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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER: 0-28150
NEUROCRINE BIOSCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0525145
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3050 SCIENCE PARK ROAD, SAN DIEGO, CA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 658-7600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.001
PAR VALUE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of the issuer held by
non-affiliates of the issuer on February 27, 1998 was approximately
$123,019,669, based upon the closing price of such stock of $8.25 on February
27, 1998. As of February 27, 1998, 17,707,815 shares of Common Stock of the
registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this Form 10-K is incorporated
by reference from the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 25, 1998 (the "Proxy Statement"), which will be
filed with the Securities and Exchange Commission within 120 days after the
close of the Registrant's fiscal year ended December 31, 1997.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Neurocrine Biosciences, Inc. is a leading neuroimmunology company focused
on the discovery and development of novel therapeutics to treat diseases and
disorders of the central nervous and immune systems. The Company's neuroscience
and immunology disciplines provide a biological understanding of the molecular
interactions between the central nervous, immune and endocrine systems leading
to therapeutic opportunities for diseases and disorders such as anxiety,
depression, Alzheimer's disease, obesity and multiple sclerosis.
Neurocrine is leveraging its resources through strategic alliances and
other financing mechanisms to build its internal product development and
commercialization capabilities. To date, Neurocrine has entered into strategic
alliances with Janssen Pharmaceutica, N.V. ("Janssen"), a subsidiary of Johnson
& Johnson Development Corporation, focused on the treatment of anxiety,
depression and substance abuse; Novartis, Inc. ("Novartis") for the treatment of
multiple sclerosis; and Eli Lilly and Co. ("Lilly") for the treatment of central
nervous system disorders including obesity and dementias such as Alzheimer's
disease. In conjunction with a number of institutional investors, the Company
has also established a research and development affiliate in Canada,
Neuroscience Pharma (NPI) Inc. ("NPI"), to develop additional compounds for the
treatment of Alzheimer's disease and other neurodegenerative diseases and
disorders.
The following Business section contains forward-looking statements
concerning the continuation of the Company's strategic alliances and the receipt
of payments thereunder, the identification of drug targets and selection of lead
compounds for clinical development, the commencement and successful conclusion
of clinical trials, the receipt of regulatory approvals, and the potential
development of future commercial products. Such forward-looking statements
necessarily involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, without limitation, that research
funding and development will continue under the Company's collaborations, that
research and development candidates will successfully proceed through
pre-clinical and early stage clinical trials, that development candidates will
prove effective for treatment in humans in later stage clinical trials, the
timely receipt of regulatory clearances required for clinical testing,
manufacturing and marketing of products, the potential impact of competitive
technologies and potential products, and the failure to achieve product
development and commercialization goals. Actual results and the timing of
certain events could differ materially from those indicated in the
forward-looking statements as a result of these and other factors.
RISKS INHERENT IN THE COMPANY'S BUSINESS
Neurocrine was founded in 1992 and all of its product candidates are in
research or early stages of development. The Company has not requested nor
received regulatory approval to commercialize any product from the United Stated
Food and Drug Administration ("FDA") or any other regulatory body. Any products
which may result from the Company's research and development programs are not
expected to be commercially available for the foreseeable future, if at all.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Such reasons include the possibilities that the potential products
will be found ineffective or cause harmful side effects during preclinical
testing or clinical trials, fail to receive necessary regulatory approvals, be
difficult to manufacture on a large scale, be uneconomical, fail to achieve
market acceptance or be precluded from commercialization by proprietary rights
of third parties.
The Company's product candidates require significant additional research
and development efforts. No assurance can be given that any of the Company's
development programs will be successfully completed, that any investigational
new drug application ("IND") will be accepted or approved by the FDA, that
clinical trials will commence as planned, that required regulatory approvals
will be obtained on a timely basis, if at all,
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or that any products for which approval is obtained will be approved for the
indications requested or be commercially successful. If any of the Company's
development programs are not successfully completed, required regulatory
approvals and appropriate labeling are not obtained, or products for which
approvals are obtained are not commercially successful, the Company's business,
financial condition and results of operations would be materially adversely
affected.
BACKGROUND
Corticotropin Releasing Factor ("CRF")
Corticotropin releasing factor, the central regulator of the body's overall
response to stress, affects multiple systems by functioning both as an endocrine
factor and a neurotransmitter. CRF acts as a hormone at the pituitary gland
causing the secretion of the steroid cortisol from the adrenal glands resulting
in a number of metabolic effects, including suppression of the immune system.
CRF also functions as a neurotransmitter in the brain and plays a critical role
in coordinating psychological and behavioral responses to stress such as
increased heart rate, anxiety, arousal and reduced appetite. In addition to
neuroendocrine and neurotransmitter roles, accumulating evidence suggests that
CRF may also integrate actions between the immune and central nervous systems in
response to physiological and psychological stressors.
The body has several mechanisms to regulate the effects of CRF. The
Company's recent cloning of human CRF receptors suggests that the diverse
functions of CRF are mediated through distinct receptor subtypes which are
differentially distributed in specific brain areas and in tissues outside of the
central nervous system. These receptors may offer a mechanism to modulate
specific actions of CRF without affecting the broad range of its activities.
There are several diseases and disorders such as anxiety, depression and
substance abuse in which CRF levels are increased. The deleterious effects of
high levels of CRF may be countered by the administration of selective CRF
receptor antagonists. A protein in the brain that binds to CRF and holds it in
an inactive state, CRF-binding protein ("CRF-BP"), tightly regulates levels of
CRF in certain brain regions. CRF-BP may provide a novel target to selectively
increase levels of CRF in diseases that are associated with decreased levels of
CRF, such as Alzheimer's disease and obesity.
Altered Peptide Ligands
The immune system employs highly specific T-cells that recognize and attack
foreign antigens that invade the body. Occasionally, certain T-cells arise that
inappropriately recognize the body's own tissues as foreign and attack healthy
cells, resulting in autoimmune diseases such as multiple sclerosis and Type I
diabetes. Recently, it has been found that the peptide recognition site on
healthy tissue can be altered, creating molecular decoys that can be developed
as potential drug candidates. The Company believes that these molecules, known
as altered peptide ligands, are capable of binding to and deactivating T-cells
implicated in certain autoimmune diseases.
Multiple sclerosis is a chronic disease caused by the immune system's
attack on myelin, the insulating material that surrounds and protects nerve
fibers in the central nervous system ("CNS"). This autoimmune reaction is led by
T-cells which come in contact with myelin by utilizing T-cell receptors specific
for myelin proteins. This interaction leads to a destructive inflammatory
response mediated by molecules of the immune system known as cytokines.
Cytokines such as gamma interferon, tumor necrosis factor-alpha and
interleukin-6 are found at the site of inflammation and demyelination and play a
role in further advancing nerve cell destruction. The use of altered peptide
ligands of dominant antigens in autoimmune diseases may inactivate certain
T-cells and decrease the production of destructive cytokines.
Neurosteroids
Neurosteroids are a class of steroidal compounds produced in the central
nervous system that show a wide range of effects on neurons.
Dehydroepiandrosterone ("DHEA") is the most abundant adrenal steroid in humans.
Blood levels of this hormone peak by age 20 and then decrease throughout life,
reaching their lowest levels by age 65. DHEA levels have been found to be
decreased in Alzheimer's patients while DHEA has been shown to have
memory-enhancing effects in animal studies. For example, studies have been
performed in aged
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mice which perform more poorly than young mice in certain memory tasks.
Administration of DHEA in the older animals has been shown to improve memory to
the high levels seen in the younger animals. DHEA has also been shown to
significantly reverse pharmacologically-induced amnesia and memory impairment in
these animals.
In addition to the memory-enhancing effects of DHEA, preliminary data
suggest that this steroid also increases neuronal survival. DHEA may also induce
neuroprotection through inhibition of inflammatory cytokines in the brain which
have recently been implicated in neurodegeneration. In view of its cognitive
enhancing and neuroprotective potential, DHEA replacement therapy may be
beneficial for the treatment of neurodegenerative disorders such as Alzheimer's
disease.
Neurogenomics
The brain and spinal cord are comprised of two major cell types -- glial
cells and neurons. Glial cells are the most prevalent cell type in the central
nervous system, comprising over 75% of all brain cells. The gene products from
these cells are crucial for the survival and development of neurons. Neurons are
CNS cells which transmit and receive complex electrical and chemical messages
from other neurons to control all cognitive processes. In certain pathological
states, excessive glial activity results in the activation of cytosine and
related genes. The proteins encoded by these genes may be implicated in the
degenerative cascade leading to neurological disorders such as Alzheimer's
disease, stroke, multiple sclerosis, Parkinson's disease, epilepsy and AIDS
dementia. For example, in AIDS, the HIV virus does not attack neurons but does
infect glial cells which in turn release inflammatory cytokines and other
factors which are toxic to neurons. Similarly, in Alzheimer's disease,
accumulating evidence suggests complex interactions between neurons, glia and a
protein fragment known as beta amyloid leading to formation of senile plaques
and neurodegeneration. Currently, it is estimated that only a small fraction of
genes involved in neurodegeneration or regeneration have been identified. The
identification of novel CNS genes involved in the neurodegenerative process may
yield new therapeutic and diagnostic opportunities.
BUSINESS STRATEGY
The Company's strategy is to utilize its understanding of the biology of
the central nervous, immune and endocrine systems to identify and develop novel
therapeutics. There are five key elements to the Company's business strategy:
Target Multiple Product Platforms. Neurocrine is focusing on research and
development programs which utilize its distinct biological and technological
competencies. The Company believes certain central nervous system drug targets,
such as CRF, CRF-BP, Insulin-like Growth Factor Binding Protein (IGF-BP) and
neurosteroids, represent significant market opportunities in psychiatric,
neurologic and metabolic disorders. Immunological targets, such as altered
peptide ligands, offer product opportunities related to autoimmune diseases.
Neurogenomics allows the Company to combine its neuroscience and immunology
expertise with new drug discovery technologies to identify novel gene-related
product or gene therapy opportunities.
Identify Novel Neuroscience and Immunology Drug Targets for the Development
of Therapeutics Which Address Large Unmet Market Opportunities. Neurocrine
employs molecular biology as an enabling discipline to identify novel drug
targets such as receptors, genes and gene-related products. The Company uses
advanced technologies, including combinatorial chemistry, high-throughput
screening, gene sequencing and bioinformatics, to discover and develop novel
small molecule therapeutics for diseases and disorders of the central nervous
and immune systems including anxiety, depression, Alzheimer's disease, obesity
and multiple sclerosis.
Leverage Strategic Alliances to Enhance Development and Commercialization
Capabilities. Neurocrine intends to leverage the development, regulatory and
commercialization expertise of its corporate partners to accelerate the
development of its potential products, while retaining full or co-promotion
rights in North America. The Company intends to further leverage its resources
by continuing to enter into strategic alliances and novel financing mechanisms
to enhance its internal development and commercialization capabilities. To
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date, Neurocrine has entered into a strategic alliance with Janssen focusing on
CRF receptor antagonists to treat anxiety, depression, and substance abuse; with
Novartis to develop altered peptide ligands for the treatment of MS; and with
Lilly to collaborate in the discovery, development and commercialization of CRF
binding protein ligand inhibitors for the treatment of central nervous system
disorders including obesity and dementias such as Alzheimer's disease. The
Company has also formed NPI, a research and development subsidiary, to finance
its Neurosteroid clinical development program for Alzheimer's disease and
Neurogenomics programs.
Outsource Capital Intensive and Non-Strategic Activities. Neurocrine
intends to focus its resources on research and development activities by
outsourcing its requirements for manufacturing, preclinical testing, and
clinical monitoring activities. The Company utilizes contract current Good
Manufacturing Processes ("cGMP") manufacturing for both its Neurosteroid and
Altered Peptide Ligand programs. Neurocrine believes that the ease of
manufacturing of small molecule therapeutics will allow the Company to focus on
its core discovery and development programs to generate additional product
opportunities.
Acquire Complementary Products in Clinical Development. Neurocrine plans to
acquire rights to products in various stages of clinical development in the
fields of neurology and immunology to take advantage of the development and
future commercialization capabilities it is developing in cooperation with its
strategic partners. For example, Neurocrine has licensed rights to DHEA for the
treatment of Alzheimer's disease which is currently being evaluated in a
physician investigational new drug application ("physician-IND") Phase II
clinical trial and in a Company-sponsored Phase II/III clinical trial in Canada
under the regulatory authority of the Canadian Health Protection Board ("HPB").
TECHNOLOGY
Neurocrine utilizes advanced technologies to enhance its drug discovery
capabilities and to accelerate the drug development process. These technologies
include:
High-Throughput Screening. Neurocrine has assembled a chemical library of
diverse, low molecular weight organic molecules for lead compound
identification. The Company has implemented robotic screening capabilities
linked to its library of compounds that facilitate the rapid identification of
new drug candidates for multiple drug targets. The Company believes that the
utilization of high-throughput screening and medicinal and peptide chemistry
will enable the rapid identification and optimization of lead molecules.
Combinatorial Chemistry. Neurocrine has developed an automated
combinatorial chemistry technology (Rapid Microscale Synthesis or "RMS") which
is capable of rapidly producing large quantities of highly purified small
organic molecules for evaluation as drug candidates. Unlike other combinatorial
chemistry technologies, RMS enables individual chemists to optimize candidate
compounds quickly and efficiently by producing hundreds of variations of
existing lead molecules.
Molecular Biology. Neurocrine scientists have utilized novel techniques for
examination of gene expression in a variety of cellular systems. The Company has
developed a sophisticated technique to evaluate the type and quantity of genes
in various cellular systems prior to the isolation of genes. Neurocrine has also
developed unique expression vectors and cell lines that allow for the highly
efficient protein expression of specific genes.
Gene Sequencing. Neurocrine applies integrated automated DNA sequencing and
gene identification technology in its Neurogenomics program. The systems
utilized by Neurocrine allow for extended gene analysis in a rapid,
high-throughput format with independent linkage into a sequence identification
database. Neurocrine has optimized gene sequencing instrumentation for
"differential display," a technique that may facilitate the rapid identification
of novel genes.
Bioinformatics. Neurocrine's Neurogenomics program creates a significant
amount of genetic sequence information. Applied genomics relies on information
management systems to collect, store and rapidly analyze thousands of gene
sequences. Neurocrine has developed a bioinformatics system which the Company
believes will allow it to identify novel genes which are involved in
neurodegeneration. Data are collected by automated
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instruments and stored and analyzed by Neurocrine using customized computational
tools. To date, Neurocrine's molecular biologists have identified over 4,500
novel genes.
PRODUCTS UNDER DEVELOPMENT
The following table summarizes Neurocrine's most advanced products in
development. This table is qualified in its entirety by reference to the more
detailed descriptions appearing elsewhere in this Form 10-K.
PROGRAM INDICATION STATUS(1) COMMERCIAL RIGHTS
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Corticotropin Releasing Factor
Receptor Antagonists Anxiety Phase I Janssen/Neurocrine
Depression Phase I Janssen/Neurocrine
Stroke Development Neurocrine
Substance Abuse Research Janssen/Neurocrine
Binding Protein Antagonists Alzheimer's Disease Development Lilly/Neurocrine
Obesity Development Lilly/Neurocrine
Altered Peptide Ligands Multiple Sclerosis Phase II Novartis/Neurocrine
Type I Diabetes Preclinical Neurocrine
Neurosteroids Alzheimer's Disease Physician-IND Phase II; Neurocrine/NPI
Phase II/III
Neurogenomics Neurodegenerative Research Neurocrine/NPI
Diseases
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(1) "Research" indicates identification and evaluation of compounds in in vitro
and animal models.
"Development" indicates that lead compounds have been discovered that meet
certain in vitro and in vivo criteria. These compounds may undergo
structural modification and more extensive evaluation prior to selection for
preclinical development.
"Preclinical" indicates that Neurocrine is conducting pharmacology testing,
toxicology testing, formulation, process development and/or manufacturing,
and is in the process of preparing an IND for regulatory submission.
"Phase I" indicates that Neurocrine or its collaborative partner is
conducting clinical trials to determine safety, the maximally tolerated dose
and pharmacokinetics of the compound in healthy volunteers.
"Physician-IND Phase II" indicates that an independent physician has
received FDA approval to evaluate one of the Company's products in humans to
determine safety and efficacy in an expanded patient population. This
clinical trial is not under full control of the Company.
"Phase II" indicates that the Company has received FDA approval to evaluate
one of the Company's products in humans to determine safety and efficacy in
an expanded patient population.
"Phase II/III" indicates that the Company has received regulatory approval
from the Canadian HPB to evaluate in Canada a multi-center Phase II/III
clinical trial of DHEA.
CORTICOTROPIN RELEASING FACTOR -- RECEPTOR ANTAGONIST PROGRAM
Anxiety
Anxiety is among the most commonly observed group of CNS disorders, which
includes phobias or irrational fears, panic attacks, obsessive-compulsive
disorders and other fear and tension syndromes. Estimates by the National
Institute of Mental Health suggest that the most commonly diagnosed forms of
anxiety disorders may affect 10% of the United States population. Of the
pharmaceutical agents that are currently marketed for the treatment of anxiety
disorders, a class of compounds known as the benzodiazepines, such as Valium, is
the most frequently prescribed. In spite of their therapeutic efficacy, several
side effects limit the utility of these anti-anxiety drugs. Most problematic
among these are drowsiness, ataxia (the inability to stand up), amnesia, drug
dependency and withdrawal reactions following the cessation of therapy.
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Neurocrine is developing a new class of therapeutics that target
stress-induced anxiety. In view of the evidence implicating CRF in
anxiety-related disorders, Neurocrine is developing small molecule CRF receptor
antagonists as anti-anxiety agents which block the effects of overproduction of
CRF. The Company believes that these compounds represent a class of molecules
based on a novel mechanism of action which may offer the advantage of being more
selective, thereby providing increased efficacy with reduced side effects. In
animal studies used to evaluate anti-anxiety drugs, Neurocrine scientists have
demonstrated the efficacy of its lead candidates following oral administration
without evidence of apparent side effects. Neurocrine's corporate partner,
Janssen, selected a drug candidate in 1996 for preclinical testing and commenced
Phase I clinical trials on the drug candidate in late 1997. However, results
obtained in animals are not necessarily predictive of results obtained in man,
and no assurance can be given that the Company's partner will successfully
complete Phase I clinical testing or progress to later clinical trials in a
timely manner, or at all.
Depression
Depression is one of a group of neuropsychiatric disorders that is
characterized by extremes of elation and despair, loss of body weight, decrease
in aggressiveness and sexual behavior, and loss of sleep. This condition is
believed to result from a combination of environmental factors, including
stress, as well as an individual's biochemical vulnerability, which is
genetically predetermined. The biochemical basis of depression is thought to
involve elevated secretion of CRF and abnormally low levels of other
neurotransmitters in the brain such as serotonin. Clinical depression was
reported to affect 6% of the population, or approximately 25 million individuals
in the United States in 1994. Current antidepressant therapies, including
Prozac, increase the levels of several chemicals in the brain, such as
serotonin. Because these drugs affect a wide range of neurotransmitters, they
have been associated with a number of side effects. While newer, more selective
drugs offer some safety improvement, their side effect profiles are still
inadequate due to their unwanted effects on gastrointestinal and sexual
function, and on appetite. Furthermore, most existing antidepressant therapies
are limited by their slow onset of action.
Neurocrine is developing small molecule therapeutics to block the effects
of overproduction of CRF for the treatment of depression. The Company has
developed several CRF receptor antagonists. The Company's corporate partner,
Janssen, selected a drug candidate in 1996 for preclinical testing and commenced
Phase I clinical trials on the drug candidate in late 1997. However, results
obtained in animals are not necessarily predictive of results obtained in man,
and no assurance can be given that the Company's partner will successfully
complete Phase I clinical testing or progress to later clinical trials in a
timely manner, or at all.
Stroke
Stroke is an acute neurologic event caused by blockage or rupture of
vessels which supply blood to the brain. Neuronal damage progresses over a
period of four to six hours. According to the National Institutes of Health
("NIH") estimates, approximately 500,000 patients experience a stroke in the
United States each year, with an approximately equal incidence in the rest of
the world. Stroke results in an estimated 150,000 fatalities each year, making
it the leading cause of death behind heart disease and cancer, and an estimated
additional 150,000 stroke victims suffer permanent neurological damage.
Survivors of stroke are at significantly increased risk of suffering another
episode. Current treatments for stroke consist of surgery, steroid therapy and
anti-platelet therapy. These treatments may help increase blood flow but do not
affect the secondary mechanisms which cause nerve cell death.
Neurocrine believes its CRF receptor antagonist program may have utility in
the treatment of stroke. Preliminary experiments in animal models of stroke show
substantial enhancement of neuronal survival following treatment with a CRF
receptor antagonist. The survival benefit is independent of increased blood flow
and may be acting on secondary mechanisms.
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CORTICOTROPIN RELEASING FACTOR -- BINDING PROTEIN ANTAGONIST PROGRAM
Alzheimer's Disease
Alzheimer's disease is a neurodegenerative brain disorder which leads to
progressive memory loss and dementia. Alzheimer's disease generally follows a
predictable course of deterioration over eight years or more, with the earliest
symptom being impairment of short-term memory. Gradually, memory loss increases,
reasoning abilities deteriorate, and individuals become depressed, agitated,
irritable and restless. In the final stages of the disease, patients become
unable to care for themselves. According to the National Alzheimer's
Association, in 1994 over four million individuals in the United States suffered
from Alzheimer's disease. Alzheimer's disease is the fourth leading cause of
death for adults, responsible for over 100,000 deaths in 1994. Marketed
therapies currently available for the treatment of Alzheimer's disease are
severely limited. Tacrine, a therapy which has been recently approved, shows
limited memory improvement in Alzheimer's patients; however, concerns regarding
drug-induced elevations in liver enzymes have limited the widespread use of this
product.
Neurocrine scientists have found that there are significant decreases in
CRF levels in the brain areas that are affected in Alzheimer's disease. In spite
of reduced CRF concentrations, CRF-BP levels are not decreased in areas of the
brain affected by Alzheimer's disease, thereby providing the Company with a
novel target for drug intervention. Consequently, Neurocrine is developing
CRF-BP antagonists to displace CRF from the binding protein and effectively
increase the amount of "free CRF" available to interact with the CRF receptors.
This strategy is expected to selectively raise the concentration of CRF in brain
areas involved in learning and memory processes. Because the therapeutic is
designed to restore normal levels of CRF only in these areas, the Company
believes that the drug will not induce the side effects associated with
administering CRF directly, such as anxiety. The Company has identified a number
of lead compounds which show efficacy following oral administration in animal
models of learning and memory. Efforts are underway to further optimize these
molecules. However, no assurance can be given that the Company and its corporate
partner will successfully identify suitable candidate compounds for development
in a timely manner, or at all.
Obesity
Obesity is the most common nutritional disorder in Western societies. As
many as three in 10 adult Americans weigh at least 20% in excess of their ideal
body weight, with 35 million people in the United States characterized as
clinically obese. Increased body weight is a significant public health problem
because it is associated with a number of serious diseases, including type II
diabetes, hypertension, hyperlipidemia and several cancers. Although obesity has
been commonly considered to be a behavioral problem, there is now evidence that
body weight is physiologically regulated. The regulation of body weight is
complex and appears to consist of both centrally and peripherally acting
mechanisms.
Preliminary data indicate that CRF may act as a central regulator of both
appetite and metabolism. Neurocrine has evaluated CRF-BP antagonists in a
genetically mutant strain of obese animals as well as in animal models which
were pharmacologically induced to overeat. Treatment with CRF-BP antagonists
consistently normalized feeding behavior and weight in both types of models and
did so without inducing excess CRF-related side effects such as anxiety.
Neurocrine has developed several active series of lead molecules. Medicinal
chemistry efforts have resulted in the generation of high-affinity molecules
that show efficacy in elevating brain CRF levels. Neurocrine and its corporate
partner, Lilly, anticipate selecting lead compounds in 1998 for further
development. However, no assurance can be given that the Company and its
corporate partner will successfully identify suitable candidate compounds for
development in a timely manner, or at all. Further, results obtained in animals
are not necessarily predictive of results obtained in humans, and
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no assurance can be given that the Company will progress to clinical trials or
successfully complete clinical trials in a timely manner, if at all.
ALTERED PEPTIDE LIGAND PROGRAM
Multiple Sclerosis ("MS")
Multiple sclerosis is a chronic immune mediated disease characterized by
recurrent attacks of neurologic dysfunction due to damage in the CNS. The
classic clinical features of MS include impaired vision and weakness or
paralysis of one or more limbs. Patients develop a slow, steady deterioration of
neurologic function over an average duration of approximately 30 years. The
cause of MS is unknown but immunologic or infectious factors have been
implicated. According to the National Multiple Sclerosis Society, there are an
estimated 350,000 cases of multiple sclerosis in the United States and an equal
number of patients in Europe with approximately 20,000 new cases diagnosed in
the world each year. Currently available treatments for MS offer only limited
efficacy. Steroids have been used to reduce the severity of acute flare-ups and
speed recovery. Experimental therapy with other immunosuppressive agents has
been tried, but with limited success. Betaseron (a form of beta-interferon) has
been shown to delay the onset of flare-ups of the symptoms in approximately 30%
of patients and has been approved for marketing by the FDA. In addition, Avonex,
a similar form of beta-interferon, has received FDA approval. Clinical trial
results show these therapies slowed, but did not prevent, the growth of lesions
in the CNS which cause the disease. Patients treated with beta-interferon
experience a variety of side effects, including "flu-like" symptoms.
One of the Company's co-founders, Dr. Lawrence Steinman, identified the
dominant invading T-cell in the brains of patients who had died of MS. Dr.
Steinman further identified the dominant target or recognition site on the
myelin sheath to which invading T-cells bind. Neurocrine has exclusively
licensed this technology and has designed altered peptide ligands which resemble
native disease-causing molecules of the myelin sheath. These molecules have been
altered to attract and bind to disease-causing T-cells and inhibit their
destructive capabilities. Neurocrine's altered peptide ligand for the treatment
of MS has been shown to reverse disease in animal models of MS and decrease the
production of cytokines such as gamma interferon and tumor necrosis factor-alpha
which contribute to the disease. These same molecules demonstrate the ability to
turn off pathogenic T-cells from MS patients in vitro. Quantities of the
Company's drug candidate were produced under cGMP conditions in preparation for
a Phase I clinical trial. Together with Novartis, the Company's collaborative
partner for this program, Neurocrine filed an IND and received approval in 1996
to commence clinical trials. The Company and its corporate partner have
completed Phase I clinical trials and began patient accrual for Phase II
randomized clinical trials in the latter half of 1997. However, results obtained
in animals or in earlier phases of clinical trials are not necessarily
predictive of results obtained in humans, and no assurance can be given that the
Company will successfully complete clinical trials in a timely manner, if at
all.
Type I Diabetes
Type I diabetes, or juvenile-onset diabetes, is an autoimmune disease
resulting from the destruction of insulin producing cells, causing impaired
glucose metabolism resulting from a deficiency in the action of the hormone
insulin. It is one of the most prevalent chronic conditions in the United
States, afflicting approximately 500,000 patients in all age groups in 1994.
Diabetics suffer from a number of complications of the disease including heart
disease, circulatory problems, kidney failure, neurologic disorders and
blindness. Current therapy for type I diabetes consists of daily insulin
injections to regulate blood glucose levels.
Neurocrine is developing altered peptide ligands which target dominant
antigens on insulin producing cells to treat type I diabetes. Pre-diabetic
patients can now be identified using immune markers of the disease several years
before they become insulin dependent. The Company believes that an altered
peptide ligand specific for autoimmune T-cells involved in diabetes may stop the
destruction of the insulin secreting cells in these pre-diabetic patients, thus
allowing them to delay or avoid chronic insulin therapy. The Company believes
that this program can leverage the technological expertise the Company has
developed in its MS program to discover and design altered peptide ligand
therapy useful in treating diabetics and pre-diabetics.
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Neurocrine has begun collaborations with a leading diabetes center, the Barbara
Davis Center for Childhood Diabetes at the University of Colorado, to study the
effects of altered peptide ligands on human T-cells from diabetic patients. A
preliminary preclinical candidate was selected in late 1997 and the Company
expects to file an IND or a foreign IND equivalent in Canada or Europe in late
1998. However, no assurance can be given that the Company will conclude
preclinical testing in a timely manner, or at all.
NEUROSTEROID PROGRAM
Alzheimer's Disease
Alzheimer's disease is a neurodegenerative brain disorder which leads to
progressive memory loss and dementia. The Company believes that DHEA, a
naturally occurring hormone, may be useful in treatment of this disease based on
a variety of mechanisms. DHEA may protect neurons from death by increasing
growth factor levels in the brain, such as insulin-like growth factor-1. DHEA
also appears to modulate several cytokines involved in inflammation, which are
believed to be involved in the pathology of Alzheimer's disease. In addition,
DHEA improves memory and learning processes in both animal models and humans and
may prove beneficial in slowing the memory loss seen in Alzheimer's disease.
Because DHEA is naturally occurring, it is expected to have few toxicity
problems, which differentiates this drug from other compounds that are currently
being tested as therapeutics for Alzheimer's disease.
A double-blind, placebo-controlled, physician-IND Phase II clinical trial
of DHEA, was conducted in 1997 with investigators from the Alzheimer's Clinic at
the University of California, San Francisco. The trial was designed to determine
efficacy as measured by improving memory in mild to moderate Alzheimer's
patients. Approximately 60 patients were treated for six months with either an
active drug or a placebo. The trial was completed in 1997 and results are
expected in mid-1998. The patients in this study will be evaluated to assess the
progress of disease and retention of memory. However, no assurance can be given
that the results of these clinical trials will be positive, that the Company
will begin its own clinical trials in a timely manner (if at all), or that if
the results are positive, the Company will be able to duplicate such results in
its own Phase II clinical trials.
The Company has obtained regulatory approval and initiated a multi-center
Phase II/III double-blind, placebo-controlled clinical trial of DHEA in Canada,
New Zealand, Australia, South Africa and Europe. This trial has been designed to
determine efficacy as measured by improving memory in mild to moderate
Alzheimer's patients. The study was designed in collaboration with, and will be
conducted by, the Consortium of Canadian Centres for Clinical Cognitive Research
in 18 Canadian Alzheimer's research centers. The clinical trial plans to
evaluate efficacy parameters in 300 patients with a single dose of DHEA vs.
placebo administered twice daily. The Company anticipates that this trial will
be completed by the end of 1998. However, results obtained in earlier clinical
trials are not necessarily predictive of results obtained in later trials, and
no assurance can be given that the Company will successfully complete clinical
trials in a timely manner, or at all. Even if regulatory approval is granted in
Canada, the Company will likely be required to undertake additional clinical
testing to obtain regulatory approval from the FDA for sales in the United
States.
NEUROGENOMICS PROGRAM
Neurodegenerative Diseases and Disorders
Neurodegenerative diseases and disorders involve damage to the cellular
structure of the brain either acutely, as in stroke or trauma, or chronically,
as in epilepsy and Alzheimer's disease. To date, only a limited number of
effective therapeutics exist to treat neurological disorders, resulting in
significant economic and social costs. In 1994, over 26 million people in the
United States were affected by neurological disorders.
Activation of glial cells is a common feature of many neurodegenerative
diseases. The primary goal of Neurocrine's Neurogenomics program is to identify
and characterize novel genes that are induced in glial cells under conditions
that lead to neurodegeneration or regeneration. The Company is focusing on
stroke, multiple sclerosis, AIDS dementia, epilepsy, Parkinson's disease and
Alzheimer's disease. The unique conditions leading to neurodegeneration in each
of the disorders have been established in both animal and cellular models of the
disease. Neurocrine is actively isolating and analyzing genes associated with
neuronal cell death
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utilizing state of the art molecular biology, gene sequencing and
bioinformatics. In addition, activated genes which are neuroprotective or allow
for the regeneration of neurons may also be identified.
Novel neurodegenerative genes that are discovered may include proteins,
enzymes or receptors. Protein signaling molecules or the genes encoding such
molecules may be utilized as therapeutics, while enzymes and receptors may serve
as new targets for drug discovery. Neurocrine currently intends to place the
receptors and enzymes encoded by these genes in high-throughput screens in an
attempt to discover small molecule therapeutics to treat neurodegenerative
disorders. To date, the Company has identified more than 4,500 novel genes of
which a number are undergoing biological evaluation in in vitro and animal
models. The Company currently intends to identify candidate genes as drugs or
drug targets for one or more neurological diseases. However, there can be no
assurance that the Company will successfully identify suitable gene candidates
for development in a timely manner, or at all.
STRATEGIC ALLIANCES
The Company's business strategy is to utilize strategic alliances and novel
financing mechanisms to enhance its development and commercialization
capabilities. To date, Neurocrine has completed the following alliances:
JANSSEN PHARMACEUTICA, N.V.
On January 1, 1995, Neurocrine entered into a research and development
agreement (the "Janssen Agreement") with Janssen to collaborate in the
discovery, development and commercialization of CRF receptor antagonists
focusing on the treatment of anxiety, depression and substance abuse. The
collaboration utilizes Neurocrine's expertise in cloning and characterizing CRF
receptor subtypes, CRF pharmacology and medicinal chemistry. Pursuant to the
Janssen Agreement, the Company has received $2.0 million in license payments. In
connection with the Janssen Agreement, Johnson & Johnson Development Corporation
("JJDC") purchased $5 million of the Company's Common Stock. The collaborative
research portion of the Janssen Agreement was completed as scheduled in 1997
with the selection of a clinical candidate and the commencement of clinical
trials in Europe. The Company will continue to receive milestone payments and
royalties upon the successful continuation of the development portion of the
Janssen Agreement. The Company has received $9.7 million in sponsored research
payments during the term of the Janssen Agreement, of which $3.7 million was
received in 1997.
Under the Janssen Agreement, Neurocrine is entitled to receive up to $10.0
million in milestone payments for the indications of anxiety, depression, and
substance abuse, and up to $9.0 million in milestone payments for other
indications, if certain development milestones are achieved. The Company has
received $3.3 million of milestone payments through December 31, 1997, of which
$1.5 million was received in 1997. The Company has granted Janssen an exclusive
worldwide license to manufacture and market products developed under the Janssen
Agreement. The Company is entitled to receive royalties on product sales
throughout the world. The Company has certain rights to co-promote such products
in North America. Janssen is responsible for funding all clinical development
and marketing activities, including reimbursement to Neurocrine for its
promotional efforts, if any. There can be no assurance that the Company and its
corporate partner will be successful in developing, receiving regulatory
approvals or commercializing any potential products discovered under the Janssen
Agreement. As a result, there can be no assurance that any product development
milestone or royalty payments will be made.
NOVARTIS
In January 1996, the Company entered into a binding letter agreement with
Ciba-Geigy (which subsequently became Novartis) to develop altered peptide
ligand therapeutics for the treatment of MS based upon the Company's drug
development candidates and expertise in immunology and protein chemistry. In
December 1996, the Company and Novartis entered into a definitive agreement (the
"Novartis Agreement") incorporating the terms and conditions set forth in the
letter agreement and certain other terms and conditions agreed to by the Company
and Novartis. Novartis paid the Company a $5 million non-refundable fee prior to
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executing the Novartis Agreement. In connection with the Novartis Agreement,
Novartis purchased $10.0 million of the Company's Common Stock. Pursuant to the
Novartis Agreement, Novartis is obligated to provide the Company with $3.5
million in research and development funding, plus certain other program
expenses, each year for five years ending on December 31, 2000. In event that no
biological license application ("BLA") has been filed as a result of the
collaboration by December 31, 2000, then Novartis may be obligated to provide
the Company with an additional $2.5 million per year thereafter until a Product
License Application is filed, except in certain circumstances. The Company has
received a total of $15.7 million in license fees and research funding under the
Novartis Agreement (including the $5.0 million non-refundable fee), of which
$7.2 million was received in 1997. Neurocrine is also entitled to receive
milestone payments if certain research, development and regulatory milestones
are achieved. Milestone payments were $3.8 million and $3.0 million for 1997 and
1996, respectively. Novartis has the right to terminate the Novartis Agreement
on six months' notice which may be given at any time after December 30, 1997.
The Company has granted Novartis an exclusive license outside of the United
States and Canada to market altered peptide ligand products developed under the
Novartis Agreement for multiple sclerosis. The Novartis Agreement provides that
the Company and Novartis will collaborate in the marketing of products developed
under the Novartis Agreement in the United States and Canada. The Company has
the option to discontinue the collaborative marketing effort in the United
States and Canada, in which case Novartis will have exclusive marketing rights
in such territory. Neurocrine is entitled to receive royalties on product sales.
Neurocrine is entitled to receive a share of the profits resulting from
sales of altered peptide ligand products in North America subject to the
recoupment of a portion of Novartis's development costs. Neurocrine retains the
right to convert its profit share to the right to receive royalty payments at
its sole discretion in which case no repayment of development costs are due to
Novartis. Neurocrine is obligated to repay a portion of the development costs of
any potential product developed pursuant to the collaboration unless the Company
elects to convert to the right to receive royalty payments. There can be no
assurance that the Company and Novartis will be successful in developing or
commercializing any potential products. As a result, there can be no assurance
that any product development milestone, royalty, or profit sharing payments will
be made.
ELI LILLY AND CO.
On October 15, 1996, Neurocrine entered into a research and license
agreement (the "Lilly Agreement") with Lilly to collaborate in the discovery,
development and commercialization of CRF binding protein ligand inhibitors for
the treatment of central nervous system disorders including obesity and
dementias such as Alzheimer's disease. Neurocrine has received $10.4 million in
research payments under the Lilly Agreement, of which $9.1 million was received
in 1997. Neurocrine expects to receive an additional $11.6 million in research
payments between January 1, 1998 and October 15, 1999, as well as additional
sponsored research payments over the subsequent two-year period if certain
milestones are met, and up to an additional $49.0 million in milestone payments
for the first two products for dementia or obesity if certain development and
regulatory milestones are achieved. The Company has granted Lilly an exclusive
worldwide license to manufacture and market CRF binding protein ligand inhibitor
products. Lilly is obligated to fund clinical development and marketing expenses
(except as set forth below) and is responsible for clinical development,
regulatory compliance, and manufacturing of products. Neurocrine is entitled to
royalties on product sales. At its option, Neurocrine is entitled to receive a
portion of the profits resulting from sales of products for the treatment of
dementia in the United States subject to the Company's obligation to pay a
portion of the development costs for such product. Lilly has agreed to provide
the Company with access to a portion of its chemical compound library for
screening against targets outside of the field of the Lilly Agreement and other
Lilly program areas, subject to the Company's obligation to pay Lilly royalties
on sales of products developed based on compounds in such library and milestone
payments based upon certain development and regulatory milestones for such
products. There can be no assurance that the Company's research under the Lilly
Agreement will be successful in discovering any potential products or that Lilly
will be successful in developing, receiving regulatory approvals, or
commercializing any potential products that may be discovered.
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As a result there can be no assurance that any product development milestone,
royalty, or profit sharing payments will be made.
NEUROSCIENCE PHARMA INC.
In March 1996, Neurocrine formed Neuroscience Pharma (NPI) Inc. ("NPI"), a
research and development company. Neurocrine licensed to NPI certain technology
and Canadian marketing rights to the Company's Neurosteroid and Neurogenomics
programs in exchange for 49% of the outstanding Common Stock of NPI. A group of
Canadian institutional investors have invested approximately $9.5 million in NPI
in exchange for Preferred Stock of NPI, which may be exchanged for an aggregate
of approximately 1,279,758 shares of Common Stock of the Company. In December
1997, certain of such Canadian institutional investors exercised their right to
exchange an aggregate of 610,000 shares of NPI Preferred Stock for warrants
exercisable for an aggregate of 600,502 shares of Common Stock of the Company.
In December 1997, such Canadian institutional investors exercised the warrants
for 600,502 shares of Common Stock of the Company. Pursuant to a Research and
Development Agreement with a wholly owned subsidiary of the Company, NPI has
committed to expend an aggregate amount of $9.5 million for clinical development
of the Neurosteroid program for Alzheimer's disease and for research activities
related to the Neurogenomics program. Pursuant to such Research and Development
Agreement, NPI is entitled to receive royalties on sales of products developed
in these programs as well as exclusive Canadian marketing rights for such
products in the event that the Company has not terminated the technology license
and the marketing rights or that the investors have not exchanged their NPI
Preferred Stock for shares of the Company's Common Stock. In connection with
their initial investment in NPI, such investors also received warrants
exercisable for 383,875 shares of the Company's Common Stock and are eligible to
receive additional warrants in the future in the event that NPI receives certain
Canadian government incentives for research activities.
DEPENDENCE ON STRATEGIC ALLIANCES
The Company is dependent upon its corporate partners to provide adequate
funding for certain of its programs. Under these arrangements, the Company's
corporate partners are responsible for (i) selecting compounds for subsequent
development as drug candidates, (ii) conducting preclinical testing and clinical
trials and obtaining required regulatory approvals for such drug candidates,
and/or (iii) manufacturing and commercializing any resulting drugs. Failure of
these partners to select a compound discovered by the Company for subsequent
development into marketable products, gain the requisite regulatory approvals or
successfully commercialize products would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
strategy for development and commercialization of certain of its products is
dependent upon entering into additional arrangements with research
collaborators, corporate partners and others, and upon the subsequent success of
these third parties in performing their obligations. There can be no assurance
that the Company will be able to enter into additional strategic alliances on
terms favorable to the Company, or at all. Failure of the Company to enter into
additional strategic alliances would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company cannot control the amount and timing of resources which its
corporate partners devote to the Company's programs or potential products. If
any of the Company's corporate partners breach or terminate their agreements
with the Company or otherwise fail to conduct their collaborative activities in
a timely manner, the preclinical testing, clinical development or
commercialization of product candidates will be delayed, and the Company will be
required to devote additional resources to product development and
commercialization, or terminate certain development programs. The Company's
strategic alliances with Janssen, Novartis and Lilly are subject to termination
by Janssen, Novartis, or Lilly, respectively. There can be no assurance that
Janssen, Novartis, or Lilly will not elect to terminate its strategic alliance
with the Company prior to its scheduled expiration. In addition, if the
Company's corporate partners effect a merger with a third party, there can be no
assurance that the strategic alliances will not be terminated or otherwise
materially adversely affected. Ciba-Geigy Ltd. recently completed a merger with
Sandoz Ltd., another major pharmaceutical company, becoming Novartis. The
termination of any current or future strategic alliances
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could have a material adverse effect on the Company's business, financial
condition and results of operations. Neurocrine's corporate partners may
develop, either alone or with others, products that compete with the development
and marketing of the Company's products. Competing products, either developed by
the corporate partners or to which the corporate partners have rights, may
result in their withdrawal of support with respect to all or a portion of the
Company's technology, which would have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that disputes will not arise in the future with respect to the
ownership of rights to any products or technology developed with corporate
partners. These and other possible disagreements between corporate partners and
the Company could lead to delays in the collaborative research, development or
commercialization of certain product candidates or could require or result in
litigation or arbitration, which would be time-consuming and expensive, and
would have a material adverse effect on the Company's business, financial
condition and results of operations.
MANUFACTURING
The Company has in the past utilized, and intends to continue to utilize,
third-party manufacturing for the production of material for use in clinical
trials and for the potential commercialization of future products. The Company
has no experience in manufacturing products for commercial purposes and does not
have any manufacturing facilities. Consequently, the Company is solely dependent
on contract manufacturers for all production of products for development and
commercial purposes. In the event that the Company is unable to obtain or retain
third-party manufacturing, it will not be able to commercialize its products as
planned. The manufacture of the Company's products for clinical trials and
commercial purposes is subject to cGMP regulations promulgated by the FDA. No
assurance can be given that the Company's third-party manufacturers will comply
with cGMP regulations or other regulatory requirements now or in the future. The
Company's current dependence upon third parties for the manufacture of its
products may adversely affect its profit margin, if any, on the sale of future
products and the Company's ability to develop and deliver products on a timely
and competitive basis.
MARKETING, SALES, AND PHARMACEUTICAL PRICING ISSUES
Neurocrine has retained certain marketing or co-promotion rights in North
America to its products under development, and plans to establish its own North
American marketing and sales organization. The Company currently has no
experience in marketing or selling pharmaceutical products and does not have a
marketing and sales staff. In order to achieve commercial success for any
product candidate approved by the FDA, Neurocrine must either develop a
marketing and sales force or enter into arrangements with third parties to
market and sell its products. There can be no assurance that Neurocrine will
successfully develop such experience or that it will be able to enter into
marketing and sales agreements with others on acceptable terms, if at all. If
the Company develops its own marketing and sales capabilities, it will compete
with other companies that currently have experienced and well funded marketing
and sales operations. To the extent that the Company enters into co-promotion or
other marketing and sales arrangements with other companies, any revenues to be
received by Neurocrine will be dependent on the efforts of others, and there can
be no assurance that such efforts will be successful.
The Company's business may be materially adversely affected by the
continuing efforts of government and third-party payers to contain or reduce the
costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar government control in such jurisdictions. In addition, an
increasing emphasis on managed care in the United States has put, and will
continue to put, pressure on pharmaceutical pricing. Such initiatives and
proposals, if adopted, could decrease the price that the Company receives for
any products it may develop and sell in the future, and thereby have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, to the extent that such proposals or initiatives have a
material adverse effect on other pharmaceutical companies that are
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corporate partners or prospective corporate partners for certain of the
Company's potential products, the Company's ability to commercialize its
potential products may be materially adversely affected.
The Company's ability to commercialize pharmaceutical products may depend
in part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health insurers and other third-party payers. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third-party payers are increasingly challenging the prices charged
for medical products and services. There can be no assurance that any
third-party insurance coverage will be available to patients for any products
developed by the Company. Government and other third-party payors are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new therapeutic products, and by refusing, in
some cases, to provide coverage for uses of approved products for disease
indications for which the FDA has not granted marketing approval. If adequate
coverage and reimbursement levels are not provided by government and third-party
payors for the Company's products, the market acceptance of these products would
be materially adversely affected.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid and
intense technological change. The Company faces, and will continue to face,
competition in the development and marketing of its product candidates from
academic institutions, government agencies, research institutions and
biotechnology and pharmaceutical companies. Competition may arise from other
drug development technologies, methods of preventing or reducing the incidence
of disease, including vaccines, and new small molecule or other classes of
therapeutic agents. There can be no assurance that developments by others will
not render the Company's product candidates or technologies obsolete or
noncompetitive.
Betaseron and Avonex, similar forms of beta-interferon marketed by Berlex
BioSciences and Biogen, Inc., respectively, and Capoxen, a peptide polymer
marketed by Teva, have been approved for the marketing in the United States and
certain other countries for the treatment of relapsing remitting multiple
sclerosis. Tacrine, marketed by Warner-Lambert Co., and Aricept, marketed by
Pfizer Inc, have been approved for the treatment of Alzheimer's dementia. Sales
of these drugs may reduce the available market for any product developed by the
Company for these indications. The Company is developing products for the
treatment of anxiety disorders, which will compete with well-established
products in the benzodiazepene class, including Valium, marketed by Hoffman-La
Roche, Inc., and depression, which will compete with well-established products
in the anti-depressant class, including Prozac, marketed by Eli Lilly & Co.
Certain technologies under development by other pharmaceutical companies could
result in treatments for these and other diseases and disorders being pursued by
the Company. For example, a number of companies are conducting research on
molecules to block CRF to treat anxiety and depression. Other biotechnology and
pharmaceutical companies are developing compounds to treat obesity. In the event
that one or more of these products and/or programs are successful, the market
for the Company's products may be reduced or eliminated.
In addition, if Neurocrine receives regulatory approvals for its products,
manufacturing efficiency and marketing capabilities are likely to be significant
competitive factors. At the present time, Neurocrine has no commercial
manufacturing capability, sales force or marketing experience. In addition, many
of the Company's competitors and potential competitors have substantially
greater capital resources, research and development resources, manufacturing and
marketing experience and production facilities than does Neurocrine. Many of
these competitors also have significantly greater experience than does
Neurocrine in undertaking preclinical testing and clinical trials of new
pharmaceutical products and obtaining FDA and other regulatory approvals.
PATENTS AND PROPRIETARY RIGHTS
The Company files patent applications both in the United States and in
foreign countries, as it deems appropriate, for protection of its proprietary
technology and products. As of December 31, 1997, only one patent has been
issued to the Company; however, the Company otherwise owns or has received
exclusive
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licenses to four issued patents. The Company owns or has exclusive rights to a
total of approximately 120 patent applications pursuant to license agreements
with academic and research institutions, including the Beckman Research
Institute of the City of Hope, the Salk Institute for Biological Studies, and
Leland Stanford Junior University. The Company intends to file additional United
States and foreign applications in the future as appropriate.
The Company's success will depend on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the United States and internationally.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the pharmaceutical industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, the Company intends to seek
patent protection for its proprietary technology and compounds. There can be no
assurance as to the success or timeliness in obtaining any such patents, that
the breadth of claims obtained, if any, will provide adequate protection of the
Company's proprietary technology or compounds, or that the Company will be able
to adequately enforce any such claims to protect its proprietary technology and
compounds. Since patent applications in the United States are confidential until
the patents issue, and publication of discoveries in the scientific or patent
literature tend to lag behind actual discoveries by several months, the Company
cannot be certain that it was the first creator of inventions covered by pending
patent applications or that it was the first to file patent applications for
such inventions.
The degree of patent protection afforded to pharmaceutical inventions is
uncertain and any patents which may issue with regard to the Company's potential
products will be subject to this uncertainty. There can be no assurance that
competitors will not develop competitive products outside the protection that
may be afforded by the claims of the Company's patents. For example, the Company
is aware that other parties have been issued patents and have filed patent
applications in the United States and foreign countries which claim alternative
uses of DHEA, a potential product of the Company, and cover other therapeutics
for the treatment of multiple sclerosis. DHEA is not a novel compound and is not
covered by a composition of matter patent. The issued patents licensed to the
Company covering DHEA are use patents containing claims covering therapeutic
methods and the use of specific compounds and classes of compounds for
neuroregeneration. Other potential products which the Company may develop may
not consist of novel compounds and therefore would not be covered by composition
of matter patent claims. Competitors may be able to commercialize DHEA products
for indications outside of the protection provided by the claims of any use
patents that may be issued to the Company. In this case, physicians, pharmacies
and wholesalers could then substitute a competitor's product for the Company's
product. Use patents may be unavailable or may afford a lesser degree of
protection in certain foreign countries due to the patent laws of such
countries.
The Company may be required to obtain licenses to patents or proprietary
rights of others. As the biotechnology industry expands and more patents are
issued, the risk increases that the Company's potential products may give rise
to claims that such products infringe the patent rights of others. At least one
patent containing claims covering compositions of matter consisting of certain
altered peptide ligand therapeutics for use in modulating the immune response
has issued in Europe, and the Company believes that this patent has been
licensed to a competitor of the Company. There can be no assurance that a patent
containing corresponding claims will not issue in the United States. In
addition, there can be no assurance that the claims of the European patent or
any corresponding claims of any future United States patents or other foreign
patents which may issue will not be infringed by the manufacture, use or sale of
any potential altered peptide ligand therapeutics developed by the Company or
Novartis. Furthermore, there can be no assurance that the Company or Novartis
would prevail in any legal action seeking damages or injunctive relief for
infringement of any patent that might issue under such applications or that any
license required under any such patent would be made available or, if available,
would be available on acceptable terms. Failure to obtain a required license
could prevent the Company and Novartis from commercializing any altered peptide
ligand products which they may develop.
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No assurance can be given that any licenses required under any patents or
proprietary rights of third parties would be made available on terms acceptable
to the Company, or at all. If the Company does not obtain such licenses, it
could encounter delays in product introductions while it attempts to design
around such patents, or could find that the development, manufacture or sale of
products requiring such licenses could be foreclosed. Litigation may be
necessary to defend against or assert such claims of infringement, to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the scope and validity of the proprietary rights of
others. In addition, interference proceedings declared by the United States
Patent and Trademark Office may be necessary to determine the priority of
inventions with respect to patent applications of the Company or its licensors.
Litigation or interference proceedings could result in substantial costs to and
diversion of effort by, and may have a material adverse impact on, the Company.
In addition, there can be no assurance that these efforts by the Company would
be successful.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that relevant inventions will not be
developed by a person not bound by an invention assignment agreement. There can
be no assurance that binding 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 be independently discovered by competitors.
As is commonplace in the biotechnology industry, the Company employs
individuals who were previously employed at other biotechnology or
pharmaceutical companies, including competitors or potential competitors of the
Company. To the extent such Company employees are involved in research areas at
the Company which are similar to those areas in which they were involved at
their former employer, the Company may be subject to claims that such employees
and/or the Company have inadvertently or otherwise used or disclosed the alleged
trade secrets or other proprietary information of the former employers.
Litigation may be necessary to defend against such claims, which could result in
substantial costs and be a distraction to management, and which may have a
material adverse effect on the Company, even if the Company were successful in
defending such claims.
GOVERNMENT REGULATION
Regulation by government authorities in the United States and foreign
countries is a significant factor in the development, manufacture and marketing
of the Company's proposed products and in its ongoing research and product
development activities. All of the Company's products will require regulatory
approval by government agencies prior to commercialization. In particular, human
therapeutic products are subject to rigorous preclinical testing and clinical
trials and other approval procedures of the FDA and similar regulatory
authorities in foreign countries. Various federal and state statutes and
regulations also govern or influence testing, manufacturing, safety, labeling,
storage and record-keeping related to such products and their marketing. The
process of obtaining these approvals and the subsequent substantial compliance
with appropriate federal and state statutes and regulations require the
expenditure of substantial time and financial resources. Any failure by the
Company or its collaborators or licensees to obtain, or any delay in obtaining
or maintaining, regulatory approval could adversely affect the marketing of any
products developed by the Company, its ability to receive product or royalty
revenues and its liquidity and capital resources.
Preclinical testing is generally conducted in laboratory animals to
evaluate the potential safety and the efficacy of a product. The results of
these studies are submitted to the FDA as a part of an IND, which must be
approved before clinical trials in humans can begin. Typically, clinical
evaluation involves a time consuming and costly three-phase process. In Phase I,
clinical trials are conducted with a small number of subjects to determine the
early safety profile, the pattern of drug distribution and metabolism. In Phase
II, clinical trials are conducted with groups of patients afflicted with a
specific disease in order to determine preliminary efficacy, optimal dosages and
expanded evidence of safety. In Phase III, large-scale, multi-center,
comparative trials are conducted with patients afflicted with a target disease
in order to provide enough data to demonstrate with substantial evidence the
efficacy and safety required by the FDA. The FDA closely monitors
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the progress of each of the three phases of clinical trials and may, at its
discretion, re-evaluate, alter, suspend or terminate the testing based upon the
data which have been accumulated to that point and its assessment of the
risk/benefit ratio to the patient.
A physician-IND is an IND that allows a physician to conduct a clinical
trial under less rigorous regulatory review standards. A physician-IND clinical
trial does not replace the need for Company-sponsored clinical trials, but can
provide a preliminary indication as to whether further clinical trials are
warranted and may sometimes facilitate the more formal regulatory review
process.
The results of preclinical testing and clinical trials are submitted to the
FDA in the form of an NDA or BLA for approval to commence commercial sales. In
responding to an NDA or BLA, the FDA may grant marketing approval, request
additional information or deny the application if the FDA determines that the
application does not satisfy its regulatory approval criteria. There can be no
assurance that approvals will be granted on a timely basis (or at all). If
approved, there can be no assurance that such approval will include acceptable
labeling to adequately commercialize the product. Similar regulatory procedures
must also be complied with in countries outside the United States.
To date, the Company or its collaborators have submitted two IND
applications in the United States and Canada with regard to its product
candidates and has commenced clinical trials with regard to two potential
products. A physician-IND Phase II clinical trial was initiated in March 1996
with regard to the use of DHEA for the treatment of Alzheimer's disease.
However, such clinical trials are not under the full control of the Company. A
multi-center Phase II/III clinical trial was initiated in Canada in early 1997
with respect to the same potential product under the regulatory authority of the
Canadian HPB. However, a physician-IND clinical trial does not replace the need
for Company-sponsored clinical trials. Even if Canadian regulatory approval is
obtained, the Company will be required to undertake additional clinical testing
to obtain FDA regulatory approval in the United States. No assurance can be
given that the Company will be able to obtain FDA or other governmental
regulatory approval for any products.
In late 1997, the Company's corporate partner, Janssen, initiated Phase I
clinical trials on a CRF receptor antagonist for anxiety and depression,
representing the Company's first CRF product to enter clinical trials. However,
results obtained in animals are not necessarily predictive of results obtained
in man, and no assurance can be given that the Company's partner will
successfully complete Phase I clinical testing or progress to later clinical
trials in a timely manner, or at all.
The results from preclinical testing and early clinical trials may not be
predictive of results obtained in later clinical trials, and there can be no
assurance that clinical trials conducted by the Company or its corporate
partners will demonstrate sufficient safety and efficacy to obtain the requisite
regulatory approvals or will result in marketable products or marketable
indications. In addition, late stage clinical trials are often conducted with
patients having the most advanced stages of disease. During the course of
treatment, these patients can die or suffer other adverse medical effects for
reasons that may not be related to the pharmaceutical agent being tested but
which can nevertheless adversely affect clinical trial results. A number of
companies in the biotechnology and pharmaceutical industries have suffered
significant setbacks in advanced clinical trials, even after promising results
in earlier trials. If the Company's drug candidates are not shown to be safe and
effective in clinical trials, the resulting delays in developing other compounds
and conducting related preclinical testing and clinical trials, as well as the
potential need for additional financing, would have a material adverse effect on
the Company's business, financial condition and results of operations.
The rate of completion of clinical trials conducted by the Company or its
corporate partners may be delayed by many factors, including slower than
expected patient recruitment or unforeseen safety issues. Any delays in, or
termination of, the Company's clinical trials would have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that Neurocrine will be permitted by regulatory
authorities to undertake clinical trials for its products or, if such trials are
conducted, that any of the Company's product candidates will prove to be safe
and efficacious or will receive regulatory approvals.
The Company is required to conduct its research activities in compliance
with good laboratory practice regulations enforced by FDA. The Company is also
subject to various Federal, state and local laws, regulations and
recommendations relating to safe working conditions, laboratory manufacturing
practices, and the use and
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disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with the Company's
research. The extent of government regulation which might result from future
legislation or administrative action cannot be predicted accurately.
SCIENTIFIC ADVISORY BOARD
Neurocrine has assembled a Scientific Advisory Board that currently
consists of 16 individuals. Members of the Scientific Advisory Board are leaders
in the fields of neurobiology, immunology, endocrinology, psychiatry and
medicinal chemistry. Scientific Advisory Board members meet as a group at least
yearly to advise the Company in the selection, implementation and prioritization
of its research programs. Certain members meet more frequently to advise the
Company with regard to its specific programs.
The Scientific Advisory Board presently consists of the following
individuals:
Floyd E. Bloom, M.D., is Chairman of the Department of Neuropharmacology at
The Scripps Research Institute. Dr. Bloom is an internationally recognized
expert in the fields of neuropharmacology and neurobiology. He is the current
editor of the journal, Science.
Michael Brownstein, M.D., Ph.D., is Chief of the Laboratory of Cell Biology
at the National Institute of Mental Health. He is a recognized expert in
molecular pharmacology as it applies to the field of neuroendocrinology, where
he has defined many of the pharmaceutically important neurotransmitter receptors
and transporter systems.
Iain Campbell, Ph.D., is an Associate Member of the Department of
Neuropharmacology at The Scripps Research Institute. Dr. Campbell is an expert
in cytosine activation in autoimmune diseases and neuronal degeneration.
George P. Chrousos, M.D., Sc.D., is Chief of the Pediatric Endocrinology
Section at the National Institute of Child Health and Human Development. He has
investigated the role of stress hormones in pathological conditions such as
Cushing's disease, anxiety-related disorders and rheumatoid arthritis.
Caleb E. Finch, Ph.D., is the Arco and William F. Kieschnick Professor of
Neurobiology of Aging at the University of Southern California. He is an
internationally recognized expert in the field of molecular gerontology and the
genomic control of mammalian development and aging. His recent work has focused
on the role of cytokines in neuronal protection and aging.
Stephen M. Hedrick, Ph.D., is Professor and Chairman of Cell Biology at the
University of California, San Diego. Dr. Hedrick is an expert in T-cell
immunology and co-discovered the first T-cell receptor genes and identified the
regions responsible for antigen binding. He is an editor for the Journal of
Immunology.
Florian Holsboer, M.D., Ph.D., is Director at the Max Planck Institute fur
Psychiatrie. Dr. Holsboer is an international expert on the role of
glucocorticoids and neuropeptides, particularly CRF, in neuropsychiatric
disorders. He coordinates the efforts of several hundred scientists and
clinicians at the Max Planck Institute, a major European neuropsychiatric
institute.
George F. Koob, Ph.D., is a Member of the Department of Neuropharmacology
at The Scripps Research Institute and an Adjunct Professor in the Departments of
Psychology and Psychiatry at the University of California, San Diego. Dr. Koob
is an internationally recognized behavioral pharmacology expert on the role of
peptides in the central nervous system, the neurochemical basis of addiction and
in the development of preclinical behavioral procedures for the screening of
anxiolytic and antidepressant drugs and memory enhancers.
Phillip J. Lowry, Ph.D., is Professor and Head of the Department of
Biochemistry and Physiology at the University of Reading in Great Britain. Dr.
Lowry is an internationally recognized biochemical endocrinologist whose work
has focused on the purification and characterization of some of the key hormonal
mediators of the endocrine response to stress. Dr. Lowry is a member of the
European Neuroscience Steering Committee, the European Neuroendocrine
Association and the Committee of British Endocrinology.
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Joseph B. Martin, M.D., Ph.D., is Chancellor and Professor of Neurology at
the University of California, San Francisco. Dr. Martin is an internationally
recognized expert in clinical and basic research in neurology and
neuroendocrinology and the etiology of hypothalamic diseases, and was one of the
first neurologists to embrace the role of the central nervous system on immune
function.
Bruce S. McEwen, Ph.D., is Professor and Head of the Harold and Margaret
Milliken Hatch Laboratory of Neuroendocrinology at The Rockefeller University.
Dr. McEwen has identified and studied the function of intracellular receptors
for neuroactive steroid hormones in the brain and immune system, in relation to
stress and sex differences. Dr. McEwen is also President of the Society for
Neuroscience.
Charles B. Nemeroff, M.D., Ph.D., is Chairman and Professor of the
Department of Psychiatry and Behavioral Sciences at Emory University School of
Medicine. Dr. Nemeroff is an internationally recognized expert on the effects of
neuropeptides on behavior and their relevance in clinically important conditions
such as depression, anxiety and schizophrenia, and has published over 400
articles on this subject.
Lawrence J. Steinman, M.D., is Chief Scientist, Neuroimmunology of the
Company and a member of Neurocrine's Founding Board of Scientific and Medical
Advisors and its Executive Committee. See "Item 10 -- Executive Officers and
Directors of the Registrant."
Wylie W. Vale, Ph.D., is Chief Scientist, Neuroendocrinology of the Company
and a member of Neurocrine's Founding Board of Scientific and Medical Advisors
and its Executive Committee. See "Item 10 -- Executive Officers and Directors of
the Registrant."
Stanley J. Watson, Jr., M.D., Ph.D., is Professor and Associate Chair for
Research in the Department of Psychiatry and Co-Director of the Mental Health
Research Institute at the University of Michigan. Dr. Watson is a recognized
expert in neuropeptides and their receptors and their role in psychiatric
diseases and behavior. Dr. Watson is also a member of the Institute of Medicine
of the National Academy of Sciences.
Each of the members of the Scientific Advisory Board have signed consulting
agreements that contain confidentiality provisions and restrict the members of
the Scientific Advisory Board from competing with the Company for the term of
the agreement. Each member of the Scientific Advisory Board receives either a
per diem consulting fee or a retainer fee and is anticipated to provide at least
five days of consulting per year. Each member also has received stock or stock
options in the Company, which vest over time. All but one member of the
Scientific Advisory Board is a full-time employee of a university or research
institute that has regulations and policies which limit the ability of such
personnel to act as part-time consultants or in other capacities for any
commercial enterprise, including the Company. A change in these regulations or
policies could adversely affect the relationship of the Scientific Advisory
Board member with the Company.
INSURANCE
The Company maintains product liability insurance for clinical trials in
the amount of $5.0 million per occurrence and $5.0 million in the aggregate. The
Company intends to expand its insurance coverage to include the sale of
commercial products if marketing approval is obtained for products in
development. However, insurance coverage is becoming increasingly expensive, and
no assurance can be given that the Company will be able to maintain insurance
coverage at a reasonable cost or in sufficient amounts to protect the Company
against losses due to liability. There can also be no assurance that the Company
will be able to obtain commercially reasonable product liability insurance for
any products approved for marketing. A successful product liability claim or
series of claims brought against the Company could have a material adverse
effect on its business, financial condition and results of operations.
EMPLOYEES
As of December 31, 1997, the Company had 108 employees, consisting of 92
full-time and 16 part-time employees. Of the full-time employees, 39 hold Ph.D.,
M.D., or equivalent degrees. None of the Company's employees are represented by
a collective bargaining arrangement, and the Company believes its relationship
with its employees is good. The Company is highly dependent on the principal
members of its management and scientific staff. The loss of services of any of
these personnel could impede the achievement of the Company's development
objectives. Furthermore, recruiting and retaining qualified scientific personnel
to
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perform research and development work in the future will also be critical to the
Company's success. There can be no assurance that the Company will be able to
attract and retain personnel on acceptable terms given the competition among
biotechnology, pharmaceutical and health care companies, universities and
non-profit research institutions for experienced scientists. In addition, the
Company relies on members of its Scientific Advisory Board and a significant
number of consultants to assist the Company in formulating its research and
development strategy.
ITEM 2. PROPERTIES
The Company leases approximately 48,000 square feet of corporate and
laboratory facilities at 3050 Science Park Road, San Diego, California. The
lease extends through 2006. The Company has sublet 19,000 square feet of this
facility to a third party for up to four years. The Company has also leased an
additional 2,000 square-foot animal facility for a term of two years. The
Company believes that its facilities will be adequate to meet its research and
development needs through 1998.
In May 1997, the Company purchased two adjacent parcels of land in San
Diego for approximately $5.0 million in cash. The Company sold one parcel to a
third party in 1997, but expects to repurchase the land and lease the parcel to
Science Park Center LLC, a California limited liability company (the "LLC"), of
which the Company owns a minority interest. The LLC will construct an expanded
laboratory and office complex which will be leased by the Company under a 15
year operating lease. The Company has the option to purchase the facility at any
time during the lease at a predetermined price. The remaining parcel will be
held by the Company until such time as the Company's growth requires additional
expansion.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
System under the symbol NBIX since the Company's initial public offering on May
23, 1996. Prior to that time there was no established public trading market for
the Company's Common Stock. The following table sets forth for the periods
indicated the high and low sale price for the Common Stock.
HIGH LOW
FISCAL YEAR 1997 ---- ---
4th Quarter................................................ 11 7/8 7 1/2
3rd Quarter................................................ 10 3/4 7 7/8
2nd Quarter................................................ 10 1/2 7
1st Quarter................................................ 13 1/4 8 5/8
FISCAL YEAR 1996
4th Quarter................................................ 13 9 1/4
3rd Quarter................................................ 12 3/8 6 1/2
2nd Quarter (from May 23, 1996)............................ 13 1/4 8 1/8
As of February 28, 1998, there were approximately 234 holders of record of
Common Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since its
inception and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Financial
Statements of the Company, which have been audited by Ernst & Young LLP. The
information presented below should be read in conjunction with the Company's
Financial Statements and Notes thereto included elsewhere in this Form 10-K. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SELECTED FINANCIAL DATA
The following tables set forth certain financial data with respect to the
Company (in thousands, except net income (loss) per share). The selected
financial data should be read in conjunction with the consolidated financial
statements and notes thereto.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
------- -------- -------- -------- -------
STATEMENT OF OPERATIONS DATA:
Revenues:
Sponsored research.................. $11,250 $ 7,344 $ 3,000 $ -- $ --
License fees........................ -- 5,000 2,000 -- --
Milestones.......................... 10,250 4,000 750 -- --
Other revenues...................... 4,644 2,872 356 162 --
------- -------- -------- -------- -------
Total revenues.............. 26,144 19,216 6,106 162 --
Operating expenses:
Research and development............ 19,888 12,569 7,740 6,231 2,804
General and administrative.......... 5,664 3,697 2,728 2,223 1,550
------- -------- -------- -------- -------
Total operating expenses.... 25,552 16,266 10,468 8,454 4,354
Income (loss) from operations......... 592 2,950 (4,362) (8,292) (4,354)
Interest income, net.................. 3,931 2,598 839 627 118
Other income (expense)................ 818 574 177 (41) --
------- -------- -------- -------- -------
Net income (loss) before income
taxes............................... 5,341 6,122 (3,346) (7,706) (4,236)
Income taxes.......................... 214 248 -- -- --
------- -------- -------- -------- -------
Net income (loss)..................... $ 5,127 $ 5,874 $ (3,346) $ (7,706) $(4,236)
Earnings (loss) per share:
Basic............................... $ 0.30 $ 0.39 $ (0.29) $ (0.70) $ (0.69)
Diluted............................. $ 0.28 $ 0.36 $ (0.29) $ (0.70) $ (0.69)
Shares used in calculation of earnings
(loss) per share
Basic............................... 16,930 14,971 11,684 10,933 6,123
Diluted............................. 18,184 16,127 11,684 10,933 6,123
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments*........................ $75,092 $ 69,920 $ 18,696 $ 18,228 $21,639
Total assets................ 91,903 77,957 24,012 22,344 24,436
Long-term debt........................ 722 847 1,631 1,733 758
Accumulated deficit................... (4,895) (10,022) (15,895) (12,549) (4,843)
Total stockholders'
equity.................... 83,152 72,767 19,225 18,743 22,137
- ---------------
* Excludes funds held by NPI, which is available to fund certain of the
Company's research and development activities.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations of Neurocrine Biosciences, Inc. ("Neurocrine" or the
"Company") contains forward-looking statements which involve risks and
uncertainties, pertaining generally to the expected continuation of the
Company's collaborative agreements, the receipt of research payments thereunder,
the future achievement of various milestones in product development and the
receipt of payments related thereto, the potential receipt of royalty payments,
and financial results and operations. Actual results could differ materially
from those anticipated in such forward-looking statements as a result of various
factors, including those set forth below, and those outlined in "Item
1 -- Business" above.
OVERVIEW
Since the founding of the Company in January 1992, Neurocrine has been
engaged in the discovery and development of novel pharmaceutical products for
diseases and disorders of the central nervous and immune systems. To date,
Neurocrine has not generated any revenues from the sale of products, and does
not expect to generate any product revenues for the foreseeable future. The
Company's revenues are expected to come from its strategic alliances for the
next several years.
Results of Operations. Revenues increased to $26.1 million in 1997 compared
with $19.2 million in 1996 and $6.1 million in 1995. These increases were
primarily due to increased sponsored research, license fees, and milestone
revenues recognized under the Janssen, Novartis, and Eli Lilly collaborations.
Research and development expenses increased to $19.9 million in 1997
compared with $12.6 million in 1996 and $7.7 million in 1995. These increases
reflect continued additions to scientific personnel and related support
expenditures as the Company increased its research, development, and clinical
activities primarily in the CRF and Altered Peptide Ligand programs and the
recognition of $1.1 million of research and development expenses related to the
Company's minority owned investee, NPI.
General and administrative expenses increased to $5.7 million in 1997
compared with $3.7 million in 1996 and $2.7 million in 1995. These increases
reflect the additional administrative staff required to support increased
research, development and clinical activities, increased facility expenses,
increased patent costs and expanded business development activities.
Interest income increased to $4.1 million in 1997 compared with $2.9
million in 1996 and $1.1 million in 1995. These increases were due to increased
investment income attributable to increased cash and short-term investments
purchased with proceeds from the Company's prior financings and corporate
collaborators.
Net income decreased to $5.1 million or $0.30 per share ($0.28 assuming
dilution) in 1997 compared with net income of $5.9 million or $0.39 per share
($0.36 assuming dilution) for 1996 and increased compared to a net loss of $3.3
million or $0.29 per share in 1995. The decrease in net income from 1996 to 1997
was primarily due to increased research and development expenditures. The
increase in net income from 1995 to 1996 was primarily attributable to increased
revenues earned under the Company's collaborations. Neurocrine has incurred a
cumulative deficit of approximately $4.9 million as of December 31, 1997 and
expects to incur additional operating losses in the future which are potentially
greater than losses in prior years.
Liquidity and Capital Resources. At December 31, 1997 the Company's cash,
cash equivalents, and short-term investments totaled $75.1 million. The Company
invests its excess cash primarily in investment grade debt instruments,
marketable debt securities of U.S. government agencies, and high grade
commercial paper. Management has established guidelines relative to
diversification and maturities that maintain safety and liquidity. The primary
market risk associated with such investments is vulnerability to changes in
short-term and long-term U.S. prime interest rates. See "Notes to Financial
Statements -- Notes 1 and 2" below for further information regarding the
Company's investments.
Net cash provided by operating activities in 1997 increased to $11.0
million compared with $6.7 million in 1996 and net cash used of $2.4 million in
1995. The 1997 and 1996 increase in cash provided by operating
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activities and the 1995 decline in cash used in operating activities was
primarily the result of the timing of cash receipts under the Janssen, Novartis
and Eli-Lilly collaborations.
Net cash used in investing activities was $7.2 million in 1997 compared
with $48.6 million used in 1996 and $933,000 provided by investing activities in
1995. The cash used in investing activities in 1997 and 1996 resulted from the
purchase of short-term investments with proceeds from the Company's prior
financings and the sale of Common Stock to corporate collaborators. The cash
provided by investing activities in 1995 resulted from the timing differences of
various investment purchases and sales/maturities, in addition to the
fluctuations in the Company's portfolio mix between cash and cash equivalent and
short-term investment holdings.
Net cash provided by financing activities was $659,000 in 1997 compared
with $46.8 million in 1996 and $3.2 million in 1995. The cash provided in 1997
resulted from issuances of Common Stock upon the exercises of stock options and
warrants and proceeds from a note payable used to finance the purchase of land.
The 1997 decrease resulted from the decline in outside equity financings during
this period. The 1996 increase resulted from proceeds received from the
Company's initial public offering and the sale of Common Stock to corporate
collaborators in May 1996.
Neurocrine has primarily financed its operations through proceeds from the
sale of Common Stock in various private and public offerings as well as to
corporate collaborators.
In February 1995, the Company entered into a three year collaborative
research and development agreement with Janssen for the development of CRF
receptor antagonists for the treatment of anxiety, depression and substance
abuse. Janssen paid the Company $3.7 million in 1997 and $3.0 million in 1996
for sponsored research. Milestone payments totaled $1.5 million and $1.0 million
for 1997 and 1996, respectively. The collaborative research portion of the
agreement was completed as scheduled in 1997 with the selection of a clinical
candidate and the commencement of clinical trials in Europe. The Company may
continue to receive milestone payments and royalties upon the successful
continuation of the development portion of the agreement.
In January 1996, the Company entered into an agreement with Novartis to
develop altered peptide ligands for the treatment of multiple sclerosis.
Novartis paid the Company $7.2 million in 1997 and $8.5 million in 1996 for
license fees and research funding. Milestone payments were $3.8 million and $3.0
million for 1997 and 1996, respectively.
In March 1996, the Company participated in the formation of a research and
development company, Neuroscience Pharma, Inc. (NPI), with a group of Canadian
investors.
In October 1996, the Company entered into a Collaborative Research
Agreement with Eli Lilly and Company to discover and develop corticotropin
releasing factor (CRF) -- binding protein ligand inhibitors for the treatment of
central-nervous system disorders, including obesity and dementia, such as that
associated with Alzheimer's disease. Lilly paid the Company $4.1 million in 1997
and $1.3 million in 1996 for research. Milestone payments totaled $5.0 million
in 1997.
In May 1997, the Company purchased two adjacent parcels of land in San
Diego for approximately $5.0 million in cash. The Company sold one parcel to a
third party in 1997, but expects to repurchase the land and lease the parcel to
Science Park Center LLC, a California limited liability company (the "LLC"), of
which the Company owns a minority interest. The LLC will construct an expanded
laboratory and office complex which will be leased by the Company under a 15
year operating lease. The Company has the option to purchase the facility at any
time during the lease at a predetermined price. The remaining parcel will be
held by the Company until such time as the Company's growth requires additional
expansion.
In December 1997, the Company issued 600,502 shares of Common Stock upon
the exercise of warrants by certain of the original investors in NPI.
The Company believes that its existing capital resources, together with
interest income and future payments due under the strategic alliances, will be
sufficient to satisfy its current and projected funding requirements at least
through 2000. However, no assurance can be given that such capital resources and
payments will be sufficient to conduct its research and development programs as
planned. The amount and
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timing of expenditures will vary depending upon a number of factors, including
progress of the Company's research and development programs.
Year 2000 Compliance. The Company has implemented systems and software
infrastructures which are Year 2000 compliant. Although the Company believes its
key financial, information and operational systems are Year 2000 compliant,
there can be no assurance that other defects will not be discovered in the
future. The Company is unable to control whether the firms and vendors that it
does business with currently, and in the future, will have systems that are Year
2000 compliant. The Company's operations could be affected to the extent that
the firms and vendors would be unable to provide services and ship products.
However, management does not believe that Year 2000 changes will have a material
impact on its business, financial condition or results of operations.
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations of Neurocrine Biosciences, Inc., as well as the
preceding sections of this Annual Report on Form 10-K, contain forward-looking
statements which involve risks and uncertainties, pertaining generally to the
expected continuation of the Company's collaborative agreements, the receipt of
research payments thereunder, the future achievement of various milestones in
product development and the receipt of payments related thereto, the potential
receipt of royalty and profit-sharing payments, the anticipated dates of
commencement of selection of development candidates and the commencement of
clinical trials, the successful continuation of the Company's research and
development programs and the potential development of future products, the
period of time the Company's existing capital resources will meet its funding
requirements, and the Company's financial results and operations. Actual results
could differ materially from those anticipated in such forward-looking
statements as a result of various factors, including those outlined in "Item
1 -- Business" above. The Company's business is subject to significant risks,
including but not limited to, the risks inherent in its research and development
activities, including uncertainties associated with the successful continuation
of the Company's strategic collaborations, uncertainties associated with the
successful accomplishment of milestones pursuant to these collaborations, the
successful completion of clinical trials, the lengthy, expensive and uncertain
process of seeking regulatory approvals, uncertainties associated both with
obtaining and enforcing its patents and with patent rights of others,
uncertainties regarding government reforms and of product pricing and
reimbursement levels, technological change and competition, manufacturing
uncertainties, and uncertainties associated with dependence on third parties.
Even if the Company's product candidates appear promising at an early stage of
development, they may not reach the market for numerous reasons. Such reasons
include the possibilities that the product will be ineffective or unsafe during
clinical trials, will fail to receive necessary regulatory approvals, will be
difficult to manufacture on large scale, will be uneconomical to market or will
be precluded from commercialization by proprietary rights of third parties.
Neurocrine will require substantial additional funding for the continuation
of its research and product development programs, for progress with preclinical
testing and clinical trials, for operating expenses, for the pursuit of
regulatory approvals for its product candidates, for the costs involved in
filing and prosecuting patent applications and enforcing patent claims, if any,
the cost of product in-licensing and any possible acquisitions, and may require
additional funding for establishing manufacturing and marketing capabilities in
the future. The Company may seek to access the public or private equity markets
whenever conditions are favorable. The Company may also seek additional funding
through strategic alliances and other financing mechanisms, potentially
including off-balance sheet financing. There can be no assurance that adequate
funding will be available on terms acceptable to the Company, if at all. If
adequate funds are not available, the Company may be required to curtail
significantly one or more of its research or development programs or obtain
funds through arrangements with collaborative partners or others. This may
require the Company to relinquish rights to certain of its technologies or
product candidates.
Neurocrine expects to incur substantial additional operating expenses over
the next several years as its research, development, preclinical testing and
clinical trial activities increase. To the extent that the Company is unable to
obtain third-party funding for such expenses, the Company expects that increased
expenses will result in increased losses from operations. There can be no
assurance that the Company's products under development will be successfully
developed or that its products, if successfully developed, will generate
revenues sufficient to enable the Company to earn a profit.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See the list of the Company's Financial Statements filed with this Form
10-K under Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Information required by this item will be contained in the Company's Notice
of 1998 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 1997 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be contained in the Company's Notice
of 1998 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 1997 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be contained in the Company's Notice
of 1998 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 1997 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be contained in the Company's Notice
of 1998 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 1997 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
1. List of Financial Statements. The following financial statements of
Neurocrine Biosciences, Inc. and Report of Ernst & Young LLP, Independent
Accountants, are included in this report:
Report of Ernst & Young LLP, Independent Auditors
Balance Sheet as of December 31, 1997 and 1996
Statement of Operations for the years ended December 31, 1997, 1996 and
1995
Statement of Stockholders' Equity for the years ended December 31, 1997,
1996 and 1995
Statement of Cash Flows for the years ended December 31, 1997, 1996 and
1995
Notes to Financial Statements
2. List of all Financial Statement schedules. All schedules are omitted
because they are not applicable or the required information is shown in
the Financial Statements or notes thereto.
3. List of Exhibits Required by Item 601 of Regulation S-K. See part (c)
below.
(b)Reports on Form 8-K. No reports on Form 8-K were filed during the quarter
ended December 31, 1997.
26
27
(c)Exhibits. The following exhibits are filed as part of, or incorporated by
reference into, this report:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Certificate of Incorporation.(1)
3.2 Bylaws.(1)
3.3 Certificate of Amendment of Bylaws.
4.1 Form of Lock-Up Agreement.(1)
4.2 Form of Common Stock Certificate.(1)
4.3 Form of warrant issued to existing warrant holders.(1)
4.4 Form of Series A warrant issued in connection with the
execution by the Company of the Unit Purchase Agreement (see
below).(1)
4.5 New Registration Rights Agreement dated March 29, 1996 among
the Company and the investors signatory thereto.(1)
4.6 Letter of Intent between Northwest NeuroLogic, Inc. and the
Company dated February 27, 1998.(2)
10.1 Purchase and Sale Agreement and Escrow Instructions between
MS Vickers II, LLC and the Company dated February 13,
1997.(3)
10.2 1992 Incentive Stock Plan, as amended.
10.3 1996 Employee Stock Purchase Plan.(1)
10.4 1996 Director Stock Option Plan and form of stock option
agreement.(1)
10.5 Form of Director and Officer Indemnification Agreement.(1)
10.6 Employment Agreement dated March 1, 1997, between the
Registrant and Gary A. Lyons, as amended.(4)
10.7 Employment Agreement dated March 1, 1997, between the
Registrant and Errol B. De Souza, Ph.D.(4)
10.8 Employment Agreement dated March 1, 1997, between the
Registrant and Paul W. Hawran.(4)
10.9 Employment Agreement dated March 1, 1997, between the
Registrant and Stephen Marcus, M.D.
10.10 Consulting Agreement dated September 25, 1992, between the
Registrant and Wylie A. Vale, Ph.D.(1)
10.11 Consulting Agreement effective as of January 1, 1992,
between the Registrant and Lawrence J. Steinman, M.D.(1)
10.12 Lease Agreement dated June 1, 1993, between the Registrant
and Hartford Accident and Indemnity Company, as amended.(1)
10.13 Exclusive License Agreement dated as of July 1, 1993, by and
between the Beckman Research Institute of the City of Hope
and the Registrant covering the treatment of nervous system
degeneration and Alzheimer's disease.(1)
10.14 Exclusive License Agreement dated as of July 1, 1993, by and
between the Beckman Research Institute of the City of Hope
and the Registrant covering the use of Pregnenolone for the
enhancement of memory.(1)
10.15 License Agreement dated May 20, 1992, by and between The
Salk Institute for Biological Studies and the Registrant.(1)
10.16 License Agreement dated July 17, 1992, by and between The
Salk Institute for Biological Studies and the Registrant.(1)
27
28
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.17 License Agreement dated November 16, 1993, by and between
The Salk Institute for Biological Studies and the
Registrant.(1)
10.18 License Agreement dated October 19, 1992, by and between The
Board of Trustees of the Leland Stanford Junior University
and the Registrant.(1)
10.19 Agreement dated January 1, 1995, by and between the
Registrant and Janssen Pharmaceutica, N.V.(1)
10.20 Letter Agreement dated January 19, 1996, by and between the
Registrant and Ciba-Geigy Limited.(1)
10.21+ Unit Purchase Agreement dated March 29, 1996, by and between
Neuroscience Pharma (NPI) Inc., the Registrant and the
investors signatory thereto.(1)
10.22+ Exchange Agreement dated March 29, 1996, by and between
Neurocrine Biosciences (Canada) Inc., the Registrant and the
investors signatory thereto.(1)
10.23+ Research and Development Agreement dated March 29, 1996, by
and between Neurocrine Biosciences (Canada) Inc. and
Neuroscience Pharma (NPI) Inc.(1)
10.24+ Intellectual Property and License Grants Agreement dated
March 29, 1996, by and between the Registrant and Neurocrine
Biosciences (Canada) Inc.(1)
10.25+ Development and Commercialization Agreement dated December
20, 1996, by and between Ciba-Geigy Ltd. and the
Registrant.(5)
10.26+ Letter and Purchase Order dated June 7, 1996, by and between
Ciba-Geigy and the Registrant.(5)
10.27 Third Lease Amendment dated June 6, 1996, by and between
Talcott Realty I Limited Partnership and the Registrant.(5)
10.28+ Research and License Agreement dated October 15, 1996,
between the Registrant and Eli Lilly and Company.(5)
10.29+ Lease between Science Park Center LLC and the Company.(6)
10.30+ Option Agreement between Science Park Center LLC (Optionor)
and the Company (Optionee).(6)
10.31+ Construction Loan Agreement.(6)
10.32 Secured Promissory Note.(6)
10.33+ Operating Agreement for Science Park Center LLC.(6)
10.34 Information and Registration Rights Agreement dated
September 15, 1992, as amended to date.(1)
10.35 Form of incentive stock option agreement and nonstatutory
stock option agreement for use in connection with 1992
Incentive Stock Plan.(1)
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney (reference is made to the following page
of this Form 10-K).
27.1 Financial Data Schedule for the fiscal year ended December
31, 1997.
27.2 Financial Data Schedule for the fiscal year ended December
31, 1996.
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-03172).
(2) Incorporated by reference to the Company's Report on Form 8-K filed on March
13, 1998.
(3) Incorporated by reference to the Company's amended Quarterly Report on Form
10-Q filed on August 15, 1997.
28
29
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed on August 14, 1997.
(5) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1996, as amended.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed on November 14, 1997.
* Confidential treatment has been requested with respect to certain portions
of the exhibit.
+ Confidential treatment has been granted with respect to certain portions of
the exhibit.
(d) Financial Statement Schedules
See Item 14(a)(2) above.
29
30
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.
NEUROCRINE BIOSCIENCES, INC.,
a Delaware Corporation
By: /s/ GARY A. LYONS
------------------------------------
Gary A. Lyons
President and Chief Executive
Officer
Date: March 31, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gary A. Lyons and Paul W. Hawran, jointly
and severally his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendment to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GARY A. LYONS President, Chief Executive Officer and March 31, 1998
- ------------------------------------ Director (Principal Executive Officer)
Gary A. Lyons
/s/ PAUL W. HAWRAN Chief Financial Officer (Principal Financial March 31, 1998
- ------------------------------------ and Accounting Officer)
Paul W. Hawran
/s/ HARRY F. HIXSON, JR. Chairman of the Board of Directors March 31, 1998
- ------------------------------------
Harry F. Hixson, Jr.
/s/ DAVID E. ROBINSON Director March 31, 1998
- ------------------------------------
David E. Robinson
/s/ JOSEPH A. MOLLICA Director March 31, 1998
- ------------------------------------
Joseph A. Mollica
/s/ ERROL B. DESOUZA Executive Vice President, Research and March 31, 1998
- ------------------------------------ Development and Director
Errol B. DeSouza
/s/ WYLIE W. VALE Director March 31, 1998
- ------------------------------------
Wylie W. Vale
30
31
NEUROCRINE BIOSCIENCES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... 32
Balance Sheet............................................... 33
Statement of Operations..................................... 34
Statement of Stockholders' Equity........................... 35
Statement of Cash Flows..................................... 36
Notes to Financial Statements............................... 37
31
32
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Neurocrine Biosciences, Inc.
We have audited the accompanying balance sheet of Neurocrine Biosciences,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three 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 Neurocrine Biosciences, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
San Diego, California
February 3, 1998,
except for Note 10,
for which the date is
February 27, 1998
32
33
NEUROCRINE BIOSCIENCES, INC.
BALANCE SHEET
ASSETS
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
Current assets
Cash and cash equivalents................................... $ 15,771,099 $ 11,325,361
Short-term investments, available for sale................ 59,321,095 58,594,853
Receivable under collaborative agreements................. 193,784 1,329,513
Other current assets...................................... 1,091,653 840,962
------------ ------------
Total current assets.............................. 76,377,631 72,090,689
Property and equipment, net................................. 8,846,179 3,546,420
Licensed technology and patent application costs, net....... 1,185,384 1,443,403
Investment in NPI........................................... 3,343,740 --
Other assets................................................ 2,150,451 876,070
------------ ------------
Total assets...................................... $ 91,903,385 $ 77,956,582
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 1,822,173 $ 800,157
Accrued liabilities....................................... 2,756,352 1,564,889
Deferred revenue.......................................... 1,918,750 918,750
Current portion of long-term debt......................... 872,595 783,718
------------ ------------
Total current liabilities......................... 7,369,870 4,067,514
Long-term debt.............................................. 721,894 846,744
Deferred rent............................................... 659,146 275,356
Commitments
Stockholders' equity
Preferred Stock, $0.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding........... -- --
Common Stock, no par value: authorized
shares -- 100,000,000 issued and outstanding
shares -- 17,686,802 in 1997 and 16,776,614 in 1996.... 88,604,106 83,251,404
Deferred compensation..................................... (439,582) (377,057)
Notes receivable from stockholders........................ (119,848) (127,704)
Unrealized gains on short-term investments................ 2,500 41,870
Accumulated deficit....................................... (4,894,701) (10,021,545)
------------ ------------
Total stockholders' equity........................ 83,152,475 72,766,968
------------ ------------
Total liabilities and stockholders' equity........ $ 91,903,385 $ 77,956,582
============ ============
See accompanying notes.
33
34
NEUROCRINE BIOSCIENCES, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
---- ----------- -----------
Revenues:
Sponsored research................................ $11,250,000 $ 7,343,750 $ 3,000,000
License fees...................................... -- 5,000,000 2,000,000
Milestones........................................ 10,250,000 4,000,000 750,000
Other revenues.................................... 4,643,616 2,871,912 355,750
----------- ----------- -----------
Total revenues............................ 26,143,616 19,215,662 6,105,750
Operating expenses:
Research and development.......................... 19,887,917 12,569,114 7,740,128
General and administrative........................ 5,663,580 3,696,515 2,728,342
----------- ----------- -----------
Total operating expenses.................. 25,551,497 16,265,629 10,468,470
Income (loss) from operations....................... 592,119 2,950,033 (4,362,720)
Interest income..................................... 4,083,552 2,870,407 1,137,004
Interest expense.................................... (152,817) (272,464) (297,675)
Other income........................................ 818,078 573,627 177,001
----------- ----------- -----------
Income (loss) before income taxes................... 5,340,932 6,121,603 (3,346,390)
Income taxes........................................ 214,088 247,683 --
----------- ----------- -----------
Net income (loss)................................... $ 5,126,844 $ 5,873,920 $(3,346,390)
=========== =========== ===========
Earnings (loss) per common share
Basic............................................. $ 0.30 $ 0.39 $ (0.29)
Diluted........................................... $ 0.28 $ 0.36 $ (0.29)
Shares used in the calculation of earnings (loss)
per share
Basic............................................. 16,929,925 14,970,734 11,683,877
Diluted........................................... 18,184,458 16,127,034 11,683,877
See accompanying notes.
34
35
NEUROCRINE BIOSCIENCES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
UNREALIZED
GAINS
NOTES (LOSSES)
RECEIVABLE ON TOTAL
DEFERRED FROM SHORT-TERM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT COMPENSATION STOCKHOLDERS INVESTMENTS DEFICIT EQUITY
---------- ----------- ------------ ------------ ----------- ------------ -------------
Balance at December 31,
1994....................... 11,059,426 $31,463,666 $ -- $(148,263) $(23,535) $(12,549,075) $18,742,793
Issuance of Common Stock for
cash....................... 659,635 3,730,000 -- -- -- -- 3,730,000
Issuances of Common Stock for
services................... 4,040 20,200 -- -- -- -- 20,200
Payment on notes
receivable................. -- -- -- 10,086 -- -- 10,086
Deferred compensation related
to grant of stock
options.................... -- 384,075 (384,075) -- -- -- --
Amortization of deferred
compensation............... -- -- 41,396 -- -- -- 41,396
Unrealized gains on
short-term investments..... -- -- -- -- 26,854 -- 26,854
Net loss..................... -- -- -- -- -- (3,346,390) (3,346,390)
---------- ----------- --------- --------- -------- ------------ -----------
Balance at December 31,
1995....................... 11,723,101 35,597,941 (342,679) (138,177) 3,319 (15,895,465) 19,224,939
Issuance of Common Stock for
cash....................... 5,053,513 47,539,591 -- -- -- -- 47,539,591
Payments on notes
receivable................. -- -- -- 10,473 -- -- 10,473
Deferred compensation related
to grant of stock
options.................... -- 113,872 (113,872) -- -- -- --
Amortization of deferred
compensation............... -- -- 79,494 -- -- -- 79,494
Unrealized gains on
short-term investments..... -- -- -- -- 38,551 -- 38,551
Net income................... -- -- -- -- -- 5,873,920 5,873,920
---------- ----------- --------- --------- -------- ------------ -----------
Balance at December 31,
1996....................... 16,776,614 83,251,404 (377,057) (127,704) 41,870 (10,021,545) 72,766,968
Issuance of Common Stock for
warrants................... 182,467 59,250 -- -- -- -- 59,250
Issuance of Common Stock for
stock options.............. 105,686 453,301 -- -- -- -- 453,301
Issuance of Common Stock
under the Employee Stock
Purchase Plan.............. 21,533 174,411 -- -- -- -- 174,411
Issuance of Common Stock in
exchange for investment in
NPI........................ 600,502 4,473,740 -- -- -- -- 4,473,740
Payments on notes
receivable................. -- -- -- 7,856 -- -- 7,856
Deferred compensation related
to grant of stock
options.................... -- 192,000 (192,000) -- -- -- --
Amortization of deferred
compensation............... -- -- 129,475 -- -- -- 129,475
Unrealized losses on
short-term investments..... -- -- -- -- (39,370) -- (39,370)
Net income................... -- -- -- -- -- 5,126,844 5,126,844
---------- ----------- --------- --------- -------- ------------ -----------
Balance at December 31,
1997....................... 17,686,802 $88,604,106 $(439,582) $(119,848) $ 2,500 $ (4,894,701) $83,152,475
========== =========== ========= ========= ======== ============ ===========
See accompanying notes.
35
36
NEUROCRINE BIOSCIENCES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 5,126,844 $ 5,873,920 $ (3,346,390)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 1,322,231 980,833 715,398
Research and development expense related to
NPI........................................ 1,130,000 -- --
Deferred revenue.............................. 1,000,000 418,750 500,000
Deferred rent................................. 383,790 61,431 213,925
Compensation expense recognized for stock
options.................................... 129,475 79,494 41,396
Common Stock issued for technology............ -- -- 20,200
Write-off of licensed technology and patent
costs...................................... 75,762 -- --
Loss on sale of assets........................ -- 25,370 --
Change in operating assets and liabilities:
Receivable under collaborative
agreements............................... 1,135,729 (329,513) (1,000,000)
Other current assets....................... (250,691) (606,628) 67,797
Other assets............................... (1,274,381) (486,774) 9,516
Accounts payable and accrued liabilities... 2,213,479 664,876 356,429
------------- ------------ ------------
Net cash flows provided by (used in) operating
activities.................................... 10,992,238 6,681,759 (2,421,729)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of short-term investments............. (113,080,238) (85,171,207) (17,854,139)
Sales/maturities of short-term investments...... 112,314,626 38,918,365 19,098,351
Purchase of licensed technology and patent
application costs, net........................ -- (663,796) (263,261)
Purchases of property and equipment, net........ (6,439,733) (1,640,337) (47,657)
------------- ------------ ------------
Net cash flows (used in) provided by investing
activities.................................... (7,205,345) (48,556,975) 933,294
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of Common Stock, net................... 686,962 47,539,591 3,730,000
Principal payments on obligations under capital
leases........................................ (782,763) (742,236) (574,954)
Proceeds from note payable...................... 746,790 -- --
Payments received on notes receivable from
stockholders.................................. 7,856 10,473 10,086
------------- ------------ ------------
Net cash flows provided by financing
activities.................................... 658,845 46,807,828 3,165,132
------------- ------------ ------------
Net increase in cash and cash equivalents....... 4,445,738 4,932,612 1,676,697
Cash and cash equivalents at beginning of
year.......................................... 11,325,361 6,392,749 4,716,052
------------- ------------ ------------
Cash and cash equivalents at end of the year.... $ 15,771,099 $ 11,325,361 $ 6,392,749
============= ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid................................. $ 152,817 $ 272,464 $ 298,332
============= ============ ============
Taxes paid.................................... $ 250,000 $ 40,000 $ --
============= ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Furniture and equipment financed with
obligations under capital leases.............. $ -- $ -- $ 689,791
============= ============ ============
See accompanying notes
36
37
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity: Neurocrine Biosciences, Inc. (the
"Company") was incorporated in California on January 17, 1992 and was
reincorporated in Delaware in March 1996. The Company is engaged in the
discovery and development of therapeutics for the treatment of diseases and
disorders of the central nervous and immune systems which includes anxiety,
depression, Alzheimer's disease, obesity, stroke and multiple sclerosis.
Cash Equivalents: The Company considers as cash equivalents all highly
liquid investments with a maturity of three months or less when purchased.
Short-Term Investments Available-for-Sale: In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Debt
and Equity Securities," short-term investments are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in a separate component of
stockholders' equity. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses
and declines in value judged to be other-than-temporary, if any, on
available-for-sale securities are included in investment income. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
interest income.
The Company invests its excess cash primarily in investment grade debt
instruments, marketable debt securities of U.S. government agencies, and high
grade commercial paper. Management has established guidelines relative to
diversification and maturities that maintain safety and liquidity.
Property and Equipment: Furniture, equipment and leasehold improvements are
carried at cost. Depreciation and amortization are provided over the estimated
useful lives of the assets, ranging from five to seven years, using the
straight-line method.
Licensed Technology and Patent Application Costs: Licensed technology
consists of exclusive, worldwide, perpetual licenses to patents related to the
Company's platform technology which are capitalized at cost and amortized over
periods of 7 to 11 years.
Asset Impairment: The Company accounts for its Long-Lived Assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". There were no material
adjustments to the carrying values of these assets during 1997 and 1996.
Research and Development Revenue and Expenses: Revenue under strategic
alliances is recognized over the term of the agreement. Advance payments
received in excess of amounts earned are classified as deferred revenue and
recognized as income in the period earned. Research and development costs are
expensed as incurred.
Stock-Based Compensation: The Company has elected to continue to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its employee
stock options. The alternative fair value accounting provided for under SFAS No.
123, "Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. As a
result, deferred compensation is recorded only in the event that the fair market
value of the stock on the date of the option grant exceeds the exercise price of
the options. Such deferred compensation is amortized over the vesting period of
the options. Compensation expense recognized during the years ended December 31,
1997, 1996 and 1995 was $129,475, $79,494 and $41,396, respectively.
37
38
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Earnings Per Share: In February 1997, the Financial Accounting Standards
Board issued SFAS No. 128, "Earnings Per Share" (Statement No. 128). Statement
No. 128 is effective for financial statements issued for periods ending after
December 15, 1997. Statement No. 128 replaces APB Opinion 15, Earnings per Share
("EPS"). Statement No. 128 requires dual presentation of basic and diluted
earnings per share by entities with complex capital structures. Basic EPS
includes no dilution and is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution of securities that could share in the earnings of the
Company such as common stock which may be issuable upon exercise of outstanding
common stock options, warrants and preferred stock.
Comprehensive Income and Segment Information: In June 1997, the Financial
Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Segment Information". Both of these standards are effective
for fiscal years beginning after December 15, 1997. SFAS No. 130 requires that
all components of comprehensive income, including net income, be reported in the
financial statements in the period in which they are recognized. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments, shall be reported net of their
related tax effect, to arrive at comprehensive income. The Company does not
believe that comprehensive income or loss will be materially different than net
income or loss. SFAS No. 131 amends the requirements for public enterprises to
report financial and descriptive information about its reportable operating
segments. Operating segments, as defined in SFAS No. 131, are components of an
enterprise for which separate financial information is available and is
evaluated regularly by the Company in deciding how to allocate resources and in
assessing performance. The financial information is required to be reported on
the basis that is used internally for evaluating the segment performance. The
Company believes it operates in one business and operating segment and does not
believe adoption of the standard will have a material impact on the Company's
financial statements.
Reliance on Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
2. SHORT-TERM INVESTMENTS
The following is a summary of short-term investments classified as
available-for-sale securities:
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------------------- ------------------------
GROSS GROSS ESTIMATED GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED
COST GAINS LOSSES VALUE COST GAINS
----------- ---------- ---------- ----------- ----------- ----------
US Government
securities.............. $11,974,539 $54,201 $ -- $12,028,740 $ 7,973,645 $ 24,706
Certificates of deposit... 246,639 -- -- 246,639 484,022 --
Commercial paper.......... 9,850,123 -- -- 9,850,123 3,972,292 --
Corporate debt
securities.............. 37,143,192 3,590 (59,779) 37,087,003 46,123,024 80,288
Other..................... 104,102 4,488 -- 108,590 -- --
----------- ------- -------- ----------- ----------- --------
Total debt
securities.......... $59,318,595 $62,279 $(59,779) $59,321,095 $58,552,983 $104,994
=========== ======= ======== =========== =========== ========
DECEMBER 31, 1996
------------------------
GROSS ESTIMATED
UNREALIZED FAIR
LOSSES VALUE
---------- -----------
US Government
securities.............. $(26,388) $ 7,971,963
Certificates of deposit... -- 484,022
Commercial paper.......... -- 3,972,292
Corporate debt
securities.............. (36,736) 46,166,576
Other..................... -- --
-------- -----------
Total debt
securities.......... $(63,124) $58,594,853
======== ===========
38
39
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Gross realized gains and losses were not material for any of the reported
periods. The amortized cost and estimated fair value of debt securities by
contractual maturity, are shown below.
AMORTIZED ESTIMATED
COST FAIR VALUE
AT DECEMBER 31, 1997 ----------- -----------
Due in one year or less........................... $16,181,291 $16,206,592
Due after one year through five years............. 43,137,304 43,114,503
----------- -----------
$59,318,595 $59,321,095
=========== ===========
3. BALANCE SHEET DETAILS
Other current assets at December 31, 1997 and 1996, consist of the
following:
1997 1996
---------- --------
Interest income receivable........................... $ 779,056 $381,947
Other................................................ 312,597 459,015
---------- --------
$1,091,653 $840,962
========== ========
Property and equipment at December 31, 1997 and 1996, consist of the
following:
1997 1996
----------- -----------
Furniture and fixtures............................ $ 1,204,534 $ 1,123,956
Equipment......................................... 4,955,553 3,738,213
Land.............................................. 4,985,314 --
Leasehold improvements............................ 717,094 646,939
----------- -----------
11,862,495 5,509,108
Less accumulated depreciation and amortization.... (3,016,316) (1,962,688)
----------- -----------
Net property and equipment........................ $ 8,846,179 $ 3,546,420
=========== ===========
Accrued liabilities at December 31, 1997 and 1996 consist of the following:
1997 1996
---------- ----------
Accrued employee benefits........................... $1,510,476 $ 414,971
Accrued professional fees........................... 470,847 143,407
Accrued clinical trial costs........................ 300,000 256,141
Income taxes payable................................ 195,199 206,883
Other accrued liabilities........................... 279,830 543,487
---------- ----------
$2,756,352 $1,564,889
========== ==========
39
40
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Long-term debt at December 31, 1997 and 1996 consist of the following:
1997 1996
-------- --------
Current portion of debt:
Note payable to bank................................. $149,358 $ --
Obligations under capital leases..................... 723,237 783,718
-------- --------
$872,595 $783,718
-------- --------
Long-term portion of debt:
Note payable to bank................................. $597,432 $ --
Obligations under capital leases..................... 124,462 846,744
-------- --------
$721,894 $846,744
======== ========
During 1997 the Company partially financed the purchase of land under a 5
year note payable for approximately $747,000, which bears interest at a floating
rate of prime plus one quarter percent (8.75% at December 31, 1997). The note is
repayable in equal monthly installments beginning February 1998.
4. COMMITMENTS
Leases: The Company leases its corporate and laboratory facilities under an
operating lease which expires in June 2006. Rent expense and sublease rental
revenue was approximately $2,139,000, $1,298,000, $798,000 and $917,000,
$598,000, $177,000, for the years ended December 31, 1997, 1996 and 1995,
respectively.
Furniture and equipment under capital leases were approximately $3,287,000
and $3,368,000 at December 31, 1997 and 1996, respectively. Accumulated
depreciation of furniture and equipment under capital leases totaled
approximately $2,226,000 and $1,679,000 at December 31, 1997 and 1996,
respectively.
Future minimum payments at December 31, 1997 are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- -----------
1998................................ $758,411 $ 2,276,327
1999................................ 129,239 3,698,216
2000................................ -- 3,832,587
2001................................ -- 3,971,926
2002................................ -- 4,116,419
Thereafter.......................... -- 44,927,206
-------- -----------
Total minimum payments.... $887,650 $62,822,681
===========
Amount representing interest........ 39,951
--------
Present value of net minimum
payments.......................... 847,699
Less current portion................ 723,237
--------
Long-term obligations under capital
leases............................ $124,462
========
In May 1997, the Company purchased two adjacent parcels of land in San
Diego for approximately $5.0 million in cash. The Company sold one parcel to a
third party in 1997, but expects to repurchase the land and lease the parcel to
Science Park Center LLC, a California limited liability company (the "LLC"), of
which the Company owns a minority interest. The LLC will construct an expanded
laboratory and office complex which will be leased by the Company under a 15
year operating lease. The Company has the option
40
41
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
to purchase the facility at any time during the lease at a predetermined price.
The remaining parcel will be held by the Company until such time as the
Company's growth requires additional expansion.
Future minimum rental income to be received under non-cancelable subleases
at December 31, 1997 will be $512,257, $527,625, $543,453 and $559,757 for the
years ending December 31, 1998 through 2001, respectively.
Licensing and Research Agreements: The Company has entered into licensing
agreements with various universities and research organizations. Under the terms
of these agreements, the Company has received licenses to technology, or
technology claimed, in certain patents or patent applications. The Company is
required to pay royalties on future sales of products employing the technology
or falling under claims of a patent, and, certain agreements require minimum
royalty payments. Certain agreements also require the Company to make payments
of up to an aggregate of approximately $4.9 million upon the achievement of
specified milestones.
5. STOCKHOLDERS' EQUITY
Common Stock Issuances: Since its inception, the Company has issued Common
Stock in various private and public offerings as well as to corporate
collaborators at prices between $5.00 and $10.50 per share resulting in
aggregate net proceeds of approximately $78.6 million.
Options: The Company has reserved 4,100,000 and 100,000 shares of Common
Stock for issuance upon exercise of options or stock purchase rights granted
under the 1992 Incentive Stock Option Plan ("The Plan") and 1996 Director Option
Plan ("The Director Plan"), respectively. These plans provide for the grant of
stock options and stock purchase rights to officers, directors, and employees
of, and consultants and advisors to, the Company. Options under both plans have
terms of up to 10 years from the date of grant and may be designated as
incentive stock options or nonstatutory stock options under the Plan, and as
nonstatutory options under The Director Plan.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model using the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
5.8%, 6.1% and 6.1%; a dividend yield of 0.0% (for all years), volatility
factors of the expected market price of the Company's common stock of .43, .41,
and .41; and a weighted average expected life of the option of 5 years (for all
years).
For purposes of pro forma disclosures, the estimated fair value of the
options granted is amortized to expense over the options' vesting period. The
Company's pro forma information for the years ended December 31, 1997, 1996 and
1995 follows:
1997 1996 1995
------ ------ -------
Pro forma net income (loss) (in thousands).............. $4,364 $5,375 $(3,474)
Pro forma income (loss) per share (diluted)............. $ 0.24 $ 0.33 $ (0.30)
The pro forma effect on net income for 1997 and 1996 and net loss for 1995
is not likely to be representative of the effects on reported income or loss in
future years because these amounts reflect less than full vesting for options
granted during these periods.
41
42
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
WEIGHTED- WEIGHTED-
OPTIONS AVERAGE OPTIONS WEIGHTED OPTIONS AVERAGE
(IN THOUSANDS) EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE
-------------- -------------- -------------- -------------- -------------- --------------
Outstanding --
beginning of
year............... 1,739 $4.48 1,415 $3.61 906 $3.22
Granted
(below market)..... 275 $7.43 255 $6.90 638 $4.28
Granted
(at market)........ 797 $8.02 123 $9.30 -- --
Exercised............ (100) $4.10 (11) $3.60 -- --
Forfeited............ (58) $5.88 (43) $4.41 (129) $4.18
----- ----- ----- ----- ----- -----
Outstanding -- year
end................ 2,653 $5.85 1,739 $4.48 1,415 $3.61
===== ===== ===== ===== ===== =====
A summary of options outstanding as of December 31, 1997 follows:
OPTIONS EXERCISE WEIGHTED- WEIGHTED- OPTIONS EXERCISE WEIGHTED-
OUTSTANDING PRICE AVERAGE AVERAGE OUTSTANDING PRICE AVERAGE
(IN THOUSANDS) RANGE EXERCISE PRICE CONTRACTUAL LIFE (IN THOUSANDS) RANGE EXERCISE PRICE
- -------------- --------------- -------------- ---------------- -------------- --------------- --------------
515 $2.50 $2.50 5.6 years 515 $2.50 $2.50
807 $4.25 to $5.95 $4.42 7.2 years 536 $4.25 to $5.95 $4.41
1,331 $6.91 to $10.25 $8.02 9.2 years 218 $6.91 to $10.25 $8.17
Warrants: The Company has outstanding warrants to purchase 531,465 shares
of Common Stock at exercise prices of $5.00 and $10.50 per share. The warrants
generally expire between 1998 and 2007. At December 31, 1997, all outstanding
warrants were exercisable.
Employee Stock Purchase Plan: The Company has reserved 125,000 shares of
Common Stock for issuance under the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). The Purchase Plan permits eligible employees to purchase
Common Stock through payroll deductions at a purchase price equal to 85% of the
lesser of the fair market value per share of Common Stock on the start date of
an offering period or on the date on which the shares are purchased. Through
December 31, 1997, 21,533 shares had been issued pursuant to the Purchase Plan.
Shares reserved for future issuances:
Stock options............................................. 2,640,901
Warrants.................................................. 531,465
Employee stock purchase plan.............................. 103,467
Director option plan...................................... 100,000
---------
Total........................................... 3,375,833
=========
Of the shares available for future issuance under the Plan, 2,603,174 are
outstanding grants and 37,727 remain available for future grant.
6. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
Janssen: In January 1995, the Company entered into a research and
development agreement (the "Janssen Agreement") with Janssen, under which
Janssen paid the Company $2.0 million in up-front license
42
43
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
fees and $3.7 million, $3.0 million and $3.0 million in sponsored research
payments in 1997, 1996 and 1995, respectively.
Under the Janssen Agreement, Neurocrine is entitled to receive up to $10.0
million in milestone payments for the indications of anxiety, depression and
substance abuse, and up to $9.0 million in milestone payments for other
indications, if certain development milestones are achieved; $1.5 million, $1.0
million and $750,000 was received in 1997, 1996 and 1995, respectively. The
Company has granted Janssen an exclusive worldwide license to manufacture and
market products developed under the Janssen Agreement. The Company is entitled
to receive royalties on product sales throughout the world. The Company has
certain rights to co-promote such products in North America. Janssen is
responsible for funding all clinical development and marketing activities,
including reimbursement to Neurocrine for its promotional efforts, if any.
The collaborative research portion of the agreement was completed as
scheduled in 1997 with the selection of a clinical candidate and the
commencement of clinical trials in Europe. The Company may continue to receive
milestone payments and royalties upon the successful continuation of the
development portion of the agreement.
Janssen has the right to terminate the Agreement upon six months notice.
However, in the event of termination, other than termination by Janssen for
cause or as a result of the acquisition of Neurocrine, all product and
technology rights become the exclusive property of Neurocrine.
Novartis: In January 1996, the Company entered into an agreement with
Novartis under which Novartis paid the Company $5.0 million in up-front fees and
is obligated to provide Neurocrine with $7.0 million in research and development
funding during the first two years of the agreement and up to $15.5 million in
further research and development funding thereafter. The Company received $7.2
million and $3.5 million of research and development funding in 1997 and 1996,
respectively. In addition, the Company is also entitled to receive milestone
payments if certain development and regulatory milestones are achieved, of which
$3.8 million and $3.0 million was received in 1997 and 1996, respectively. In
return, Novartis received manufacturing and marketing rights outside of North
America and will receive a percentage of profits on any sales in North America.
The Company will receive royalties for all sales which may occur outside North
America and a percentage of profits on sales in North America, which the Company
may at its option convert to a right to receive royalties on product sales.
Neurocrine is obligated to repay a portion of the development costs for
potential products developed in such collaboration unless the Company elects to
convert to the right to receive royalty payments. Novartis has the right to
terminate the agreement on six months notice.
Eli Lilly: In October 1996, the Company entered into an agreement with Eli
Lilly and Company ("Eli Lilly") under which the Company expects to receive $22.0
million in research payments. The Company is also entitled to milestone payments
if certain development and regulatory accomplishments are achieved. Eli Lilly
paid the Company $9.1 million and $1.3 million in research payments in 1997 and
1996, respectively. The Company will have the option to receive co-promotion
rights and share profits from commercial sales of select products, which may
result from the collaboration in the U.S. or receive royalties on U.S. product
sales. The Company will receive royalties on any product sales for the rest of
the world.
43
44
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. NEUROSCIENCE PHARMA, INC. (NPI)
In March 1996, the Company established Neuroscience Pharma, Inc. ("NPI")
with a group of Canadian institutional investors (the "Canadian Investors"). The
Company licensed to NPI certain technology, which had no accounting basis, and
Canadian marketing rights to such technology, for 49% of the Common Stock of
NPI. The Canadian Investors invested approximately $9.5 million cash in NPI in
exchange for Preferred Stock of NPI, as well as a 51% ownership interest in
NPI's Common Stock. The Preferred Stock was exchangeable at the option of the
Canadian Investors into approximately 1,279,758 shares of the Company's Common
Stock, using an exchange ratio based on the assumed fair value of the Company's
Common Stock in March 1996. NPI has committed to use these funds for research
and clinical development of certain of the Company's programs in exchange for
royalties on sales of products developed in these programs as well as exclusive
Canadian marketing rights for such products in certain situations. The Company
has the right to terminate the agreement under certain conditions by purchasing
the shares of NPI Preferred Stock held by the Canadian Investors in exchange for
cash or the Company's Common Stock at a predetermined price.
In December 1997, certain of the Canadian Investors exchanged their NPI
Preferred Stock into 600,502 shares of the Company's Common Stock. The Company
recorded the issuance of its equity at the agreed-upon exchange rate, which
approximated the fair market value of the Company's Common Stock at such date,
and recorded an investment of $4,473,740 in NPI.
In accordance with the equity method of accounting, the Company has
recognized $1,130,000 of research and development expense, representing its
share of NPI's losses since inception, of which $970,000 relates to 1997 and
$160,000 relates to 1996.
As of December 31, 1997, NPI has total assets of approximately $6.9
million, consisting primarily of cash, cash equivalents and short-term
investments. The Company's investment in NPI is carried at approximately $3.3
million.
In connection with their investment in NPI, the Canadian Investors also
received warrants exercisable for 383,875 shares of the Company's Common Stock
at an exercise price of $10.50 per share and are eligible to receive additional
warrants in the future upon attainment of certain Canadian government incentives
for research activities.
8. INCOME TAXES
At December 31, 1997, the Company had federal income tax net operating loss
and research tax credit carryforwards of approximately $2.8 million and
$935,000, respectively, which will begin to expire in 2007 unless utilized. The
Company also has federal Alternative Minimum Tax credit carryforwards of
approximately $241,000, which will carryforward indefinitely.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss and credit carryforwards may be limited because of
cumulative changes in ownership of more than 50% which occurred during 1992 and
1993. However, the Company does not believe such changes will have a material
impact upon the utilization of these carryforwards.
44
45
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Significant components of the Company's deferred tax assets as of December
31, 1997 and 1996 are shown below. A valuation allowance of $3,474,000 and
$4,647,000 at December 31, 1997 and 1996, respectively, have been recognized to
offset the net deferred tax assets, as realization of such assets is uncertain.
1997 1996
----------- -----------
Deferred tax assets:
Net operating loss carryforwards........................ $ 993,000 $ 3,038,000
Tax credit carryforwards................................ 1,176,000 946,000
Capitalized research and development.................... 525,000 594,000
Other, net.............................................. 780,000 69,000
----------- -----------
Total deferred tax assets....................... 3,474,000 4,647,000
Valuation allowance for deferred tax assets............... (3,474,000) (4,647,000)
----------- -----------
Net deferred tax assets................................... $ -- $ --
=========== ===========
The provision for income taxes on earnings subject to income taxes differs
from the statutory federal rate at December 31, 1997 and 1996, due to the
following:
1997 1996
---------- ----------
Federal income taxes at 34%................................. $1,816,000 $2,081,000
State income tax, net of federal benefit.................... 86,787 --
Tax effect on non-deductible expenses....................... 21,000 17,000
Benefit of net operating loss carryforwards................. (1,837,000) (2,098,000)
Alternative minimum taxes................................... 127,301 247,683
---------- ----------
$ 214,088 $ 247,683
========== ==========
The provision for taxes based on income at December 31, 1997 and 1996,
consists of the following:
1997 1996
-------- --------
Current
Federal.............................. $127,301 $247,683
State................................ 86,787 --
Deferred
Federal.............................. -- --
State................................ -- --
-------- --------
Total........................ $214,088 $247,683
======== ========
45
46
NEUROCRINE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
9. EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share
and the effect on income and the weighted-average number of shares of dilutive
potential common stock, as of the years ended December 31.
1997 1996 1995
----------- ----------- -----------
Numerator:
Net income (loss)......................... $ 5,126,844 $ 5,873,920 $(3,346,390)
Effect of dilutive securities............. -- -- --
----------- ----------- -----------
Numerator for earnings (loss) per share... 5,126,844 5,873,920 (3,346,390)
Denominator:
Denominator for basic earnings (loss) per
share.................................. 16,929,925 14,970,734 11,683,877
Effect of dilutive securities:
Employee stock options................. 909,264 795,697 Antidilutive
Convertible preferred stock............ 203,998 182,964 Antidilutive
Warrants............................... 141,271 177,639 Antidilutive
----------- ----------- -----------
Dilutive potential of common shares....... 1,254,533 1,156,300 --
----------- ----------- -----------
Denominator for diluted earnings (loss)
per share.............................. 18,184,458 16,127,034 11,683,877
=========== =========== ===========
Basic earnings (loss) per share........... $ 0.30 $ 0.39 $ (0.29)
=========== =========== ===========
Diluted earnings (loss) per share......... $ 0.28 $ 0.36 $ (0.29)
=========== =========== ===========
10. SUBSEQUENT EVENT
On February 27, 1998, the Company signed a letter of intent to acquire
Northwest NeuroLogic, Inc., an Oregon-based corporation, in a 100% stock
transaction valued at approximately $4.0 million.
46
47
INDEX OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation.(1)
3.2 Bylaws.(1)
3.3 Certificate of Amendment of Bylaws.
4.1 Form of Lock-Up Agreement.(1)
4.2 Form of Common Stock Certificate.(1)
4.3 Form of warrant issued to existing warrant holders.(1)
4.4 Form of Series A warrant issued in connection with the
execution by the Company of the Unit Purchase Agreement (see
below).(1)
4.5 New Registration Rights Agreement dated March 29, 1996 among
the Company and the investors signatory thereto.(1)
4.6 Letter of Intent between Northwest NeuroLogic, Inc. and the
Company dated February 27, 1998.(2)
10.1 Purchase and Sale Agreement and Escrow Instructions between
MS Vickers II, LLC and the Company dated February 13,
1997.(3)
10.2 1992 Incentive Stock Plan, as amended.
10.3 1996 Employee Stock Purchase Plan.(1)
10.4 1996 Director Stock Option Plan and form of stock option
agreement.(1)
10.5 Form of Director and Officer Indemnification Agreement.(1)
10.6 Employment Agreement dated March 1, 1997, between the
Registrant and Gary A. Lyons, as amended.(4)
10.7 Employment Agreement dated March 1, 1997, between the
Registrant and Errol B. De Souza, Ph.D.(4)
10.8 Employment Agreement dated March 1, 1997, between the
Registrant and Paul W. Hawran.(4)
10.9 Employment Agreement dated March 1, 1997, between the
Registrant and Stephen Marcus, M.D.
10.10 Consulting Agreement dated September 25, 1992, between the
Registrant and Wylie A. Vale, Ph.D.(1)
10.11 Consulting Agreement effective as of January 1, 1992,
between the Registrant and Lawrence J. Steinman, M.D.(1)
10.12 Lease Agreement dated June 1, 1993, between the Registrant
and Hartford Accident and Indemnity Company, as amended.(1)
10.13 Exclusive License Agreement dated as of July 1, 1993, by and
between the Beckman Research Institute of the City of Hope
and the Registrant covering the treatment of nervous system
degeneration and Alzheimer's disease.(1)
10.14 Exclusive License Agreement dated as of July 1, 1993, by and
between the Beckman Research Institute of the City of Hope
and the Registrant covering the use of Pregnenolone for the
enhancement of memory.(1)
10.15 License Agreement dated May 20, 1992, by and between The
Salk Institute for Biological Studies and the Registrant.(1)
10.16 License Agreement dated July 17, 1992, by and between The
Salk Institute for Biological Studies and the Registrant.(1)
48
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.17 License Agreement dated November 16, 1993, by and between
The Salk Institute for Biological Studies and the
Registrant.(1)
10.18 License Agreement dated October 19, 1992, by and between The
Board of Trustees of the Leland Stanford Junior University
and the Registrant.(1)
10.19 Agreement dated January 1, 1995, by and between the
Registrant and Janssen Pharmaceutica, N.V.(1)
10.20 Letter Agreement dated January 19, 1996, by and between the
Registrant and Ciba-Geigy Limited.(1)
10.21+ Unit Purchase Agreement dated March 29, 1996, by and between
Neuroscience Pharma (NPI) Inc., the Registrant and the
investors signatory thereto.(1)
10.22+ Exchange Agreement dated March 29, 1996, by and between
Neurocrine Biosciences (Canada) Inc., the Registrant and the
investors signatory thereto.(1)
10.23+ Research and Development Agreement dated March 29, 1996, by
and between Neurocrine Biosciences (Canada) Inc. and
Neuroscience Pharma (NPI) Inc.(1)
10.24+ Intellectual Property and License Grants Agreement dated
March 29, 1996, by and between the Registrant and Neurocrine
Biosciences (Canada) Inc.(1)
10.25+ Development and Commercialization Agreement dated December
20, 1996, by and between Ciba-Geigy Ltd. and the
Registrant.(5)
10.26+ Letter and Purchase Order dated June 7, 1996, by and between
Ciba-Geigy and the Registrant.(5)
10.27 Third Lease Amendment dated June 6, 1996, by and between
Talcott Realty I Limited Partnership and the Registrant.(5)
10.28+ Research and License Agreement dated October 15, 1996,
between the Registrant and Eli Lilly and Company.(5)
10.29+ Lease between Science Park Center LLC and the Company.(6)
10.30+ Option Agreement between Science Park Center LLC (Optionor)
and the Company (Optionee).(6)
10.31+ Construction Loan Agreement.(6)
10.32 Secured Promissory Note.(6)
10.33+ Operating Agreement for Science Park Center LLC.(6)
10.34 Information and Registration Rights Agreement dated
September 15, 1992, as amended to date.(1)
10.35 Form of incentive stock option agreement and nonstatutory
stock option agreement for use in connection with 1992
Incentive Stock Plan.(1)
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney (reference is made to the following page
of this Form 10-K).
27.1 Financial Data Schedule for the fiscal year ended December
31, 1997.
27.2 Financial Data Schedule for the fiscal year ended December
31, 1996.
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-03172).
(2) Incorporated by reference to the Company's Report on Form 8-K filed on March
13, 1998.
(3) Incorporated by reference to the Company's amended Quarterly Report on Form
10-Q filed on August 15, 1997.
49
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed on August 14, 1997.
(5) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1996, as amended.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed on November 14, 1997.
* Confidential treatment has been requested with respect to certain portions
of the exhibit.
+ Confidential treatment has been granted with respect to certain portions of
the exhibit.