Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18311
NEUROGEN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-2845714
(State or other jurisdiction of (I.R.S. Employer
Corporation or organization) Identification No.)
35 NORTHEAST INDUSTRIAL ROAD
BRANFORD, CONNECTICUT 06405
(Address of principal executive offices) (Zip Code)
(203) 488-8201
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.025 per share (the "Common Stock")
(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
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant was $75,277,000 as of March 1, 1999, based upon
the closing price of the Common Stock as reported on The Nasdaq National Market
on such date. For purposes of determining this number, shares of Common Stock
held by officers, directors and stockholders whose ownership exceeds five
percent were excluded. This number is provided only for purposes of this report
and does not represent an admission by either the registrant or any such person
as to the status of such person.
As of March 1, 1999, the registrant had 14,704,488 shares of Common Stock
outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) The Neurogen Corporation
Proxy Statement for the Annual Meeting of Stockholders to be held on May 26,
1999, is incorporated by reference into Items 10, 11, 12 and 13 of Part III of
this Form 10-K.
PART I
ITEM 1. BUSINESS
Neurogen Corporation ("Neurogen" or the "Company") is an emerging
pharmaceutical company engaged in the discovery and development of a new
generation of drugs which are designed to selectively regulate the communication
between cells in order to influence cell function associated with a given
disorder. The Company has developed an integrated platform of technologies to
discover drug candidates which work through specific cellular mechanisms within
the human body identified as drug "targets". The mechanistic (cellular) targets
of the Company's programs consist of both existing targets where traditional
drug discovery methods have failed to produce successful drug candidates and new
targets derived from the rapid advances being made in industry and academia
towards better understanding the genetic and cellular underpinnings of disease.
A majority of the Company's efforts are dedicated to developing new drugs to
treat psychiatric and neurological disorders. Based on the Company's expertise
in neuronal (nerve cell) communication, Neurogen is developing "receptor subtype
specific" drugs which target subtypes of the receptors located on the neurons
responsible for neuronal communication in the brain. The Company believes that
receptor subtype specific drugs offer the potential for equivalent or improved
efficacy with fewer side effects than currently marketed psychotherapeutic
drugs, most of which interact with multiple receptor subtypes. Neurogen has also
applied its receptor subtype strategy and drug discovery expertise to expand its
portfolio of drug programs to include drugs to treat obesity and metabolic
disorders and, more recently, pain and inflammatory disorders. The Company
leverages its resources, where it believes it to be advantageous, through
collaborations with large pharmaceutical companies for advanced clinical
development and commercialization of its products. The Company has five of its
drug development programs partnered with Pfizer Inc ("Pfizer") and one program
with Schering Corporation and Schering-Plough Ltd. (together, "Schering-Plough")
and intends to enter into additional collaborations where appropriate.
Neurogen believes that its expertise in neurobiology, medicinal chemistry,
pharmacology and molecular biology, combined with its Accelerated Intelligent
Drug Design (AIDD) program, which combines a biased combinatorial chemistry
program with high-throughput screening, informatics and robotics, enables it to
identify and develop compounds more quickly and efficiently than it could using
traditional drug discovery techniques. Neurogen has developed a portfolio of
drug candidates designed to treat anxiety, obesity and other metabolic
disorders, sleep disorders, cognitive impairment, schizophrenia, depression,
asthma and other inflammatory disorders. Industry analysts estimate the
worldwide market for currently marketed drugs for such disorders to be in excess
of $33 billion annually.
The Company was incorporated in Delaware in September 1987 and commenced
operations in July 1988. The Company's executive offices and its research and
development facility are located at 35 Northeast Industrial Road, Branford,
Connecticut 06405. Its telephone number is (203) 488-8201.
BACKGROUND
Neurogen's operations are dedicated wholly to research and development
activities to discover and develop new drugs with competitive advantages over
available therapies.
The business of drug discovery involves many disciplines and is changing
rapidly in response to advances in both the scientific understanding of the
cause and treatment of disorders as well as advances in the technologies
available to discover and test new drugs. Neurogen has developed an integrated
platform of technologies to discover new drug leads and to optimize these leads
into drug candidates suitable for human (clinical) testing and
commercialization. Neurogen's lead discovery technologies include the identity
of biological mechanisms thought to have a role in treating a given disorder
(drug targets); the development of assays designed to identify compounds which
have biological activity at such targets; the design and creation of libraries
of compounds which can be screened for biological activity and the ability to
rapidly screen them. Once compounds have been identified as active at a
particular drug target Neurogen applies its integrated technologies to develop
leads into clinical candidates, including the development of both in vitro (test
tube) and in vivo (animal) models to evaluate the pharmacological profile of
drug candidates for potential efficacy and side effects and the development of
preclinical tests to predict the metabolic, toxicologic and physical properties
of drug candidates to assess their commercial potential. Neurogen applies these
technologies in an iterative process where information gathered at later stages
of the development process is continually fed to earlier stages.
The Company's most advanced programs are focused on regulating the
communication between cells in the central nervous system (the "CNS"). The CNS
is composed of nerve cells (neurons) in the brain and spinal cord which are
organized into interconnecting networks responsible for coordinating all
functions in the body. As a result, neurons are implicated in all psychiatric
and neurological disorders.
Neurons can be divided into many different classes. While the fundamental
purpose of all neurons is to communicate with other neurons and cells throughout
the body, each class of neurons has a particular function to play in the CNS,
including controlling a physiological action, responding to stimulation or
storing memory. Communication between neurons occurs through complex electrical
and chemical processes involving the transmission of chemicals, known as
neurotransmitters, across spaces between nerve cells, known as synapses. At a
synapse, electrical signals in the transmitting neuron cause the release of
neurotransmitters. After being released from one neuron, a neurotransmitter
diffuses in the synapse and interacts with proteins, known as receptors, located
on the surface of adjacent neurons. Each neuron contains thousands of receptors.
When a neurotransmitter binds to and activates a receptor, it produces a
response in the receiving neuron thereby stimulating specific functions or
actions.
Disruption of normal neuronal communication has been implicated in many
neurological and psychiatric disorders, including anxiety, schizophrenia, eating
disorders, stroke and depression. Such disruption can result from abnormal
release of neurotransmitters, aberrant signaling between nerve cells or
heightened sensitivity of receptors to normal levels of neurotransmitters.
The complex task of communication between neurons is carried out by almost
100 different types of neurotransmitters. Each neurotransmitter interacts only
with selected types of receptors specific to that neurotransmitter.
For many years, it was commonly believed that each neurotransmitter
interacted with one or at most two types of receptors, made up of folded protein
sections forming the central pore which opens and closes as the receptor is
stimulated. In the last decade, however, scientists, including current members
of Neurogen's scientific staff, have discovered that each neurotransmitter
typically interacts with not just one type of receptor but with multiple
receptor subtypes which are grouped into families depending on the similarity of
their molecular structure. Slight differences in the folded protein sections
making up the receptor distinguish one receptor subtype from other members of
their family. Receptor subtypes from the same family are often distributed
differently throughout the brain and may control distinct physiological
functions from other receptor subtypes within the same family.
Neurotransmitters such as gamma-aminobutyric acid ("GABA"), dopamine and
various neuropeptides control many important neurophysiological functions. GABA
is believed to be one of the most prevalent neurotransmitters in the CNS. GABA
interacts with a family of receptor subtypes, to regulate the activity level of
neurons. Subtypes of GABA receptors have evolved to carry out particular
functions in the CNS. Because of its prevalence in the CNS, disruption of normal
GABA receptor function is implicated in many neuro-psychiatric disorders,
including anxiety, learning and memory impairment, sleep disorders and seizures.
The Company believes certain neuropeptides, by interacting with certain
receptors, are associated with, among other things, eating, stress responses and
cognitive functions. One neuropeptide, neuropeptide Y ("NPY"), has for several
years been associated with eating responses as well as other functions,
including metabolism and blood pressure. Another neuropeptide, corticotrophin
releasing factor ("CRF") is believed to be associated with stress responses,
while a third neuropeptide, galanin, is thought to be involved in eating
responses as well as cognitive functions. Dopamine, another type of
neurotransmitter, is present at fewer synapses in the CNS than GABA, but is
known to control important functions such as movement and emotional responses.
Dopamine interacts with a family of receptors, consisting of at least five
subtypes, each of which is responsible for certain functions in the CNS. For
example, abnormalities in dopamine transmission have been implicated in
schizophrenia.
Outside of the central nervous system, peptides and hormones interact with
cell membrane receptors to cause cellular changes in a similar fashion as
synaptic communication occurs within the CNS. Neurogen has expanded its drug
development programs to include a number of programs which apply the Company's
drug design expertise to these types of mediators of cellular activity,
including GLP1, bradykinin, and C5a. Like many of Neurogen's neurotransmitter
receptor targets, these receptors consist of folded protein chains that are
embedded in the cell membrane. Different sections of the protein chains may vary
to produce different receptor subtypes. Neurogen believes that by designing
small molecules that interact with the targeted receptors, the Company may be
able to develop new drugs which modulate different disease-linked receptors, or
design new drugs which are more targeted than currently marketed drugs.
The identity and role of various subtypes of the receptor families of each
of the above neurotransmitters, neuropeptides and cellular mediators is the
subject of ongoing scientific research at Neurogen as well as at many other
institutions and companies.
Neurogen's drug development programs design drugs for targets that are
either more specific than drugs currently available to treat a particular
disease, or targets that have been newly identified as mediators in a disease.
In both cases, Neurogen believes that by applying its drug design expertise to
designing drugs that specifically target a receptor, such compounds offer the
potential for equivalent or improved efficacy with fewer side effects than drugs
currently on the market, or may grow markets in areas where few effective
therapeutics currently exist.
BUSINESS STRATEGY
Neurogen's mission is to be a leader in the design, development and
commercialization of new drugs. The Company focuses its drug discovery programs
on small molecule compounds that target specific receptor subtypes implicated in
a variety of disorders. The key points of the Company's strategy are as follows:
TARGET MULTIPLE MARKETS WITH MULTIPLE DRUG CANDIDATES. Neurogen utilizes
its expertise in the discovery of novel drug candidates to develop a diverse
portfolio of candidates to treat common disorders, such as anxiety, obesity and
other metabolic disorders, sleep disorders, cognitive impairment, schizophrenia
and depression. By targeting multiple disorders which represent large markets,
the Company seeks to reduce its reliance on any single program. Further, within
each program Neurogen seeks to develop multiple drug candidates with differing
chemical structures, pharmacokinetic profiles and, at times, differing subtype
profiles in order to further enhance the likelihood of producing a successful
drug candidate from such program.
DEVELOP RECEPTOR SUBTYPE SPECIFIC COMPOUNDS. The Company focuses its drug
discovery efforts on receptor-subtype-specific small molecule compounds the
Company believes will have fewer side effects than currently marketed drugs. The
Company believes that such drugs have the potential to penetrate and expand
existing markets as evidenced by the newest class of antidepressants (e.g.,
Prozac(R), Zoloft(R) and Paxil(R)) which selectively interact with serotonin
(another neurotransmitter) reuptake receptors and have less severe side effects
than previous antidepressants. In addition, the Company seeks to develop small
molecule drugs due to their relatively high solubility, increased ability to
cross the blood brain barrier (a critical consideration in developing safe and
efficacious psychotherapeutic drugs) and low manufacturing costs.
UTILIZE ADVANCED DISCOVERY TECHNOLOGIES. The Company utilizes its advanced
discovery technologies, including its AIDD program, to enhance its drug
discovery capabilities and to provide new opportunities for strategic
partnerships. Through its AIDD program, the Company employs biased combinatorial
chemistry methodologies to develop extensive libraries of small molecule
compounds. Together with its combinatorial chemistry effort, Neurogen's AIDD
program integrates advanced high-throughput screening techniques and informatics
systems designed to intelligently optimize library synthesis and screening
selection from a virtually infinite number of alternatives. This program has
been instrumental in providing new drug leads or optimizing existing leads in
all of Neurogen's programs. The Company has also granted limited access to its
AIDD technologies to certain third parties in exchange for rights to other
technologies, access fees and/or a share of commercial rights to successful
candidates derived from the technologies.
RATCHET GROWTH THROUGH STRATEGIC COLLABORATIONS. The Company seeks to
ratchet its growth through successive strategic collaborations in which it seeks
to diversify the development risk of its programs and to enhance the likelihood
of commercialization of its compounds. Further, through its collaborations,
Neurogen hopes to progressively retain additional commercial rights and assume
additional responsibilities to develop incrementally its clinical development,
manufacturing and sales capabilities. In its first two collaborations with
Pfizer (1992 and 1994), Neurogen has focused its efforts primarily on research
and discovery and looks to Pfizer to conduct and fund all clinical development,
manufacturing and sales/marketing activities. In its collaboration with
Schering-Plough (June 1995), in addition to leading the research and discovery
efforts, Neurogen retained the right to participate in the clinical development
of collaboration compounds (while Schering-Plough will conduct and fund clinical
trials) and an option to manufacture products resulting from the collaboration
for the United States market. In its third collaboration with Pfizer (November
1995), in addition to retaining similar rights relating to clinical trials and
manufacturing, Neurogen retained an option to earn a portion of the profits, if
any, generated by sales of collaboration drugs to the North American Free Trade
Agreement ("NAFTA") countries by funding a portion of the cost of clinical
trials and marketing in those countries.
PRODUCT RESEARCH AND DEVELOPMENT
The Company believes it is well-positioned to capitalize on advances in
biochemistry, molecular biology, medicinal chemistry and neurobiology to develop
new drugs. The Company believes that its scientists possess an advanced
understanding of the workings of receptor systems in cellular communication and
the design of small molecule drug candidates to modulate these receptor systems.
This understanding has enabled the Company to develop a portfolio of compounds
which include product candidates for the treatment of anxiety, obesity and other
metabolic disorders, sleep disorders, cognitive impairment, schizophrenia,
depression, asthma and other inflammatory disorders.
ACCELERATED INTELLIGENT DRUG DESIGN
Neurogen's Accelerated Intelligent Drug Design (AIDD) program integrates
its biased combinatorial chemistry program and high-throughput screening
capabilities with state-of-the-art automation and an interactive data system.
Combinatorial Chemistry libraries and high-throughput screening systems like
those being developed at Neurogen can be used to find new chemical leads for
receptors or other targets where no leads exist as well as to optimize chemical
leads by refining candidates into structures with suitable drug-like
characteristics.
Neurogen's drug lead discovery technologies include both traditional
medicinal chemistry techniques and combinatorial design techniques integrated
into the AIDD program. Unlike traditional drug discovery, in which compounds are
typically designed and synthesized at a rate of 50 to 100 compounds per year per
chemist, combinatorial chemistry technologies can generate libraries of
thousands of compounds per day. Moreover, advances in screening techniques and
robotics now allow the rapid screening of thousands of compounds created through
combinatorial efforts to identify possible new drug candidates. These advances
in chemistry and screening technologies have significantly impacted the drug
discovery practices of the industry. Neurogen believes it has been, and believes
it can remain, a leader in the development and application of such technologies.
Many companies with combinatorial chemistry programs have used these
technologies to systematically and randomly create immense libraries of diverse
compounds. However, since the number of unique organic compounds is essentially
infinite, Neurogen believes it is important to bias its AIDD libraries (rather
than randomly generate compounds) toward the selection of molecules most likely
to interact with receptor families of interest to Neurogen and other
pharmaceutical companies. Neurogen also biases its libraries to create compounds
more likely to have drug-like characteristics such as oral availability. To bias
its libraries, Neurogen first selects or designs a number of known and
proprietary pharmacophores (arrangements of atoms thought to have activity in
some biochemical assay) with the aid of Computer Assisted Molecular Modeling
(CAMM). These pharmacophores then serve as templates and are subjected to
"combinatorial" procedures, whereby the templates are reacted with numerous
different variants of a given reaction simultaneously, producing a pool of
numerous compounds. The pools of compounds are then screened through a variety
of high capacity receptor-based assays to identify compounds that interact with
specific receptor subtypes. Certain results of these tests of activity are then
utilized to aid in the development of new generations of compounds.
To date, Neurogen has generated a library of more than 1,000,000 compounds
using its AIDD program. The Company believes that, to date, the discovery of
active compounds and the optimization of drug leads in several of its programs
has required substantially less time that would have been needed using only
traditional approaches. Neurogen believes these discovery technologies will
continue to enhance its ability to find lead structures for difficult medicinal
chemistry problems and significantly shorten the time required to optimize such
leads and produce viable drug candidates. In addition, the Company believes that
these discovery technologies will provide it with new opportunities for
strategic partnerships.
PRODUCT DEVELOPMENT PROGRAMS
The following table lists the Company's most advanced programs and the current
status of these programs.
DISORDER TARGET MECHANISM PROGRAM STATUS COMMERCIAL RIGHTS
Anxiety GABA NGD 91-2 Phase I Pfizer (Neurogen royalty)
(1) NGD 91-3 pre-
clinical development (2)
Insomnia GABA NGD 96-1 Phase I human Pfizer (Neurogen royalty)
clinical trials (1)
NGD 96-2 pre-clinical
development (2)
Dementia, cognition deficits GABA NGD 97-1 Phase I human Pfizer (Neurogen royalty)
clinical trials (1)
Depression and stress-related CRF1 NGD 98-1 pre-clinical Neurogen
disorders development (2)
Obesity and other eating disorders Neuropeptide Y Evaluation of new pre-clinical Pfizer (Neurogen royalty,
candidates (2) following manufacturing and profit
safety test of NGD 95-1 in sharing options)
Phase I clinical trials (1)
Schizophrenia Dopamine Evaluation of new Schering-Plough (Neurogen royalty
candidates following and manufacturing option)
Phase I (1) trials of NGD 94-4
and NGD 94-1
Inflammatory disorders, C5a Leads identified (3) Neurogen
rheumatoid arthritis
Depression NK Leads Identified (3) Neurogen
Asthma Bradykinin Leads identified (3) Neurogen
Type II diabetes, obesity GLP1 - like Leads identified (3) Neurogen
Depression Neuropeptide Y Leads identified (3) Neurogen
Anxiety in companion animals (4) GABA receptor subtypes Leads identified (3) Pfizer (Neurogen royalty)
Dementia in companion animals (4) GABA receptor subtypes Leads identified (3) Pfizer (Neurogen royalty)
------------
(1) See "Government Regulation" for a description of the phases of
clinical trials.
(2) "Pre-clinical development" indicates that Neurogen and/or one of its
collaborators is conducting pharmacology testing, toxicology testing,
formulation, process development and/or manufacturing scale-up prior to possible
submission of an Investigational New Drug application (an "IND").
(3) "Leads identified" indicates that lead compounds have been discovered
that meet certain in vitro criteria of the Company. Lead compounds may undergo
structural modification and more extensive evaluation prior to selection of
candidates, if any, for pre-clinical development.
(4) "Companion animals" is a population, consisting of household pets such
as dogs and cats, which is targeted by Pfizer's Animal Health Division.
ANXIETY. Estimates by the National Institute of Mental Health (the "NIMH")
suggest that anxiety disorders, characterized by a sense of irrational fear or
dread, are the most common CNS disorders in the United States affecting
approximately 23 million people, or 12% of the adult population. The most common
anxiety-reducing drugs, or anxiolytics, are the class of drugs known as
benzodiazepines (such as Valium(R), Xanax(R) and Librium(R)) which are orally
administered compounds that exert their pharmacologic effect on the GABA family
of receptors. Benzodiazepines alleviate some of the symptoms of anxiety, but at
the same time cause numerous side effects, including drowsiness, impairment of
motor skills, memory loss and addiction. In addition, benzodiazepines can cause
coma or death if a patient consumes excess alcohol in conjunction with drug
treatment. The Company believes these side effects are due to benzodiazepines
interacting with and enhancing the activity of many or all GABA receptor
subtypes. Despite these side effects, based on studies by market sources, the
Company estimates the annual market for currently marketed anxiolytics to be
approximately $2.6 billion worldwide and $1.1 billion in the United States.
Neurogen's scientists have been leaders in defining the mechanism of action
of benzodiazepines at the GABA receptors. Based on its scientists' understanding
of the role which GABA receptor subtypes play in the side effects caused by
benzodiazepines, Neurogen has developed small molecule, orally administered
anxiolytic compounds which it believes may avoid or reduce the adverse side
effects of currently marketed anxiolytics by binding to specific subtypes in the
GABA receptor family. The Company entered into the Collaborative Research
Agreement dated as of January 1, 1992 between the Company and Pfizer (the "1992
Pfizer Agreement") to research, develop and commercialize with Pfizer anxiolytic
and cognition enhancing compounds that act through the GABA family of receptors.
See "Collaborative Research and Licensing Agreements."
Certain of Neurogen's GABA-based compounds have also demonstrated efficacy
in animal models of depression. Accordingly, in a 1998 extension and expansion
of the 1992 and 1994 Agreements with Pfizer, depression was added as an
additional target indication for Neurogen's development candidates from the
anxiety drug development program. Recent academic research has indicated that as
many as 60 percent of depressed patients also have anxiety. Under the 1992
Pfizer Agreement, Pfizer has the right to determine what disease indications to
pursue with development candidates in the clinical development process, if any.
DRUG CANDIDATES. Neurogen has discovered several drug candidates that have
the novel GABA binding activity which the Company believes will relieve anxiety
while avoiding or reducing adverse side effects. Three of these candidates, NGD
91-2, NGD 91-3 and NGD 91-1, have been the primary focus of development efforts
of Pfizer and Neurogen. NGD 91-1, the initial clinical candidate from the
collaboration, was the subject of Phase I studies to explore safety and
pharmacokinetic properties and to obtain preliminary indications of efficacy of
drugs which have the novel binding profile discovered by Neurogen. NGD 91-2 is
currently in a Phase I-B clinical study. NGD 91-3 is currently in pre-clinical
development.
In order to obtain an early indication of efficacy and the desired lack of
sedation of the novel binding profile of Neurogen's drug candidates, Pfizer
designed and conducted a Phase I-B study of NGD 91-1 to test the drug in an
acute (situational) anxiety setting. In this trial, NGD 91-1 was compared to a
marketed anti-anxiety drug, Valium(R), and to a control placebo. The study was
"double-blinded" and involved 150 healthy men and women exposed to anxiety
caused by the anticipation of an unpleasant medical procedure. Both NGD 91-1 and
Valium(R) demonstrated significant anti-anxiety effects. However, while
Valium(R) caused significant sedation, NGD 91-1 did not cause sedation. While
the goal of the collaboration with Pfizer is to develop drugs to treat
generalized anxiety disorder, a chronic condition, the Company believes the
results of the Phase I-B study demonstrate that the selective GABA activity
identified by Neurogen can relieve anxiety without causing sedation. In late
1996, Neurogen and Pfizer transferred the development focus of the collaboration
from NGD 91-1 to NGD 91-2, a newer development compound, following a
determination that, when metabolized, NGD 91-1 did not possess optimal
pharmacokinetic properties needed to provide a consistent level of the compound
in the bloodstream.
In July 1997, Pfizer commenced human testing of NGD 91-2 in a Phase I
clinical trial. In the fall of 1998, Pfizer commenced a Phase I-B human clinical
study of NGD 91-2 designed to explore the safety and efficacy in acute or
short-term settings as a means of evaluating the potential of NGD 91-2 for use
as a chronic treatment for generalized anxiety disorder and to help set doses
for further studies. Similar to the earlier study conducted with NGD 91-1,
several doses of NGD 91-2 were compared to the marketed anti-anxiety drug
Valium(R), and to a control placebo. The study was "double-blinded" and involved
200 healthy men and women exposed to anxiety caused by the anticipation of an
unpleasant medical procedure. Interim results of this study suggest that Valium
has demonstrated an ability to reduce anxiety in the subjects tested to date and
also caused the side effect of sedation. These interim results suggest that NGD
91-2 has not exhibited a significant reduction in anxiety. Consequently, in
February 1999 Neurogen announced that the clinical development timeline for NGD
91-2 would be extended pending the final results of this situational anxiety
trial and the results of two ongoing short term studies in patients suffering
from generalized anxiety disorder (GAD). Neurogen and Pfizer expect to evaluate
the data from all three studies before determining the next steps in development
for NGD 91-2.
Neurogen has identified another development compound from the
collaboration, called NGD 91-3, which, similar to NGD 91-1 and NGD 91-2, has
novel receptor subtype binding activity that Neurogen scientists believe is
important for reducing anxiety without producing the side effects such as
sedation, memory impairment and interaction with alcohol. Animal studies
conducted to date indicate that NGD 91-3 has better pharmacokinetic properties
than NGD 91-1 and is more potent than NGD 91-2. NGD 91-3 is currently in
pre-clinical development.
Under the 1992 Pfizer Agreement, Pfizer has the right to determine when to
advance compounds in the clinical process, if at all. As with all drugs that
enter clinical testing, no assurances can be given that NGD 91-2, NGD 91-3 or
any other collaboration compound will successfully complete the clinical trials
or advance through the regulatory approval process.
In order to increase the likelihood that Neurogen's portfolio will produce
a successful anxiolytic drug, Neurogen, in collaboration with Pfizer, has been
developing additional alternative anxiolytic candidates that act through the
GABA family of receptors and have properties similar to those of the current
candidates but which belong to different chemical series than these compounds.
Neurogen has filed patent applications with respect to the composition of NGD
91-2, NGD 91-3 and NGD 91-1 and other compounds in its anxiolytic program. See
"Collaborative Research and Licensing Agreements."
SLEEP DISORDERS. Recent studies indicate that as many as 20 million people
in the United States experience chronic insomnia and an additional 20 to 30
million Americans experience intermittent sleep-disorders. Industry analysts
estimate that the annual market for drugs to treat insomnia is approximately
$1.7 billion worldwide and over $560 million in the United States. Neurogen is
developing drugs to treat sleep disorders, primarily insomnia. While currently
marketed drugs to treat sleep disorders, or hypnotics, are effective, they cause
numerous side effects, including "hangovers," rebound insomnia, short-term
memory loss and addiction.
Humans possess an internal "biological clock" that controls the timing of
different biological processes and affects the ability to sleep. This mechanism
influences many different processes well beyond those associated with activity
and rest. GABA receptor subtypes are involved in sleep regulation as well as
anxiety. Neurogen's research suggests that some hypnotics may interact with
different GABA receptor subtypes than those which regulate anxiety. Further,
Neurogen believes that the side effects associated with many currently marketed
medications arise from the fact that these drugs bind non-specifically to many
different GABA receptor subtypes. Neurogen believes that drugs which are
selective for certain sleep-inducing GABA receptor subtypes will have fewer side
effects than the non-selective benzodiazepines currently on the market and could
represent a substantial improvement in the treatment of sleep disorders.
The Company has identified certain compounds in its portfolio which
interact selectively with the GABA receptor subtypes it believes are involved in
sleep regulation. Animal studies, to date, suggest that these compounds are
efficacious in inducing sleep with fewer side effects than existing therapies.
Currently, Pfizer, Neurogen's collaborative partner in this program, is
evaluating the most advanced of these compounds, NGD 96-1 in Phase I human
clinical studies. A second candidate, NGD 96-2 is currently undergoing
pre-clinical development. Neurogen is pursuing its sleep disorder program in
collaboration with Pfizer under the Collaborative Research Agreement dated as of
July 1, 1994 between the Company and Pfizer (the "1994 Pfizer Agreement" and,
together with the 1992 Pfizer Agreement and the 1995 Pfizer Agreement, the
"Pfizer Agreements"). See "Collaborative Research and Licensing Agreements."
COGNITION DISORDERS. Memory loss is one of the most devastating symptoms of
neurodegenerative diseases such as Alzheimer's disease and Parkinson's disease.
Research sponsored by the NIMH indicates that in any given year as many as five
million people in the United States suffer from dementia, a condition
characterized by the impairment of learning and memory recall. A 1990 study by
the U.S. Office of Science and Technology Policy indicates that dementia
afflicts approximately 10% of people over the age of 65. Industry analysts
estimate the current annual market for drugs to treat cognitive disorders to be
approximately $1.0 billion worldwide.
The Company believes that GABA may affect and modulate the activity of
other neurotransmitters which contribute to the storage and retrieval of memory.
By understanding how GABA affects these other neurotransmitters, the Company
believes that it may be able to develop a drug candidate that acts through GABA
receptor subtypes to enhance brain function and cognition where brain function
has been impaired through neurodegenerative processes caused by aging, chemical
toxins, Alzheimer's disease or Parkinson's disease. Moreover, the
benzodiazepines, which produce their desired anti-anxiety effect by enhancing
the activity of certain GABA receptors, also cause memory impairment and other
side effects. The Company believes this memory impairment is due to the
nonselective binding of benzodiazapines to GABA receptor subtypes. Accordingly,
the Company believes that modulating the GABA system in the opposite direction
by inhibiting certain GABA receptor subtypes in the cortex and hippocampal
regions of the brain may enhance the storage and retrieval of memory. Neurogen
has discovered a number of compounds that inhibit activity at these GABA
receptor subtypes. Animal studies, to date, suggest that these compounds are
efficacious in enhancing memory. Currently, Pfizer, Neurogen's collaborative
partner in this program is evaluating the most advanced of these compounds, NGD
97-1 in Phase I human clinical studies, which began in the first quarter of
1999. Neurogen is pursuing its cognition enhancement program in collaboration
with Pfizer under the 1992 Pfizer Agreement. See "Collaborative Research and
Licensing Agreements."
Neurogen has also established a program to develop drugs which modulate the
neuropeptide galanin for the treatment of cognitive deficits. Galanin has been
demonstrated in various industry studies to modulate the neurotransmitter
acetycholine, a neurotransmitter which is thought to be involved in Alzheimer's
disease. Neurogen believes that a drug which blocks the activity of galanin
could in turn increase acetycholine. Through its AIDD program, Neurogen is
conducting an early stage program to discover galanin leads suitable for further
testing and optimization. Neurogen has, to date, retained all commercial rights
to its galanin program.
DEPRESSION AND STRESS DISORDERS. Depression is one of the most prevalent
mental illnesses in the United States, affecting approximately 17 million people
or 9% of the adult population annually according to the NIMH. Depression occurs
in a variety of forms, ranging from a single episode of depressive symptoms to
recurrent cycling of moods which can be severe in some patients, alternating
between manic "highs" and depressed "lows." Research suggests that more than
half of the people who have had one episode of major depression will have
another at some point in their lives. While many patients function normally
between episodes, it is believed that 20 to 35 percent of the victims suffer
chronic depression that prevents them from maintaining a normal routine. Many
depressed people sleep too much or too little, are lethargic or agitated and
experience feelings of worthlessness and guilt or have recurring thoughts of
death or suicide. Older generic antidepressants may cause sedation, mouth
dryness or heart irregularities and can be lethal in overdose. Other classes of
antidepressants exhibit toxicity when combined with certain foods. While recent
pharmaceutical research has led to improved drugs, such as Prozac(R), for the
treatment of depression, these medications have limitations in their use
primarily because of their slow onset of therapeutic action (often greater than
10 days from the commencement of dosing) and lack of efficacy in some patients.
Industry analysts estimate the current annual market for antidepressants to be
approximately $9.2 billion worldwide and over $6.1 billion in the United States.
Neurogen believes that exploring alternative mechanisms of action may lead to a
new class of antidepressants that act quickly, safely and effectively either by
themselves or in conjunction with existing medications.
Stress is a condition commonly associated with depression. A number of
neuropeptide receptors which appear to be involved in stress responses,
including receptors for CRF and NPY, are altered in depressed patients.
CRF1. The Company believes that an orally available drug candidate that
blocks the CRF1 receptor may be efficacious in relieving depression, anxiety
and/or stress related disorders without significant side effects. Academic and
industry research indicates that administration of CRF into specific brain sites
produces a variety of behavioral effects, which are characterized as increases
in arousal or a behavioral manifestation of a state of stress. Research also
indicates that by exposing laboratory animals to a variety of environmental
stressors, levels of CRF increase in areas of the brain that have been
associated with producing behavioral or autonomic responses to stress. Industry
studies have demonstrated that antagonists, or blockers, of the CRF1 receptor
subtype can reduce indications of stress in animal models. Through its AIDD
program, Neurogen has discovered a number of compounds which block the CRF1
receptor subtype and have demonstrated efficacy in animal models of depression
and stress. The most advanced of these, called NGD 98-1, is currently in
pre-clinical development. Neurogen has, to date, retained all commercial rights
relating to the CRF drug discovery program.
NK. Neurogen has applied its AIDD program to discover compounds which block
certain types of neurokinin receptors, which the Company believes may be
effective in treating depression. Neurogen has identified several lead compounds
which are NK blockers and is currently evaluating these leads in animal models.
NPY2. The Company has also discovered compounds, through its AIDD program,
which block the NPY2 receptor subtype, which the Company believes to be
implicated in depression. These compounds are currently being evaluated for
testing in animal models. Neurogen has, to date, retained all commercial rights
relating to the NPY2 for depression drug discovery program.
OBESITY AND OTHER METABOLIC DISORDERS. Obesity is a major health problem in
the United States. Recent studies indicate that almost one-third of the adult
population fits the criteria for at least moderate obesity and that severe
obesity affects a large subgroup of this population. Many health problems,
including hypertension, arthritis, non-insulin dependent diabetes and elevated
cholesterol, are associated with obesity. In addition, among females in the
United States, it is estimated that as many as one percent suffer from anorexia
nervosa and three percent suffer from bulimia nervosa. Based on studies by
market sources, Neurogen believes the annual market for currently marketed
obesity drugs to be approximately $604 million worldwide and $351 million in the
United States.
Obesity has traditionally been treated with amphetamines or
amphetamine-like drugs which can be highly addictive. Antidepressants, such as
Prozac(R), have also been used with limited success in treating obesity.
Recently, other drugs to treat obesity by modulating the neurotransmitter
serotonin have been approved for marketing or gained popularity. These drugs,
like older approaches continue to be plagued by serious side effects, some of
which have been severe enough to cause two drugs to be withdrawn from the market
in 1997. Due to the limited success of obesity therapy and side effects,
including nervousness, tremors, primary pulmonary hypertension, increases in
blood pressure, insomnia and intestinal tract discomfort, associated with
currently available medications, Neurogen believes that an eating disorder
therapy without these side effects would have the ability to penetrate and
potentially expand the market for these drugs.
NPY. Neuropeptide Y (NPY) is a neurotransmitter which has been closely
linked with animal feeding behavior and appetite control. Certain NPY receptors
are known to localize in the hypothalamus, a section of the human brain
associated with eating. The Company believes that a drug which selectively
blocks the effects of the neurotransmitter NPY may moderate eating habits while
reducing the potential for side effects. In pre-clinical animal studies,
injection of NPY into the hypothalamic region of the brain has stimulated
animals that have just eaten to eat again. Studies indicate that animals develop
no tolerance for NPY and that those chronically exposed to NPY (over a period of
days to weeks) become obese. Independent of these studies, there has developed a
greater understanding of the existence and role of NPY receptor subtypes which
has stimulated interest in pursuing an NPY-mediated treatment of obesity. Based
on these studies and its understanding of receptor subtypes and receptor
modulation, Neurogen believes that a drug which blocks the binding (that is,
acts as an antagonist) of NPY to certain of its receptor subtypes located in the
hypothalamus may have the opposite effect of chronic exposure to NPY and reduce
the desire to eat. In rodent studies several of Neurogen's NPY antagonists have
been shown to inhibit normal eating as well as eating induced by food
deprivation or the administration of NPY. In a 21-day study of normal growing
rodents, NGD 95-1, Neurogen's first NPY-blocking drug candidate to be tested in
humans, was shown to reduce food intake and weight gain beginning early in the
trial and showed no signs of tolerance during the balance of the trial.
DRUG CANDIDATES. Through its AIDD program, Neurogen has identified a number
of antagonists for the NPY family of receptors. Neurogen's first NPY antagonist,
NGD 95-1, demonstrated efficacy in pre-clinical animal models of feeding. In
collaboration with Pfizer, Neurogen has conducted Phase I human clinical trials
of the compound. The Phase I human clinical trials of NGD 95-1, believed to be
the first NPY blocker to be tested in humans, examined the drug's safety in
obese, but otherwise healthy, volunteers. In a Phase I-B human clinical study
conducted in the fall of 1997, elevated liver enzymes were discovered in some
volunteers taking the highest of three doses tested over a period of three
weeks, and further development of that compound has been halted. These findings
were unexpected based on long-term drug safety testing in animal studies, and
were not seen in earlier human testing of the compound. Subsequently, the
primary focus of the collaboration research has turned to the identification of
additional clinical candidates. Neurogen and Pfizer are examining several new
NPY antagonist candidates for pre-clinical development from classes of compounds
which are both chemically similar to and different from NGD 95-1.
Neurogen is pursuing its NPY based obesity program in collaboration with
Pfizer under the Collaborative Research Agreement and the Commercialization and
Development Agreement, each dated as of November 1995 between the Company and
Pfizer (collectively, the "1995 Pfizer Agreement"). Under this agreement, Pfizer
has the right to determine when to advance collaboration compounds in the
clinical process, if at all. No assurance can be given that any collaboration
compound will successfully complete the clinical trials or advance through the
regulatory approvals process. In order to increase the likelihood that
Neurogen's portfolio will produce a successful obesity drug, Neurogen is
developing alternative NPY blocker obesity drug candidates in collaboration with
Pfizer. See "Collaborative Research and Licensing Agreements."
GLP1. Type II diabetes (adult-onset or noninsulin-dependent) comprises the
majority of diabetes cases, and the American Diabetes Association estimates 14.9
million people in the US are afflicted with the disease. Current estimates place
the annual market for drugs to treat Type II diabetes at approximately $3.6
billion worldwide and $2.0 billion in the US. The disease arises from a
reduction in insulin secretion by the pancreas. Although insulin secreting cells
are present in Type II diabetics, there is a reduced sensitivity and/or response
to insulin. Type II diabetes is currently treated with oral hypoglycemic agents
(OHAs) to stimulate insulin secretion, however the disease is progressive and
patients often require insulin injections as the disease continues. In addition,
overstimulation of insulin secretion due to OHAs often results in low blood
sugar levels, or hypoglycemia, in Type II diabetic patients. Glucagon Like
Peptide1 (GLP1) is secreted from cells in the intestine and its glucose lowering
effect is dependent upon circulating glucose levels. Industry tests have
demonstrated that GLP1 raises insulin secretion from pancreatic cells in the
presence of elevated glucose levels without overstimulating insulin secretion
and has no effect when glucose levels are in normal range, preventing
hypoglycemia. Industry experiments also indicate that GLP1 delays stomach
emptying, a mechanism which may play a role in treating obesity. Efforts to use
the natural peptide for Type II diabetes treatment have demonstrated that it has
a short half-life which renders it difficult to commercialize as a therapeutic.
Through its AIDD program, Neurogen has identified a number of non-peptide small
molecules which in in vitro tests indicate they have modulatory effects similar
to GLP1. The Company is currently in the process of further testing and
optimizing these compounds and evaluating them in its animal models. Neurogen
has, to date, retained all of its commercial rights in its GLP1 program.
GALANIN. Neurogen has also established a program to explore the utility of
and develop drugs which modulate the neuropeptide galanin for the treatment of
obesity. Galanin has been demonstrated in various industry studies to stimulate
eating, and some researchers have demonstrated that galanin may stimulate the
consumption of fats in laboratory animals. Neurogen believes that a drug which
blocks the activity of galanin could decrease appetite. Through its AIDD
program, Neurogen is conducting an early stage program to discover galanin leads
suitable for further testing and optimization. Neurogen has, to date, retained
all commercial rights to its galanin program.
RHEUMATOID ARTHRITIS AND INFLAMMATION. Rheumatoid arthritis (RA) is a
chronic inflammatory disease involving many systems of the body. While the cause
of RA is not known, the spread of the disease is believed to be caused by
inflammatory T-lymphocyte cells, a type of white blood cell, which starts a
cascade resulting in the activation of several factors which exacerbate the
inflammatory process including C5a. C5a attracts and promotes the immune system
to start attacking the body's own cells, an inappropriate reaction causing this
autoimmune disease. Although there are a variety of systemic manifestations, the
characteristic feature of RA is persistent inflammation of the joint, usually
involving peripheral joints, which also may be accompanied by pain, swelling,
stiffness and loss of joint function. The potential of the joint inflammation to
cause cartilage destruction and bone erosions, and subsequently joint
deformities, is the hallmark of the disease. The onset of RA usually occurs in
40 to 50 year old individuals, is found throughout the world regardless of race,
and the National Institutes of Health estimate that it affects approximately 1%
of the US population.
Current medications used to treat rheumatoid arthritis and inflammation are
targeted towards varying aspects of the disease, from reducing pain and
inflammation to attempts to slow down or stop joint damage. In 1998, industry
analysts estimate that worldwide sales of drugs to treat rheumatoid arthritis
were $6.4 billion and $2.1 billion in the US. These estimates do not include low
dose anti-inflammatories, such as aspirin and other nonsteroidal
anti-inflammatory drugs (NSAIDS) which are commonly used to treat both pain and
inflammation, however gastrointestinal disturbances and ulcers are a common side
effect of these drugs. A newer generation of anti-inflammatory drugs which
inhibit the cyclooxygenase-2 enzyme specifically (COX-2 inhibitors) has recently
been approved and may address this side effect. For more severe inflammatory
flare-ups, corticosteroids are used, however, particularly at high doses, these
have the potential for serious side effects, such as osteoporosis, fluid
retention, muscle weakness, hypertension, increased risk of infection, diabetes
and easy bruising. Drugs which are currently used to alter the course of the
disease to prevent joint and cartilage destruction and also restrain the overly
active immune system have been efficacious for many patients, however patients
often experience diminishing effectiveness over time and serious side effects
are common. Many of these drugs produce upset stomach, liver and kidney
problems, and suppress the immune system, resulting in low white blood cell
counts and blood abnormalities.
Neurogen scientists believe that inhibiting the activation of the C5a
receptor through a small molecule, orally available antagonist would be
efficacious in the treatment of rheumatoid arthritis by blocking the
inflammatory response and breakdown of tissue. This drug could also be effective
in treating other inflammatory diseases, with the ease of delivery via a pill
and without many of the side effects associated with currently available
treatments. Through its AIDD program, the Company has identified several
compounds which block the activation of C5a receptors. These compounds are
currently being evaluated in additional pre-clinical models of inflammation.
Neurogen has, to date, retained all rights in its C5a antagonist program.
ASTHMA. Asthma is a chronic, persistent disease of the airways in the lungs
characterized by chronic inflammation with acute flare-ups of coughing,
wheezing, chest tightness, and difficult breathing that are usually reversible,
but that can be severe and sometimes fatal. Recent academic research indicates
that inflammation is a critical factor in the cause of asthma, and treating this
abnormal inflammation is a primary goal of asthma therapy. Despite the
development of new medications to treat asthma, the disease is on the rise.
According to the Centers for Disease Control and Prevention, the prevalence of
asthma in the US increased 61% between 1982 and 1994, with about 15 million
Americans having asthma. The National Institute of Health reports that asthma is
the single most common chronic disease causing absences from school, with about
5 million children in the US having asthma. If not properly controlled, asthma
can be life threatening, and asthma deaths have increased to about 5600
Americans per year, representing a 45% increase in mortality between 1985 and
1995, according to the American Lung Association. Industry analysts estimate
that worldwide sales of drugs used to treat the inflammatory component of asthma
were $3.9 billion in 1998 and $1.1 billion in the US.
Asthma has traditionally been treated by two types of drugs:
anti-inflammatories and bronchodilators. Anti-inflammatory drugs like
corticosteroids or cromolyn sodium interrupt the development of inflammation in
the bronchial tubes of the lungs and have a preventative action. Bronchodilators
act principally to open airways by relaxing bronchial smooth muscle. A third
class of drug, the nonsteroidal oral leukotriene inhibitors, was introduced late
in 1996, and are considered daily controller medications because they reduce
airway inflammation and are used to control the disease and not to treat its
sudden attack. In an effort to manage the disease and prevent tissue damaging
attacks, treatment focus has shifted to anti-inflammatory drugs from those used
to control symptoms such as constricted airways. Some clinical experts believe
that preventative care is the key to controlling asthma. Most anti-asthma
medications used today are inhaled, and while they often control the
inflammatory symptoms, patient compliance is a concern. Neurogen believes that a
small molecule orally available drug working through a novel mechanism to treat
asthma would offer an improved route to controlling asthma.
Through its AIDD program, Neurogen has identified a number of compounds
active as bradykinin2 receptor subtype specific antagonists. Bradykinin (BK) and
its metabolites have been implicated in a variety of physiological disease
responses and bradykinin may play a participatory role in asthma. Bradykinin
receptors have been found on a variety of lung tissues which are involved in the
asthma response. Academic studies have demonstrated that bradykinin has been
found in fluid taken from the lungs of asthmatics after allergen challenge and
that inhalation of the BK peptide provokes constriction of the bronchial tubes
and induces a sensation similar to that experienced during as asthma attack.
This BK-induced bronchoconstriction is only observed in asthmatic patients and
not in normal control subjects. Extensive published literature classifies BK
receptors into two types: BK1 and BK2. The airway effects of bradykinin are
believed to be mediated through the BK2 receptor as demonstrated by industry and
academic studies with non-small molecule, peptide formulations of BK2
antagonists which have shown inhibition of allergen-induced asthma in animal
models and improved pulmonary function in human clinical trials. Neurogen's
small molecule BK2 antagonists are currently being evaluated in pre-clinical
models of asthma. Neurogen has, to date, retained all rights in its BK2
antagonist program.
SCHIZOPHRENIA PROGRAM. Schizophrenia refers to a group of mental illnesses
of unknown origin which have no known cure and are characterized by a variety of
symptoms including hallucinations, delusions and social withdrawal.
Schizophrenia is estimated to affect between one-half and one percent of the
population worldwide. Although recently approved drugs for the treatment of
schizophrenia, including Zyprexa(R) and Risperdal(R), have demonstrated
improvements over existing medications such as Clozapine(R) and Haldol(R), they
do not completely alleviate the symptoms of schizophrenia and also produce
undesirable side effects themselves. Weight gain, impairments of motor function
and other side effects have been associated with treatment with Zyprexa(R) and
Risperdal(R), however the newer drugs produce a lower incidence of adverse
movement disorders and serious blood disorders than seen with older medications.
Moreover, as many as 40 percent of all schizophrenics are unresponsive to
standard antipsychotic medications and as many as 60 percent of treated patients
subsequently relapse and require hospitalization. Industry analysts estimate the
current annual market for antipsychotic drugs to be approximately $3.9 billion
worldwide and $2.2 billion in the United States.
Neurogen's antipsychotic program has concentrated on the discovery and
development of drugs which block specific dopamine receptor subtypes. Research
indicates that dopamine and its receptors play a critical role in schizophrenia.
Neurogen scientists have investigated the pharmacology of dopamine receptors and
their interaction with the network of neurons involved in emotional response and
motor function. The Company believes that selectively blocking certain dopamine
receptor subtypes could be efficacious in treating schizophrenia. The
development of drug candidates under the Company's dopamine program are subject
to the Collaboration and License Agreement dated as of June 28, 1995 between the
Company and Schering-Plough (the "Schering-Plough Agreement"). In accordance
with the terms of the agreement, in June 1998 Neurogen's portion of the research
component of this collaboration expired, and all drug discovery research was
transferred to Schering-Plough. See "Collaborative Research and Licensing
Agreements."
DRUG CANDIDATES. The Company's focus on dopamine receptor subtypes and the
design of specific binding agents for these subtypes originated similarly to its
approach with respect to GABA receptor subtypes. In recent years, distinct
dopamine receptor subtypes, known as D1, D2, D3, D4 and D5, have been discovered
which Neurogen believes may be involved in schizophrenia. Because elevated D4
receptors have been measured in the autopsied brains of schizophrenics, Neurogen
believes that high levels of D4 receptors may intensify signals in the brain,
thus causing many of the symptoms associated with schizophrenia. As a result,
Neurogen believes that a compound which specifically blocks the D4 receptor or
which blocks the D4 receptor and has limited activity at certain other dopamine
receptors might be an effective antipsychotic agent and, because of its
selectivity, might have a reduced side effect profile compared to currently
marketed drugs.
Neurogen has identified several series of compounds which selectively block
the D4 receptor or the D4 receptor and the D2 receptor, and other combinations
of dopamine antagonists. Neurogen believes that because of their activity at
alternate receptor sites, these drugs, which are currently in pre-clinical
development or earlier stage research, could potentially be used to treat a
spectrum of disorders associated with schizophrenia. At the conclusion of
Neurogen's research, the Company provided Schering-Plough with these compounds
and all accompanying data for further development.
Pursuant to the Schering-Plough Agreement, Schering-Plough has the right to
determine when to advance collaboration compounds in the clinical process, if at
all. No assurance can be given that any collaboration compound will successfully
complete the clinical trials or advance through the regulatory approval process.
In order to increase the likelihood that Neurogen's portfolio will produce a
successful antipsychotic, Neurogen provided Schering-Plough with multiple
chemical series which may provide alternative antipsychotic candidates in
collaboration with Schering-Plough.
ANIMAL HEALTH. According to leading veterinarians, behavior problems in
household pets are the leading cause of death in the pet population, responsible
for the euthanasia of between three and six million dogs and cats per year. In
many cases, these behavior problems are treatable by behavior modification and
pharmacotherapy when indicated. Few drugs to treat neuropsychiatric disorders in
dogs and cats are available, and those that are available are often
broader-acting human drugs that are provided in smaller doses. With the advance
of more targeted medications that offer relief from a disorder without reduced
side effects, adapting a number of Neurogen's drug development programs for use
in companion animals becomes possible.
In September 1998, Neurogen announced a new licensing agreement with
Pfizer's Animal Health Group which expands the 1992 Pfizer Agreement. This
expansion covers the development of Neurogen's small molecule compounds which
work through the GABA neurotransmitter system for the treatment of anxiety and
cognitive dysfunction in companion animals, such as dogs and cats. Pets often
suffer undue stress and exhibit disruptive behavior when placed in anxiety
producing situations such as when an owner leaves or a stranger is present. The
initial goal of the agreement is to develop a drug that will reduce anxiety in
companion animals without producing side effects such as sedation. From
Neurogen's existing GABA drug development programs for humans, the Company has
identified several lead candidates which are currently in pre-clinical testing.
Neurogen will be eligible to receive milestone payments on drug candidates
as they progress through development and royalty payments when such candidates
are marketed, if at all. All development costs will be borne by Pfizer. Under
the 1992 Pfizer Agreement, Pfizer has the right to determine when to advance
compounds in the clinical process, if at all. See "Collaborative Research and
Licensing Agreements."
COLLABORATIVE RESEARCH AND LICENSING AGREEMENTS
As part of its business strategy, the Company seeks collaborative
agreements with pharmaceutical companies as a means to achieve ratcheted growth
in its own drug development, manufacturing and, possibly, sales and marketing
capabilities. In February 1992, July 1994 and again in November 1995, Neurogen
entered into collaborations with Pfizer. In June 1995, Neurogen entered into a
collaboration with Schering-Plough. Neurogen will strive through strategic
alliances with major pharmaceutical companies to balance its exposure to
research and development risks inherent in the industry and to retain an
increasing share in the success of its future products. There can be no
assurance that the Company will establish any additional collaborative
arrangements or that such future relationships, if established, or its current
relationships will result in marketed pharmaceutical products.
PFIZER
In the first quarter of 1992, Neurogen and Pfizer entered into the 1992
Pfizer Agreement pursuant to which Neurogen and Pfizer are collaborating in the
discovery and development of anxiolytics and cognition enhancers which act
through the GABA family of receptors. Pursuant to the 1992 Pfizer Agreement,
Pfizer purchased 1.0 million shares of the Company's Common Stock for $13.8
million. In addition, the Company received approximately $4.6 million per year
from 1992 through 1996 and has continued to receive additional funding pursuant
to the December 1996 extension referred to below for research and development
funding of the Company's anxiolytic and cognition enhancement programs. Neurogen
could also receive milestone payments if certain development and regulatory
objectives are achieved regarding its anxiolytic and cognition enhancement
products. In return, Pfizer received the exclusive worldwide license to
manufacture, use and sell GABA-based anxiolytics and cognition enhancers
developed in the collaboration. Pfizer is required to pay Neurogen royalties
based upon net sales levels, if any, for such products. Any compound which acts
through the GABA family of receptors and is not an anxiolytic or cognition
enhancer falls outside the parameters of the 1992 Pfizer Agreement, but Pfizer
has a right of first review for a period of six months from disclosure of such
compound to Pfizer by Neurogen.
In July 1994, Neurogen and Pfizer entered into the 1994 Pfizer Agreement.
Under this second agreement, Neurogen and Pfizer are collaborating in the
discovery and development of hypnotics which act through the GABA family of
receptors to treat sleep disorders. Pursuant to the 1994 Pfizer Agreement,
Pfizer purchased approximately 1.1 million shares of the Company's Common Stock
for approximately $9.9 million. In addition, the Company received approximately
$2.4 million per year during the period July 1994 to June 1997 and has continued
to receive additional funding pursuant to the December 1996 extension referred
to below for research and development funding of the Company's sleep disorder
program. Neurogen could also receive milestone payments of up to approximately
$3.3 million if certain development and regulatory objectives are achieved
regarding its sleep disorder compounds. As part of this second collaboration,
Pfizer received the exclusive worldwide license to manufacture, use and sell
GABA-based sleep disorder products developed in the collaboration. Pfizer is
required to pay Neurogen royalties based on net sales levels, if any, for such
products.
In December 1996, Neurogen announced that it and Pfizer had agreed to
extend the research programs under both the 1992 Pfizer Agreement and the 1994
Pfizer Agreement through December 1998. Pursuant to the agreement to extend
these programs, Pfizer has agreed to pay Neurogen an additional aggregate of
$11.5 million during 1997 and 1998 to fund Neurogen's research efforts.
In December 1998, Neurogen announced that it and Pfizer had agreed to an
additional extension of the research programs under both the 1992 Pfizer
Agreement and the 1994 Pfizer Agreement, through December 2000. As part of the
extension, Pfizer and Neurogen also announced that GABA-based drugs to treat
depression would also be explored as a part of the research programs. Pursuant
to the agreement to extend these programs, Pfizer has agreed to pay Neurogen
$6.24 million each year in 1999 and 2000 to fund Neurogen's research efforts in
its GABA-based drug discovery programs to treat anxiety, depression, insomnia
and dementia.
In September 1998, Neurogen announced that it and Pfizer had agreed to
expand the anxiety and cognition enhancement license agreement to include
developing drugs to treat anxiety disorders and memory impairment in companion
animals, such as dogs and cats. As part of this agreement, Neurogen could
receive milestone payments if certain development and regulatory objectives are
achieved regarding its animal health compounds. In exchange for receiving
exclusive worldwide license to manufacture, use and sell GABA-based drugs to
treat anxiety and or cognition impairment in companion animals, Pfizer has
agreed to pay Neurogen royalties based on net sales levels, if any, for such
products.
Under each of the first two Pfizer Agreements, in addition to making the
equity investments and the research and milestone payments noted above, Pfizer
is responsible for funding the cost of all clinical development and the
manufacturing and marketing, if any, of drugs developed pursuant to the
collaborations. As a result of these collaborations, Neurogen is dependent on
Pfizer to seek regulatory approvals for, to conduct trials for and to determine
the ultimate commercialization of compounds subject to the collaborations.
In November 1995, Neurogen and Pfizer entered into the 1995 Pfizer
Agreement. Pursuant to this third agreement, Neurogen and Pfizer are
collaborating in the discovery and development of drugs for the treatment of
NPY-mediated disorders, including obesity and eating disorders. Pursuant to the
1995 Pfizer Agreement, Pfizer purchased 750,000 shares of the Company's common
stock for approximately $16.5 million and paid Neurogen a license fee of $3.5
million. The Company has received or, subject to certain conditions,is entitled
to receive approximately $2.4 million per year during the period from November
1, 1995 through October 1999, for research and development funding of the
Company's eating disorder program and may receive additional research and
development funding of up to $2.4 million for an additional one-year period
depending on whether and the extent to which Pfizer exercises its rights to
extend the research program under the collaboration beyond November 1999.
Neurogen could also receive milestone payments of up to approximately $28
million if certain development and regulatory objectives are achieved regarding
compounds subject to the collaboration. As part of this third collaboration,
Pfizer received the exclusive worldwide rights to products developed in the
collaboration subject to certain rights retained by Neurogen as described below.
While Pfizer is responsible for Phase II and later stage clinical trials under
this collaboration, Neurogen has primary responsibility for the preparation and
filing of INDs and for the conduct the Phase I studies. Pursuant to the 1995
Pfizer Agreement, Neurogen will fund a minority share of early stage development
costs and has retained the right to manufacture any products resulting from the
collaboration for markets in NAFTA countries and has retained a profit sharing
option with respect to future sales in NAFTA countries. If Neurogen exercises
this profit sharing option, it will fund a portion of the cost of late stage
clinical trials and marketing and in return share in any profit generated by
sales of products developed pursuant to the collaboration in NAFTA countries. If
Neurogen chose not to exercise its profit-sharing option, Pfizer would pay
Neurogen royalties on drugs marketed in NAFTA countries and would fund a
majority of early stage and all late stage development and marketing expenses.
In either case, Neurogen would be entitled to royalties on drugs marketed in
non-NAFTA countries.
SCHERING-PLOUGH
In June 1995, Neurogen and Schering-Plough entered into the Schering-Plough
Agreement to collaborate in the discovery and development of drugs for
schizophrenia and other disorders which act through the dopamine family of
receptors. Pursuant to the Schering-Plough Agreement, the Company received a
license fee of $14.0 million for rights relating to Neurogen's dopamine program
and $3.0 million for the right to test certain of Neurogen's combinatorial
chemistry libraries in selected non-CNS assays. Schering-Plough also paid an
additional $3.0 million in 1996 for the right to test additional libraries.
Neurogen received approximately $3.6 million per year during the period from
July 1995 through June 1998 for research and development funding of the
Company's schizophrenia program. In June 1998 Neurogen concluded its role in the
research stage of the collaboration and transferred collaboration candidates to
Schering-Plough for any further research and development. Neurogen could also
receive milestone payments of up to approximately $32.0 million if certain
development and regulatory objectives are met regarding its products subject to
the collaboration. In return, Schering-Plough received the exclusive worldwide
license to market products subject to the collaboration and Neurogen retained
the rights to receive royalties based on net sales levels, if any. In addition
to the payments described above, Schering-Plough is responsible for funding the
cost of all clinical development and marketing, if any, of drugs subject to the
collaboration. Pursuant to the Schering-Plough Agreement, Neurogen has retained
the right to participate on an advisory clinical development committee and an
option to manufacture on a cost plus basis any products resulting from the
collaboration for the United States market. As a result of this collaboration,
Neurogen is dependent on Schering-Plough to seek regulatory approvals for, to
conduct clinical trials for and to determine the ultimate commercialization of
compounds subject to this collaboration.
AMERICAN HOME PRODUCTS AND NIH
In January 1992, Neurogen licensed a class of compounds including the
anticonvulsant compound ADCI, from the NIH. In November 1996, Neurogen entered
into the American Home Products Agreement pursuant to which Neurogen licensed to
American Home Products its worldwide development and commercial rights with
respect to ADCI and the related compounds licensed from NIH. Under this
agreement, American Home Products agreed to conduct and fund all future research
and development and commercialization activities under the program and subject
to certain requirements in its agreement with Neurogen and Neurogen's agreement
with the NIH. The November 1996 agreement with American Home Products provides
that American Home Products is entitled to make all determinations regarding
research, development and commercialization of ADCI. In February 1999, Neurogen
announced that due to toxicities discovered through long term animal studies
conducted by American Home Products, further development of ADCI has been
discontinued. It is unlikely that development of ADCI will resume and as a
result, Neurogen expects, upon reviewing the final data from American Home
Products that it will terminate its agreements regarding ADCI with both American
Home Products and the NIH.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success depends, in part, on its ability to obtain patents,
maintain trade secrets and operate without infringing on the intellectual
property rights of third parties. The Company files patent applications both in
the United States and in foreign countries, as it deems appropriate, for
protection of both its products and processes. To date, Neurogen has filed
numerous patent applications in the United States and foreign countries, and
intends to file additional domestic and foreign applications in the near future.
Presently, the Company is the sole assignee of seventy-eight issued United
States patents and several foreign patents. Forty-five of the Company's issued
United States patents and several pending patent applications concern the
compounds in its GABA-based program to discover drugs to treat anxiety, sleep
disorders and dementia. Twenty-six of the Company's issued United States patents
and several pending patent applications concern the compounds in its
antipsychotic program. Five of the Company's issued United States patents and
several pending patent applications are in Neurogen's drug discovery program to
treat depression through the CRF receptor. Except in the case of the NIH with
respect to ADCI, the Company has engaged in no technology transfer which would
obligate it to pay royalties to any third party.
There can be no assurance that patent applications relating to the
Company's products or processes will result in patents being issued or, if
issued, the claims allowed will be adequate to protect the Company's technology
from competitors. Moreover, patent positions of pharmaceutical and biotechnology
firms and patent protection for products such as those the Company is developing
and proposes to develop are often highly uncertain and involve complex legal and
factual questions. No assurance can be given that any patents issued or licensed
to the Company will not be held unenforceable, invalidated or circumvented, or
that the rights granted under such patents will provide competitive advantages
to the Company. Because patent applications in the United States are maintained
in secrecy until patents issue and because publication of technological
developments in the scientific or patent literature often lags behind actual
developments, the Company cannot be certain that it was the first to invent the
subject matter covered by its patent applications or patents or that it was the
first to file patent applications for such inventions. Moreover, the Company may
have to participate in litigation or interference proceedings declared by the
United States Patent and Trademark Office to determine priority of invention,
which could result in substantial cost to the Company, even if the eventual
outcome is favorable to the Company. There can be no assurance that the
Company's patents would be held valid and infringed by a court of competent
jurisdiction. An adverse outcome with regard to a third-party claim could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology, which could have a material adverse effect on the
Company's business.
As scientific advances have rapidly changed the business of drug discovery,
significant uncertainties have arisen as to the scope and enforceability of
patents in the pharmaceutical and biotechnology industries which purport to
enable competitors to restrict others from pursuing certain drug targets or
technologies potentially useful in drug discovery and development. Because the
Company's programs and technologies are focused in such areas of rapid change,
these uncertainties are particularly significant to Neurogen. While the Company
believes that it does not currently infringe any third party patents, it cannot
be certain of the ultimate scope and validity of existing or future patents
which could limit the areas in which the Company works or the technologies which
the Company uses.
The development of drugs is intensely competitive. A number of
pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents in this field.
Some of these applications or patents may be competitive with the Company's
applications or conflict in certain respects with claims made under the
Company's applications. Such conflict could result in a significant reduction of
the coverage of the Company's patents, if issued. In addition, if patents are
issued to other companies which contain competitive or conflicting claims and
such claims are ultimately determined to be valid, the Company may be required
to obtain licenses to these patents or to develop or obtain alternative
technology. If any licenses are required, there can be no assurance that the
Company will be able to obtain any such licenses on commercially favorable
terms, if at all. The Company's breach of an existing license or failure to
obtain a license to any technology that it may require to commercialize its
products may have a material adverse impact on the Company.
In connection with the Pfizer Agreements, the Schering-Plough Agreement and
the American Home Products Agreement, Neurogen has granted Pfizer,
Schering-Plough, and American Home Products as the case may be, the exclusive,
worldwide license to manufacture (subject to Neurogen's option to manufacture
products for the United States pursuant to the Schering-Plough Agreement and for
NAFTA countries pursuant to 1995 Pfizer Agreement), use and sell compounds
subject to those agreements. To the extent that Neurogen enters into future
collaborations or license agreements with third parties, it may have to share,
or it may have no rights to, intellectual property developed or patents obtained
in connection with such arrangements.
In addition to patent protection, the Company also relies on trade secrets
and proprietary know-how which it seeks to protect, in part, by confidentiality
agreements with collaborators, advisors, employees and consultants. There can be
no assurance, however, that these agreements will not be breached, that the
Company would have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known or independently discovered by
competitors. The Company's business may be adversely affected by competitors who
independently develop substantially equivalent technology.
COMPETITION
The biopharmaceutical industry is highly competitive. The Company's most
significant competition comes from fully-integrated pharmaceutical companies,
most of which have products and major research and development programs in the
neuroscience field, certain of which are in late-stage clinical trials. In
addition, many biotechnology companies, including many public and private
companies formed in recent years, have dedicated significant resources to the
discovery and development of drugs to treat neurological and psychiatric
disorders. Further, there are many other entities, both public and private, in
the United States and overseas, including fully-integrated chemical companies,
academic institutions, government agencies and other research organizations
which are involved in the development of products similar to those of Neurogen.
Furthermore, many of the above-noted companies and institutions compete with the
Company in developing competing technologies for drug discovery and development
and in recruiting and retaining highly qualified scientific and management
personnel. Many of the Company's existing or potential competitors possess
substantially greater research and development, financial, technical,
manufacturing, marketing, and human resources than Neurogen. There can be no
assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective than those developed by the
Company or which would render the Company's technology and products less
competitive or obsolete.
MANUFACTURING
Neurogen is currently relying, in part, on third-party manufacturers to
produce its compounds for research purposes and for pre-clinical and clinical
trials. The Company, which manufactures certain of its compounds to conduct
pre-clinical studies, may expand its facilities to produce sufficient quantities
of compounds for the clinical stage of development in certain circumstances.
Neurogen has focused its research on developing compounds that are small
molecules. The Company believes these compounds are more efficient to
manufacture and do not require purification associated with certain protein
compounds.
Pfizer manufactures or will be responsible for manufacturing drugs for
clinical trials which are subject to the 1992 Pfizer Agreement and the 1994
Pfizer Agreement and has the right to manufacture future products, if any, for
commercialization. Pfizer will also be responsible for manufacturing drugs for
Phase II and later stage clinical trials which are subject to the 1995 Pfizer
Agreement and subject to Neurogen's option described below, has the right to
manufacture future products, if any for commercialization. Schering-Plough will
be responsible for manufacturing for clinical trials compounds which are subject
to the Schering-Plough Agreement and, subject to Neurogen's option described
below, has the right to manufacture future products, if any, for
commercialization. Neurogen, however, has retained an option to manufacture
future products, if any, developed pursuant to the Schering-Plough Agreement for
sales in the United States and developed pursuant to the 1995 Pfizer Agreement
for sales in NAFTA countries. See "Collaborative Research and Licensing
Agreements." With respect to compounds not currently subject to collaborations,
the Company plans either to establish supply arrangements with third-party
manufacturers for clinical trials and for commercial distribution or to develop
its own manufacturing capabilities. There can be no assurance that the Company
will be able to achieve third-party arrangements on terms acceptable to the
Company or that such arrangements will be successful. While the Company may
attempt to develop internal manufacturing capabilities for certain of its
products, there can be no assurance that the Company will be able to establish
such capabilities or to do so at an acceptable cost.
SALES AND MARKETING
The Company's strategy is to market products either directly or through
co-promotion arrangements or other licensing arrangements with large
pharmaceutical or biotechnology companies. Implementation will depend in large
part on the market potential of any products the Company develops as well as on
the Company's financial resources. The Company does not expect to establish a
direct sales capability for at least the next several years. Pfizer and
Schering-Plough each have the right to market worldwide future products, if any,
resulting from their respective collaborations, except for Neurogen's option to
co-market products under the 1995 Pfizer Agreement.
GOVERNMENT REGULATION
The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous federal
regulation and to a lesser extent state regulation. The Federal Food, Drug and
Cosmetic Act, as amended ("FFDCA"), and the regulations promulgated thereunder,
and other federal and state statutes and regulations govern, among other things,
the testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of the Company's products. Product
development and approval within this regulatory framework will take a number of
years and involve the expenditure of substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
United States include (i) pre-clinical laboratory tests, in vivo pre-clinical
studies and formulation studies, (ii) the submission to the FDA of an
Investigational New Drug Application ("IND") for human clinical testing which
must become effective before human clinical trials can commence, (iii) adequate
and well-controlled human clinical trials to establish the safety and efficacy
of the drug, (iv) the submission of a New Drug Application ("NDA") or Product
License Application ("PLA") to the FDA and (v) FDA approval of the NDA or PLA
prior to any commercial sale or shipment of the drug. In addition to obtaining
FDA approval for each product, each domestic drug manufacturing establishment
must be registered with, and approved by, the FDA. Domestic manufacturing
establishments are subject to biennial inspections by the FDA and must comply
with the FDA's Good Manufacturing Practices ("GMP") for both drugs and devices.
To supply products for use in the United States, foreign manufacturing
establishments must comply with GMP and are subject to periodic inspection by
the FDA or by regulatory authorities in such countries under reciprocal
agreements with the FDA.
Pre-clinical testing includes laboratory evaluation of product chemistry
and formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Pre-clinical safety tests must be conducted by
laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the pre-clinical testing are submitted to the FDA as
part of an IND and are reviewed by the FDA prior to the commencement of human
clinical trials. Unless the FDA objects to an IND, the IND will become effective
30 days following its receipt by the FDA. There can be no assurance that
submission of an IND will result in commencement of clinical trials.
Clinical trials involve the administration of the new drug to healthy
volunteers or to patients under the supervision of a qualified principal
investigator. Clinical trials must be conducted in accordance with Good Clinical
Practices under 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 must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an
independent Institutional Review Board ("IRB") at the institution where the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution. Compounds must be formulated according to GMP.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse side effects),
absorption, dosage tolerance, metabolism, bio-distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited
patient population (i) to determine the efficacy of the drug for specific,
targeted indications, (ii) to determine dosage tolerance and optimal dosage and
(iii) to identify possible adverse side effects and safety risks. When a
compound is found to be effective and to have an acceptable safety profile in
Phase II evaluations, Phase III trials are undertaken to further evaluate
clinical efficacy and to test for safety within an expanded patient population
at geographically dispersed clinical study sites. There can be no assurance that
Phase I, Phase II or Phase III testing will be completed successfully within any
specified or targeted time period, if at all, with respect to any of the
Company's products subject to such testing. Furthermore, the Company or the FDA
may suspend clinical trials at any time if it is believed that the individuals
participating in such trials are being exposed to unacceptable health risks.
The results of the pharmaceutical development, pre-clinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the drug. The testing and approval
process is likely to require substantial time and effort. The approval process
is affected by a number of factors including the severity of the disease, the
availability of alternative treatments and the risks and benefits demonstrated
in clinical trials. Consequently, there can be no assurance that any approval
will be granted on a timely basis, if at all. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, require additional testing or
information or require post-marketing testing and surveillance to monitor the
safety of the Company's products if it does not believe the NDA contains
adequate evidence of the safety and efficacy of the drug. Notwithstanding the
submission of such data, the FDA may ultimately decide that an NDA does not
satisfy its regulatory criteria for approval. Moreover, if regulatory approval
of a drug is granted, such approval may entail limitations on the indicated uses
for which it may be marketed. Finally, product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
following initial marketing.
Among the conditions for NDA approval is the requirement that any
prospective manufacturer's quality control and manufacturing procedures conform
to GMP. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
production and quality control to ensure full technical compliance.
Manufacturing establishments, both foreign and domestic, also are subject to
inspections by or under the authority of the FDA and by other federal, state or
local agencies.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals vary
widely from country to country, and the time required for approval may be longer
or shorter than that required for FDA approval. Although there are some
procedures for unified filings for certain European countries, in general, each
country at this time has its own procedures and requirements.
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. The Company's research and development involves the controlled use
of hazardous materials, chemicals, and various radioactive compounds. Although
the Company believes that its safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of any accident, the Company could
be held liable for any damages that result and any such liability could exceed
the resources of the Company.
THIRD-PARTY REIMBURSEMENT
The Company's ability to commercialize its products successfully will
depend in part on reimbursement of the costs of such products and related
treatments at acceptable levels from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). Third-party payors are increasingly challenging the prices charged for
medical products and services. Also, the trend towards managed health care in
the United States and the concurrent growth of organizations, such as HMOs,
which can control or significantly influence the purchase of health care
services and products, as well as legislative proposals to reform health care or
reduce government insurance programs, may all result in lower prices for the
Company's products. The cost containment measures that health care providers are
instituting and the effect of any health care reform could adversely affect the
Company's ability to sell its products if successfully developed and approved by
the FDA and/or any other appropriate regulatory authority.
There can be no assurance that reimbursement in the United States or
foreign countries will be available for any products the Company may develop, or
if available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products, thereby
adversely affecting the Company's business. The unavailability or inadequacy of
third-party reimbursement for the Company's products would adversely affect the
Company's business. Moreover, the Company is unable to predict what additional
legislation or regulation, if any, relating to the health care industry or
third-party coverage and reimbursement may be enacted in the future or what
effect such legislation or regulation would have on the Company's business.
SCIENTIFIC ADVISORY BOARD
Neurogen's Scientific Advisory Board is composed of certain of its
scientists and other leading scientists from Yale University (the "University")
who have been actively involved in pioneering research in the field of
neurobiology and the treatment of neurological disorders for a number of years.
Scientific Advisory Board members meet with management and key scientific
employees of the Company on both a formal and informal basis. Scientific
Advisory Board members have taken an active role in helping the Company identify
scientific and product development opportunities and recruit and evaluate the
Company's scientific staff.
The Scientific Advisory Board presently consists of the following
individuals:
NAME POSITION
---- --------
John F. Tallman, Ph.D....... Chairman of the Scientific Advisory Board,
Executive Vice President and Scientific Director
of Neurogen Corporation
George K. Aghajanian, M.D... Professor of Psychiatry and Pharmacology,
Yale University
B. Stephenson Bunney, M.D... Professor of Psychiatry and Pharmacology, Chairman,
Department of Psychiatry, Yale University
Dennis S. Charney, M.D...... Associate Professor of Psychiatry and Director,
Clinical Neuroscience Research Unit, Yale
University
Michael Davis, Ph.D......... Professor of Psychiatry and Psychology, Yale
University
Dorothy W. Gallager, Ph.D... Vice President-Pharmacology, Neurogen Corporation
George R. Heninger, M.D..... Professor of Psychiatry and Director of the Abraham
Ribicoff Research Facilities of the Connecticut
Mental Health Center, Yale University
Alan J. Hutchison, Ph.D..... Senior Vice President-Drug Discovery, Neurogen
Corporation
Eric Nestler, M.D., Ph.D.... Associate Professor of Psychiatry and Pharmacology,
Yale University
D. Eugene Redmond, Jr., M.D. Professor of Psychiatry, Yale University
Robert H. Roth, Ph.D........ Professor of Psychiatry and Pharmacology, Yale
University
Each member of the Scientific Advisory Board who is not also an employee of
the Company receives a fee of $15,000 per year and is eligible to participate in
the Neurogen Corporation 1993 Omnibus Incentive Plan. All non-employee members
of the Scientific Advisory Board are employed on a full-time basis by the
University and, accordingly, devote only a small portion of their time to
Neurogen. The University has regulations and policies which limit the ability of
such personnel to act as part-time consultants or in other capacities for a
commercial enterprise. A change in these regulations or policies could adversely
affect the Company. Furthermore, it is possible that inventions or processes
discovered by the outside members of the Scientific Advisory Board will not
become the property of Neurogen, but will remain the property of such persons,
the University or other entities to which the Scientific Advisory Board members
have obligations.
HUMAN RESOURCES
As of December 31, 1998, the Company had 148 full-time employees, of which
122 persons were scientists and 48 had Ph.D. degrees. Neurogen believes that its
success will be dependent largely upon its ability to continue to attract and
retain scientists and technical staff qualified in pharmacology, neuroscience,
medicinal chemistry and molecular biology. The failure to retain such personnel
or to develop expertise in such fields could materially adversely affect
prospects for the Company's success. None of the Company's employees are covered
by collective bargaining agreements, and the Company considers relations with
its employees to be good. In addition, the failure to retain certain of the
Company's current scientific personnel, almost all of whom do not have
employment contracts with the Company, could adversely affect the Company. Each
of the Company's current scientific personnel has entered into confidentiality
and non-competition agreements with the Company.
RESEARCH AND DEVELOPMENT EXPENSES
In each of 1998, 1997 and 1996 Neurogen incurred research and development
expenses of $20,914,000, $19,710,000 and $13,934,000, respectively. Neurogen's
operations are dedicated wholly to supporting its research and development
programs.
ITEM 2. PROPERTIES
The Company conducts its operations in laboratory and administrative
facilities on a single site located in Branford, Connecticut. The Company's
facilities total approximately 78,000 square feet, of which approximately 54,000
square feet are owned by the Company and approximately 24,000 square feet are
leased under a ten-year lease which commenced in July 1995. Pursuant to the
lease agreement, the Company has an option to extend the lease for an additional
ten-year period and an option to purchase the facility during the term of the
lease. The Company expects that its expanded facility will accommodate the
anticipated administrative and research needs of the Company for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
Neurogen knows of no material litigation or proceeding pending or
threatened to which the Company is, or may become, a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 5, 1998 the Company held a meeting of the stockholders to adopt
an amendment to the Neurogen Corporation 1993 Omnibus Incentive Plan (the
"Plan") to increase the shares in the Plan by 1,500,000. The Plan as originally
adopted provided for the granting of awards aggregating up to 3,000,000 shares
of Common Stock. As of November 1998, approximately 400,000 shares remained
available for future awards. The stockholders approved the proposal voting as
follows:
For Against Abstained
---------- ---------- ----------
7,551,617 1,757,624 17,728
CAUTIONARY STATEMENT FOR PURPOSES OF THE
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
Except for historical matters, the matters discussed in this Form 10K are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 or any rules, regulations or releases of the
Securities and Exchange Commission with respect thereto. Forward-looking
statements in this Form 10K include, but are not limited to, statements in Item
1 under the caption "Business--Product Research and Development" with respect to
the Company's various product development programs and statements in Item 7
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" with respect to the sufficiency of the Company's cash
balance to fund planned operations. In addition, the Company may from time to
time make forward-looking statements in the future.
Neurogen wishes to caution readers, and others to whom forward-looking
statements are addressed, that any such forward-looking statements are not
guarantees of future performance and that actual results may differ materially
from estimates in the forward-looking statements. In addition to the important
factors described elsewhere in this Form 10K and the Company's other filings
with the Securities and Exchange Commission, the following important factors,
among others, could affect Neurogen's actual future results and could cause such
results to differ materially from estimates expressed in any forward-looking
statements made by, or on behalf of, Neurogen:
o Difficulties or delays in discovery, research, development, testing,
regulatory approval, production and marketing of any of the Company's
drug candidates, including without limitation any unanticipated
pre-clinical or clinical delays, delays in regulatory approvals, the
failure to develop follow-on candidates in a given program, the
failure to attract or retain scientific and management personnel, any
unexpected adverse side effects or inadequate therapeutic efficacy
which could slow or prevent product development efforts at any stage
of product development by delaying or preventing clinical trials,
delaying or preventing regulatory approval for commercialization or
adversely affecting acceptance by the market.
o Vigorous competition within the Company's anticipated product markets,
including without limitation competition from fully-integrated
pharmaceutical companies and specialty biotechnology companies, many
or all of which may have substantially greater capabilities,
experience and resources than the Company.
o Risk that competitors will succeed in developing technologies
(including drug discovery techniques) and products that are more
effective than those of the Company or that are commercialized prior
to similar technologies or products of the Company.
o Neurogen's dependence on its corporate partners with respect to
research and development funding, pre-clinical evaluation of drug
candidates, human clinical trials of drug candidates, regulatory
filings and manufacturing and marketing expertise with respect to its
most advanced compounds.
o Risk that Neurogen's interest will not coincide with those of its
collaborators with respect to the timing or conduct of clinical
development of compounds, the future productions of developed products
and strategies with respect to marketing such products.
o Risk that actual research and development costs may exceed budgeted
amounts for a variety of reasons linked to the uncertainty of product
development in the pharmaceutical industry.
o Inability to obtain sufficient funds through future collaborative
arrangements, equity or debt financings or other sources to continue
the operation of the Company's business which may require the Company
to reduce substantially or eliminate expenditures for product
development or to relinquish rights to certain of its technologies or
potential products.
o Risk that the Company's patents and confidentiality agreements of the
Company with collaborators, employees, consultants or vendors will not
adequately protect the Company's intellectual property or trade
secrets.
o Uncertainty of the scope and enforceability of patents in the
pharmaceutical and biotechnology industries which purport to enable
competitors to restrict others from pursuing certain drug targets or
technologies potentially useful in drug discovery and development.
o The Company's dependence upon third parties for the manufacture of its
potential products and the Company's inexperience in manufacturing if
the Company establishes internal manufacturing capabilities, each of
which could adversely affect the Company's future profit margins, if
any, and its ability to develop and manufacture products on a timely
and competitive basis.
o Neurogen's dependence on third parties to market potential products
and Neurogen's lack of sales and marketing capabilities, each of which
could adversely affect the success of any sales and marketing efforts
for the Company's products.
o Unavailability or inadequacy of medical insurance or other third-party
reimbursement for the cost of purchases of the Company's products.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Neurogen is traded on The NASDAQ Stock Market under the
symbol NRGN. As of March 1, 1999, there were approximately 380 holders of record
of the Company's common stock. No dividends have been paid on the common stock
to date, and the Company currently intends to retain any earnings for further
development of the Company's business.
The following table sets forth the high and low closing bid prices for the
common stock as reported by NASDAQ.
HIGH LOW
---- ---
FISCAL 1998:
First Quarter.................................................. 17 3/4 13 3/8
Second Quarter................................................. 20 1/2 16 1/8
Third Quarter.................................................. 18 3/8 10 5/8
Fourth Quarter................................................. 18 13 5/8
FISCAL 1997:
First Quarter.................................................. 22 17 1/4
Second Quarter................................................. 23 1/8 13 3/4
Third Quarter.................................................. 27 18 3/4
Fourth Quarter................................................. 28 1/5 13
ITEM 6. SELECTED FINANCIAL DATA
For the Year Ended December 31
(in thousands, except per share data)
-----------------------------------------------
1998 1997 1996 1995 1994
-------- -------- --------- --------- ---------
Total operating revenues.......................$ 11,081 $17,979 $ 18,286 $ 26,929 $ 5,789
Total operating expenses.......................$ 24,834 $23,276 $17,229 $ 15,585 $12,924
Net income (loss)..............................$ (9,458) (257) $ 5,894 $ 13,353 $(6,651)
Net income (loss) per share-basic (1)..........$ (.66) (.02) $ .42 $ 1.19 $ (.70)
Net income (loss) per share-diluted (1)........$ (.66) (.02) $ .38 $ 1.07 $ (.70)
Total assets...................................$101,810 $111,869 $113,869 $104,856 $25,889
Long-term debt.................................$ - $ 74 $ 279 $ 460 $ 620
Stockholders' equity...........................$ 98,567 $106,918 106,245 $ 98,076 $24,080
Weighted average number of shares outstanding-
basic.......................................... 14,419 14,348 14,145 11,267 9,528
(1) All per share data conforms to SFAS No. 128, Earnings Per
Share - See footnote 1 to the financial statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Since its inception in September 1987, Neurogen has been engaged in the
discovery and development of drugs. The Company has not derived any revenue from
product sales and, excluding the effect of certain license fees of a
non-recurring nature received in connection with entering into research and
development collaborations, expects to incur significant losses in most years
prior to deriving any such product revenues. Revenues to date have come from
three collaborative research agreements entered into with Pfizer, one
collaboration with Schering-Plough, one license agreement with American Home
Products and from interest income.
RESULTS OF OPERATIONS
Results of operations may vary from period to period depending on numerous
factors, including the timing of income earned under existing or future
strategic alliances, joint ventures or financings, if any, the progress of the
Company's research and development projects, technological advances and
determinations as to the commercial potential of proposed products. Neurogen
expects research and development costs to increase significantly over the next
several years as its drug development programs progress. In addition, general
and administrative expenses necessary to support the expanded research and
development activities are expected to increase for the foreseeable future.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Company's fiscal 1998 operating revenues decreased 38 percent to $11.1
million from 1997 operating revenues of $18.0 million, which were relatively
consistent with 1996 fiscal operating revenues of $18.3 million. The decrease in
1998 is due to a decrease in license fees which were recognized in both 1997 and
1996, the scheduled conclusion in June 1998 of the research phase of the
Schering-Plough Agreement (as described below), a reduction in reimbursement of
costs under a cost sharing arrangement for certain expenses associated with
human clinical trials conducted by Neurogen under its NPY obesity collaboration
with Pfizer. The amount of the above described reimbursements may fluctuate
significantly depending on the level of clinical trials being conducted. The
amount of scheduled research funding may also fluctuate significantly depending
on the level of funded staffing and the extent to which Pfizer extends the
research programs.
Neurogen's license fees of $3.0 million in 1997, and $3.8 million in 1996
represent non-recurring, nonrefundable fees which relate to the granting of
certain commercial licenses and rights to collaborative partners as described
below. License fees in 1997 represented a previously unearned $3.0 million
library access fee from Schering-Plough for access to a portion of Neurogen's
combinatorial chemistry libraries. License fees in 1996 were composed of a
similar $3.0 million library access fee from Schering-Plough together with a
$0.8 million fee from American Home Products received in connection with
entering into the American Home Products Agreement. The amount of the above
described reimbursements may fluctuate significantly depending on the level of
clinical trials being conducted. The amount of scheduled research funding may
also fluctuate significantly depending on the level of funded staffing and the
extent to which Pfizer extends the research programs.
Research and development costs increased 6 percent to $20.9 million for the
year ended December 31, 1998 as compared to the same period in 1997. Research
and development costs increased 41 percent to $19.7 million in 1997 compared to
$13.9 million in 1996. These increases are due primarily to an increase in
research and development personnel to staff the company's growing portfolio of
drug development programs and an expansion of Neurogen's drug discovery
capabilities through its growing AIDD (Accelerated Intelligent Drug Design)
program and fluctuations in clinical development activities which increased in
1997 and then decreased in 1998. Research and development costs represented 84
percent, 85 percent and 81 percent of total operating expenses for the years
ended December 31, 1998, 1997 and 1996, respectively.
General and administrative expenses increased 10 percent to $3.9 million in
1998 from $3.6 million in 1997 and 8 percent in 1997 from $3.3 million in 1996.
The increases in both years were due primarily to an increase in administrative
activities and the addition of related facilities to support the Company's
expanded research programs.
Other income, consisting primarily of interest income and gains and losses
from marketable securities, was $4.3 million in 1998, $5.0 million in 1997 and
$4.9 million in 1996, respectively. The decrease in 1998 compared to 1997 and
1996 was due primarily to a lower level of invested funds.
The Company recognized a net loss of $9.5 million for the year ended
December 31, 1998 a net loss of $0.3 million for the year ended December 31,
1997 and net income of $5.9 million for the year ended December 31, 1996. The
decrease in earnings is primarily due to the decrease in operating revenues and
the increase in operating expenses described above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998 and 1997, cash, cash equivalents and marketable
securities were in the aggregate $75.0 million and $84.2 million, respectively.
The decrease in 1998 was due primarily to a decrease in operating revenue and an
increase in operating expenses, all as described above, together with capital
expenditures for plant and equipment. The Company's aggregate level of cash,
cash equivalents and marketable securities has fluctuated significantly in the
past and is expected to do so in the future as a result of the factors described
below.
Neurogen's cash requirements to date have been met by the proceeds of its
financing activities, amounts received pursuant to collaborative arrangements
and interest earned on invested funds. The Company's financing activities
include three private placement offerings of its common stock prior to its
initial public offering, underwritten public offerings of the Company's common
stock in 1989, 1991 and 1995, and the private sale of common stock to Pfizer in
connection with entering into the Pfizer Agreements and to American Home
Products in the American Home Products Agreement. Total funding received from
these financing activities was approximately $105.6 million. The Company's
expenditures have been primarily to fund research and development and general
and administrative expenses and to construct and equip its research and
development facilities.
In the first quarter of 1992, the Company entered into the 1992 Pfizer
Agreement pursuant to which Pfizer made a $13.8 million equity investment in the
Company. Under this agreement, the Company received $4.6 million to fund
research and development programs in each of the five years from 1992 through
1996. The Company has received and is receiving additional funding pursuant to
the December 1996 and December 1998 extensions, as described below. Neurogen is
eligible to receive milestone payments of up to $12.5 million if certain
development and regulatory objectives are achieved regarding its products
subject to the collaboration. In return, Pfizer received the exclusive rights to
manufacture and market collaboration anxiolytics and cognition enhancers that
act through the family of receptors which interact with the neuro-transmitter
gamma-aminobutyric acid, or GABA. Pfizer will pay Neurogen royalties based upon
net sales levels, if any, for such products. As of December 31, 1998, Pfizer had
provided $31.6 million of research funding to the Company pursuant to the 1992
Pfizer Agreement, as extended, (as described below), and $0.3 million due to the
completion of a clinical development milestone.
Neurogen and Pfizer entered into their second collaborative agreement, the
1994 Pfizer Agreement, in July 1994, pursuant to which Pfizer made an additional
$9.9 million equity investment in the Company. Under this agreement, the Company
received approximately $7.4 million during the three-year period which commenced
July 1, 1994, to fund Neurogen's sleep disorder program. The Company has
received and is receiving additional funding pursuant to the December 1996 and
December 1998 extensions, as described below. Neurogen could also receive
milestone payments of up to $3.3 million if certain development and regulatory
objectives are achieved regarding its products subject to the collaboration. In
return, Pfizer received the exclusive rights to manufacture and market
GABA-based sleep disorder products for which it will pay Neurogen royalties
based upon net sales levels, if any. As of December 31, 1998, Pfizer had
provided $10.3 million of research funding to the Company pursuant to the 1994
Pfizer Agreement, as extended, (as described below).
In 1996 and 1997, Neurogen and Pfizer extended the 1992 and 1994
Agreements. Pursuant to the extension agreements, Neurogen received $6.5 million
and $6.3 million in 1998 and 1997, respectively, to fund research and
development programs. In the fourth quarter of 1998, Neurogen announced that it
had agreed with Pfizer to further extend the 1992 and 1994 Pfizer Agreements to
provide research funding of $6.2 million per year in both 1999 and 2000.
Additionally, the companies agreed to expand the 1992 Agreement to include
depression as a new target. Pursuant to this agreement, Neurogen will be
eligible to receive certain milestone payments upon the achievement of
development and regulatory objectives and royalties based on net sales levels,
if any. Pfizer received the exclusive right to manufacture and market GABA based
drugs for depression from the collaboration.
Under both the 1992 Pfizer Agreement and the 1994 Pfizer Agreement, in
addition to making the equity investments and the research and milestone
payments noted above, Pfizer is responsible for funding the cost of all clinical
development and the manufacturing and marketing, if any, of drugs developed from
the collaborations.
Neurogen and Pfizer entered into their third collaborative agreement, the
1995 Pfizer Agreement, in November 1995, pursuant to which Pfizer made an
additional $16.5 million equity investment in the Company bringing Pfizer's
ownership of the Company's common stock up to approximately 21% and paid a $3.5
million license fee. The Company has received approximately $7.5 million during
the three year period which commenced November 1, 1995, to fund Neurogen's
neuropeptide Y (NPY) eating disorders program. Pfizer has also elected to extend
the research program through October 1999 and to increase Neurogen's staffing on
the program and pay Neurogen $3.1 million to fund the fourth year of research.
Neurogen may also receive funding for a fifth year at staffing levels to be
determined by Neurogen and Pfizer should Pfizer exercise its option to further
extend the research program and return to the original staffing levels. Neurogen
could also receive milestone payments of up to approximately $28 million if
certain development and regulatory objectives are achieved regarding its
products subject to the collaboration. Pfizer received the exclusive worldwide
rights to manufacture and market NPY-based collaboration compounds, subject to
certain rights retained by Neurogen. Pursuant to the 1995 Pfizer Agreement,
Neurogen will fund a minority share of early stage development costs and has
retained the right to manufacture any collaboration products in NAFTA countries.
Neurogen has also retained a profit sharing option with respect to product sales
in NAFTA countries. If Neurogen exercises the profit sharing option, it will
fund a portion of the cost of late stage clinical trials and marketing costs and
in return will receive a specified percentage of any profit generated by sales
of collaboration products in NAFTA countries. If Neurogen chooses not to
exercise its profit-sharing option, Pfizer would pay Neurogen royalties on drugs
marketed in NAFTA countries and will fund a majority of early stage and all late
stage development and marketing expenses. In either case Neurogen would be
entitled to royalties on drugs marketed in non-NAFTA countries. As of December
31, 1998, Pfizer had provided $8.3 million in research funding (including $.3
million in unearned revenues) pursuant to the 1995 Pfizer Agreement.
In June 1995, Neurogen and Schering-Plough entered into the Schering-Plough
Agreement to collaborate in the discovery and development of drugs for the
treatment of schizophrenia and other disorders which act through the dopamine
family of receptors. Pursuant to the Schering-Plough Agreement, the Company
received one-time license fees of $14 million for rights relating to Neurogen's
dopamine program and $3.0 million in each of 1995 and 1996 for the right to test
certain of Neurogen's combinatorial chemistry libraries in selected non-CNS
assays. Neurogen received scheduled funding aggregating approximately $10.8
million during the three-year period from June 1995 through June 1998, for
research and development funding of the Company's dopamine program. In July
1998, Neurogen announced that the Company and Schering-Plough had concluded the
research phase of the collaboration and that Schering-Plough planned to continue
the development of drug candidates identified during such research. Accordingly,
Neurogen has reassigned personnel formerly conducting such research to other
Neurogen projects and the funding of $3.6 million per year formerly received
from Schering-Plough came to its scheduled conclusion on July 1, 1998. Neurogen
could also receive milestone payments of up to approximately $32 million if
certain development and regulatory objectives are achieved regarding its
products subject to the collaboration. In return, Schering-Plough received the
exclusive worldwide license to market products subject to the collaboration.
Neurogen retained the rights to receive royalties based on net sales levels, if
any, and an option to manufacture products for the United States market. As of
December 31, 1998, Schering-Plough had provided $10.8 million in research
funding pursuant to the Schering-Plough Agreement. In addition to the payments
described above, Schering-Plough is responsible for funding the cost of all
clinical development and marketing, if any, of drugs subject to the
collaboration.
The Company plans to use its cash, cash equivalents and marketable
securities for its research and development activities, working capital and
general corporate purposes. Neurogen anticipates that its current cash balance,
as supplemented by research funding pursuant to the Pfizer Agreements will be
sufficient to fund its current and planned operations through 2001. However,
Neurogen's funding requirements may change and will depend upon numerous
factors, including but not limited to, the progress of the Company's research
and development programs, the timing and results of preclinical testing and
clinical studies, the timing of regulatory approvals, technological advances,
determinations as to the commercial potential of its proposed products, the
status of competitive products and the ability of the Company to establish and
maintain collaborative arrangements with others for the purpose of funding
certain research and development programs, conducting clinical studies,
obtaining regulatory approvals and, if such approvals are obtained,
manufacturing and marketing products. The Company anticipates that it may
augment its cash balance through financing transactions, including the issuance
of debt or equity securities and further corporate alliances. No arrangements
have been entered into for any future financing and no assurances can be given
that adequate levels of additional funding can be obtained on favorable terms,
if at all.
As of December 31, 1998, the Company had approximately $24.3 million of net
operating loss carryforwards available for federal income tax purposes which
expire from the years 2004 through 2013. The Company had approximately $19.8
million of Connecticut state tax net operating loss carryforwards as of December
31, 1998 which expire in the years 1999 through 2003. Because of "change in
ownership" provisions of the Tax Reform Act of 1986, the Company's utilization
of its net operating loss and researh and development credit carryforwards may
be subject to an annual limitation in future periods.
Discussion of the Year 2000 issue
General. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruption of operations
including, among other things, a temporary inability to access scientific data,
process transactions, or engage in similar normal business activities.
Program. The Company has begun a program to resolve the Year 2000 issue.
This program consists of four phases: assessment, remediation, testing and
contingency planning. The Company completed the assessment phase in December
1998 and is currently in the remediation phase. During the assessment phase, the
Company assessed its products, key financial and operating systems and other
systems for Year 2000 compliance. The assessment included identifying all
critical information technology systems and non-information technology critical
systems on which the Company relies, testing Year 2000 compliance of such
systems, and recommending steps for replacing or making corrective fixes to
non-compliant systems. Additionally, the Company obtained compliance
verification from key third party vendors supplying critical parts or services
to the Company in order to determine their plans to address their own Year 2000
issues.
Upon completion of the detailed assessment, the Company concluded that
substantially all its key financial operating systems and other systems are Year
2000 compliant. However, certain software and hardware components were
identified as non-compliant. The Company has established a plan to replace this
non-compliant software and hardware by September 1999. Also, the Company
believes that its processes will be unaffected by the Year 2000 issue.
The testing phase of the program has been on-going, and will continue to be
conducted as non-compliant software and hardware are replaced. The Company
estimates that the testing phase is approximately 60% completed as of December
31, 1998. The Company currently plans to develop a contingency plan during the
third quarter of 1999 for any systems not expected to be Year 2000 compliant by
December 31, 1999.
Costs. The Company plans completion of all phases, including contingency
planning, of the Year 2000 program by the end of the third quarter of 1999. All
costs associated with the Company's Year 2000 program are being expensed as
incurred. The estimated total cost of the Year 2000 program is approximately
$200,000, which primarily includes the cost of employee time spent on the issue,
and the cost of replacing or upgrading non-compliant software identified during
the assessment phase. Costs incurred through December 31, 1998 have totalled
approximately $125,000.
Risks. The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 issue can be mitigated.
However, the Company may not timely identify and remediate all significant Year
2000 problems and remedial efforts may involve greater time and expense than is
currently anticipated. If such modifications and conversions fail to be made,or
are not timely completed, the Year 2000 issue could have a material impact on
the results of operations, financial position or cash flows of the Company.
Furthermore, there can be no assurance that any Year 2000 compliance problems of
the Company or its customers or suppliers will not have a material adverse
effect on the results of operations, financial position or cash flows of the
Company.
The Company believes that the most reasonably likely worst case scenario is
that a temporary disruption of operations would occur due to any or all of the
following: unavailability of services from utility companies, delay in receipt
of supplies from vendors, having to access archived back-ups of databases of
stored information, or delays in accessing the Company's financial resources
caused by problems in the banking industry.
The estimates and conclusions herein contain forward-looking statements and
are based on management's best estimates of future events. Risks to completing
the program include the availability of resources, the Company's ability to
discover and correct Year 2000 problems which could have an impact on the
Company's operations and the ability of suppliers to bring their systems into
Year 2000 compliance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk. The Company's investment portfolio includes investment
grade debt instruments. These bonds are subject to interest rate risk, and could
decline in value if interest rates fluctuate. Due to the short duration and
conservative nature of these instruments, the Company does not believe that it
has a material exposure to interest rate risk. Additionally, funds available
from investment activities are dependent upon available investment rates. These
funds may be higher or lower than anticipated due to interest rate volatility.
Capital Market Risk. The Company currently has no product revenues and is
dependent on funds raised through other sources. One source of funding is
through further equity offerings. The ability of the Company to raise funds in
this manner is dependent upon capital market forces affecting the stock price of
the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Balance Sheets at December 31, 1998 and 1997...............................40,41
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996............................................ 42
Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996........................................... 43
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996........................................... 44
Notes to Financial Statements.............................................. 45
Report of Independent Accountants..........................................54,55
NEUROGEN CORPORATION
BALANCE SHEETS
December 31
-------------------
1998 1997
--------- ---------
(In thousands, except
per share data)
Assets
Current Assets:
Cash and cash equivalents............................................. $ 26,066 $ 66,924
Marketable securities................................................. 48,944 17,227
Receivable from corporate partners.................................... 656 1,192
Other current assets.................................................. 1,298 1,122
--------- ---------
Total current assets.................................................. 76,964 86,465
Property, plant & equipment:
Land and land improvements............................................ 542 542
Building and building improvements.................................... 16,704 16,377
Leasehold improvements................................................ 4,026 4,026
Equipment............................................................. 9,949 8,422
Furniture............................................................. 534 484
--------- ---------
31,755 29,851
Less accumulated depreciation and amortization........................ 7,265 4,950
--------- ---------
Net property, plant and equipment..................................... 24,490 24,901
Other assets, net..................................................... 356 503
--------- ---------
$101,810 $111,869
========= =========
See accompanying notes to financial statements
NEUROGEN CORPORATION
BALANCE SHEETS--(Continued)
December 31
-------------------
1998 1997
--------- ---------
(In thousands, except
per share data)
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses................................. $ 2,861 4,418
Unearned revenue from corporate partners.............................. 260 200
Current portion of mortgage payable................................... 74 205
--------- ---------
Total current liabilities............................................. 3,195 4,823
Mortgage payable, excluding current portion........................... - 74
Other compensation.................................................... 48 54
--------- ---------
Total liabilities..................................................... 3,243 4,951
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.025 per share authorized 2,000 shares;
none issued........................................................... - -
Common stock, par value $.025 per share authorized 30,000 shares;
issued and outstanding 14,656 shares in 1998 and 14,390 in 1997....... 366 360
Additional paid-in capital............................................ 113,901 110,231
Accumulated deficit................................................... (12,234) (2,776)
Deferred compensation................................................. (3,540) (894)
Accumulated other comprehensive income................................ 74 (3)
--------- ---------
Total stockholders' equity............................................ 98,567 106,918
--------- ---------
$101,810 $111,869
========= =========
See accompanying notes to financial statements
NEUROGEN CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended December 31
---------------------------------
1998 1997 1996
----------- ---------- ----------
(In thousands, except per share data)
Operating revenues:
License fees............................................ $ - $3,000 $3,750
Research and development................................ 11,081 14,979 14,536
----------- ---------- ----------
Total operating revenues................................ 11,081 17,979 18,286
Operating expenses:
Research and development................................ 20,914 19,710 13,934
General and administrative.............................. 3,920 3,566 3,295
----------- ---------- ----------
Total operating expenses................................ 24,834 23,276 17,229
----------- ---------- ----------
Operating income (loss)................................. (13,753) (5,297) 1,057
Other income (expense):
Investment income....................................... 4,312 5,075 4,988
Interest expense........................................ (17) (35) (51)
----------- ---------- ----------
Total other income, net................................. 4,295 5,040 4,937
----------- ---------- ----------
Income (loss) before provision for income taxes......... (9,458) (257) 5,994
Provision for income taxes.............................. - - 100
----------- ---------- ----------
Net income (loss)....................................... $(9,458) $(257) $5,894
=========== ========== ==========
Earnings (loss) per share:
Basic................................................... $(.66) $(.02) $.42
----------- ---------- ----------
Diluted................................................. $(.66) $(.02) $.38
----------- ---------- ----------
Shares used in calculation of earnings (loss) per share:
Basic................................................... 14,419 14,348 14,145
----------- ---------- ----------
Diluted................................................. 14,419 14,348 15,449
----------- ---------- ----------
See accompanying notes to financial statements
NEUROGEN CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
--------------------------------------------------------------------------
Accumulated
Additional Other
Common Stock Paid-in Accumulated Deferred Comprehensive
Shares Amount Capital Deficit Compensation Income Total
------ ------ ---------- ----------- ------------ ------------- --------
Balance at December 31, 1995.................... 13,949 $349 $106,040 $(8,413) $ - $100 $98,076
Issuance of shares for cash to American
Home Products Corporation....................... 37 1 749 - - - 750
Exercise of stock options....................... 260 6 1,623 - - - 1,629
Exercise of warrants............................ 6 - 8 - - - 8
Tax benefit relating to stock option exercises.. - - 71 - - - 71
Comprehensive income:
Net income.................................... - - - 5,894 - - 5,894
Unrealized loss on marketable securities...... - - - - - (183) (183)
------ ------ ---------- ----------- ------------ ------------- ---------
Balance at December 31, 1996.................... 14,252 356 108,491 (2,519) - (83) $106,245
Deferred compensation........................... - - 894 - (894) - -
Exercise of stock options....................... 138 4 846 - - - 850
Comprehensive income:
Net loss...................................... - - - (257) - - (257)
Unrealized gain on marketable securities...... - - - - - 80 80
------ ------ ---------- ----------- ------------ ------------- ---------
Balance at December 31, 1997.................... 14,390 360 110,231 (2,776) (894) (3) 106,918
Issuance of restricted stock.................... 145 4 2,536 - (2,540) - -
Deferred compensation .......................... - - 265 - (106) - 159
Exercise of stock options....................... 98 2 564 - - - 566
Stock issued in 401(k) match.................... 19 - 299 - - - 299
Exercise of warrants............................ 4 - 6 - - - 6
Comprehensive income:
Net loss...................................... - - - (9,458) - - (9,458)
Unrealized gain on marketable securities...... - - - - - 77 77
------ ------ ---------- ----------- ------------ ------------- ---------
Balance at December 31, 1998 14,656 $366 $113,901 $(12,234) $(3,540) $74 $98,567
====== ====== ========== =========== ============ ============= =========
See accompanying notes to financial statements
NEUROGEN CORPORATION
STATEMENTS OF CASH FLOWS
For the Years ended December 31
--------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
Cash flows from operating activities:
Net income (loss).............................................. $(9,458) $ (257) $5,894
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization expense.......................... 2,365 1,849 1,020
Noncash compensation expense................................... 458 - -
(Gain) loss on sale of assets.................................. 6 4 (15)
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable and accrued expenses... (1,557) 1,408 999
Increase (decrease)in unearned revenue from corporate partners. 60 (3,900) -
(Increase) decrease in other current assets.................... (176) 10 62
(Increase) decrease in receivable from corporate partners...... 536 (732) (136)
(Increase) decrease in other assets, net....................... 127 (110) 67
---------- ---------- ----------
Net cash provided by (used in) operating activities............ (7,639) (1,728) 7,891
---------- ---------- ----------
Cash flows from investing activities:
Purchase of plant and equipment................................ (1,974) (10,033) (6,600)
Purchases of marketable securities............................. (66,242) (35,060) (42,584)
Maturities and sales of marketable securities.................. 34,602 50,227 75,784
Proceeds from sale of assets................................... 34 26 109
---------- ---------- ----------
Net cash provided by (used in) investing activities............ (33,580) 5,160 26,709
---------- ---------- ----------
Cash flows from financing activities:
Exercise of stock options...................................... 566 850 1,629
Principal payments under mortgage payable...................... (205) (181) (160)
Proceeds from sales of common stock, net....................... - - 750
---------- ---------- ----------
Net cash provided by financing activities...................... 361 669 2,219
---------- ---------- ----------
Net increase (decrease)in cash and cash equivalents............ (40,858) 4,101 36,819
Cash and cash equivalents at beginning of year................. 66,924 62,823 26,004
---------- ---------- ----------
Cash and cash equivalents at end of year....................... $26,066 $66,924 $62,823
========== ========== ==========
See accompanying notes to financial statements
NEUROGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Neurogen Corporation ("Neurogen" or the "Company") is a
neuropharmaceuticals Company engaged in the discovery and development of drugs.
Neurogen's strategy is to discover and develop drugs which modulate
communications between cells in such a way as to avoid or minimize the negative
side effects typically associated with many currently prescribed medications.
The Company has not derived any revenue from product sales to date.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES--The Company considers cash
equivalents to be only those investments which are highly liquid, readily
convertible to cash and which mature within three months from date of purchase.
The carrying values of cash equivalents at December 31, 1998 and 1997 were
approximately $26,310,000 and $66,789,000, respectively.
The Company considers its investment portfolio to be available-for-sale
securities as defined in Statement of Financial Accounting Standards ("SFAS")
No. 115. Marketable securities at December 31, 1998 and 1997 consist of debt
securities with maturities of three months to four years. Securities are
available for sale and are carried at fair value with the unrealized
gains/losses reported as a separate component of stockholders' equity. The
aggregate cost of marketable securities at December 31, 1998 and 1997 was
approximately $48,870,000 and $17,230,000, respectively. Realized gains and
losses have been determined by the specific identification method. The Company
recognized gross realized gains of $52,000 and $116,000 in 1998 and 1997,
respectively. Gross realized losses were $60,000 and $65,000 in 1998 and 1997,
respectively.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at
cost. Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, ranging from three to forty years. Leasehold
improvements are amortized over the life of the lease.
REVENUE RECOGNITION--Revenue under research and development arrangements is
recognized as earned under the terms of the respective agreements. License
payments are recorded when received and the license agreements are signed and no
further efforts are required of the Company. Product research funding is
recorded as revenue, generally on a quarterly basis, as research effort is
incurred. Deferred revenue arises from payments received which have not yet been
earned under research and development arrangements. The Company recognizes
milestone payments when the milestones are achieved.
STOCK-BASED COMPENSATION--The Company grants qualified stock options for a
fixed number of shares to employees with an exercise price equal to the fair
market value of the shares at the date of grant. The Company accounts for stock
option grants in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and, accordingly, recognizes no compensation expense for
qualified stock option grants.
INCOME TAXES--The liability method is used to account for income taxes.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and income tax bases of assets and liabilities as well as
net operating loss carryforwards and are measured using the enacted tax rates
and laws that are expected to be in effect when the differences reverse.
Deferred tax assets may be reduced by a valuation allowance to reflect the
uncertainty associated with their ultimate realization.
EARNINGS (LOSS) PER SHARE--In 1997, the Company adopted Statement of
Accounting Standards No. 128, "Earnings Per Share" (EPS) under which primary EPS
computed in accordance with APB Opinion 15 has been replaced with a simpler
calculation called basic EPS. Basic EPS is calculated by dividing income
available to common stockholders by the weighted average common shares
outstanding. Fully dilutive EPS did not change significantly but has been
renamed diluted EPS. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts of the Company's
invested cash and marketable securities approximate fair value as estimated
based on quoted market prices. The carrying value of long-term debt approximates
its fair value based upon currently available debt instruments having similar
interest rates and maturities. The carrying amounts of the Company's other
financial instruments approximate their fair value.
2. CORPORATE PARTNER AGREEMENTS
In 1992, the Company entered into a collaborative research agreement (the
"1992 Pfizer Agreement") with Pfizer Inc. ("Pfizer"), pursuant to which Pfizer
has provided $13,750,000 in equity financing. Pursuant to the 1992 Pfizer
Agreement, the Company has received an aggregate of approximately $31,900,000
for research and development funding of the Company's anxiolytic and cognition
enhancement projects. Neurogen could also receive additional milestone payments
totaling $12,250,000 ($250,000 had been received as of December 31, 1998) if
certain development and regulatory objectives are achieved regarding its
products subject to the 1992 Pfizer Agreement. In return, Pfizer received the
exclusive rights to manufacture and market GABA-based anxiolytics and cognition
enhancers developed in the collaboration for which it will pay Neurogen
royalties based upon net sales levels, if any, for such products. In each of
1998, 1997 and 1996, Neurogen received approximately $4,685,000, $3,960,000 and
$4,600,000 respectively, in research funding, which approximates the research
costs it incurred in such years under the 1992 Pfizer Agreement.
The Company entered into its second collaborative agreement (the "1994
Pfizer Agreement") with Pfizer in June 1994 pursuant to which Pfizer made an
additional equity investment in the Company of $9,864,000. Pursuant to the 1994
Pfizer Agreement, the Company has received an aggregate of approximately
$10,300,000 during the three-year period which commenced July 1, 1994, for
research and development funding of the Company's sleep disorder project.
Neurogen could also receive additional milestone payments totaling $3,250,000 if
certain development and regulatory objectives are achieved regarding its
products subject to the 1994 Pfizer Agreement. In return, Pfizer received the
exclusive right to manufacture and market GABA-based sleep disorder products
developed in the collaboration for which it will pay Neurogen royalties
depending upon net sales levels, if any. In 1998, 1997 and 1996, the Company
received research funding of approximately $1,600,000, $2,500,000 and
$2,379,000, respectively, which approximates the research costs incurred in such
years under the 1994 Pfizer Agreement.
In 1996 and 1997, Neurogen and Pfizer extended the 1992 and 1994
Agreements. Pursuant to the extension agreements, Neurogen received $6,080,000
and $6,470,000 in 1998 and 1997, respectively. In the fourth quarter of 1998,
Neurogen announced that it had agreed with Pfizer to further extend the 1992 and
1994 Pfizer Agreements to provide research funding of $6,240,000 per year in
both 1999 and 2000. Additionally, the companies agreed to expand the 1992
Agreement to include depression or a new target. Pursuant to this agreement,
Neurogen will be eligible to receive certain milestone payments upon the
achievement of development and regulatory objectives and royalties based on net
sales levels, if any. Pfizer received the exclusive right to manufacture and
market GABA based drugs for depression from the collaboration.
Neurogen and Pfizer entered into their third collaborative agreement (the
"1995 Pfizer Agreement") in November 1995, pursuant to which Pfizer paid
$3,500,000 in one-time license fees and made an additional equity investment in
the Company of $16,500,000, bringing Pfizer's ownership of the Company's common
stock up to 21%. The Company has received approximately $7,500,000 per year
during the three year period which commenced November 1, 1995, to fund
Neurogen's neuropeptide Y (NPY) eating disorders program. Pfizer has also
elected to extend the research program through October 1999 and increase
Neurogen's staffing on the program and pay Neurogen $3,120,000 to fund the
fourth year of research. Neurogen may also receive funding for a fifth year at
staffing levels to be determined by Neurogen and Pfizer should Pfizer exercise
its option to further extend the research program. Neurogen could also receive
milestone payments of up to approximately $28,000,000 if certain development and
regulatory objectives are achieved regarding its products subject to the
collaboration. Pfizer received the exclusive worldwide rights to manufacture and
market NPY-based collaboration compounds, subject to certain rights retained by
Neurogen. Pursuant to the 1995 Pfizer Agreement, Neurogen will fund a minority
share of early stage development costs and has retained the right to manufacture
any collaboration products in NAFTA (North American Free Trade Agreement)
countries and has retained a profit sharing option with respect to product sales
in NAFTA countries. If Neurogen exercises the profit sharing option, it will
fund a portion of the cost of late stage clinical trials and marketing costs and
in return receive a share of any profit generated by sales of collaboration
products in NAFTA countries. If Neurogen chooses not to exercise its profit
sharing option, Pfizer would pay Neurogen royalties on drugs marketed in NAFTA
countries and will fund a majority of early stage and all late stage development
and marketing expenses. In either case Neurogen would be entitled to royalties
on drugs marketed in non-NAFTA countries. As of December 31, 1998, Pfizer had
provided $8,280,000 in research funding (including $260,000 in unearned
revenues) pursuant to the 1995 Pfizer Agreement.
In June 1995, Neurogen and Schering Corporation and Schering-Plough Ltd.
(together, "Schering-Plough") entered into an Agreement (the "Schering-Plough
Agreement") to collaborate in the discovery and development of drugs for the
treatment of schizophrenia and other disorders which act through the dopamine
family of receptors. Pursuant to the Schering-Plough Agreement, the Company
received in 1995 one-time license fees of $14,000,000 in exchange for rights
relating to Neurogen's dopamine program and $3,000,000 in each 1995 and 1996 for
the right to test certain of Neurogen's combinatorial chemistry libraries in
selected non-CNS assays of which $3,000,000 was included in unearned revenue at
December 31, 1996 and recognized as revenue in 1997. Neurogen received scheduled
funding aggregating approximately $10,800,000 during the period from June 1995
through June 1998 for research and development funding of the Company's dopamine
program. In July 1998 Neurogen announced that the Company and Schering-Plough
had concluded the research phase of the collaboration and that Schering-Plough
planned to continue the development of drug candidates identified during such
research. Neurogen could also receive milestone payments of up to approximately
$32,000,000 if certain development and regulatory objectives are achieved
regarding its products subject to the Schering-Plough Agreement. In return,
Schering-Plough received the exclusive worldwide license to market products
subject to the collaboration and Neurogen retained the rights to receive
royalties based on net sales levels, if any, and an option to manufacture
products for the United States market. In addition to the payments described
above, Schering-Plough is responsible for funding the cost of all clinical
development and marketing, if any, of drugs subject to the collaboration.
In the fourth quarter of 1996, Neurogen entered into an agreement pursuant
to which it out-licensed to American Home Products (acting through its
Wyeth-Ayerst Laboratories division) Neurogen's commercial rights to ADCI, a
small molecule drug candidate for the treatment of epilepsy and related
disorders. Neurogen had previously in-licensed its rights to ADCI from the
National Institutes of Health ("NIH"). Under the terms of Neurogen's agreement
with American Home Products, Neurogen received a $0.8 million for 37,442 shares
of common stock. In January 1999, Wyeth-Ayerst informed Neurogen that it would
not pursue further clinical testing on ADCI due to toxocological results from a
clinical study.
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31 are summarized as
follows (in thousands):
1998 1997
------ ------
Accounts payable...... $1,798 $3,374
Accrued compensation.. 1,064 1,044
------ ------
$2,862 $4,418
====== ======
4. LONG-TERM DEBT AND LEASE OBLIGATIONS
At December 31, 1998, the Company had a $74,000 mortgage payable on, and
secured by, its Branford, Connecticut office and research facility, payable in
monthly installments. The interest rate is adjusted quarterly to the prime rate
plus 1%. At December 31, 1998, the prime rate was 7.75%.
The Company anticipates paying off the mortgage in full by the second
quarter of 1999.
In the third quarter of 1995, the Company entered into a ten year operating
lease agreement to lease 24,000 square feet of space in a building adjacent to
the Company's existing research facility. The Company has a renewal option to
extend the lease for an additional ten year period. The Company may also
exercise an option to purchase the building after the sixth year of the lease.
The improvements made to the leased facility for laboratory and office space
were completed in the fourth quarter of 1996 and are to be amortized over the
life of the lease, or ten years. Rent expense approximated $130,000 in 1998,
1997 and 1996.
Future minimum rental lease payments subsequent to December 31, 1998
(in thousands) are:
1999.......................... $ 126
2000.......................... 130
2001.......................... 151
2002.......................... 151
2003.......................... 151
Thereafter.................... 278
------
Total minimum lease payments.. $ 987
======
5. STOCK OPTIONS, WARRANTS AND RESTRICTED STOCK
The Neurogen Corporation Stock Option Plan (the "Plan") originally adopted
in 1988 and amended in 1992, provided for the issuance of incentive and
non-qualified stock options for up to 1,200,000 shares of common stock. In May
1994, the Company's shareholders approved its 1993 Omnibus Incentive Plan which
made 3,000,000 shares available for grant and its 1993 Non-Employee Directors
Stock Option Program which made 500,000 shares available for grant. In November
1998 the shareholders approved a 1,500,000 increase in shares to the 1993
Omnibus Incentive Plan. The Plan allows for stock appreciation rights,
restricted shares, and performance units. All options expire not later than ten
years after the date of grant. Employees vest annually over five years, while
directors vest monthly over three years.
Options
- - -------
The following table presents the combined activity of its stock option
plans for the years ended December 31, as follows:
1998 1997 1996
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- -------- ---------- -------- ---------- --------
Outstanding at January 1............ 3,389,576 $14.11 2,874,994 $13.70 2,478,149 $11.10
Granted............................. 524,788 16.91 777,349 16.27 669,830 20.54
Exercised........................... ( 97,645) 5.80 (138,382) 6.60 (260,118) 6.43
Canceled............................ (124,259) 18.95 (124,385) 20.53 (12,867) 16.74
---------- -------- ---------- -------- ---------- --------
Outstanding at December 31.......... 3,692,460 $14.56 3,389,576 $14.11 2,874,994 $13.70
========== ======== ========== ======== ========== ========
Options exercisable at December 31.. 2,006,784 $12.21 1,504,716 $10.78 1,121,296 $8.54
With respect to options for 66,250 shares granted at year-end 1997, if the
recipient remains employed with the Company for a period of seven years from the
date of grant, the exercise price for any of such options which have not been
exercised at the end of the ten year term of such option, shall become zero. The
exercise price for any of such options exercised prior to the end of such
ten-year term shall be $13.50 per share, the market price of the common stock on
the date of grant. In connection with this grant, the Company recorded deferred
compensation totaling $894,000. Such deferred compensation is to be amortized
over the seven year service period required for this provision to vest.
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). The Company will continue to account for its stock
option plans in accordance with the provisions of APB 25, "Accounting for Stock
Issued to Employees."
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1998:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Yrs.) Price Exercisable Price
- - ----------------- ----------- ----------- -------- ----------- --------
Less than $6.50.. 83,465 3.8 $5.35 83,265 $5.35
$6.50-$10.00..... 1,247,763 5.3 6.57 1,156,563 6.56
$10.00-$20.00.... 1,619,186 8.9 16.35 360,171 16.89
$20.00-34.88..... 742,046 7.3 25.10 406,785 25.55
----------- -----------
3,692,460 2,006,784
=========== ===========
Restricted Stock
- - ----------------
In December 1998, 145,125 shares of restricted stock were granted to
certain employees. If the stock price reaches $45.00 within four years from date
of grant the restriction will be removed and the individual will be able to
trade the stock with no cost to the employee. If the stock price does not reach
$45.00 the shares will be forfeited. In connection with this grant, the Company
has recorded $2,540,000 of deferred compensation within stockholders' equity.
Warrants
- - --------
As of December 31, 1998 the Company had a total of 36,266 warrants
outstanding issuable for shares of common stock at $2.55 per share. Such
warrants were issued to a prior lessor in connection with a sale and lease back
of certain of the Company's furniture and equipment and will expire in the year
2001.
In February 1995, the Board of Directors approved the conversion of 112,000
warrants granted to the Company's scientific advisory board at $6.50 per share
to options under the 1993 Omnibus Incentive Plan. The new options have
substantially the same terms as the warrants which they replaced and are
included in the table above as options granted.
Compensation cost has not been recognized for the stock option plans,
except as noted above for 66,250 options granted at year-end 1997. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date for awards in 1998, 1997 and 1996 consistent
with the provisions of SFAS No. 123, the Company's net earnings (loss) and
earnings (loss) per share would have been adjusted to the pro forma amounts
indicated below (in thousands):
1998 1997 1996
------------- -------- --------
Net earnings (loss) as reported.. ........... $ (9,458) $ (257) $ 5,894
Net earnings (loss) pro forma................ $(15,971) $(6,613) $ 892
Diluted earnings (loss) per share as reported $ (.66) $ (.02) $ .38
Diluted earnings (loss) per share-pro forma.. $ (1.11) $ (.46) $ .06
The estimated fair value at the date of grant for options granted in 1998,
1997 and 1996 was $10.15 $ 9.07 and $13.01, respectively, using the
Black-Scholes model with the following weighted average assumptions:
1998 1997 1996
------- ------ -------
Expected life............... 5 5 5
Interest rate............... 4.6% 5.75% 6.4%
Volatility.................. 66% 65% 70%
The effects on 1998, 1997 and 1996 pro forma net earnings (loss) and net
earnings (loss) per share of expensing the estimated fair value of stock options
are not necessarily representative of the effects on reporting the results of
operations for future years as the period presented includes only one, two and
three years, respectively, of option grants under the Company's plans.
The Company has reserved 5,378,196 shares of common stock for the exercise
of options, restricted stock and warrants.
6. INCOME TAXES
The difference between the Company's "expected" tax provision (benefit), as
computed by applying the U.S. federal corporate tax rate of 34% to income (loss)
before provision for income taxes, and actual tax is reconciled below (in
thousands):
1998 1997 1996
--------- --------- ---------
Expected tax provision (benefit) at 34%....................... $(3,216) $ (87) $2,038
State tax provision (benefit) net of federal benefit.......... (593) (20) 456
Change in valuation allowance ................................ 3,993 100 (2,252)
R & D credit.................................................. - - (150)
Disqualifying stock dispositions.............................. (342) - -
Nondeductible expense, Other.................................. 10 7 8
Expiring loss carry forward................................... 148 - -
--------- --------- ---------
$ - $ - $ 100
========= ========= =========
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below (in thousands):
1998 1997
--------- ---------
DEFERRED TAX ASSETS:
Federal tax operating loss carryforwards.. $8,256 $4,619
State tax operating loss carryforwards.... 1,239 867
Research & development credit............. 2,084 1,595
Alternative minimum tax credit carryover.. 362 366
Other miscellaneous....................... 283 296
--------- ---------
Gross deferred asset...................... 12,224 7,743
Valuation allowance....................... (11,325) (7,333)
--------- ---------
Net deferred asset........................ 899 410
DEFERRED TAX LIABILITY:
Depreciation.............................. (899) (410)
--------- ---------
Net asset/liability....................... $ - $ -
========= =========
The valuation allowance changed by $3,993,000 during 1998 due primarily to
the increase in net operating loss and research and development tax credit carry
forwards. This allowance has been established due to the uncertainty in the
ability of the Company to benefit in the future from the federal and state
operating loss carry forwards.
Any subsequently recognized tax benefits relating to the valuation
allowance for deferred tax assets as of December 31, 1998 would be allocated as
follows (in thousands):
Income tax provision........ $6,763
Additional paid-in-capital.. 4,562
------
$11,325
======
As of December 31, 1998, the Company had approximately $24,281,000 of net
operating loss carryforwards available for federal income tax purposes which
expire in the years 2004 through 2013. The Company also had approximately
$19,760,000 of Connecticut state tax operating loss carryforwards as of December
31, 1998 which expire in the years 1999 through 2003. Because of "change in
ownership" provisions of the Tax Reform Act of 1986, the Company's utilization
of its net operating loss and research and development credit carryforwards may
be subject to an annual limitation in future periods.
7. COMMITMENTS AND CONTINGENCIES
The Company has granted Pfizer certain registration rights with respect to
2,846,000 shares of Common stock and limited preemptive rights with respect to
future public offerings pursuant to stock purchase agreements entered into in
connection with the Pfizer Agreements. The Company has granted certain
registration rights to American Home Products with respect to 37,442 shares of
common stock purchased in connection with entering into a licensing agreement in
1996.
8. BENEFIT PLANS
The Company maintains a 401(k) Plan under which all of the Company's
employees are eligible to participate. Each year the Company may, but is not
required to, make a discretionary matching contribution to the Plan. Effective
January 1, 1998, the Company increased the match on employee contributions to
100%, up to 6% of an employee's salary. One third of the match is in cash and
two thirds of the match is in company stock. Contributions to the 401(k) plan
totaled approximately $432,000 in 1998, $111,000 in 1997 and $92,000 in 1996.
The Company has made loans to certain officers subject to various
compensation agreements. The loans will be forgiven and recognized as
compensation expense ratably over service periods of five to seven years. The
amount of loans outstanding at December 31, 1998 was $459,000, of which $140,000
was short-term.
9. SUPPLEMENTAL CASH FLOW INFORMATION
The Company made interest payments of approximately $17,000 in 1998,
$36,000 in 1997 and $51,000 in 1996. The Company made no income tax payments in
1998 and 1997 and $37,000 in 1996.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Stockholders of Neurogen Corporation
In our opinion, the accompanying balance sheet as of December 31, 1998 and
the related statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Neurogen
Corporation (the "Company") at December 31, 1998, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. The financial statements of
the Company as of December 31, 1997 and for each of the two years in the period
then ended were audited by other independent accountants whose report dated
February 13, 1998 expressed an unqualified opinion on those statements.
PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
February 16, 1999
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Neurogen Corporation
We have audited the accompanying balance sheets of Neurogen Corporation as
of December 31, 1997 and 1996 and the related statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Neurogen Corporation at
December 31, 1997 and 1996 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 13, 1998
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported on the Company's Current Report on Form 8-K dated
December 17, 1998, the Company, upon the approval of the Audit Committee of its
Board of Directors, elected not to retain Ernst & Young LLP as its principal
independent accountants. On December 11, 1998, the Audit Committee of the Board
of Directors appointed PriceWaterhouseCoopers LLP to succeed Ernst & Young LLP
as the principal independent accountants of the Company.
Neither of the accountant's reports for the last two years contained any
adverse opinion, disclaimer or qualification. There has also not been any
disagreements with the Company's accountants on any matter of accounting
principles or practices, financial statement disclosure or audit scope or
procedure in the last two fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information relating to directors and executive officers of the
Company, reference is made to pages 2 through 5 and 8 through 12 of the
Company's Proxy Statement delivered to stockholders in connection with the
Annual Meeting of Stockholders to be held on May 26, 1999, which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information relating to executive compensation, reference is made to
pages 8 through 12 of the Company's Proxy Statement delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on May 26, 1999,
which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information relating to the security ownership of certain beneficial
owners and management, reference is made to pages 6 and 7 of the Company's Proxy
Statement delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 26, 1999, which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information relating to certain relationships and related transactions,
reference is made to page 5 and pages 8 through 12 of the Company's Proxy
Statement delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 26, 1999, which information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Reference is made to the Index to Financial Statements under Item 8 in
Part II hereof, where these documents are listed.
(2) Financial Statement Schedule
Note: Schedules are omitted as not applicable, not required, or
the information is included in the financial statements or notes thereto.
(3) Executive Compensation Plans and Arrangements
The following executive compensation plans or arrangements are required to
be filed, and are filed, as exhibits to this Form 10-K:
EXHIBIT
NUMBER DESCRIPTION
- - ------- ----------------------------------------------------------------------
10.1 - Neurogen Corporation Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-K for the fiscal
year ended December 31, 1991).
10.2 - Form of Stock Option Agreement currently used in connection with the
grant of options under Neurogen Corporation Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the Company's Form 10-K
for the fiscal year ended December 31, 1992).
10.3 - Neurogen Corporation 1993 Omnibus Incentive Plan, as amended
(incorporated by reference to Exhibit 10.3 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
10.4 - Form of Stock Option Agreement currently used in connection with the
grant of options under Neurogen Corporation 1993 Omnibus Incentive
Plan (incorporated by reference to Exhibit 10.4 to the Company's Form
10-K for the fiscal year ended December 31, 1993).
10.5 - Neurogen Corporation 1993 Non-Employee Directors Stock Option
Program (incorporated by reference to Exhibit 10.5 to the Company's
Form 10-K for the fiscal year ended December 31, 1993).
10.6 - Form of Stock Option Agreement currently used in connection with the
grant of options under Neurogen Corporation 1993 Non-Employee
Directors Stock Option Program (incorporated by reference to Exhibit
10.6 to the Company's Form 10-K for the fiscal year ended December 31,
1993).
10.7 - Employment Contract between the Company and Harry H. Penner, Jr.,
dated as of October 12, 1993 (incorporated by reference to Exhibit
10.7 to the Company's Form 10-K for the fiscal year ended December 31,
1993).
10.8 - Employment Contract between the Company and John F. Tallman, dated as
of December 1, 1993 (incorporated by reference to Exhibit 10.25 to the
Company's Form 10-Q for the quarterly period ended September 30,
1994).
(4) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- - ------- ----------------------------------------------------------------------
3.1 - Restated Certificate of Incorporation, filed June 17, 1994.
3.2 - By-Laws, as amended (incorporated by reference to Exhibit 3.6 to the
Company's Form 10-K for the fiscal year ended December 31, 1993).
10.1 - Neurogen Corporation Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-K for the fiscal
year ended December 31, 1991).
10.2 - Form of Stock Option Agreement currently used in connection with the
grant of options under Neurogen Corporation Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the Company's Form 10-K
for the fiscal year ended December 31, 1992).
10.3 - Neurogen Corporation 1993 Omnibus Incentive Plan, as amended
(incorporated by reference to Exhibit 10.3 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
10.4 - Form of Stock Option Agreement currently used in connection with the
grant of options under Neurogen Corporation 1993 Omnibus Incentive
Plan (incorporated by reference to Exhibit 10.4 to the Company's Form
10-K for the fiscal year ended December 31, 1993).
10.5 - Neurogen Corporation 1993 Non-Employee Directors Stock Option Program
(incorporated by reference to Exhibit 10.5 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
10.6 - Form of Stock Option Agreement currently used in connection with the
grant of options under Neurogen Corporation 1993 Non-Employee
Directors Stock Option Program (incorporated by reference to Exhibit
10.6 to the Company's Form 10-K for the fiscal year ended December 31,
1993).
10.7 - Employment Contract between the Company and Harry H. Penner, Jr.,
dated as of October 12, 1993 (incorporated by reference to Exhibit
10.7 to the Company's Form 10-K for the fiscal year ended December 31,
1993).
10.8 - Employment Contract between the Company and John F. Tallman, dated as
of December 1, 1993 (incorporated by reference to Exhibit 10.25 to the
Company's Form 10-Q for the quarterly period
ended September 30, 1994).
10.9 - Open-End Mortgage Deed and Security Agreement between the Company and
Orion Machinery & Engineering Corp., dated March 16, 1989
(incorporated by reference to Exhibit 10.15 to Registration Statement
No. 33-29709 on Form S-1).
10.10 - Form of Proprietary Information and Inventions Agreement(incorporated
by reference to Exhibit 10.31 to Registration Statement No. 33-29709
on Form S-1).
10.11 - Warrant to Purchase 47,058 Shares of Common Stock to MMC/GATX
Partnership No. I, dated February 20, 1991 (incorporated by reference
to Exhibit 10.34 to the Company's Form 10-K for the fiscal year ended
December 31, 1990).
10.12 - Collaborative Research Agreement and License and Royalty Agreement
between the Company and Pfizer Inc, dated as of January 1, 1992
(confidential treatment requested) (incorporated by reference to
Exhibit 10.35 to the Company's Form 10-K for the fiscal year ended
December 31, 1991).
10.13 - License Agreement between the Company and the National Technical
Information Service, dated as of January 1, 1992 (incorporated by
reference to Exhibit 10.36 to the Company's Form 10-K for the fiscal
year ended December 31, 1991).
10.14 - Cooperative Research and Development Agreement between the Company and
the National Institutes of Health, dated as of January 21, 1993
(incorporated by reference to Exhibit 10.37 to the Company's Form 10-K
for the fiscal year ended December 31, 1991).
10.15 - Letter Agreement between the Company and Barry M. Bloom, dated January
12, 1994 (incorporated by reference to Exhibit 10.25 to the Company's
Form 10-K for the fiscal year ended December 31, 1993).
10.16 - Letter Agreement between the Company and Robert H. Roth, dated April
14, 1994 (incorporated by reference to Exhibit 10.26 to the Company's
Form 10-K for the fiscal year ended December 31, 1994).
10.17 - Collaborative Research Agreement and License and Royalty Agreement
between the Company and Pfizer Inc, dated as of July 1, 1994
(confidential treatment requested) (incorporated by reference of
Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended
June 30, 1994).
10.18 - Stock Purchase Agreement between the Company and Pfizer dated as of
July 1, 1994 (incorporated by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarterly period ended June 30, 1994).
10.19 - Registration Rights and Standstill Agreement among the Company and the
Persons and Entities listed on Schedule I thereto, dated as of July
11, 1994 (incorporated by reference to Exhibit 10.29 to the Company's
Form 10-Q for the quarterly period ended September 30, 1994).
10.20 - Collaboration and License Agreement and Screening Agreement between
the Company and Schering-Plough Corporation (confidential treatment
requested) (incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K dated July 28, 1995).
10.21 - Lease Agreement between the Company and Commercial Building Associates
dated as of August 30, 1995 (incorporated by reference to Exhibit
10.27 to the Company's Form 10-Q for the quarterly period ended
September 30, 1995).
10.22 - Collaborative Research Agreement between the Company and Pfizer dated
as of November 1, 1995 (confidential treatment requested)
(incorporated by reference to Exhibit 10.1 of the Company's Form 8-K
dated November 1, 1995).
10.23 - Development and Commercialization Agreement between the Company and
Pfizer dated as of November 1, 1995 (confidential treatment requested)
(incorporated by reference to Exhibit 10.2 of the Company's Form 8-K
dated November 1, 1995).
10.24 - Stock Purchase Agreement between the Company and Pfizer dated as of
November 1, 1995 (incorporated by reference to Exhibit 10.3 of
the Company's Form 8-K dated November 1, 1995).
10.25 - Licensing Agreement dated as of November 25, 1996 between American
Home Products Corporation,acting through its Wyeth-Ayerst Laboratories
Division, and Neurogen Corporation (CONFIDENTIAL TREATMENT REQUESTED)
(incorporated by reference to Exhibit 10.1 of the Company's Form 8-K
dated March 31, 1997).
10.26 - Stock Purchase Agreement dated as of November 25, 1996 between
American Home Products Corporation, acting through its Wyeth-Ayerst
Laboratories Division, and Neurogen Corporation (CONFIDENTIAL
TREATMENT REQUESTED) (incorporated by reference to Exhibit 10.1 of
the Company's Form 8-K dated March 31, 1997).
16 - Letter re Change in Certifying Accountant (incorporated by reference
to Exhibit 16 of the Company's Form 8-K dated December 17, 1998.
23.1 - Consent of Price Waterhouse Coopers LLP, Independent Auditors.
23.2 - Consent of Ernst & Young LLP, Independent Auditors.
24.1 - Powers of Attorney of Frank C. Carlucci, Robert H. Roth, John Simon,
John F. Tallman, Robert M. Gardiner, Robert N. Butler, Jeffrey J.
Collinson, Suzanne Woolsey, Mark Novitch and Barry M. Bloom.
27 - Financial Data Schedule.
99.1 - Proxy Statement for the Annual Meeting of Stockholders to be held on
May 26, 1999 (to be filed with the Commission on or before April 30,
1999).
(b) Reports on Form 8-K
On December 17, 1998 a Form 8-K was filed disclosing a change in the
Company's auditors.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEUROGEN CORPORATION
/S/ HARRY H. PENNER, JR.
By:______________________________
Harry H. Penner, Jr.
President and Chief Executive Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated:
SIGNATURE TITLE DATE
----------- ------- ------
*
___________________________ Chairman of the Board March 31, 1999
Frank C. Carlucci and Director
/S/ HARRY H. PENNER, JR.
___________________________ President, Chief Executive March 31, 1999
Harry H. Penner, Jr. Officer and Director
(Principal Executive
Officer)
*
___________________________ Executive Vice President, March 31, 1999
John F. Tallman, Ph.D. Secretary and Director
/S/ STEPHEN R. DAVIS
___________________________ Vice President--Finance, March 31, 1999
Stephen R. Davis Chief Financial Officer
and Treasurer (Principal
Financial and Accounting
Officer)
*
_________________________ Director March 31, 1999
Robert H. Roth, Ph.D.
*
__________________________ Director March 31, 1999
Jeffrey J. Collinson
*
_________________________ Director March 31, 1999
John Simon
*
_________________________ Director March 31, 1999
Robert M. Gardiner
*
_________________________ Director March 31, 1999
Robert N. Butler, M.D.
________________________ Director March 31, 1999
Suzanne Woolsey
*
________________________ Director March 31, 1999
Barry M. Bloom
*
________________________ Director March 31, 1999
Mark Novitch
/S/ HARRY H. PENNER, JR.
*By:____________________
Harry H. Penner, Jr., Attorney-in-Fact
EXHIBIT 23.1
Consent of Independent Auditors
We hereby consent to the incorporation by reference in the Registration
Statements (Forms S-8 No. 33-43441, 33-43541 and 33-81266) pertaining to the
Neurogen Stock Option Plan, the 1993 Omnibus Incentive Plan and the 1993
Non-Employee Directors Plan of Neurogen Corporation of our report dated February
16, 1999, appearing on page 54 of this form 10-K.
PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
March 31, 1999
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors
Neurogen Corporation:
We consent to the use of our report dated February 13, 1998, included in
the Annual Report (Form 10-K) of Neurogen Corporation for the year ended
December 31, 1997, with respect to the balance sheet of Neurogen Corporation as
of December 31, 1997 and the related statements of operations, changes in
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1997 included in this Annual Report (Form 10-K) for the year
ended December 31, 1998.
ERNST & YOUNG LLP
Boston, Massachusetts
February 13, 1998
POWER OF ATTORNEY
KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby
make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each
his attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to execute for him and on his behalf an Annual Report pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K
relating to the fiscal year ended December 31, 1998, of Neurogen Corporation
(the "Company"), and any and all amendments to the foregoing Annual Report on
Form 10-K, which amendments may make such changes in the Annual Report on Form
10-K as such attorney-in-fact deems appropriate, and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 8th day of March, 1999.
/s/ FRANK C. CARLUCCI
----------------------------
Frank C. Carlucci
POWER OF ATTORNEY
KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby
make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each
his attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to execute for him and on his behalf an Annual Report pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K
relating to the fiscal year ended December 31, 1998, of Neurogen Corporation
(the "Company"), and any and all amendments to the foregoing Annual Report on
Form 10-K, which amendments may make such changes in the Annual Report on Form
10-K as such attorney-in-fact deems appropriate, and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 8th day of March, 1999.
/s/ JOHN F. TALLMAN
----------------------------
John F. Tallman
POWER OF ATTORNEY
KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby
make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each
his attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to execute for him and on his behalf an Annual Report pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K
relating to the fiscal year ended December 31, 1998, of Neurogen Corporation
(the "Company"), and any and all amendments to the foregoing Annual Report on
Form 10-K, which amendments may make such changes in the Annual Report on Form
10-K as such attorney-in-fact deems appropriate, and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 8th day of March, 1999.
/s/ ROBERT H. ROTH, PH.D.
----------------------------
Robert H. Roth, Ph.D.
POWER OF ATTORNEY
KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby
make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each
his attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to execute for him and on his behalf an Annual Report pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K
relating to the fiscal year ended December 31, 1998, of Neurogen Corporation
(the "Company"), and any and all amendments to the foregoing Annual Report on
Form 10-K, which amendments may make such changes in the Annual Report on Form
10-K as such attorney-in-fact deems appropriate, and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 8th day of March, 1999.
/s/ JEFFREY J. COLLINSON
----------------------------
Jeffrey J. Collinson
POWER OF ATTORNEY
KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby
make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each
his attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to execute for him and on his behalf an Annual Report pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K
relating to the fiscal year ended December 31, 1998, of Neurogen Corporation
(the "Company"), and any and all amendments to the foregoing Annual Report on
Form 10-K, which amendments may make such changes in the Annual Report on Form
10-K as such attorney-in-fact deems appropriate, and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 8th day of March, 1999.
/s/ JOHN SIMON
----------------------------
John Simon
POWER OF ATTORNEY
KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby
make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each
his attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to execute for him and on his behalf an Annual Report pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K
relating to the fiscal year ended December 31, 1998, of Neurogen Corporation
(the "Company"), and any and all amendments to the foregoing Annual Report on
Form 10-K, which amendments may make such changes in the Annual Report on Form
10-K as such attorney-in-fact deems appropriate, and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 8th day of March, 1999.
/s/ ROBERT M. GARDINER
----------------------------
Robert M. Gardiner
POWER OF ATTORNEY
KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby
make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each
his attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to execute for him and on his behalf an Annual Report pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K
relating to the fiscal year ended December 31, 1998, of Neurogen Corporation
(the "Company"), and any and all amendments to the foregoing Annual Report on
Form 10-K, which amendments may make such changes in the Annual Report on Form
10-K as such attorney-in-fact deems appropriate, and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 8th day of March, 1999.
/s/ ROBERT N BUTLER, M D
----------------------------
Robert N. Butler, M.D.
POWER OF ATTORNEY
KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby
make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each
his attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to execute for him and on his behalf an Annual Report pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K
relating to the fiscal year ended December 31, 1998, of Neurogen Corporation
(the "Company"), and any and all amendments to the foregoing Annual Report on
Form 10-K, which amendments may make such changes in the Annual Report on Form
10-K as such attorney-in-fact deems appropriate, and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 8th day of March, 1999.
/s/ BARRY M. BLOOM
----------------------------
Barry M. Bloom
POWER OF ATTORNEY
KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby
make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each
his attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to execute for him and on his behalf an Annual Report pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K
relating to the fiscal year ended December 31, 1998, of Neurogen Corporation
(the "Company"), and any and all amendments to the foregoing Annual Report on
Form 10-K, which amendments may make such changes in the Annual Report on Form
10-K as such attorney-in-fact deems appropriate, and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 8th day of March, 1999.
/s/ MARK NOVITCH
----------------------------
Mark Novitch