall, which cover a wide range of issues related to TBI and other conditions
of the brain, have been published in dozens of scientific journals. Among the
numerous board, committee, editorial and other positions Dr. Marshall has held
or holds are board and committee memberships with the American Brain Injury
Consortium, the National Head Injury Foundation, the American Association of
Neurological Surgeons and the Congress of Neurological Surgeons. Dr. Marshall is
the recipient of many distinguished medical prizes and awards.
ROLE OF THE BOARD; CORPORATE GOVERNANCE MATTERS
It is the paramount duty of the Board of Directors to oversee the Chief
Executive Officer and other senior management in the competent and ethical
operation of the Company on a day-to-day basis and to assure that the long-term
interests of the shareholders are being served. To satisfy this duty, the
directors set standards to ensure that the Company is committed to business
success through maintenance of the highest standards of responsibility and
ethics.
Members of the Board bring to the Company a wide range of experience, knowledge
and judgment. The governance structure in the Company is designed to be a
working structure for principled actions, effective decision-making and
appropriate monitoring of both compliance and performance. The key practices and
procedures of the Board are outlined in the Corporate Governance Code of Conduct
filed as an exhibit to this annual report on Form 10-K and are also available on
the Company's website at www.pharmoscorp.com/investors.
BOARD COMMITTEES
The Board has a standing Compensation Committee, Governance and Nominating
Committee and Audit Committee.
The Compensation Committee is primarily responsible for reviewing the
compensation arrangements for the Company's executive officers, including the
Chief Executive Officer, and for administering the Company's stock option plans.
Members of the Compensation Committee are Messrs. Ben Dor, Gamzu and Marshall.
The Governance and Nominating Committee, created by the Board in February 2004,
assists the Board in identifying qualified individuals to become directors,
determines the composition of the Board and its committees, monitors the process
to assess Board effectiveness and helps develop and implement the Company's
corporate governance guidelines. Members of the Governance and Nominating
Committee are Messrs. Ben Dor, Marcel and Schlachet.
The Audit Committee is primarily responsible for overseeing the services
performed by the Company's independent auditors and evaluating the Company's
accounting policies and its system of internal controls. Consistent with the
Nasdaq audit committee structure and membership requirements, the Audit
Committee is comprised of three members: Messrs. Gamzu, Marcel and Schlachet,
all of whom are independent directors. While more than one member of the
Company's Audit Committee qualifies as an "audit committee financial expert"
under Item 401(h) of Regulation S-K, Mr. David Schlachet, the Committee
chairperson, is the designated audit committee financial expert. Mr. Schlachet
is considered "independent" as the term is used in Item 7(d)(3)(iv) of Schedule
14A under the Exchange Act.
The Audit Committee, Compensation Committee and Governance and Nominating
Committee each operate under written charters adopted by the Board. These
charters are filed as exhibits to this annual report on Form 10-K and are also
available on the Company's website at www.pharmoscorp.com/investors.
26
CODE OF ETHICS
As part of our system of corporate governance, our Board of Directors has
adopted a Code of Ethics and Business Conduct that is applicable to all
employees and specifically applicable to our chief executive officer, president,
chief financial officer and controllers. The Code of Ethics and Business
Guidelines are filed as exhibits to this Annual Report on Form 10-K and is also
available on our website at www.pharmoscorp.com/investors. We intend to disclose
any changes in or waivers from our Code of Ethics and Business Conduct by filing
a Form 8-K or by posting such information on our website.
SECTION 16 FILINGS
No person who, during the fiscal year ended December 31, 2003, was a director,
officer or beneficial owner of more than ten percent of the Company's Common
Stock which is the only class of securities of the Company registered under
Section 12 of the Securities Exchange Act of 1934 (the "Act"), a "Reporting
Person" failed to file on a timely basis, reports required by Section 16 of the
Act during the most recent fiscal year. The foregoing is based solely upon a
review by the Company of Forms 3 and 4 during the most recent fiscal year as
furnished to the Company under Rule 16a-3(d) under the Act, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, and any representation received by the Company from any reporting
person that no Form 5 is required.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the total compensation of the Chief Executive
Officer of the Company in 2003 and the two previous years, as well as all other
executive officers of the Company who received compensation in excess of
$100,000 for 2003.
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------- ----------------------
STOCK
NAME/ RESTRICTED UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS OTHER STOCK OPTIONS
- ------------------ ---- -------- -------- ----------- ---------- ----------
Haim Aviv, Ph.D
Chairman, Chief 2003 $281,400 $ 50,000 $ 21,928(1) 200,000
Executive Officer, and 2002 $289,459 $100,000 $ 19,833(1) 150,000
Chief Scientist 2001 $268,000 $ 80,000 $ 2,844 100,000
Gad Riesenfeld, Ph.D
President and 2003 $234,965 $ 40,000 $ 60,743(2) 135,000
Chief Operating Officer 2002 $255,157 $ 80,000 $ 74,924(2) 100,000
2001 $209,790 $ 42,000 $ 56,556(2) 50,000
Robert W. Cook
Executive Vice President 2003 $222,264 $ 37,500 $ 24,608(1) 115,000
and Chief Financial Officer 2002 $222,264 $ 75,000 $ 15,338(1) 80,000
2001 $198,450 $ 40,000 $ 15,338(1) 40,000
- ----------
(1) Consists of contributions to insurance premiums and car allowance.
(2) Consists of housing allowance, contributions to insurance premiums, car
allowance and car expense.
The following tables set forth information with respect to the named executive
officers concerning the grant and exercise of options during the last fiscal
year and unexercised options held as of the end of the fiscal year.
27
OPTION GRANTS FOR THE YEAR ENDED DECEMBER 31, 2003
COMMON
STOCK % OF TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED TO PRICE PER
GRANTED EMPLOYEES SHARE EXPIRATION DATE
---------- ----------- --------- ---------------
Haim Aviv, Ph.D 187,500 24.4% $ 1.02 Feb 18, 2013
Gad Riesenfeld, Ph.D 125,000 16.3% $ 1.02 Feb 18, 2013
Robert W. Cook 100,000 13.0% $ 1.02 Feb 18, 2013
AGGREGATED OPTION EXERCISES FOR THE YEAR ENDED DECEMBER 31, 2003 AND OPTION
VALUES AS OF DECEMBER 31, 2003:
VALUE OF UNEXERCISED
NUMBER OF NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT DECEMBER 31, 2003 DECEMBER 31, 2003
ACQUIRED ON VALUE ---------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ----------- -------- ----------- ------------- ----------- -------------
Haim Aviv, Ph.D -- -- 555,001 346,875 $635,276 $681,250
Gad Riesenfeld, Ph.D 50,000 $62,500 273,083 221,250 $269,978 $440,625
Robert W. Cook 40,000 $50,000 188,750 176,250 $199,450 $352,500
STOCK OPTION PLANS
It is currently the Company's policy that all full time key employees are
considered annually for the possible grant of stock options, depending upon
employee performance. The criteria for the awards are experience, uniqueness of
contribution to the Company and level of performance shown during the year.
Stock options are intended to generate greater loyalty to the Company and help
make each employee aware of the importance of the business success of the
Company.
As of December 31, 2003, 3,791,449 options to purchase shares of the Company's
Common Stock were outstanding under various option plans, 723,942 of which are
non-qualified options. During 2003, the Company granted 967,500 options to
purchase shares of its Common Stock to employees and directors, of which 200,000
are non-qualified options.
A summary of the various established stock option plans is as follows:
1992 PLAN. The maximum number of shares of the Company's Common Stock available
for issuance under the 1992 Plan is 750,000 shares, subject to adjustment in the
event of stock splits, stock dividends, mergers, consolidations and the like.
Common Stock subject to options granted under the 1992 Plan that expire or
terminate would again be available for options to be issued under the 1992 Plan.
As of December 31, 2003, there were 277,086 options outstanding to purchase the
Company's Common Stock under this plan. Each option granted which is outstanding
under the 1992 plan as of December 31, 2003 expires on October 31, 2005.
1997 PLAN AND 2000 PLAN. The 1997 Plan and the 2000 Plan are each administered
by a committee appointed by the Board of Directors (the "Compensation
Committee"). The Compensation Committee will designate the persons to receive
options, the number of shares subject to the options and the terms of the
options, including the option price and the duration of each option, subject to
certain limitations.
The maximum number of shares of Common Stock available for issuance under the
1997 Plan is 1,500,000 shares, as amended, and under the 2000 Plan is 3,500,000
shares. Each plan is subject to adjustment in the event of stock splits, stock
dividends, mergers, consolidations and the like. Common Stock subject to
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options granted under the 1997 Plan and the 2000 Plan that expire or terminate
will again be available for options to be issued under each Plan.
The price at which shares of Common Stock may be purchased upon exercise of an
incentive stock option must be at least 100% of the fair market value of Common
Stock on the date the option is granted (or at least 110% of fair market value
in the case of a person holding more than 10% of the outstanding shares of
Common Stock (a "10% Stockholder")).
The aggregate fair market value (determined at the time the option is granted)
of Common Stock with respect to which incentive stock options are exercisable
for the first time in any calendar year by an optionee under the 1997 Plan, the
2000 Plan or any other plan of the Company or a subsidiary, shall not exceed
$100,000. The Compensation Committee will fix the time or times when, and the
extent to which, an option is exercisable, provided that no option will be
exercisable earlier than one year or later than ten years after the date of
grant (or five years in the case of a 10% Stockholder). The option price is
payable in cash or by check. However, the Board of Directors may grant a loan to
an employee, pursuant to the loan provision of the 1997 Plan or the 2000 Plan,
for the purpose of exercising an option or may permit the option price to be
paid in shares of Common Stock at the then current fair market value, as defined
in the 1997 Plan or the 2000 Plan.
Under the 1997 Plan, upon termination of an optionee's employment or
consultancy, all options held by such optionee will terminate, except that any
option that was exercisable on the date employment or consultancy terminated
may, to the extent then exercisable, be exercised within three months thereafter
(or one year thereafter if the termination is the result of permanent and total
disability of the holder), and except such three month period may be extended by
the Compensation Committee in its discretion. If an optionee dies while he is an
employee or a consultant or during such three-month period, the option may be
exercised within one year after death by the decedent's estate or his legatees
or distributees, but only to the extent exercisable at the time of death. The
2000 Plan provides that the Compensation Committee may in its discretion
determine when any particular stock option shall expire. A stock option
agreement may provide for expiration prior to the end of its term in the event
of the termination of the optionee's service to the Company or death or any
other circumstances.
The 1997 Plan and the 2000 Plan each provides that outstanding options shall
vest and become immediately exercisable in the event of a "sale" of the Company,
including (i) the sale of more than 75% of the voting power of the Company in a
single transaction or a series of transactions, (ii) the sale of substantially
all assets of the Company, (iii) approval by the stockholders of a
reorganization, merger or consolidation, as a result of which the stockholders
of the Company will own less than 50% of the voting power of the reorganized,
merged or consolidated company.
The Board of Directors may amend, suspend or discontinue the 1997 Plan, but it
must obtain stockholder approval to (i) increase the number of shares subject to
the 1997 Plan, (ii) change the designation of the class of persons eligible to
receive options, (iii) decrease the price at which options may be granted,
except that the Board may, without stockholder approval accept the surrender of
outstand