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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)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-28150
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)
10555 Science Center Drive, San Diego, CA 92121
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (858) 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 held by non-affiliates
of the Registrant as of March 15, 2002 totaled approximately $1,102,649 based on
the closing stock price as reported by the Nasdaq National Market. As of March
15, 2002, there were 30,399,620 shares of the Registrant's Common Stock, $0.001
par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated
by reference from the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 23, 2002 (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, 2001.
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1
TABLE OF CONTENTS
Page
PART I
Item 1. Business ................................................. 3
Item 2. Properties ............................................... 29
Item 3. Legal Proceedings ........................................ 29
Item 4. Submission of Matters to a Vote of
Security Holders ........................................ 30
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters .................. 30
Item 6. Selected Financial Data .................................. 31
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 32
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk ........................... 38
Item 8. Financial Statements and Supplementary Data .............. 38
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure .............................................. 38
PART III
Item 10. Executive Officers and Directors of the
Registrant .............................................. 38
Item 11. Executive Compensation ................................... 38
Item 12. Security Ownership of Certain Beneficial
Owners and Management ................................... 38
Item 13. Certain Relationships and Related Transactions ........... 38
PART IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K ..................................... 39
2
PART I
Forward-Looking Statements
This Annual Report on Form 10-K and the information incorporated herein
by reference contain forward-looking statements that involve a number of risks
and uncertainties. Although our forward-looking statements reflect the good
faith judgment of our management, these statements can only be based on facts
and factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties, and actual results and outcomes
may differ materially from results and outcomes discussed in the forward-looking
statements.
Forward-looking statements can be identified by the use of
forward-looking words such as "believes," "expects," "hopes," "may," "will,"
"plan," "intends," "estimates," "could," "should," "would," "continue," "seeks,"
"pro forma" or "anticipates," or other similar words (including their use in the
negative), or by discussions of future matters such as the development of new
products, technology enhancements, possible changes in legislation and other
statements that are not historical. These statements include but are not limited
to statements under the captions "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" as
well as other sections in this report. You should be aware that the occurrence
of any of the events discussed under the heading "Item 1. Business - Risk
Factors" and elsewhere in this report could substantially harm our business,
results of operations and financial condition and that if any of these events
occurs, the trading price of our common stock could decline and you could lose
all or a part of the value of your shares of our common stock.
The cautionary statements made in this report are intended to be
applicable to all related forward-looking statements wherever they may appear in
this report. We urge you not to place undue reliance on these forward- looking
statements, which speak only as of the date of this report.
ITEM 1. BUSINESS
We develop and intend to commercialize drugs for the treatment of
neurologic and endocrine system-related diseases and disorders. Our product
candidates address some of the largest pharmaceutical markets in the world,
including insomnia, anxiety, depression, cancer, diabetes and multiple
sclerosis. We currently have 15 programs in various stages of research and
development, including seven programs in clinical development. Our lead clinical
development program is a drug for the treatment of insomnia currently being
evaluated in Phase III clinical trials.
While we independently develop the majority of our product candidates,
we have entered into collaborations for five of our 15 programs. We currently
have active collaborations with GlaxoSmithKline, Wyeth-Ayerst Laboratories
(Wyeth-Ayerst), a division of American Home Products and Taisho Pharmaceutical
Co., Ltd. (Taisho).
Our Product Pipeline
The following table summarizes our most advanced product candidates
currently in pre-clinical or clinical development and those currently in
research, and is followed by detailed descriptions of each program:
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Program Compound Targeted Indication Status Commercial Rights
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PRODUCTS UNDER DEVELOPMENT:
GABA-A Agonist NBI-34060 Insomnia Phase III Neurocrine
CRF R1 Antagonist NBI-34041 Anxiety, Depression Phase I GlaxoSmithKline/Neurocrine
IL-4 Fusion Toxin NBI-3001 Malignant Glioma Phase II Neurocrine
IL-4 Fusion Toxin NBI-3001 Additional Cancers Phase I Neurocrine
(kidney,lung,breast)
Altered Peptide Ligand NBI-5788 Multiple Sclerosis Phase II Neurocrine
Altered Peptide Ligand NBI-6024 Type 1 Diabetes Phase II Taisho/Neurocrine
3
GnRH Antagonist Endometriosis, Phase I Neurocrine
Prostate Cancer
RESEARCH:
Excitatory Amino Neurodegenerative Research Wyeth-Ayerst/Neurocrine
Acid Transporters Diseases
CRF R1 Antagonist Gastrointestinal Research GlaxoSmithKline/Neurocrine
Disorders
CRF R2 Antagonist Eating Disorders Research GlaxoSmithKline/Neurocrine
Urocortin/CRF R2 Agonist Obesity Research Eli Lilly/Neurocrine
Melanocortin Receptor Obesity/cachexia Research Neurocrine
Agonist/Antagonist
Melanin Concentrating Obesity Research Neurocrine
Hormone Antagonist
Hypocretin Agonist/Antagonist Sleep Disorders Research Neurocrine
CCR7 Immune/Cancer Research Neurocrine
"Phase III" indicates that we or our collaborators are conducting
confirmatory clinical trials to determine safety and efficacy as primary support
for regulatory approval to market a product for a specific disease or condition.
"Phase II" indicates that the we or our collaborators are conducting
clinical trials on groups of patients afflicted with a specific disease or
condition to determine preliminary efficacy, optimal dosages and expanded
evidence of safety.
"Phase I" indicates that we or our collaborators are conducting
clinical trials to determine early safety profile, maximally tolerated dose and
pharmacological properties of the product in human volunteers.
"Research" indicates identification and evaluation of compounds in
laboratory and pre-clinical models.
"R1 and R2" refer to two CRF receptor subtypes.
Products under Development
GABA-A Agonist
Insomnia is a prevalent neurological disorder in the United States,
with approximately one-half of the adult population reporting trouble sleeping a
few nights per week or more, according to the National Sleep Foundation.
Additionally, the National Sleep Foundation reported that approximately 29% of
the adult population indicated that they experience insomnia every night or
almost every night. It is also estimated that the elderly comprise 13% of the
total insomnia population. Despite this widespread prevalence, insomnia remains
a disorder with high unmet medical needs, including the ability to maintain
sleep throughout the night without next-day residual effects. Researchers have
found that insomnia can be treated by drugs that interact with the site of
action of a natural brain chemical involved in promoting and maintaining sleep.
This chemical is called gamma amino-butyric acid, or GABA, and the site of
action is called the GABA-A receptor.
During the 1980s, a class of drugs that targets the GABA-A receptor,
known as benzodiazepines, were used as sedatives to treat insomnia. The most
well-known of the benzodiazepines is Valium(copyright). This class of drugs
produced several undesirable side effects, including negative interactions with
other central nervous system depressants, such as alcohol, the development of
tolerance upon repeat dosing, insomnia following discontinuation of dosing, next
day residual sedation effects, and impairment of coordination and memory. Memory
impairment, which can include amnesia for events occurring prior to and after
drug administration, is of particular concern in the elderly whose cognitive
function may already be impaired by the aging process. During the late 1980s, a
class of drugs targeting a specific site on the GABA-A receptor, known as
non-benzodiazepines, was developed. The non-benzodiazepines reduce the side
effects associated with benzodiazepines. The most popular of the
non-benzodiazepines are marketed in the U.S. as Ambien(copyright) and
Sonata(copyright). Ambien(copyright) is the current leader, with approximately
$1.0 billion in worldwide sales in 2001, according Sanofi-Synthelabo.
4
Our drug candidate for the treatment of insomnia, NBI-34060, a
non-benzodiazepine, acts on a specific site on the GABA-A receptor. It is
through this mechanism that the currently marketed non-benzodiazepine
therapeutics also produce their sleep-promoting effects. However, NBI-34060 is
more potent than the currently marketed non-benzodiazepines, including
Ambien(copyright) and Sonata(copyright), and is more selective for the specific
subtype of receptors within the brain believed to be responsible for promoting
sleep. We believe that this improved profile and more selective drug targeting
will reduce the side effects characteristic of the currently marketed products.
We also believe that receptor binding studies and pre-clinical studies on
NBI-34060 indicate that it is a highly potent GABA-A receptor activator, or
agonist, that acts very specifically on the receptor subtype we are targeting.
In our Phase II clinical studies, NBI-34060 was devoid of next day residual
sedation effects, and we expect it to have a considerably reduced amnestic
potential. The elderly population, which represents a large portion of the
insomnia market, would benefit especially from a novel therapeutic with an
improved safety profile, rapidity of onset and decrease in memory impairment.
We are developing two formulations of NBI-34060, an immediate release
formulation and a modified release formulation, to address the different needs
of the insomnia patient population. To develop these two different formulations
we have capitalized on an important feature of NBI-34060, its relatively short
half-life, or duration of action of the compound, in the body. Based on our
clinical studies, we have determined that the levels of NBI-34060 in the
bloodstream reach the highest point approximately 30 minutes after the patient
takes the tablet. NBI-34060 is then rapidly removed from the blood stream to the
point that it cannot be detected four hours later. This rapid peak of drug
results in rapid sleep onset followed by rapid removal of the drug from the
body, reducing the risk of next-day effects. We believe that this short duration
of action will allow for bedtime dosing for people who have trouble falling
asleep and dosing in the middle of the night for people who have trouble staying
asleep without causing the side effects and next day residual sedation effects
that occurs with the longer acting drugs like Ambien(copyright). This short
duration of action has allowed us to formulate the drug in a modified release
form that will effectively provide two doses of drug, a bedtime dose and a
middle of the night dose, which will both rapidly induce sleep and maintain
sleep through the night. If successful, this would represent the first
non-benzodiazepine approved by the United States Food and Drug Administration
(FDA) for maintaining, rather than simply inducing, sleep.
We have completed 25 Phase I and Phase II clinical trials of NBI-34060
for safety and efficacy involving approximately 1,300 subjects. In our Phase II
clinical studies, NBI-34060 has been shown to be safe and effective in helping
subjects with both chronic and transient insomnia to fall asleep rapidly without
adverse side effects as compared to a placebo. Results of a single dose Phase II
clinical trial in 35 healthy volunteers comparing an immediate release
formulation of NBI-34060, 10 mg Ambien(copyright) and 7.5 mg zopiclone (a
sedative available in Europe and under development in the U.S.) relative to
placebo during middle of the night dosing demonstrated that NBI-34060 does not
lead to next day residual sedation effects, while both Ambien(copyright) and
zopiclone exhibited statistically significant measures of next-day adverse side
effects of residual sedation when compared with placebo. Our gender and age
studies to date have indicated that NBI-34060 works with no major differences
between male and female subjects and young adult and elderly subjects. In two
studies of transient insomnia involving an aggregate of 659 patients, the median
time to fall asleep, the primary clinical goal, was reduced by 40% to 59%
compared to a placebo. In a study of chronic insomnia, subjects receiving
NBI-34060 compared to Ambien(copyright) and a placebo showed a statistically
significant decrease in time to sleep onset and increase in sleep duration as
well as quality of sleep at every dose. Based on these results, we have
initiated Phase III clinical development to support marketing registration. Our
Phase III program will involve approximately 3,300 additional subjects in eight
large clinical trials. Our first Phase III clinical trial of NBI-34060,
commenced in November 2001, will involve approximately 500 patients to evaluate
two doses of an immediate release formulation of NBI-34060 for long-term use in
patients with chronic insomnia.
We face the risk that the side effects and efficacy profile of
NBI-34060 seen in our Phase I and II trials may not be confirmed in additional
clinical trials or that the results of future trials may not warrant further
trials.
Corticotropin-Releasing Factor
According to the Surgeon General's 1999 Report on Mental Health, 6.5%
of the U.S. adult population experiences a major depressive episode each year
and 16.4% of the U.S. adult population has an anxiety disorder. Existing
anti-depressant and anti-anxiety therapeutics sold in excess of $11.7 billion
worldwide in 2000, according to market analyst reports from Med Ad News.
However, there remain significant unmet medical needs. The leading drug class,
known as the selective serotonin reuptake inhibitors, is not effective in
one-third of patients. These drugs frequently require as long as three weeks to
take effect, and have significant adverse side effects such as sexual
dysfunction. Therefore, a rapid acting anti-depressant with fewer side effects
would represent a major advance in the treatment of depression.
5
Researchers have identified what they believe to be the central
mediator of the body's stress responses or stress-induced disorders. This
mediator is a brain chemical known as corticotropin-releasing factor, or CRF.
CRF is overproduced in clinically depressed patients and individuals with
anxiety disorders. Current research indicates that clinically depressed patients
and patients with anxiety experience dysfunction of the
hypothalamic-pituitary-adrenal axis, which is the system that manages the body's
overall response to stress. When the body detects a threat to physical or
psychological well-being, the region of the brain called the hypothalamus
amplifies production of CRF, which induces the physical effects that are
associated with stress which can lead to depression or anxiety.
The novelty and specificity of the CRF mechanism of action and the
prospect of improving upon selective serotonin reuptake inhibitor therapy is a
topic of interest throughout the psychiatric community and pharmaceutical
industry, representing a market opportunity both to better serve patients and
expand overall treatment for this life threatening disease.
We have a strategic position in the CRF field through our intellectual
property portfolio and relationship with experts in the neuropsychiatric field.
Wylie W. Vale, Ph.D., our co-founder and Chief Scientific Advisor, is considered
a leader in this field of research. We have characterized the CRF receptor
system and have identified additional members of the CRF receptor family. We
have patent rights on two receptor subtypes called CRF R1 and CRF R2, and we
have pending patent applications on small molecule organic compounds modulating
the CRF receptors.
Depression. Depression is one of a group of neuropsychiatric disorders
that is characterized by extreme feelings of elation and despair, loss of body
weight, decreased aggressiveness and sexual behavior, and loss of sleep.
Researchers believe that depression results from a combination of environmental
factors, including stress, as well as an individual's biochemical vulnerability,
which is genetically predetermined. Researchers believe that the biochemical
basis of depression involves elevated secretion of CRF and abnormally low levels
of other neurotransmitters in the brain such as serotonin. The most frequently
prescribed antidepressant therapies are selective serotonin reuptake inhibitors
such as Prozac(copyright), Zoloft(copyright), Paxil(copyright) and
Celexa(copyright) which act to increase the levels of serotonin and several
other chemicals in the brain. However, because these drugs affect a wide range
of neurotransmitters, they have been associated with a number of adverse side
effects. While newer, more selective drugs offer some safety improvement, side
effects remain problematic. In addition, one of the biggest limitations of most
existing antidepressant therapies is their slow onset of action.
The first clinical trial to offer evidence of proof of concept of CRF
antagonists in addressing depression was a Phase IIa open label trial conducted
with our NBI-30775 product candidate in 1999. Results from this trial indicated
that NBI-30775 was safe and well tolerated and demonstrated anti-depressant
activity as measured by a widely-accepted depression scale known as the Hamilton
Depression Scores. In this trial, NBI-30775 was administered to 20 patients with
major depressive disorders. Results from the trial, as reported in the Journal
of Psychiatric Research, showed that treatment response, as defined by more than
a 50% reduction in Hamilton Depression Scores, occurred in 50% of the patients
in the low dose group and 80% of the patients in the higher dose group. While
development of NBI-30775 was discontinued by our collaborator Janssen
Pharmaceutica N.V. (Janssen), we continue to be strongly encouraged by these
results, which we believe support the hypothesized mechanism of action.
Our initial CRF antagonist clincial studies were conducted pursuant to
our two collaborations with Janssen. Our first collaboration was in 1995 and led
to the development of NBI-30775. While NBI-30775 appeared to be safe in
Janssen's clinical studies (including the Phase IIa proof of concept study
described above), reversible increases in liver enzymes occurred in two
volunteers in an expanded safety study. As a result, Janssen announced its
decision to discontinue development of NBI-30775. While all collaborative work
under the Janssen agreement was completed in 1998, because of the positive
efficacy results for NBI-30775, Janssen decided to proceed with a back-up
compound identified from the collaborative Janssen/Neurocrine patent portfolio
and funded certain additional work at Neurocrine to identify additional first
generation back-up compounds to NBI-30775 from the same chemical series. This
work was completed in February 2001. Our back-up program agreement provides that
in August 2001 Neurocrine was to receive either a $3.5 million milestone payment
from Janssen or exclusive rights to the first generation back-up compounds. We
agreed to postpone the August event to allow Janssen to complete certain studies
with the back-up program compounds. In March 2002, Janssen notified us that it
had elected to terminate the 1995 and 1999 agreements with us. As a result,
exclusive rights to these first generation CRF antagonist compounds have
reverted to us. We do not expect any additional payments of any kind under the
Janssen agreements.
6
In 1998, we announced that we had initiated a proprietary CRF R1
antagonist program independent of Janssen. This program led to the discovery of
a novel class of second generation CRF R1 antagonist compounds of a chemical
class distinct from the class of compounds that were subject to the Janssen
collaboration. Clinical development of our second generation CRF R1 antagonists
began in December 2000 when we initiated a Phase I clinical program with
NBI-34041, our current lead candidate. Our first study was a Phase I,
randomized, double blind, placebo controlled single dose clinical trial of
NBI-34041. The trial was conducted in normal volunteers and was designed to
evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics over a
range of six escalating doses. The study results indicated no safety issues
which would preclude advancement of the candidate to the next phase of clinical
evaluation.
In July 2001, we announced our second CRF antagonist collaboration, a
worldwide collaboration with GlaxoSmithKline, or GSK, to develop and
commercialize CRF antagonists for psychiatric, neurological and gastrointestinal
diseases. Under the terms of this agreement, Neurocrine and GSK will conduct a
collaborative research program for up to five years and collaborate in the
development of NBI-34041, as well as novel back-up candidates and second
generation compounds identified through the collaborative research. In the
second quarter of 2001, we initiated a Phase I sequential dose escalation study
with three doses of NBI-34041 which has been completed. Data from this study
indicates that NBI-34041 was safe and well tolerated at all doses tested with an
adverse event profile no different than that of the placebo. The future
development of this product candidate will be directed by a joint steering
committee of Neurocrine and GSK and will take into account data from this study.
We face the risk that CRF R1 antagonist compounds may not be effective
and safe therapeutics for the treatment of depression or any other conditions.
In addition, we or GSK may decide not to initiate Phase II clinical testing or
progress to later clinical trials in a timely manner, if at all.
Anxiety. Anxiety is among the most commonly observed group of central
nervous system disorders, which includes phobias or irrational fears, panic
attacks, obsessive-compulsive disorders and other fear and tension syndromes.
The Surgeon General's 1999 Report on Mental Health estimates that anxiety
disorders affect 16.4% of the U.S. adult population. Of the pharmaceutical
agents that other companies currently market for the treatment of anxiety
disorders, benzodiazepines, such as Valium(copyright) and Xanax(copyright), and
the anxiolytic BuSpar(copyright) are the most frequently prescribed. Several
side effects, however, limit the utility of these anti-anxiety drugs. Most
problematic among these are drowsiness, the inability to stand up, amnesia, drug
dependency and withdrawal reactions following the termination of therapy.
Despite the undesirable side effects of the benzodiazepines and the delayed
time-of-onset of BuSpar(copyright), these market leaders collectively achieved
approximately $1.5 billion worldwide in revenues in the year 2000, according to
Med Ad News. In view of significant evidence implicating CRF in anxiety-related
disorders, we are developing small molecule CRF R1 receptor antagonists as
anti-anxiety agents that block the effects of overproduction of CRF. We believe
that these compounds utilize a novel mechanism of action that may offer the
advantage of being more selective, thereby providing increased efficacy with
reduced side effects as compared to benzodiazepines.
As a co-examined variable in the open label Phase IIa clinical trial
for depression described above, Janssen analyzed the anti-anxiety effects of the
CRF R1 receptor antagonist NBI-30775 using the Hamilton Anxiety Scores. Janssen
observed a reduction in Hamilton Anxiety Scores from baseline in both treatment
groups at all times after dosing. In addition, in pre-clinical studies used to
evaluate anti-anxiety drugs, our scientists have demonstrated with statistical
significance that clinical compound candidates from our independent CRF R1
antagonist program are effective following oral administration. We did not
observe any evidence of clinically relevant side effects. These results are
encouraging because they suggest that compounds blocking the CRF R1 receptor may
be effective in treating anxiety-related disorders. Despite these early results,
further clinical studies may fail to demonstrate that CRF R1 antagonists are
safe or effective in addressing anxiety.
IL-4 Fusion Toxin
Interleukin 4, or IL-4, is a natural chemical that modulates cell
growth. Proteins that bind to IL-4, known as IL-4 receptors, are highly
concentrated on the cells of malignant brain tumors as well as many other
cancers, including some types of kidney, lung and breast cancer. Targeted toxins
are a novel form of anticancer therapy under investigation in a variety of
clinical settings. Targeted toxin therapeutics carry a toxin to a target site on
the cancer cells and subsequently kill the cancer cell. Many scientists believe
that targeted toxins have several potential advantages over conventional
chemotherapy in that they are more selective and effective in the treatment of
chemotherapy-resistant cancer cells.
7
In 1998, we exclusively licensed from the National Institutes of
Health, or NIH, a targeted toxin compound, IL-4 fusion toxin, which we call
NBI-3001. A collaboration between the FDA and the National Cancer Institute
designed the IL-4 fusion toxin. It is a combination protein in which IL-4 is
attached to Pseudomonas exotoxin, a toxin that can kill cells. The IL-4 portion
of the fusion toxin preferentially binds to human cancer cells because the
cancer cells express elevated levels of receptors for IL-4 on their surface,
while IL-4 receptor expression is absent or undetectable in normal tissue. Once
the IL-4 portion of the IL-4 fusion toxin targets the toxin to the cancer cells,
the toxin portion of the molecule preferentially kills the cancer cells.
Malignant Glioma. Malignant brain tumors are a significant cause of
cancer death. Despite current therapeutic options such as surgery, radiation and
chemotherapy, according to the American Cancer Society, the median survival rate
for malignant glioma, the most common form of malignant brain cancer, is only in
the range of nine to twelve months. These tumors arise within the brain and
generally remain confined to the brain. The clinical course of malignant glioma
is characterized by relentless loss of vital neurological functions and death
within approximately twelve months. The American Association for Cancer Research
has reported that there has been no improvement in survival for malignant brain
cancer over the past 25 years.
In 1999, we initiated a Phase I/II trial of NBI-3001 in patients with
malignant glioma in which the primary endpoints were to determine safety and the
maximum tolerated dose. A secondary objective was to document therapeutic
effect. We completed this trial in June 2000. We enrolled a total of 31 patients
with recurrent gliomas which were unresponsive to surgery and radiotherapy in
the trial. Our researchers treated patients with intratumoral infusions of
NBI-3001 for up to four days. This trial found NBI-3001 to be safe and to have
an acceptable degree of tolerability in this patient population. While
approximately one-third of the patients exhibited side effects during or
immediately following therapy, these effects were consistent with marked tumor
cell death and the subsequent inflammatory response to this tumor cell death.
The researchers did not observe any significant peripheral drug-related
toxicities. The researchers reported that, of the 27 patients who completed
therapy:
o 7 patients, or 26%, were evaluated at least once during follow-up as
complete remissions, defined as no evidence of viable tumor;
o 10 patients, or 37%, were evaluated at least once during follow-up as
a partial response, defined as greater than 50% reduction in tumor
mass; and
o 10 patients, or 37%, were evaluated at least once during follow-up as
continuing to suffer from stable or progressive disease.
In addition, the six-month median survival data showed trends toward
efficacy. In the fourth quarter of 2000, we initiated an additional Phase II
trial to better establish a dosing regimen, safety and efficacy for Phase III
studies. To date, 30 patients have been enrolled in three dosing groups. These
patients will be followed to evaluate 26-week survival, safety, tolerability and
optimal clinical dose prior to embarking on the Phase III program. We have
selected an acceptable dose for our Phase III program. We have elected to enroll
additional patients in our Phase II study to expand our safety database for the
selected dose and gain data on product manufactured for the Phase III study.
In October 1999, the FDA granted us fast track designation for
NBI-3001. Fast track designation allows us to accelerate our clinical program
for NBI-3001 and expedite receipt of regulatory approvals. In April 2000, we
were awarded orphan drug designation for NBI-3001 for astrocytic glioma. Under
FDA rules, drug developers may obtain orphan drug designation for drugs that
treat a disease or condition that affects fewer than 200,000 people in the
United States per year. Orphan drug designation provides us with seven years of
marketing exclusivity following approval, tax incentives and access to grant
funding. We face the risk that we will not successfully complete clinical
testing or progress to later clinical trials in a timely manner, or at all.
Additional Cancers. In conjunction with our clinical trials of IL-4
fusion toxin in malignant glioma, we entered into a collaborative research and
development agreement with the FDA to investigate the safety and efficacy of
IL-4 fusion toxin in laboratory models of different cancers and by different
routes of administration. Research teams from the FDA and NIH have published
results with IL-4 fusion toxin demonstrating a high level of binding and
destruction of specific types of cancers. We have conducted pre-clinical
research to support the application of NBI-3001 to peripheral solid tumors and
have shown that IL-4 fusion toxin can be safely administered intravenously in
pre-clinical models. We filed an investigational new drug, or IND, application
with the FDA in July 2001 and initiated a Phase I clinical trial in November
2001 to first investigate the safety and efficacy of NBI-3001 against kidney,
non-small-cell lung and breast cancers. These three cancers had a combined
expected incidence in 2001 of approximately 400,000 people in the United States
according to the American Cancer Society.
8
We face the risks that the effectiveness of NBI-3001 seen in our
laboratory models, or the safety profile of NBI-3001 seen in our pre-clinical
models, may not be confirmed in clinical trials or that the results of future
clinical trials may not warrant further development in any of these settings or
that the trial results may not support initiating clinical trials in cancers
other than malignant glioma.
Altered Peptide Ligand
The American Autoimmune Related Diseases Association estimates that
approximately 50 million people in the United States suffer from autoimmune
diseases such as multiple sclerosis, rheumatoid arthritis, Type 1 diabetes,
systemic lupus erythematosus and thyroiditis. Scientists believe that the body's
immune system causes these diseases. The immune system protects an individual
from disease agents, such as viruses, by recognizing and destroying those
foreign substances using specialized blood cells, called lymphocytes.
Occasionally, however, certain lymphocytes arise that inappropriately recognize
the body's own tissues as an invader and begin to attack normal healthy tissue,
resulting in an autoimmune disease like Type 1 diabetes. While the mechanism
through which the lymphocyte initiates the autoimmune disease is still unknown,
the development of drugs that specifically suppress the action of self-reactive
lymphocytes or restore the function of regulatory cells may prove advantageous
for the prevention, cure or treatment of an autoimmune disease.
One type of lymphocyte involved in the immune response to self or
foreign substances is the T cell. T cells detect antigens, which are foreign
substances, such as viruses, bacteria or other proteins the T cell recognizes as
foreign. T cells recognize these antigens and destroy them. Experiments
conducted by our scientists determined that specific amino acid residues within
a peptide sequence of an antigen are required for T cell recognition and
subsequent cellular activation. Scientists can specifically alter the structure
of such a peptide fragment so that it will not properly activate the T cell.
This altered peptide ligand can thus prevent the T cell from destroying its
target, or in the case of an autoimmune reaction, prevent the T cell from
destroying the healthy tissue.
Multiple Sclerosis. Multiple sclerosis is a chronic autoimmune disease
characterized by recurrent attacks of neurologic dysfunction due to damage in
the central nervous system. The classic clinical features of multiple sclerosis
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. According to the National Multiple Sclerosis
Society, there are between 250,000 and 350,000 cases of multiple sclerosis in
the United States and a similar number of patients in Europe. Currently
available treatments for multiple sclerosis offer only limited efficacy. Doctors
often prescribe steroids to reduce the severity of acute flare-ups and speed
recovery. Experimental therapy with other immune-suppressive agents has shown
limited success. Nevertheless, worldwide sales of multiple sclerosis therapies
reached $1.8 billion in 2000.
Our co-founder, Dr. Lawrence Steinman, identified one of the dominant
destructive T cell types in the brains of patients who had died of multiple
sclerosis. Dr. Steinman further identified one of the dominant antigens on the
normal cell targeted by the autoreactive T cells, a peptide from a brain protein
know as myelin basic protein. We designed a novel altered peptide ligand based
on myelin basic protein that would target the autoreactive T cells that cause
neurological damage in multiple sclerosis. Together with Novartis
Pharmaceuticals Corporation, our former collaborative partner for this program,
we filed an IND with the FDA and received approval in 1996 to commence clinical
trials. We subsequently initiated clinical development of our altered peptide
ligand for the treatment of multiple sclerosis, NBI-5788, in 1999.
We have completed one Phase I and two Phase II trials of NBI-5788 in
patients with a recurring form of multiple sclerosis. One of these trials was a
multi-center, placebo-controlled, randomized, parallel design study in which
patients received one of three doses of NBI-5788, and the other was an open
label, unblinded, non-placebo-controlled study in eight patients conducted in
collaboration with the NIH. While allergic reactions were seen in some patients
in these trials, suggesting that optimal dosing may be at lower levels than
those selected for the trials, of the patients completing the placebo controlled
study, the total volume of enhancing lesions was reduced in the lowest dose
group compared to the placebo control. Moreover, in this study 57% of the
patients in the lowest dose group experienced reductions in the volume of new
enhancing lesions compared to 25% in the placebo group. In the open label study,
a higher incidence of new brain lesions was found in two patients who received
the highest dose and the one patient who received the low dose. As a result, the
trial was stopped.
We plan to initiate a confirmatory efficacy trial to determine the
optimal dose and frequency of administration. Our aim for future trials will be
to further establish the benefit of low-dose altered peptide ligand therapy in
patients with multiple sclerosis. We face the risks that we may not initiate or
complete additional clinical trials or that results of any such studies may not
warrant additional clinical development of potential products.
9
Type 1 Diabetes. Utilizing our experience in the development of altered
peptide ligands for multiple sclerosis, we have extended this approach to Type 1
or juvenile-onset diabetes, which is a metabolic disease in which the body does
not produce enough insulin. Like multiple sclerosis, in Type 1 diabetes the
immune system erroneously targets healthy tissue, in this case the pancreatic
cells responsible for the production of insulin. According to the International
Diabetes Federation, Type 1 diabetes is one of the most prevalent chronic
childhood conditions in North America, afflicting approximately one million
patients in 2000. Diabetics often suffer from a number of complications of the
disease including heart disease, circulatory problems, kidney failure,
neurologic disorders and blindness. Current therapy for Type 1 diabetes consists
of daily insulin injections to regulate blood glucose levels.
We believe that an altered peptide ligand specific for autoimmune T
cells involved in diabetes may stop the destruction of the insulin-secreting
cells in early onset Type 1 diabetic patients, thus allowing them to delay or
avoid chronic insulin therapy. Working with leading diabetologists at the
Barbara Davis Center for Childhood Diabetes at the University of Colorado, our
scientists have engineered an altered peptide ligand that affects immune cells
targeting the pancreas. In pre-clinical studies, this altered peptide ligand,
NBI-6024, was capable of eliciting a protective immune response and reducing the
incidence of diabetes. In addition, experiments using immune cells derived from
the blood of Type 1 diabetes patients indicate that patients' immune cells
recognize NBI-6024. This suggests that NBI-6024 may have the potential to
intervene in the disease process in humans. We have completed four Phase I/IIa
safety and dose escalating clinical trials in approximately 100 diabetic
patients. Data from these trials indicates that NBI-6024 is safe and well
tolerated. We and Taisho initiated a Phase IIb clinical program in the fourth
quarter of 2001. The first trial in this Phase IIb clinical program is a
randomized, double blind, placebo-controlled, multi-center, multi-national study
in adolescent and adult patients with new onset Type 1 diabetes. This study will
involve approximately 40 medical sites in the United States, Canada, Europe and
South America and enroll approximately 400 patients. The United States sites
will be initiated following completion of the United States Phase I/II studies.
In 2000, we entered into agreements with Taisho providing them with
worldwide rights to NBI-6024. Pursuant to the collaboration agreements, we will
receive licensing and option fees, payments for certain development and
regulatory milestones, significant reimbursement of worldwide development
expenses and payments based on sales.
We face the risks that we may not initiate or complete additional
clinical trials or that results of any such studies may not warrant additional
clinical development of NBI-6024.
GnRH Antagonist
Gonadotropin-releasing hormone, or GnRH, is a brain peptide that
stimulates the secretion of the pituitary hormones that are responsible for sex
steroid production and normal reproductive function. Researchers have found that
chronic administration of GnRH agonists reversibly shuts down, or antagonizes,
this transmitter pathway and is clinically useful in treating hormone-dependent
diseases such as prostate cancer and endometriosis. Other companies have
developed several peptide drugs on this principle, such as Lupron(copyright) and
Zoladex(copyright), and according to market analyst reports by Med Ad News, the
annual worldwide sales in 2000 for these drugs were approximately $2.5 billion.
These drugs are peptide agonist and must be administered by injection rather
than taken orally. In addition, these types of agonists take up to several weeks
to exert their effect, a factor not seen with direct gonadotropin-releasing
hormone antagonists, and until these drugs exert their effects, they have shown
a tendency to exacerbate the condition.
We believe that there is a large potential market for an orally
delivered gonadotropin-releasing hormone antagonist that does not have the
tendency to initially exacerbate the patient's condition. We selected a lead
clinical candidate in early 2001 and initiated our Phase I clinical program in
November 2001. We face the risk that clinical studies may show different results
than our pre-clinical studies or that clinical trials may show that our GnRH
antagonist product candidates are not safe or effective.
We plan to focus our clinical efforts on prostate cancer and in the
area of women's health, including endometriosis and uterine fibroids. According
to the Endometriosis Association, researchers believe that more than five
million women in the U.S. and Canada are affected by chronic endometriosis. Of
those afflicted, approximately 200,000 patients are treated in a hospital
setting, and approximately 250,000 are treated in an outpatient setting,
according to a 1998 National Patient Profile audit. We believe that the
availability of an oral treatment lacking the side effect profile of the
currently available peptide agonists may be an alternative to surgery and
encourage a higher treatment rate. We also believe our drug will have utility on
the treatment of prostate cancer, of which there are expected to be
approximately 200,000 new cases in 2001 in the U.S., according to the American
Cancer Society.
10
Research
Excitatory Amino Acid Transporters
Some of the most successful central nervous system drugs, including
selective serotonin reuptake inhibitors such as Prozac(copyright), selectively
target brain amino acid transporters. Similarly, we are targeting a set of
proteins generally located in the brain which transport brain chemicals in and
out of cells, called excitatory amino acid transporters, to selectively control
the levels of a brain chemical called glutamate in order to produce a
therapeutic benefit in disorders where glutamate levels are abnormal such as
head trauma, schizophrenia, Lou Gehrig's Disease and other neurodegenerative and
psychiatric disorders.
We are collaborating with Wyeth-Ayerst to control glutamate transporter
function as a novel strategy for the treatment of neurodegenerative and
psychiatric disorders. Our collaboration includes basic research to understand
the function and regulation of the transporters, along with the identification
and characterization of chemical and biological leads. We face the risks that we
may be unable to demonstrate that these excitatory amino acid transporters are
therapeutic targets or that we may fail to identify any product candidates for
pre-clinical or subsequent clinical development.
In 2000, we expanded our excitatory amino acid transporter research and
initiated a research program focused on retinal cell death associated with
damage from low blood flow. The NIH awarded us a research grant to fund our work
to identify novel compounds for the alleviation of neuronal cell death in
response to a wide range of conditions including diabetic induced nerve damage,
glaucoma and other circulatory conditions of the eye. This work is independent
of our collaboration with Wyeth-Ayerst.
CRF R1 Antagonist
Recent reports have suggested that CRF plays a role in the control or
modulation of the gastrointestinal system. Studies have demonstrated that
central administration of CRF acts in the brain to inhibit emptying of the
stomach while stimulating bowel activity, and suggest that overproduction of CRF
in the brain may be a main contributor to stress-related gastrointestinal
disorders.
Irritable bowel syndrome is a gastrointestinal inflammatory disease
that affects between 10% to 20% of American adults, according to the
International Foundation for Gastrointestinal Disorders. Irritable bowel
syndrome can be a lifelong, intermittent disease, involving chronic or recurrent
abdominal pain and frequent diarrhea or constipation, or both. Some patients
with irritable bowel syndrome report the onset of symptoms of the disease
following a major life stress event, such as death in the family, which suggests
that the causes of irritable bowel syndrome may be related to stress. In
addition, most irritable bowel syndrome sufferers also experience anxiety and
depression. Since researchers believe that CRF is the primary mediator of
stress, they have suggested that CRF R1 antagonists may provide a treatment for
irritable bowel syndrome. Together with GSK, we are evaluating our proprietary
CRF R1 antagonists for treatment of irritable bowel syndrome. We face the risks
that pre-clinical studies may not warrant initiating clinical testing of these
candidates or that any initial clinical data may not support continuation of the
program and additional clinical trials.
CRF R2 Antagonist
Our scientists were the first to isolate a second CRF receptor, called
CRF R2. We believe the distribution of CRF R2 in the brain suggests that CRF R2
could play a role in some forms of anxiety and some eating disorders. Our
researchers have demonstrated that administration of a CRF R2 antagonist reduces
measures of anxiety in studies of obsessive compulsive disorder and conditioned
fear. We are also evaluating our proprietary CRF R2 antagonist for treatment of
a variety of eating disorders. We have screened our small molecule library and
conducted exploratory chemistry to identify a new series of compounds to undergo
further study. We face the risks that our work in this area will not lead to
clinical candidates or that clinical trials will not find our candidates to be
safe and effective.
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Urocortin/CRF R2 Agonist
CRF R2 agonists may represent a therapeutic strategy to elevate CRF and
a related neuropeptide called urocortin. Preliminary data indicates that CRF and
urocortin may act as central regulators of both appetite and metabolism. We have
evaluated CRF R2 agonists in various models of obesity and have observed reduced
food intake and weight loss. In 1996, we initiated a collaboration with Eli
Lilly which included a three year funded research program to screen and optimize
CRF R2 agonists. In October 1999, the funded research portion of the program was
completed as scheduled and Eli Lilly has retained control of the program and
exclusive rights to the compounds. We face the risks that Eli Lilly may not
initiate further research and that, if they do, the research may not identify
suitable candidate compounds for development in a timely manner, or at all.
Melanocortin Receptor Agonist/Antagonist
Melanocortin receptors are proteins on the surface of cells which help
regulate some body functions such as eating and skin color. To date, researchers
have identified a family of five melanocortin receptor subtypes. Recently,
researchers discovered that one of the melanocortin receptor subtypes, subtype
4, plays an important role in the mechanism regulating appetite, body weight and
insulin secretion. The subtype 4 receptor is activated by melanocyte stimulating
hormone (MSH). When melanocyte stimulating hormone is injected into the brain,
it reduces food intake and body weight. Responses have included the apparent
increase in basal metabolic rate and lowering of serum insulin levels. We
believe that an orally active subtype 4 agonist may produce the same effects
and, thus, may provide a novel approach to the treatment of obesity or diabetes.
On the other hand, the subtype 4 receptor is deactivated by AGRP. AGRP has been
shown to have the reverse effect of MSH, increasing food intake over a sustained
period of time after a single brain injection and this observation has prompted
significant interest in diseases such as cancer and AIDS related cachexia as
well as failure to thrive in infants. For these reasons, we are also studying
subtype receptor antagonists and agonists and have discovered novel, potent and
selective compounds that are now being evaluated in relevant animal models.
However, these compounds may fail to progess beyond the research phase, and we
face the risk that our melanocortin research will not lead to product
candidates.
Melanin Concentrating Hormone Antagonist
Recent studies suggest that melanin concentrating hormone (MCH) plays a
role in regulating eating behavior. Based on these findings, we believe that
blocking the effect of melanin concentrating hormone with a small molecule
antagonist may represent a novel approach to the treatment of obesity.
Neurocrine has initiated a research effort to identify small-molecule,
orally-active compounds which will block the activity of MCH at its receptor. We
believe that these compounds may provide a novel therapeutic strategy for
treating obesity and related disorders. We face the risk that our research in
this area will not lead to product candidates.
Hypocretin Agonist/Antagonist
Hypocretins are peptides that researchers have linked to a variety of
activities, including the control of eating, cardiovascular regulation and water
intake. Recent publications have also reported that hypocretins appear to have a
critical role as regulators of sleep. Some studies point to a lack of hypocretin
as being instrumental in the development of narcolepsy and suggest that a small
molecule agonist may be able to offset the lack of hypocretin and provide
therapy for narcolepsy. The hypocretin system may also contribute to the
regulation of other sleeping disorders such as insomnia, particularly since
administration of excess hypocretin into animals promotes wakefulness. We have
screened our small molecule library to identify agonists and antagonists for the
hypocretin receptors and are in the process of optimizing the compounds that
resulted from these screens. We will be using these compounds to further
characterize the hypocretin system. We face the risk that our research in this
area will not lead to product candidates.
CCR7
Chemokine receptors are necessary for developing immune responses to
viruses or bacterial infections. However, in some cases an inappropriate immune
response to the body's own tissues is created, resulting in autoimmune diseases
such as rheumatoid arthritis, diabetes, or multiple sclerosis. The chemokine
receptor CCR7 has been shown in mice experiments to be critical for developing
these immune responses. We have initiated a research effort to identify
orally-active compounds which will block CCR7. These compounds may provide a
novel therapeutic strategy for treating rheumatoid arthritis, diabetes, or
multiple sclerosis.
12
Our Discovery Technology
We utilize a proprietary approach to small molecule drug design that we
refer to as multi-channel technology.
Our Multi-Channel Discovery. The advent of molecular biology,
culminating recently in the cloning of the human genome, has opened up a vast
array of receptors as potential targets for drug discovery. Over the past ten
years numerous new technologies have been developed to try to speed the
identification of small molecule drugs. These technologies have mainly relied on
the creation of large chemical libraries utilizing combinatorial chemistry,
automated synthesis of compounds and ultra-high throughput screening machines to
test hundreds of thousands of compounds against a particular receptor. While we
utilize all of these technologies, we have taken the science to the next step,
one we call Multi-Channel Discovery, or MCD(TM).
MCD is driven by the power of traditional medicinal chemistry
accelerated by a suite of computational methodologies that guide the synthesis
of highly active small molecules. At the core of MCD is our development of a
virtual library containing over 100 million molecules. Utilizing this "universe"
of compounds our chemists sequentially apply computer generated molecular
screens to filter compounds that will bind to the desired receptor. The unique
feature of MCD is that chemists are no longer constrained by the physical
properties of a particular compound but rather are free to work with thousands
of shapes and charges to design compounds that will fit onto the receptor
target.
The power of MCD however, lies not in its application to a single
receptor as a drug target but in the database of compounds that are
characterized and isolated for the next target from the same class of receptors.
Our current focus is on the most attractive receptor class in the pharmaceutical
industry, G-protein-coupled receptors. MCD is not a static process, but one that
becomes more powerful, more predictive, and more efficient with each subsequent
use. It is an artificial intelligence system applied to drug design.
In connection with our multi-channel technology, we utilize other
advanced technologies to enhance our drug discovery capabilities and to
accelerate the drug development process. These technologies include:
High-Throughput Screening. We have assembled a chemical library of
diverse, low molecular weight organic molecules for lead compound identification
and we have implemented robotics screening capabilities linked to our library of
compounds that facilitate the rapid identification of new drug candidates for
multiple drug targets. In addition, we have designed a 10,000-compound library
focused on some of our molecular targets. We believe that our utilization of
high-throughput screening and medicinal and peptide chemistry will enable us to
rapidly identify and optimize lead molecules.
Molecular Biology. Our scientists utilize novel techniques to examine
gene expression in a variety of cellular systems. We have developed a
sophisticated technique to evaluate the type and quantity of genes in various
cellular systems prior to the isolation of genes. We have also developed unique
expression vectors and cell lines that allow for the highly efficient protein
expression of specific genes.
Our drug discovery program creates a significant amount of genetic
sequence information. We have developed a bioinformatics system, which we
believe will allow us to identify novel genes involved in neurodegeneration. We
collect data with automated instruments, and we store and analyze the data using
customized computational tools.
Gene Sequencing. We apply integrated automated DNA sequencing and gene
identification technology in our drug discovery program, enabling us to perform
extended gene analysis in a rapid, high-throughput format with independent
linkage into a sequence identification database. We have optimized gene
sequencing instrumentation for differential display, a technique that may
facilitate the rapid identification of novel genes.
Our Business Strategy
Our goal is to become the leading therapeutic product-based
biopharmaceutical company focused on neurologic and endocrine diseases and
disorders. There are six key elements to our business strategy:
13
Build a Large and Diversified Product Portfolio to Mitigate Overall
Clinical and Technical Risk. We believe that by building a large and diverse
product pipeline, we can mitigate some of the risks associated with drug
development. We currently have 15 programs in various stages of research and
development, with seven projects in clinical development and eight research
projects to supply clinical compounds for the future. We take a portfolio
approach to managing our pipeline that balances the size of the market
opportunities with clear and defined clinical and regulatory paths to approval.
We do this to ensure that we focus our internal development resources on
innovative therapies with high probabilities of technical and commercial
success.
Identify Novel Drug Targets for the Development of Innovative Therapies
to Address Large Unmet Market Opportunities. We seek to identify and validate
novel drug targets for internal development or collaboration. For example, the
novel drug candidates we have identified to regulate CRF, which is believed to
be the central mediator of the body's stress response, may represent the first
new breakthrough for anxiety and depression in over 20 years.
Gonadotropin-releasing factor antagonists, compounds designed to reduce the
secretions of sex steroids, may represent the first novel non-injectible means
of treatment of prostate cancer and endometriosis. Melanocortin and hypocretin
modulators are compounds which affect proteins in the brain believed to be
involved in many activities of the body. We believe these compounds build upon
our franchise and expertise in obesity and sleep disorders. The creativity and
productivity of our discovery research group will continue to be a critical
component for our continued success. Our team of approximately 105 biologists
and chemists has a goal of delivering three innovative clinical compounds over
the next five years to fuel our research and development pipeline.
Establish Corporate Collaborations with Global Pharmaceutical Companies
to Assist in the Development of Our Products and Mitigate Financial Risk While
Retaining Significant Commercial Upside. We leverage the development, regulatory
and commercialization expertise of our corporate collaborators to accelerate the
development of our potential products while typically retaining co-promotional
rights, and at times commercial rights, in North America. We intend to further
leverage our resources by continuing to enter into strategic alliances to
enhance our internal development and commercialization capabilities. We
currently have strategic alliances with:
o GlaxoSmithKline, for second generation corticotropin-releasing factor
receptor antagonists to treat anxiety and depression and irritable
bowel syndrome;
o Wyeth-Ayerst, for compounds to treat neurodegenerative and psychiatric
diseases;
o Taisho, for compounds to treat Type 1 diabetes, in which the body does
not produce enough insulin; and
o Eli Lilly, for treatments of central nervous system disorders,
including obesity.
Acquire Rights to Complementary Drug Candidates. We plan to continue to
selectively acquire rights to products in various stages of development to take
advantage of our drug development capabilities. For example, in May 1998, we
licensed from the NIH an IL-4 fusion toxin which is currently in Phase II
clinical trials for recurrent malignant glioma, as well as kidney, lung and
other cancers. In May 1998, we acquired Northwest NeuroLogic, Inc. and thereby
considerably expanded our research pipeline. Through this acquisition, we
acquired the technology and intellectual property rights surrounding excitatory
amino acid transporters, a portion of which is now in collaboration with
Wyeth-Ayerst. We also acquired from Northwest NeuroLogic, Inc. intellectual
property relating to melanocortin technology and other technologies that we are
developing. In June 1998, we licensed exclusive worldwide commercial rights for
NBI-34060, our compound for the treatment of insomnia, from DOV Pharmaceuticals,
Inc. and have since moved this compound into advanced clinical development.
Supplement Our Internal Research Capabilities by Collaborating with
Leading Platform Technology Companies. We believe we can complement our
multidisciplinary research process by selectively accessing new technologies
from platform technology companies. Through creative collaborations with
technology leaders, we believe we can accelerate and expand our internal
discovery efforts. We have entered into a number of alliances with other
platform technology companies to enhance our drug discovery and development
capabilities. The most recent of these is our alliance with MediChem Life
Sciences to crystallize the CRF1 receptor to aid in design of a new class of CRF
blockers.
Outsource Capital Intensive and Non-Strategic Activities. We intend to
focus our resources on research and development activities by outsourcing our
requirements for clinical drug supply and certain pre-clinical studies and
clinical monitoring activities. We believe the availability of skilled contract
manufacturers and contractors will allow us to cost-effectively meet these needs
and thereby allow us to concentrate our full attention and resources on our core
discovery and development programs to generate additional product opportunities.
14
Our Strategic Alliances
One of our business strategies is to utilize strategic alliances to
enhance our development and commercialization capabilities. To date, we have
formed the following alliances:
GlaxoSmithKline. In July 2001, we announced a worldwide collaboration
with GSK to develop and commercialize CRF antagonists for psychiatric,
neurological and gastrointestinal diseases. Under the terms of this agreement,
Neurocrine and GSK will conduct a collaborative research program for up to five
years and collaborate in the development of our current lead compounds, as well
as novel back-up candidates and second generation compounds identified through
the collaborative research. In addition, Neurocrine will be eligible to receive
milestone payments as compounds progress through the research and development
process, royalties on future product sales and co-promotion rights in the U.S.
under some conditions. GSK may terminate the agreement at its discretion upon
prior written notice to us. In such event, we may be entitled to certain
payments and all product rights would revert to us. The total collaborative
value of the GSK collaboration is the largest in Neurocrine's history. As of
December 31, 2001, we have recorded revenues of $667,000 in license fees, $15.5
million in milestone payments, $2.7 million in sponsored research and
development and $390,000 in reimbursement of development costs. In addition, we
have $6.9 million of deferred license fees and sponsored research revenues that
will be amortized over the life of the agreement and as services are performed,
respectively.
Taisho Pharmaceutical Co., Ltd. In December 1999, we entered into an
agreement with Taisho, providing to them an exclusive option to obtain European,
Asian and North American development and commercialization rights for our
altered peptide ligand product, NBI-6024, for Type 1 diabetes in exchange for a
$2.0 million option fee. In July 2000, Taisho exercised its option as to Europe
and Asia, and in December 2000, Taisho exercised its option as to North America.
Together with Taisho, we formed a steering committee to oversee the worldwide
development of NBI-6024. We will receive license fees, milestone payments, and
reimbursement of 100% of worldwide development expenses. In addition, we will
receive payments on product sales for the term of the patents covering NBI-6024,
subject to adjustment for payments to third parties. Taisho may terminate the
agreement at its discretion upon prior written notice to us. In such event, all
product rights would revert to us. As of December 31, 2001, we have recorded
revenues of $2.0 million for the exclusive option, $1.1 million in license fees,
$9.5 million in milestone payments, $2.9 million in sponsored research and $8.3
million in reimbursement of development costs. In addition, we have $2.9 million
of deferred license fees and sponsored research revenues that will be amortized
over the life of the agreement and as services are performed, respectively.
Wyeth-Ayerst Laboratories. Effective January 1999, we entered into a
collaboration and license agreement with Wyeth-Ayerst relating to the research,
development and commercialization of compounds that control excitatory amino
acid transporters for the treatment of neurodegenerative and psychiatric
diseases. We have granted Wyeth-Ayerst exclusive and non-exclusive rights to
different portions of our excitatory amino acid transporters technology as well
as exclusive rights to any products developed during the collaboration. These
licenses are for the term of the patents licensed. We will receive royalties on
product sales for the terms of the patents covering the collaboration products,
subject to adjustments for royalties payable to other parties and for
competition. We will also receive royalties for products that are not the
subject of issued patents. Under certain conditions, we have the option to
co-promote collaboration products in Canada and the United States. Wyeth-Ayerst
may terminate the agreement if they decide that the research is not successful,
if they decide to stop the program or if we are acquired by another company. The
agreement may also be terminated by either party for the other party's failure
to meet its obligations under the agreement or bankruptcy. As of December 31,
2001, we have received payments and recognized a total of $12.4 million under
the Wyeth-Ayerst agreement, consisting of $9.0 million in sponsored research and
$3.4 million in milestone payments.
The three-year term of the sponsored research under the Wyeth-Ayerst
agreement was scheduled to terminate January 1, 2002, but in December 2001, we
and Wyeth-Ayerst agreed to extend the term of the sponsored research for a
period of three months during which time we and Wyeth-Ayerst will discuss a
further extension. In connection with the three-month extension, we received
$375,000 of sponsored research funding.
Eli Lilly and Company. In October 1996, we entered into a research and
license agreement with Eli 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, and CRF R2 agonists for central nervous system diseases and
disorders. Under the agreement, we received and recognized three years of
sponsored research and development payments totaling $17.2 million. We also are
15
entitled to milestone payments for certain development and regulatory
accomplishments. We will have the option to receive co-promotion rights and
share profits from commercial sales of select products that result from the
collaboration in the U.S. or receive royalties on U.S. product sales. We will
receive royalties on product sales for the rest of the world.
In October 1999, the funded portion of the research program concluded
as scheduled and, to our knowledge, Eli Lilly is not planning any specific
future development efforts, and we do not expect to receive any additional
payments under this agreement.
Janssen Pharmaceutica, N.V. In January 1995, we entered into the first
of two research and development agreements with Janssen to collaborate in the
discovery, development and commercialization of small molecule CRF R1
antagonists for the treatment of anxiety, depression and substance abuse. Under
the January 1995 agreement, Janssen funded three years of research at Neurocrine
and received exclusive licenses to all CRF R1 antagonist compounds developed
during the term of the funded research or during the year thereafter. The
collaborative research portion of the first Janssen agreement was completed as
scheduled in 1997. In September 1999, together with Janssen, we entered into an
amended agreement to expand the collaborative research and development efforts
to identify additional small molecule CRF antagonists for the treatment of
psychiatric disorders. In connection with the amended Janssen agreement, we
received an initial payment and two years of additional research funding for our
scientists working in collaboration with Janssen. All collaboration products
identified under the 1999 agreement are subject to the same terms and conditions
as the products arising under the 1995 agreement. This additional research was
completed in February 2001. Our 1999 agreement provides that in August 2001
Neurocrine was to receive either a $3.5 million milestone payment from Janssen
or exclusive rights to the first generation back-up compounds. We agreed to
postpone the August event to allow Janssen to complete certain studies with the
back-up program compounds. In March 2002, Janssen notified us that it had
discontinued development of the backup compound and elected to terminate both
the 1995 and 1999 agreements. As a result, exclusive rights to all of the first
generation CRF R1 antagonist compounds developed thereunder reverted to us. We
do not expect any additional payments of any kind under the Janssen agreement.
As of December 31, 2001, we have received and recognized a total of
$21.1 million, including $14.7 million in sponsored research, $3.5 million in
milestones, $2.0 million in license fees and $943,000 for reimbursement of
outside costs under these agreements. In connection with the 1995 agreement,
Johnson & Johnson Development Corporation purchased $5.0 million of our common
stock.
Risks Related to Our Strategic Alliances. We face the risks that we or
any of the above collaborators may not be successful in research and drug
discovery, that any pre-clinical and clinical drug candidates arising from the
collaborations may not generate commercial product candidates that have viable
clinical, regulatory and intellectual property profiles or that any commercial
products arising from any of these collaborations may not enjoy market
acceptance. Therefore, we may never receive any milestone payments or royalty
income under any of our collaboration agreements.
Intellectual Property
We seek to protect our lead compounds, compound libraries, expressed
proteins, synthetic organic processes, formulations, assays, cloned targets,
screening technology and other technologies by filing, or by causing to be filed
on our behalf, patent applications in the United States and abroad. We have 13
issued U.S. patents, approximately 60 pending U.S. patent applications and
another approximately 140 issued and pending foreign patents and applications.
We have licensed, from institutions such as The Salk Institute, Stanford
University, Oregon Health Sciences University, DOV Pharmaceuticals, Inc. and
others the rights to an additional 30 issued U.S. patents, 20 pending U.S.
patent applications, and 50 issued and pending foreign filings. Two of our
European patents are subject to opposition proceedings. These proceedings relate
to our broad patent covering immune therapeutics in diabetes and multiple
sclerosis. If successful, these opposition proceedings could reduce the breadth
of some of our proprietary rights, but we believe they would not materially
impede our commercialization strategy. We face the risk that one or more of the
above patent applications may be denied. We also face the risk that our issued
patents may be challenged or circumvented or may otherwise not provide
protection for any commercially viable products we develop.
The technologies we use in our research, as well as the drug targets we
select, may unintentionally infringe the patents or violate the proprietary
rights of third parties. If this occurs, we may be required to obtain licenses
to patents or proprietary rights of others in order to continue with the
commercialization of our products. We are aware of a European patent application
16
controlled by another company, which if granted in its broadest scope and held
to be valid, could impact the commercialization of our modified release insomnia
formulation in Europe unless we obtain a license, which may not be available to
us. We are also aware of pending and issued patent claims to melanin
concentrating hormone ligand and receptor, the hypocretin ligand and receptor
and certain uses of melanocortin subtype 4 agonists. We are conducting research
in all of those areas and may ultimately need to license those patents in order
to proceed. In addition, we are aware of a U.S. patent relating to IL-4
proteins that is controlled by another entity which, if construed very broadly,
and if valid as so construed, could prevent us from commercializing our IL-4
fusion toxin products in the United States unless we obtain a license, which may
not be available to us on commercially reasonable terms, or at all. We do not
believe that our research and development activities as currently conducted
infringe any valid issued patents.
NBI-34060, our leading gamma amino-butyric acid agonist compound for
the treatment of insomnia, is covered generically in an issued U.S. patent,
which we licensed from DOV Pharmaceuticals, Inc. The term of the U.S. patent is
due to expire in June 2003. NBI-34060 is not currently covered by any foreign
patents of which we are aware. We intend to seek additional protection of this
compound in three ways. First, we have filed nine U.S. and foreign patent
applications directed to the synthesis, formulations and various forms of
NBI-34060, which could extend patent protection to the year 2020. We face the
risk that these patents may not issue, or may subsequently be challenged
successfully. Second, patent term extension under the Hatch/Waxman Patent Term
Extension Act may add patent life in the U.S. beyond the June 2003 expiration,
depending on the length of clinical trials and other factors involved in the
filing of a new drug application. Third, in addition to this potential patent
protection, the United States, the European Union and Japan all provide data
protection for new medicinal compounds. If this protection is available, no
competitor may use the original applicant's data as the basis of a generic
marketing application during the period of data protection. This period of
exclusivity is five years in the United States, six years in Japan and six to
ten years in the European Union, measured from the date of FDA, or corresponding
foreign, approval.
In-Licensed Technology
We have in-licensed the following technologies to complement our
ongoing clinical and research programs. Most of these licenses extend for the
term of the related patent and contain customary royalty, termination and other
provisions.
o In June 2001, we licensed nonexclusive rights to the BON cell line
from the University of Texas Medical Branch.
o In May 2001, we licensed nonexclusive rights to a murine CCR7
expressing cell line from Public Health Service.
o In March 2001, we licensed nonexclusive rights to a saoS-2 cell line
from The Sloan-Kettering Institute for Cancer Research.
o In March 2001, we licensed a HERG cell line from Wisconsin Alumni
Research Foundation.
o In October 2000, we licensed nonexclusive rights to several GT1-cell
lines from The Salk Institute.
o In August 2000, we licensed nonexclusive rights to CRF R1 deficient
mice from the Research Development Foundation.
o In July 2000, we licensed exclusive rights to melanocortin subtype 3
receptor knock-out mice from Oregon Health Sciences University.
o In August 1999, we licensed nonexclusive rights to the human
gonadotropin-releasing hormone receptor from Mount Sinai School of
Medicine.
o In January 1999, we licensed exclusive worldwide rights to patents
relating to excitatory amino acid transporters and melanocortin from
Oregon Health Sciences University.
o In December 1998, we licensed nonexclusive rights to technology
covering melanocortin subtype 4 from the University of Michigan.
o In June 1998, we licensed exclusive worldwide rights to our sedative
compound, NBI-34060, from DOV Pharmaceuticals, Inc.
o In May 1998, we licensed exclusive worldwide rights to patents
covering NBI-3001, our IL-4 fusion toxin, from the National Institutes
of Health and inventors Ira Pastan and David Fitzgerald.
o In October 1997, we licensed co-exclusive rights to technology
relating to the prevention of diabetes from University Technology
Corporation.
17
o In November 1996, we licensed exclusive worldwide rights to technology
directed to peptide therapeutics for the treatment of autoimmune
disease from the Trustees of Dartmouth College.
o In November 1994, we licensed exclusive worldwide rights to technology
relating to treatment of multiple sclerosis using peptide analogs of
myelin basic protein from Stanford University.
o In November 1993, we licensed exclusive worldwide rights to CRF R1
from the Salk Institute for Biological Studies.
Manufacturing
We currently rely, and will continue to rely for at least the next few
years, on contract manufacturers to produce sufficient quantities of our product
candidates for use in our pre-clinical and anticipated clinical trials.
Manufacturers of our NBI-34060 clinical trial material include Organichem
Corporation, Pharmaceutics International, Inc. and Patheon, Inc. Polypeptide
Laboratories, Bachem, Cook Pharmaceutical Solutions, Pyramid Laboratories and
Prima Pharm Inc. manufacture our altered peptide ligands NBI-6024 and NBI-5788.
Cedarburg Pharmaceuticals, Albany Molecular Research and Pharmaceutics
International, Inc. manufacture our CRF antagonist compounds. MediChem and
Pharmaceutics International, Inc. manufacture our GnRH antagonist compounds.
Manufacturers of our NBI-3001 clinical trial material include Diosynth and
Charles River Laboratories.
There is currently a limited supply of some of these components.
Furthermore, the contract manufacturers that we have identified to date only
have limited experience at manufacturing, formulating, analyzing and packaging
our product candidates in quantities sufficient for conducting clinical trials
or for commercialization.
If we are unable to establish and maintain relationships with third
parties for manufacturing sufficient quantities of our product candidates and
their components that meet our planned time and cost parameters, it could delay
the development and timing of our clinical trials.
Marketing and Sales
We currently have no sales, marketing or distribution capabilities. In
order to commercialize any of our product candidates, we must either internally
develop sales, marketing and distribution capabilities or make arrangements with
third parties to perform these services. We intend to sell, market and
distribute some products directly and intend to rely on relationships with third
parties to sell, market and distribute other products. Under our collaboration
agreements with GSK, Wyeth-Ayerst, Taisho and Eli Lilly, we may have the
opportunity to co-promote some of our products in the United States. To market
any of our products directly, we must develop a marketing and sales force with
technical expertise and with supporting distribution capabilities, none of which
we currently have.
Government Regulation
Regulation by government authorities in the United States and foreign
countries is a significant factor in the development, manufacture and marketing
of our proposed products and in our ongoing research and product development
activities. All of our products will require regulatory approval by government
agencies prior to commercialization. In particular, human therapeutic products
are subject to rigorous pre-clinical studies 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.
Pre-clinical studies generally are conducted in laboratory animals to
evaluate the potential safety and the efficacy of a product. Drug developers
submit the results of pre-clinical studies to the FDA as a part of an
investigational new drug application which must be approved before we can begin
clinical trials in humans. Typically, clinical evaluation involves a time
consuming and costly three-phase process.
Phase I Clinical trials are conducted with a small number of subjects to
determine the early safety profile, maximum tolerated dose and
pharmacokinetics of the product in human volunteers.
18
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.
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 the progress of each of the three phases of
clinical trials that are conducted in the United States and may, at its
discretion, reevaluate, alter, suspend or terminate the testing based upon the
data accumulated to that point and the FDA's assessment of the risk/benefit
ratio to the patient. To date we have conducted many of our clinical trials in
Europe and South Africa.
Once Phase III trials are completed, drug developers submit the results
of pre-clinical studies and clinical trials to the FDA in the form of a new drug
application, or a biologics licensing application for approval to commence
commercial sales. In response, the FDA may grant marketing approval, request
additional information or deny the application if the FDA determines that the
application does not meet regulatory approval criteria. FDA approvals may not be
granted on a timely basis, or at all. Furthermore, the FDA may prevent a drug
developer from marketing a product under a label for its desired indications,
which may impair commercialization of the product. Similar regulatory procedures
must also be complied within countries outside the United States.
If the FDA approves the new drug application, the drug becomes
available for physicians to prescribe in the United States. After approval, the
drug developer must submit periodic reports to the FDA, including descriptions
of any adverse reactions reported. The FDA may request additional studies, known
as Phase IV, to evaluate long-term effects.
In addition to studies requested by the FDA after approval, a drug
developer may conduct other trials and studies to explore use of the approved
compound for treatment of new indications. The purpose of these trials and
studies and related publications is to broaden the application and use of the
drug and its acceptance in the medical community.
Orphan Drug Designation
The FDA may grant orphan drug designation to drugs intended to treat a
"rare disease or condition," which is generally a disease or condition that
affects fewer than 200,000 individuals in the United States. Orphan drug
designation must be requested before submitting a new drug application. After
the FDA grants orphan drug designation, the generic identity of the therapeutic
agent and its potential orphan use are disclosed publicly by the FDA. Orphan
drug designation does not convey any advantage in, or shorten the duration of,
the regulatory review and approval process. If a product that has orphan drug
designation subsequently receives FDA approval for the indication for which it
has orphan drug designation, the product is entitled to orphan exclusivity,
which means the FDA may not approve any other applications to market the same
drug for the same indication, except in very limited circumstances, for seven
years. Our IL-4 fusion toxin product candidate has received orphan drug
designation from the FDA for astrocytic glioma.
Approvals Outside the United States
We will have to complete an approval process similar to that in the
United States in virtually every foreign target market for our products in order
to commercialize our product candidates in those countries. The approval
procedure and the time required for approval vary from country to country and
may involve additional testing. Foreign approvals may not be granted on a timely
basis, or at all. In addition, regulatory approval of prices is required in most
countries other than the United States. We face the risk that the resulting
prices would be insufficient to generate an acceptable return to us or our
corporate collaborators.
Fast Track Designation
Congress enacted the Food and Drug Administration Modernization Act of
1997, in part, to ensure the timely availability of safe and effective drugs,
biologics and medical devices by expediting the FDA review process for new
products. The Food and Drug Administration Modernization Act establishes a
statutory program for the approval of so-called fast track products. The new law
defines a fast track product as a new drug or biologic intended for the
treatment of a serious or life-threatening condition that demonstrates the
potential to address unmet medical needs for such a condition. Under the new
19
fast track program, the sponsor of a new drug or biologic may request the FDA to
designate the drug or biologic as a fast track product at any time during
clinical development of the product. Fast-track designation provides an
expedited review of a product, which accelerates FDA approval.
We may seek fast track designation to secure expedited review of
appropriate product candidates. We can never be sure that we will obtain fast
track designation. We cannot predict the ultimate impact, if any, of the new
fast track process on the timing or likelihood of FDA approval of any of our
potential products. We received fast track designation for our IL-4 fusion
toxin.
Competition
The biotechnology and pharmaceutical industries are subject to rapid
and intense technological change. We face, and will continue to face,
competition in the development and marketing of our product candidates from
biotechnology and pharmaceutical companies, research institutions, government
agencies and academic institutions. Competition may also arise from, among other
things:
o other drug development technologies;
o methods of preventing or reducing the incidence of disease, including
vaccines; and
o new small molecule or other classes of therapeutic agents.
Developments by others may render our product candidates or
technologies obsolete or noncompetitive. We are performing research on or
developing products for the treatment of several disorders including insomnia,
anxiety, depression, malignant glioma, other forms of cancer, certain women's
health disorders, Type 1 diabetes and multiple sclerosis.
We are developing a gamma amino-butyric acid receptor agonist,
NBI-34060, for the treatment of insomnia. Ambien(copyright) and
Sonata(copyright) are already marketed for the treatment of insomnia by
Sanofi-Synthelabo and American Home Products / Elan, respectively.
In the area of anxiety disorders, our product candidates will compete
with well-established products such as Valium(copyright), marketed by Hoffman-La
Roche, Xanax(copyright), marketed by Pharmacia, BuSpar(copyright), marketed by
Bristol-Myers Squibb, among others, as well as generic alternatives for each of
these products.
We are also developing products for depression, which will compete with
well-established products in the antidepressant class, including
Prozac(copyright), marketed by Eli Lilly as well as its generic alternatives,
Zoloft(copyright), marketed by Pfizer, Paxil(copyright), marketed by GSK, and
Celexa(copyright), marketed by Forest Laboratories, among others. Certain
technologies under development by other pharmaceutical companies could result in
additional commercial treatments for depression and anxiety. In addition, a
number of companies also are conducting research on molecules to block CRF,
which is the same mechanism of action employed by our compounds.
Guilford Pharmaceuticals' Gliadel(copyright) is approved in the U.S.
and Europe for use in a subset of brain cancers known as recurrent glioblastoma
multiforme. Gliadel(copyright) is also under review by the FDA for treatment of
primary glioblastoma, and an application has been filed in Europe for this
indication. Gliadel(copyright) will potentially compete with our IL-4 fusion
toxin product, NBI-3001, if our product is approved by the FDA. Temozolomide,
marketed by Schering Plough, is approved in Europe for both recurrent malignant
glioma and recurrent astrocytoma and in the U.S. for only recurrent astrocytoma.
Temozolomide may also compete with our IL-4 fusion toxin product.
We are also pursuing development of NBI-3001 for the treatment of
peripheral solid tumors, such as kidney cancer and non-small-cell lung cancer.
Proleukin(copyright) is marketed by Chiron for the treatment of kidney cancer,
and drug treatments for non-small-cell lung cancer include Taxotere(copyright),
marketed by Aventis, Taxol(copyright), marketed by Bristol-Myers Squibb,
Navelbine(copyright), marketed by GSK, and Gemzar(copyright), which is marketed
by Eli Lilly. Breast cancer agents include Taxotere(copyright), marketed by
Aventis, Nolvadex(copyright) and Arimidex(copyright), marketed by AstraZeneca,
and Herceptin(copyright), marketed by Genentech.
Products that may compete with NBI-5788, our altered peptide ligand for
multiple sclerosis, include Betaseron(copyright) and Avonex(copyright), similar
forms of beta-interferon marketed by Berlex BioSciences and Biogen,
respectively, and Rebif(copyright) marketed by Ares Serono. Copaxone(copyright),
a peptide polymer marketed by Teva, has also been approved for the marketing in
the United States and certain other countries for the treatment of multiple
sclerosis.
20
There are a number of competitors to products in our research pipeline.
Lupron Depot(copyright), marketed by Takeda-Abbott Pharmaceuticals,
Zoladex(copyright), marketed by AstraZeneca, and Synarel(copyright), marketed by
Pharmacia, are gonadotropin-releasing hormone peptide agonists that have been
approved for the treatment of prostate cancer, endometriosis, infertility,
breast cancer and central precocious puberty. These drugs may compete with any
small molecule gonadotropin-releasing hormone antagonists we develop for these
indications. Anti-obesity therapeutics currently available include
Xenical(copyright) from Roche Laboratories and Meridia(copyright) from Abbott
Laboratories. If one or more of these products or programs are successful, it
may reduce or eliminate the market for our products.
Compared to us, many of our competitors and potential competitors have
substantially greater:
o capital resources;
o research and development resources, including personnel and
technology;
o regulatory experience;
o pre-clinical study and clinical testing experience;
o manufacturing and marketing experience; and
o production facilities.
Any of these competitive factors could harm our business, prospects,
financial condition and results of operations, which could negatively affect our
stock price.
Employees
As of December 31, 2001, we had 222 employees, consisting of 211
full-time and 11 part-time employees. Of the full-time employees, approximately
72 hold Ph.D., M.D. or equivalent degrees. None of our employees are represented
by a collective bargaining arrangement, and we believe our relationship with our
employees is good. We are highly dependent on the principal members of our
management and scientific staff. If we were to lose the services of any of these
personnel, we might not be able to achieve our development objectives.
Furthermore, recruiting and retaining qualified scientific personnel to perform
research and development work in the future will also be critical to our
success. We face the risk that we may not 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, we rely on members of our
Scientific Advisory Board and a significant number of consultants to assist us
in formulating our research and development strategies.
Insurance
We maintain product liability insurance for our clinical trials. We
intend to expand our 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 we will be able to maintain insurance coverage at a reasonable cost
or in sufficient amounts to protect us against losses due to liability. There
can also be no assurance that we will be able to obtain commercially reasonable
product liability insurance for any products approved for marketing.
Our Scientific Advisory Board
We have assembled a Scientific Advisory Board that currently consists
of 12 individuals. Members of our Scientific Advisory Board are leaders in the
fields of neurobiology, immunology, endocrinology, psychiatry and medicinal
chemistry. Our Scientific Advisory Board advises us in the selection,
implementation and prioritization of our research programs.
Our Scientific Advisory Board presently consists of the following
individuals:
Susan G. Amara, Ph.D., a Senior Scientist and Professor at the Vollum
Institute for Advanced Biomedical Research and an Investigator in the Howard
Hughes Medical Institute, is an expert on the cellular and molecular biology of
neurotransmitter transporters, excitatory amino acid transporter structure and
regulation and signaling roles of neurotransmitter transporters.
21
Dale Boger, Ph.D., joined the Scripps Institute in 1991 as the Richard
and Alice Kramer Professor of Chemistry and in 1996 was also appointed as a
member of Skaggs Institute for Chemical Biology. Dr. Boger is internationally
recognized for his work in organic synthesis, heterocyclic chemistry, natural
products total synthesis and biological evaluation, synthetic methodology
development, medicinal and bioorganic chemistry and has made seminal
contributions to the understanding of DNA-agent interactions of naturally
occurring antitumor-antibiotics.
Michael Brownstein, M.D., Ph.D., is Chief of the Laboratory of Genetics
at the National Institute of Mental Health and National Human Research
Institute. 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.
Roger D. Cone, Ph.D., a senior scientist at the Vollum Institute for
Advanced Biomedical Research, is an international expert on the neuroendocrine
system, with particular expertise on the melanocortin system and the
hypothalamic control of energy homeostasis. Dr. Cone served as an editor of the
Journal Endocrinology through December 2001.
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 Professor 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 pre-clinical behavioral procedures
for the screening of anxiolytic and antidepressant drugs and memory enhancers.
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.
Thomas Roth, Ph.D., is the head of the Division of Sleep Disorder
Research at the Henry Ford Hospital Research Institute. Dr. Roth is an
internationally recognized expert in the field of sleep research. His areas of
specialization are sleep homeostasis and neuropharmacology of sleep.
Lawrence J. Steinman, M.D., is our Chief Scientific Advisor,
Neuroimmunology and a member of our Founding Board of Scientific and Medical
Advisors and our Board of Directors.
Wylie W. Vale, Ph.D., is our Chief Scientific Advisor,
Neuroendocrinology and a member of our Founding Board of Scientific and Medical
Advisors and our Board of Directors.
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 our Scientific Advisory Board has signed a
consulting agreement that contains confidentiality provisions and restricts him
or her from competing with us for the term of the agreement. Each member of our
Scientific Advisory Board receives either a per diem consulting fee or a
retainer fee. Each member also has received Neurocrine stock or stock options,
which vest over time. All members of our Scientific Advisory Board are full-time
employees of a university or research institute that has regulations and
policies which limit their ability to act as part-time consultants or in other
capacities for any commercial enterprise, including us. A change in these
regulations or policies could adversely affect our relationship with any of our
Scientific Advisory Board members.
22
RISK FACTORS
Risks Related to the Company
We have a history of losses and expect to incur substantial losses and
negative operating cash flows for the foreseeable future, and we may never
achieve sustained profitability.
Since our inception, we have incurred significant net losses, including
net losses of $36.9 million in the year ended December 31, 2001. As a result of
ongoing operating losses, we had an accumulated deficit of $107.4 million as of
December 31, 2001. We do not expect to be profitable in 2002. We have not yet
completed the development, including obtaining regulatory approvals, of any
products and, consequently, have not generated revenues from the sale of
products. Even if we succeed in developing and commercializing one or more of
our drugs, we expect to incur substantial losses for the foreseeable future. We
also expect to continue to incur significant operating and capital expenditures
and anticipate that our expenses will increase substantially in the foreseeable
future as we:
o seek regulatory approvals for our product candidates;
o develop, formulate, manufacture and commercialize our drugs;
o implement additional internal systems and infrastructure; and
o hire additional clinical and scientific personnel.
We also expect to experience negative cash flow for the foreseeable
future as we fund our operating losses and capital expenditures. As a result, we
will need to generate significant revenues to achieve and maintain
profitability. We may not be able to generate these revenues, and we may never
achieve profitability in the future. Our failure to achieve or maintain
profitability could negatively impact the market price of our common stock. Even
if we do become profitable, we cannot assure you that we would be able to
sustain or increase profitability on a quarterly or annual basis.
If we cannot raise additional funding, we may be unable to complete
development of our product candidates.
We may require additional funding in order to continue our research and
product development programs, including pre-clinical testing and clinical trials
of our product candidates, for operating expenses, and to pursue regulatory
approvals for product candidates. We also may require additional funding to
establish manufacturing and marketing capabilities in the future. We believe
that our existing capital resources, together with interest income and future
payments due under our strategic alliances, will be sufficient to satisfy our
current and projected funding requirements for at least the next twelve months.
However, these resources might be insufficient to conduct research and
development programs as planned. If we cannot obtain adequate funds, we may be
required to curtail significantly one or more of our research and development
programs or obtain funds through additional arrangements with corporate
collaborators or others that may require us to relinquish rights to some of our
technologies or product candidates.
Our future capital requirements will depend on many factors, including:
o continued scientific progress in our research and development
programs;
o the magnitude of our research and development programs;
o progress with pre-clinical testing and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the costs involved in filing and pursuing patent applications and
enforcing patent claims;
o competing technological and market developments;
o the establishment of additional strategic alliances;
o the cost of manufacturing facilities and of commercialization
activities and arrangements; and
o the cost of product in-licensing and any possible acquisitions.
We intend to seek additional funding through strategic alliances, and
may seek additional funding through public or private sales of our securities,
including equity securities. In addition, we have leased equipment and may
continue to pursue opportunities to obtain additional debt financing in the
future. However, additional equity or debt financing might not be available on
reasonable terms, if at all, and any additional equity financings will be
dilutive to our stockholders.
23
Because the development of our product candidates is subject to a
substantial degree of technological uncertainty, we may not succeed in
developing any of our product candidates.
All of our product candidates are in research or development and we do
not expect any of our product candidates to be commercially available for the
foreseeable future, if at all. Only a small number of research and development
programs ultimately result in commercially successful drugs. Potential products
that appear to be promising at early stages of development may not reach the
market for a number of reasons. These reasons include the possibilities that the
potential products may:
o be found ineffective or cause harmful side effects during pre-clinical
studies or clinical trials;
o fail to receive necessary regulatory approvals on a timely basis or at
all;
o be precluded from commercialization by proprietary rights of third
parties;
o be difficult to manufacture on a large scale; or
o be uneconomical or fail to achieve market acceptance.
If any of these potential problems occurs, we may never successfully
market any products.
In November 2001, we began enrolling subjects in a Phase III clinical
trial for NBI-34060, our insomnia product under development. Since this is our
most advanced product program, our business and reputation would be particularly
harmed if the product does not prove to be efficacious in our late stage
clinical trials or we fail to receive necessary regulatory approvals on a timely
basis or achieve market acceptance.
We may not receive regulatory approvals for our product candidates or
approvals may be delayed.
Regulation by government authorities in the United States and foreign
countries is a significant factor in the development, manufacture and marketing
of our proposed products and in our ongoing research and product development
activities. Any failure to receive the regulatory approvals necessary to
commercialize our product candidates would have a material adverse effect on our
business. The process of obtaining these approvals and the subsequent
substantial compliance with appropriate federal and state statutes and
regulations require spending substantial time and financial resources. If we
fail or our collaborators or licensees fail to obtain or maintain, or encounter
delays in obtaining or maintaining, regulatory approvals, it could adversely
affect the marketing of any products we develop, our ability to receive product
or royalty revenues and our liquidity and capital resources. All of our products
are in research and development and we have not yet requested or received
regulatory approval to commercialize any product from the FDA or any other
regulatory body. In addition, we have limited experience in filing and pursuing
applications necessary to gain regulatory approvals, which may impede our
ability to obtain such approvals.
In particular, human therapeutic products are subject to rigorous
pre-clinical testing and clinical trials and other approval procedures of the
FDA and similar regulatory authorities in foreign countries. The FDA regulates
among other things, the development, testing, manufacture, safety, efficacy,
record keeping, labeling, storage, approval, advertising, promotion, sale and
distribution of biopharmaceutical products. Securing FDA approval requires the
submission of extensive pre-clinical and clinical data and supporting
information to the FDA for each indication to establish the product candidate's
safety and efficacy. The approval process may take many years to complete and
may involve ongoing requirements for post-marketing studies. Any FDA or other
regulatory approval of our product candidates, once obtained, may be withdrawn.
If our potential products are marketed abroad, they will also be subject to
extensive regulation by foreign governments.
Our clinical trials may fail to demonstrate the safety and efficacy of
our product candidates, which could prevent or significantly delay their
regulatory approval.
Any failure or substantial delay in completing clinical trials for our
product candidates may severely harm our business. Before obtaining regulatory
approval for the sale of any of our potential products, we must subject these
product candidates to extensive pre-clinical and clinical testing to demonstrate
their safety and efficacy for humans. Clinical trials are expensive,
time-consuming and may take years to complete.
In connection with our clinical trials, we face the risks that:
o we or the FDA may suspend the trials;
o we may discover that a product candidate may cause harmful side
effects;
24
o the results may not replicate the results of earlier, smaller trials;
o the results may not be statistically significant;
o patient recruitment may be slower than expected; and
o patients may drop out of the trials.
Also, 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.
The independent clinical investigators and contract research
organizations that we rely upon to conduct our clinical trials may not be
diligent, careful or timely, and may make mistakes, in the conduct of our
trials.
We depend on independent clinical investigators and contract research
organizations, or CROs, to conduct our clinical trials under their agreements
with us. The investigators are not our employees and we cannot control the
amount or timing of resources that they devote to our programs. If independent
investigators fail to devote sufficient time and resources to our drug
development programs, or if their performance is substandard, it will delay the
approval of our FDA applications and our introductions of new drugs. The CROs we
contract with for execution of our clinical trials play a significant role in
the conduct of the trials and the subsequent collection and analysis of data.
Failure of the CROs to meet their obligations could adversely affect clinical
development of our products. Moreover, these independent investigators and CROs
may also have relationships with other commercial entities, some of which may
compete with us. If independent investigators and CROs assist our competitors at
our expense, it could harm our competitive position.
We depend on continuing our current strategic alliances and developing
additional strategic alliances to develop and commercialize our compounds.
We depend upon our corporate collaborators to provide adequate funding
for a number of our programs. Under these arrangements, our corporate
collaborators are responsible for:
o selecting compounds for subsequent development as drug candidates;
o conducting pre-clinical studies and clinical trials and obtaining
required regulatory approvals for these drug candidates; and
o manufacturing and commercializing any resulting drugs.
Our strategy for developing and commercializing our products is
dependent upon maintaining our current arrangements and establishing new
arrangements with research collaborators, corporate collaborators and others. We
have collaborations with GlaxoSmithKline, Wyeth-Ayerst and Taisho. Because we
rely heavily on our corporate collaborators, the development of our projects
would be substantially delayed if our collaborators:
o fail to select a compound we have discovered for subsequent
development into marketable products;
o fail to gain the requisite regulatory approvals of these products;
o do not successfully commercialize products that we originate;
o do not conduct their collaborative activities in a timely manner;
o do not devote sufficient time and resources to our partnered programs
or potential products;
o terminate their alliances with us;
o develop, either alone or with others, products that may compete with
our products;
o dispute our respective allocations of rights to any products or
technology developed during our collaborations; or
o merge with a third party that may wish to terminate the collaboration.
These issues and possible disagreements with our corporate
collaborators could lead to delays in the collaborative research, development or
commercialization of many of our product candidates. Furthermore, disagreements
with these parties could require or result in litigation or arbitration, which
would be time-consuming and expensive. If any of these issues arises, it may
delay the filing of our new drug applications and, ultimately, our generation of
product revenues.
25
We have no manufacturing capabilities. If third-party manufacturers of
our product candidates fail to devote sufficient time and resources to our
concerns, or if their performance is substandard, our clinical trials and
product introductions may be delayed and our costs may rise.
We have in the past utilized, and intend to continue to utilize,
third-party manufacturers to produce the drug compounds we use in our clinical
trials and for the potential commercialization of our future products. We have
no experience in manufacturing products for commercial purposes and do not
currently have any manufacturing facilities. Consequently, we depend on several
contract manufacturers for all production of products for development and
commercial purposes. If we are unable to obtain or retain third-party
manufacturers, we will not be able to commercialize our products. The
manufacture of our products for clinical trials and commercial purposes is
subject to specific FDA regulations. In addition, our third-party manufacturers
might not comply with FDA regulations relating to manufacturing our products for
clinical trials and commercial purposes or other regulatory requirements now or
in the future. Our reliance on contract manufacturers also exposes us to the
following risks:
o Contract manufacturers may encounter difficulties in achieving volume
production, quality control and quality assurance, and also may
experience shortages in qualified personnel. As a result, our contract
manufacturers might not be able to meet our clinical schedules or
adequately manufacture our products in commercial quantities when
required;
o Switching manufacturers may be difficult because the number of
potential manufacturers is limited. It may be difficult or impossible
for us to find a replacement manufacturer quickly on acceptable terms,
or at all;
o Our contract manufacturers may not perform as agreed or may not remain
in the contract manufacturing business for the time required to
successfully produce, store and distribute our products; and
o Drug manufacturers are subject to ongoing periodic unannounced
inspection by the FDA, the Drug Enforcement Agency, and corresponding
state agencies to ensure strict compliance with good manufacturing
practices and other government regulations and corresponding foreign
standards. We do not have control over third-party manufacturers'
compliance with these regulations and standards.
Our current dependence upon third parties for the manufacture of our
products may harm our profit margin, if any, on the sale of our future products
and our ability to develop and deliver products on a timely and competitive
basis.
If we are unable to retain and recruit qualified scientists or if any
of our key senior executives discontinues his or her employment with us, it will
delay our development efforts.
We are highly dependent on the principal members of our management and
scientific staff. The loss of any of these people could impede the achievement
of our development objectives. Furthermore, recruiting and retaining qualified
scientific personnel to perform research and development work in the future will
also be critical to our success. We may be unable 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, we rely on members of our
Scientific Advisory Board and a significant number of consultants to assist us
in formulating our research and development strategy. All of our consultants and
members of the Scientific Advisory Board are employed by employers other than
us. They may have commitments to, or advisory or consulting agreements with,
other entities that may limit their availability to us.
We may be subject to claims that we or our employees have wrongfully
used or disclosed alleged trade secrets of their former employers.
As is commonplace in the biotechnology industry, we employ individuals
who were previously employed at other biotechnology or pharmaceutical companies,
including our competitors or potential competitors. Although no claims against
us are currently pending, we may be subject to claims that these employees or we
have inadvertently or otherwise used or disclosed trade secrets or other
proprietary information of their former employers. Litigation may be necessary
to defend against these claims. Even if we are successful in defending against
these claims, litigation could result in substantial costs and be a distraction
to management.
26
We have no marketing experience, sales force or distribution
capabilities, and if our products are approved, we may not be able to
commercialize them successfully.
Although we do not currently have any marketable products, our ability
to produce revenues ultimately depends on our ability to sell our products if
and when they are approved by the FDA. We currently have no experience in
marketing or selling pharmaceutical products and we do not have a marketing and
sales staff or distribution capabilities. If we fail to establish successful
marketing and sales capabilities or fail to enter into successful marketing
arrangements with third parties, our product revenues will suffer.
Governmental and third-party payors may impose sales and pharmaceutical
pricing controls on our products that could limit our product revenues and delay
profitability.
The continuing efforts of government and third-party payors to contain
or reduce the costs of health care through various means may reduce our
potential revenues. These payors' efforts could decrease the price that we
receive for any products we may develop and sell in the future. In addition,
third-party insurance coverage may not be available to patients for any products
we develop. If government and third-party payors do not provide adequate
coverage and reimbursement levels for our products, or if price controls are
enacted, our product revenues will suffer.
If physicians and patients do not accept our products, we may not
recover our investment.
The commercial success of our products, if they are approved for
marketing, will depend upon the medical community and patients accepting our
products as being safe and effective.
The market acceptance of our products could be affected by a number of
factors, including:
o the timing of receipt of marketing approvals;
o the safety and efficacy of the products;
o the success of existing products addressing our target markets or the
emergence of equivalent or superior products; and
o the cost-effectiveness of the products.
In addition, market acceptance depends on the effectiveness of our
marketing strategy, and, to date, we have very limited sales and marketing
experience or capabilities. If the medical community and patients do not
ultimately accept our products as being safe and effective, we may not recover
our investment.
Risks Related to Our Industry
We face intense competition and if we are unable to compete
effectively, the demand for our products, if any, may be reduced.
The biotechnology and pharmaceutical industries are subject to rapid
and intense technological change. We face, and will continue to face,
competition in the development and marketing of our product candidates from
academic institutions, government agencies, research institutions and
biotechnology and pharmaceutical companies. Competition may also arise from,
among other things:
o other drug development technologies;
o methods of preventing or reducing the incidence of disease, including
vaccines; and
o new small molecule or other classes of therapeutic agents.
Developments by others may render our product candidates or
technologies obsolete or noncompetitive.
We are performing research on or developing products for the treatment
of several disorders including anxiety, depression, insomnia, malignant glioma,
other forms of cancer and multiple sclerosis, and there are a number of
competitors to products in our research pipeline. If one or more of these
products or programs are successful, the market for our products may be reduced
or eliminated.
Compared to us, many of our competitors and potential competitors have
substantially greater:
27
o capital resources;
o research and development resources, including personnel and
technology;
o regulatory experience;
o pre-clinical study and clinical testing experience;
o manufacturing and marketing experience; and
o production facilities.
Any of these competitive factors could reduce demand for our products.
For more specific information about the competition we face, please review the
information under the subheading "Competition" earlier in this report.
If we are unable to protect our intellectual property, our competitors
could develop and market products based on our discoveries, which may reduce
demand for our products.
Our success will depend on our ability to, among other things:
o obtain patent protection for our products;
o preserve our trade secrets;
o prevent third parties from infringing upon our proprietary rights; and
o 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, we intend to seek patent
protection for our proprietary technology and compounds. However, we face the
risk that we may not obtain any of these patents and that the breadth of claims
we obtain, if any, may not provide adequate protection of our proprietary
technology or compounds.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position, which we seek to protect, in part, by confidentiality
agreements with our commercial collaborators, employees and consultants. We also
have invention or patent assignment agreements with our employees and some, but
not all, of our commercial collaborators and consultants. However, if our
employees, commercial collaborators or consultants breach these agreements, we
may not have adequate remedies for any such breach, and our trade secrets may
otherwise become known or independently discovered by our competitors.
In addition, although we own a number of patents, the issuance of a
patent is not conclusive as to its validity or enforceability, and third parties
may challenge the validity or enforceability of our patents. We cannot assure
you how much protection, if any, will be given to our patents if we attempt to
enforce them, and they are challenged in court or in other proceedings. It is
possible that a competitor may successfully challenge our patents or that
challenges will result in limitations of their coverage. Moreover, competitors
may infringe our patents or successfully avoid them through design innovation.
To prevent infringement or unauthorized use, we may need to file infringement
claims, which are expensive and time-consuming. In addition, in an infringement
proceeding a court may decide that a patent of ours is not valid or is
unenforceable, or may refuse to stop the other party from using the technology
at issue on the ground that our patents do not cover its technology. Two of our
European patents are subject to opposition proceedings which, if successful,
could reduce the breadth of some of our proprietary rights. These proceedings
relate to our broad patent covering immune therapeutics in diabetes and multiple
sclerosis. 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 our patent applications or those of our licensors.
Litigation or interference proceedings may fail and, even if successful, may
result in substantial costs and be a distraction to management. We cannot assure
you that we will be able to prevent misappropriation of our proprietary rights,
particularly in countries where the laws may not protect such rights as fully as
in the United States. For more information about our intellectual property,
please review the information under the subheading "Intellectual Property"
earlier in this report.
The technologies we use in our research as well as the drug targets we
select may unintentionally infringe the patents or violate the proprietary
rights of third parties.
28
We cannot assure you that third parties will not assert patent or other
intellectual property infringement claims against us or our collaboration
partners with respect to technologies used in potential products. Any claims
that might be brought against us relating to infringement of patents may cause
us to incur significant expenses and, if successfully asserted against us, may
cause us to pay substantial damages. Even if we were to prevail, any litigation
could be costly and time-consuming and could divert the attention of our
management and key personnel from our business operations. Furthermore, as a
result of a patent infringement suit brought against us or our collaboration
partners, we or our collaboration partners may be forced to stop or delay
developing, manufacturing or selling potential products that are claimed to
infringe a third party's intellectual property unless that party grants us or
our collaboration partners rights to use its intellectual property. In such
cases, we may be required to obtain licenses to patents or proprietary rights of
others in order to continue to commercialize our products. However, we may not
be able to obtain any licenses required under any patents or proprietary rights
of third parties on acceptable terms, or at all. Even if our collaboration
partners or we were able to obtain rights to the third party's intellectual
property, these rights may be non-exclusive, thereby giving our competitors
access to the same intellectual property. Ultimately we may be unable to
commercialize some of our potential products or may have to cease some of our
business operations as a result of patent infringement claims, which could
severely harm our business.
We face potential product liability exposure far in excess of our
limited insurance coverage.
The use of any of our potential products in clinical trials, and the
sale of any approved products, may expose us to liability claims. These claims
might be made directly by consumers, health care providers, pharmaceutical
companies or others selling our products. We have obtained limited product
liability insurance coverage for our clinical trials in the amount of $10
million per occurrence and $10 million in the aggregate. However, our insurance
may not reimburse us or may not be sufficient to reimburse us for any expenses
or losses we may suffer. Moreover, insurance coverage is becoming increasingly
expensive, and we may not be able to maintain insurance coverage at a reasonable
cost or in sufficient amounts to protect us against losses due to liability. We
intend to expand our insurance coverage to include the sale of commercial
products if we obtain marketing approval for product candidates in development,
but we may be unable to obtain commercially reasonable product liability
insurance for any products approved for marketing. On occasion, juries have
awarded large judgments in class action lawsuits based on drugs that had
unanticipated side effects. A successful product liability claim or series of
claims brought against us would decrease our cash reserves and could cause our
stock price to fall.
Our activities involve hazardous materials and we may be liable for any
resulting contamination or injuries.
Our research activities involve the controlled use of hazardous
materials. We cannot eliminate the risk of accidental contamination or injury
from these materials. If an accident occurs, a court may hold us liable for any
resulting damages, which may reduce our cash reserves and force us to seek
additional financing.
ITEM 2. PROPERTIES
We lease approximately 93,000 square feet of space at our headquarters
in San Diego, California, of which approximately 65% is laboratory space
dedicated to research and development. This facility was constructed in 1998 and
is under lease through August 2013. The lease payments are $216,000 per month
with annual increases of 4% on September 1st of each year. We have sublet
approximately 10,500 square feet of this building to one tenant through March
31, 2002.
We believe that our property and equipment are generally well
maintained, in good operating condition and adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
We are currently not subject to any material legal proceedings.
29
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
Our common stock has been traded on the Nasdaq National Market System
under the symbol NBIX since our initial public offering on May 23, 1996. Prior
to that time there was no established public trading market for our common
stock. The following table sets forth for the periods indicated the high and low
sale price for the common stock as reported by the Nasdaq National Market. These
prices do not include retail markups, markdowns or commissions.
High Low
---- ---
Year Ended December 31, 2000
1st Quarter .......................... $47.50 $20.75
2nd Quarter .......................... 39.75 13.94
3rd Quarter .......................... 46.00 29.13
4th Quarter .......................... 44.88 25.50
Year Ended December 31, 2001
1st Quarter .......................... $36.50 $14.25
2nd Quarter .......................... 39.99 16.75
3rd Quarter .......................... 40.71 27.93
4th Quarter .......................... 54.26 30.36
As of February 28, 2002, there were approximately 111 stockholders of
record of our common stock. We have not paid any cash dividends on our common
stock since inception and do not anticipate paying cash dividends in the
foreseeable future.
30
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from our
audited financial statements. The information set forth below is not necessarily
indicative of the results of future operations and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto appearing elsewhere
in this Form 10-K.
2001 2000 1999 (2) 1998 (1)(2) 1997
--------- --------- --------- --------- ----------
(in thousands, except for earnings/(loss) per share data)
STATEMENT OF OPERATIONS DATA
Revenues
Sponsored research and development ....... $ 16,880 $ 6,881 $ 12,662 $ 12,361 $ 14,985
Milestones and license fees .............. 22,937 6,345 3,000 2,500 10,250
Grant income and other revenues .......... 1,425 1,362 1,129 1,176 909
--------- --------- --------- --------- ---------
Total revenues ........................... 41,242 14,588 16,791 16,037 26,144
Operating expenses
Research and development ................. 74,267 40,227 29,169 21,803 18,758
General and administrative ............... 10,857 9,962 7,476 6,594 5,664
Write-off of acquired in-process research
and development and licenses ............ -- -- -- 4,910 --
--------- --------- --------- --------- ---------
Total operating expenses ................. 85,124 50,189 36,645 33,307 24,422
Income (loss) from operations ............ (43,882) (35,601) (19,854) (17,270) 1,722
Interest income, net ..................... 6,662 6,048 2,851 4,000 3,931
Other income ............................. 430 1,047 1,066 504 818
Equity in NPI losses and other
adjustments, net ........................ -- -- (885) (7,188) (1,130)
--------- --------- --------- --------- ---------
Net income (loss) before income taxes .... (36,790) (28,506) (16,822) (19,954) 5,341
Income taxes ............................. 120 302 -- 1 214
--------- --------- --------- --------- ---------
Net income (loss) ........................ $(36,910) $(28,808) $(16,822) $(19,955) $ 5,127
========= ========= ========= ========= =========
Earnings (loss) per share
Basic ................................... $ (1.42) $ (1.30) $ (0.88) $ (1.10) $ 0.30
Diluted ................................. $ (1.42) $ (1.30) $ (0.88) $ (1.10) $ 0.28
Shares used in calculation of earnings
(loss) per share
Basic .................................. 26,028 22,124 19,072 18,141 16,930
Diluted ................................ 26,028 22,124 19,072 18,141 18,184
BALANCE SHEET DATA
Cash, cash equivalents
and short-term investments .............. $319,982 $164,670 $ 91,098 $ 62,670 $ 75,092
Working capital .......................... 306,754 157,446 86,168 60,064 69,362
Total assets ............................. 346,350 185,962 109,222 80,529 91,903
Long-term debt and capital
lease obligations ....... 3,600 2,283 2,139 2,247 722
Accumulated deficit ...................... (107,390) (70,480) (41,672) (24,850) (4,895)
Total stockholders' equity ............... 310,393 163,208 96,354 71,958 83,152
- ----------
(1) Includes results of operations and financial position of Northwest
NeuroLogic, Inc. from May 28, 1998, the date of acquisition.
(2) Sponsored research and development includes $491 and $3,610 in revenues
from related party for the years ended December 31, 1999 and 1998,
respectively.
31
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 section contains forward-looking statements
which involve risks and uncertainties, pertaining generally to the expected
continuation of our 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, pre-clinical testing and clinical trials of potential products, the
period of time that our existing capital resources will meet our funding
requirements, and our financial results of operations. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including those set forth in this Annual Report on
Form 10-K.
Overview
We incorporated in California in 1992 and reincorporated in Delaware in
1996. Since we were founded, we have been engaged in the discovery and
development of novel pharmaceutical products for neurologic and endocrine
diseases and disorders. Many of our product candidates address some of the
largest pharmaceutical markets in the world, including insomnia, anxiety,
depression, cancer, multiple sclerosis and diabetes. To date, we have not
generated any revenues from the sale of products, and we do not expect to
generate any product revenues in the foreseeable future. We have funded our
operations primarily through private and public offerings of our common stock
and payments received under research and development agreements. We are
developing a number of products with corporate collaborators and will rely on
existing and future collaborators to meet funding requirements. We expect to
generate future net losses due to significant increases in operating expenses as
product candidates are advanced through the various stages of clinical
development. As of December 31, 2001, we have incurred a cumulative deficit of
$107.4 million and expect to incur operating losses in the future, which may be
greater than losses in prior years.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations is based upon financial statements, which we have prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses, and related disclosures. On an on-going basis, we evaluate these
estimates, including those related to revenues under collaborative research
agreements and grants, clinical trial accruals (R&D expense), facility lease,
investments, and fixed assets. Estimates are based on historical experience,
information received from third parties and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. The items
in our financial statements requiring significant estimates and judgments are as
follows:
Revenues under collaborative research agreements and grants are
recognized as research costs are incurred over the period specified in the
related agreement or as the services are performed. These agreements are on a
best-efforts basis and do not require scientific achievement as a performance
obligation and provide for payment to be made when costs are incurred or the
services are performed. All fees are nonrefundable to the collaborators.
Up-front, nonrefundable payments for license fees and advance payments for
sponsored research revenues received in excess of amounts earned are classified
as deferred revenue and recognized as income over the period earned. Milestone
payments are recognized as revenue upon achievement of pre-defined scientific
events. Revenues from government grants are recognized based on a
percentage-of-completion basis as the related costs are incurred. We recognize
revenue only on payments that are nonrefundable and when the work is performed.
Research and development (R&D) expenses include related salaries,
contractor fees, facilities costs, administrative expenses and allocations of
corporate costs. All such costs are charged to R&D expense as incurred. These
expenses result from our independent R&D efforts as well as efforts associated
with collaborations, grants and in-licensing arrangements. In addition, we fund
R&D at other companies and research institutions under agreements, which are
generally cancelable. We review and accrue clinical trials expenses based on
work performed, which relies on estimates of total hours incurred and completion
of certain events. We follow this method since reasonably dependable estimates
32
of the costs applicable to various stages of a research agreement or clinical
trial can be made. Accrued clinical costs are subject to revisions as trials
progress to completion. Revisions are charged to expense in the period in which
the facts that give rise to the revision become known.
We lease our current facility under an operating lease that generally
requires us to pay taxes, insurance and maintenance. Based on the structure of
the arrangement, our operating lease is commonly referred to as a "synthetic
lease." A synthetic lease is a form of off-balance sheet financing under which
an unrelated third party funds up to 100% of the costs for the acquisition
and/or construction of the facility into a special purpose entity (SPE) and
leases the facility to a lessee. At least 3% of the third party funds represent
at-risk equity. If at any time the third party fails to maintain at least 3%
at-risk equity, we will need to consolidate the SPE, which will result in debt
and equity being recorded in our financial statements. Our synthetic lease is
treated as an operating lease for accounting purposes and a financing lease for
tax purposes. We selected the synthetic lease for the financing advantages.
Also, the agreement provides that at our option, we may purchase the building by
repaying the first mortgage balance. We periodically review the fair value of
the property leased to determine potential accounting ramifications.
We record an investment impairment charge when we believe an investment
has experienced a decline in value that is other than temporary. Future adverse
changes in market conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investment's current carrying value,
thereby possibly requiring an impairment charge in the future.
We review long-lived assets, including leasehold improvements and
property and equipment, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. Long-lived assets and certain identifiable intangible assets to be
disposed of are reported at the lower of the carrying amount or fair value less
the cost to dispose.
Results of Operations for Years ended December 31, 2001, 2000 and 1999
Our revenues for the year ended December 31, 2001 were $41.2 million
compared with $14.6 million in 2000, and $16.8 million in 1999. The increase in
revenues from 2000 to 2001 was primarily the result of the Taisho and GSK
collaborations, which were effective July 2000 and July 2001, respectively.
Under the Taisho agreement, we recognized $16.6 million during 2001 compared
with $7.1 million in 2000. Under the GSK agreement, we recognized $19.2 million
during 2001, which included a $15.5 million milestone achievement. The increase
in revenues from these agreements was partially offset by the completion of the
sponsored research portion of the Janssen agreement. These activities concluded,
as scheduled, in February 2001. Under the Janssen agreement, we recognized
$525,000 during 2001 and $3.0 million during 2000.
The decline in revenues from 1999 to 2000 resulted primarily from the
conclusion of a collaboration with Novartis in January 2000 and the sponsored
research portion of a collaboration with Eli Lilly in October 1999. During 1999,
we received $6.8 million in revenues under these agreements, in addition to $3.0
million in milestones under the agreement with Wyeth-Ayerst. The absence of
these revenues during 2000 was partially offset by $7.1 million in revenues from
Taisho. In addition, revenues recognized from Janssen were $3.0 million in 2000
compared to $2.4 million recognized in 1999.
Research and development expenses increased to $74.3 million during
2001 compared with $40.2 million during 2000 and $29.2 million in 1999.
Increased expenses reflect advancement of our drug candidates through
progressive clinical development phases. We expect to incur significant
increases in future periods as later phases of development typically involve an
increase in the scope of studies, the number of patients treated and the number
of scientific personnel required to manage the trials.
General and administrative expenses increased to $10.9 million during
2001 compared with $10.0 million during 2000 and $7.5 million during 1999. The
increase in administrative expenses from 2000 to 2001 resulted primarily from
additional patent legal expenses, marketing research and the addition of
administrative personnel needed to support expanding research and development
activities. The increase in expenses from 1999 to 2000 resulted primarily from
approximately $1.0 million in business development consulting primarily relating
to the Taisho agreement and $1.1 million of non-cash stock compensation charges
relating to the employee stock purchase program and consultant stock options.
33
Interest income increased to $7.0 million during 2001 compared with
$6.3 million during 2000 and $3.1 million during 1999. The increase in 2001,
compared with 2000 and 1999, primarily resulted from higher investment balances
achieved through public and private offerings of our common stock. In December
2001, we sold 4.0 million shares of our common stock in a public offering
resulting in net proceeds of $175.6 million. In December 2000, we sold 3.2
million shares of our common stock in a public offering resulting in net
proceeds of $90.4 million. And, in December 1999, we sold 2.3 million shares of
our common stock in a private placement resulting in net proceeds of $39.5
million.
In December 1999, we sold our investment in NPI and recorded a gain of
$526,000. Our proportionate share of NPI operating losses during 1999 was
$764,000. In addition, we recorded a write-down in the investment value of
$646,000 during 1999 relating to the decline in cash redemption value of the NPI
preferred shares.
Other income consists primarily of sublease income from unrelated
parties. The fluctuations in sublease income from year to year reflect facility
capacity in excess of our needs. Excess space is subleased until it is needed to
support company growth. During 2002, we expect sublease income to decrease
significantly as increases in personnel will require us to use more office and
laboratory space.
Our net loss for 2001 was $36.9 million, or $1.42 per share, compared
with $28.8 million, or $1.30 per share, in 2000 and $16.8 million, or $0.88 per
share, in 1999. The increase in net loss primarily resulted from an increase in
scientific personnel and expanded clinical development activities. We expect
operating losses to increase for the foreseeable future as we continue to expand
our clinical development efforts.
Liquidity and Capital Resources
At December 31, 2001, our cash, cash equivalents, and short-term
investments totaled $320.0 million compared with $164.7 million at December 31,
2000. The increase in cash balances from December 31, 2000 to December 31, 2001
resulted from the sale of 4.0 million shares of our common stock in a public
offering, which generated net cash proceeds of $175.6 million. The increase in
cash was offset by net cash used in operating activities during 2001.
Net cash used in operating activities during fiscal year 2001 was $21.9
million compared with $18.6 million in 2000 and $10.3 million during 1999. The
increase in cash used in operations for 2001 compared to the prior periods
resulted primarily from the increase in clinical development activities and the
addition of scientific and clinical development personnel.
Net cash used in investing activities during fiscal year 2001 was $16.6
million compared to $75.7 million during 2000 and $21.2 million in 1999. These
fluctuations resulted primarily from the timing differences in investment
purchases, sales, maturities and the fluctuations in our portfolio mix between
cash equivalents and short-term investment holdings. We expect similar
fluctuations to continue in future periods. Capital equipment purchases for
2001, 2000 and 1999 were $3.8 million, $2.4 million and $2.1 million,
respectively, and were financed primarily through capital leasing arrangements.
Capital equipment purchases for 2002 also will be financed primarily through
leasing agreements and are expected to be approximately $6.9 million.
Net cash provided by financing activities during fiscal year 2001 was
$181.3 million compared with $94.1 million in 2000 and $41.0 million during
1999. Cash provided during 2001, 2000 and 1999 includes net proceeds from public
and private offerings of our common stock of $175.6 million, $90.4 million and
$39.5 million, respectively.
Factors that may affect future financial condition and liquidity
We anticipate significant increases in expenditures as we continue to
expand our research and development activities. Because of our limited financial
resources, our strategies to develop some of our programs include collaborative
agreements with major pharmaceutical companies and sales of our common stock in
both public and private offerings. Our collaborative agreements typically
include a partial recovery of our research costs through license fees, contract
research funding and milestone revenues. Our collaborators are also financially
and managerially responsible for clinical development and commercialization. In
these cases, the estimated completion date would largely be under the control of
34
the collaborator. We cannot forecast, with any degree of certainty, which
proprietary products or indications, if any, will be subject to future
collaborative arrangements, in whole or in part, and how such arrangements would
affect our capital requirements.
The following table summarizes our contractual obligations at December
31, 2001 and the effect such obligations are expected to have on our liquidity
and cash flow in future periods. Our license, research and clinical development
agreements are generally cancelable with written notice in 0-180 days. In
addition to the minimum payments due under our license and research agreements,
we may be required to pay up to $13.8 million in milestone payments, plus sales
royalties, in the event that all scientific research under these agreements is
successful. Some of our clinical development agreements contain incentives for
time-sensitive activities.
-----------------------------------------------------------------------------
Less than 1 - 3 After
Contractual Obligations Total 1 year years 3 years
- ------------------------------------------------------------------------------
(in thousands)
Long-term debt ...................... $ 149 $ 149 $ -- $ --
Capital lease obligations ........... 6,216 2,277 3,253 686
Operating lease ..................... 38,078 2,626 5,572 29,880
License & research agreements ....... 1,724 884 770 70
Clinical development agreements ..... 48,107 26,330 21,777 --
--------------------------------------
Total contractual obligations .... $94,247 $32,239 $31,372 $30,636
The funding necessary to execute our business strategies is subject to
numerous uncertainties, which may adversely affect our liquidity and capital
resources. As of December 31, 2001, seven of our product candidates were in
various stages of clinical trials. Completion of clinical trials may take
several years or more, but the length of time generally varies substantially
according to the type, complexity, novelty and intended use of a product
candidate. It is also important to note that if a clinical candidate is
identified, the further development of that candidate can be halted or abandoned
at any time due to a number of factors. These factors include, but are not
limited to, funding constraints, safety or a change in market demand.
An important element of our business strategy is to pursue the research
and development of a diverse range of product candidates for a variety of
disease indications. We pursue this goal through proprietary research and
development as well as searching for new technologies for licensing
opportunities. This allows us to diversify the risks associated with our
research and development spending. To the extent we are unable to maintain a
diverse and broad range of product candidates, our dependence on the success of
one or a few product candidates would increase.
The nature and efforts required to develop our product candidates into
commercially viable products include research to identify a clinical candidate,
pre-clinical development, clinical testing, FDA approval and commercialization.
This process may cost in excess of $100 million and can take as long as 10 years
to complete for each product candidate.
We test our potential product candidates in numerous pre-clinical
studies to identify disease indications for which our product candidates may
show efficacy. We may conduct multiple clinical trials to cover a variety of
indications for each product candidate. As we obtain results from trials, we may
elect to discontinue clinical trials for certain product candidates or for
certain indications in order to focus our resources on more promising product
candidates or indications. The duration and the cost of clinical trials may vary
significantly over the life of a project as a result of differences arising
during the clinical trial protocol, including, among others, the following:
o we or the FDA may suspend the trials;
o we may discover that a product candidate may cause harmful side
effects;
o the results may not replicate the results of earlier, smaller trials;
o the results may not be statistically significant;
o patient recruitment may be slower than expected; and
o patients may drop out of the trials.
For each of our programs, we periodically assess the scientific
progress and merits of the programs to determine if continued research and
development is economically viable. Certain of our programs have been terminated
due to the lack of scientific progress and lack of prospects for ultimate
commercialization. Because of the uncertainties associated with research and
35
development of these programs, we may not be successful in achieving
commercialization. As such, the ultimate timeline and costs to commercialize a
product cannot be accurately estimated.
Our product candidates have not yet achieved FDA regulatory approval,
which is required before we can market them as therapeutic products. In order to
proceed to subsequent clinical trial stages and to ultimately achieve regulatory
approval, the FDA must conclude that our clinical data establish safety and
efficacy. The results from pre-clinical testing and early clinical trials may
not be predictive of results in later clinical trials. It is possible for a
candidate to show promising results in clinical trials, but subsequently fail to
establish sufficient safety and efficacy data necessary to obtain regulatory
approvals.
As a result of the uncertainties discussed above, among others, the
duration and completion costs of our research and development projects are
difficult to estimate and are subject to considerable variation. Our inability
to complete our research and development projects in a timely manner or our
failure to enter into collaborative agreements, when appropriate, could
significantly increase our capital requirements and could adversely impact our
liquidity. These uncertainties could force us to seek additional, external
sources of financing from time to time in order to continue with our business
strategy. Our inability to raise additional capital, or to do so on terms
reasonably acceptable to us, would jeopardize the future success of our
business.
We also may be required to make further substantial expenditures if
unforeseen difficulties arise in other areas of our business. In particular, our
future capital requirements will depend on many factors, including:
o continued scientific progress in our research and development
programs;
o the magnitude of our research and development programs;
o progress with pre-clinical testing and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the costs involved in filing and pursuing patent applications and
enforcing patent claims;
o competing technological and market developments;
o the establishment of additional strategic alliances;
o the cost of manufacturing facilities and of commercialization
activities and arrangements; and
o the cost of product in-licensing and any possible acquisitions.
We believe that our existing capital resources, together with interest
income and future payments due under our strategic alliances, will be sufficient
to satisfy our current and projected funding requirements for at least the next
twelve months. However, we cannot guarantee that these capital resources and
payments will be sufficient to conduct our research and development programs as
planned. The amount and timing of expenditures will vary depending upon a number
of factors, including progress of our research and development programs.
We may require additional funding to continue our research and product
development programs, to conduct pre-clinical studies and clinical trials, for
operating expenses, to pursue regulatory approvals for our product candidates,
for the costs involved in filing and prosecuting patent applications and
enforcing or defending patent claims, if any, the cost of product in-licensing
and any possible acquisitions, and we may require additional funding to
establish manufacturing and marketing capabilities in the future. We may seek to
access the public or private equity markets whenever conditions are favorable.
We may also seek additional funding through strategic alliances and other
financing mechanisms, potentially including off-balance sheet financing. We
cannot assure you that adequate funding will be available on terms acceptable to
us, if at all. If adequate funds are not available, we may be required to
curtail significantly one or more of our research or development programs or
obtain funds through arrangements with collaborators or others. This may require
us to relinquish rights to certain of our technologies or product candidates.
We expect to incur operating losses over the next several years as our
research, development, pre-clinical studies and clinical trial activities
increase. To the extent that we are unable to obtain third-party funding for
such expenses, we expect that increased expenses will result in increased losses
from operations. We cannot assure you that we will successfully develop our
products under development or that our products, if successfully developed, will
generate revenues sufficient to enable us to earn a profit.
36
Interest Rate Risk
We are exposed to interest rate risk on our short-term investments. The
primary objective of our investment activities is to preserve principal while at
the same time maximizing yields without significantly increasing risk. To
achieve this objective, we invest in highly liquid and high quality government
and other debt securities. To minimize our exposure due to adverse shifts in
interest rates, we invest in short-term securities and ensure that the maximum
average maturity of our investments does not exceed 40 months. If a 10% change
in interest rates were to have occurred on December 31, 2001, this change would
not have had a material effect on the fair value of our investment portfolio as
of that date. Due to the short holding period of our investments, we have
concluded that we do not have a material financial market risk exposure.
Cautionary Note on Forward-Looking Statements
Our business is subject to significant risks, including but not limited
to, the risks inherent in our research and development activities, including the
successful continuation of our strategic collaborations, the successful
completion of clinical trials, the lengthy, expensive and uncertain process of
seeking regulatory approvals, uncertainties associated both with the potential
infringement of patents and other intellectual property rights of third parties,
and with obtaining and enforcing our own patents and patent rights,
uncertainties regarding government reforms and of product pricing and
reimbursement levels, technological change, competition, manufacturing
uncertainties and dependence on third parties. Even if our 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 a large
scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties. For more information
about the risks we face, see "Item 1. Business - Risk Factors" included in this
report.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 supercedes Accounting Principles Board (APB)
Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises," and requires that all
business combinations be accounted for by a single method -- the purchase
method. SFAS No. 141 also provides guidance on the recognition of intangible
assets identified in a business combination and requires enhanced financial
statement disclosures. SFAS No. 142 adopts a more aggregate view of goodwill and
bases the accounting for goodwill on the units of the combined entity into which
an acquired entity is integrated. In addition, SFAS No. 142 concludes that
goodwill and intangible assets that have indefinite useful lives will not be
amortized but rather will be tested at least annually for impairment. Intangible
assets that have finite lives will continue to be amortized over their useful
lives. SFAS No. 141 is effective for all business combinations initiated after
June 30, 2001. The adoption of SFAS No. 142 is required for fiscal years
beginning after December 15, 2001, except for the nonamortization and
amortization provisions, which are required for goodwill and intangible assets
acquired after June 30, 2001. The adoption of SFAS No. 141 had no impact on our
financial position or results of operations. We will adopt SFAS No. 142 in the
first quarter of 2002 and believe that the adoption will not have a material
impact on our financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which establishes one accounting
model to be used for long-lived assets to be disposed of by sale and broadens
the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001. We will adopt
SFAS No. 144 in the first quarter of 2002 and believe that the adoption will not
have a material impact on our financial position or results of operations.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk is contained
in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Interest Rate Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY 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 our Definitive
Proxy Statement for our 2002 Annual Meeting of Stockholders, to be filed
pursuant to Regulation 14A with the Securities and Exchange Commission within
120 days of December 31, 2001. Such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be contained in our Definitive
Proxy Statement for our 2002 Annual Meeting of Stockholders, to be filed
pursuant to Regulation 14A with the Securities and Exchange Commission within
120 days of December 31, 2001. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be contained in our Definitive
Proxy Statement for our 2002 Annual Meeting of Stockholders, to be filed
pursuant to Regulation 14A with the Securities and Exchange Commission within
120 days of December 31, 2001. Such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be contained in our Definitive
Proxy Statement for our 2002 Annual Meeting of Stockholders, to be filed
pursuant to Regulation 14A, with the Securities and Exchange Commission within
120 days of December 31, 2001. Such information is incorporated herein by
reference.
38
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 Auditors, are included in this report:
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets as of December 31, 2001 and 2000
Statements of Operations for the years ended December 31, 2001, 2000
and 1999
Statements of Stockholders' Equity for the years ended December 31,
2001, 2000 and 1999
Statements of Cash Flows for the years ended December 31, 2001, 2000
and 1999
Notes to the Financial Statements (includes unaudited Selected
Quarterly Financial Data)
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. Current Reports filed pursuant to Sections 13(a) or
15(d) of the Exchange Act on Forms 8-K dated November 16, 2001, November
27, 2001, December 3, 2001 and December 4, 2001.
1. The Registrant filed a Current Report on Form 8-K dated November 16,
2001 to report, pursuant to Item 5 (Other Events) and Item 7 (Final
Statements, Pro Forma Financial Information and Exhibits), its
announcement of the first pivotal Phase III clinical trial of
NBI-34060.
2. The Registrant filed a Current Report on Form 8-K dated November 27,
2001 to report, pursuant to Item 5 (Other Events) and Item 7 (Final
Statements, Pro Forma Financial Information and Exhibits), its
announcement of the dosing of seven subjects in the initiation of a
Phase I clinical trial with the Company's proprietary, orally active,
gonadotropin-releasing hormone antagonist.
3. The Registrant filed a Current Report on Form 8-K dated November 27,
2001 to report, pursuant to Item 5 (Other Events) and Item 7 (Final
Statements, Pro Forma Financial Information and Exhibits), the
Company's intent to file a preliminary prospectus supplement to its
$200 million universal shelf registration statement with the
Securities and Exchange Commission relating to the proposed
underwritten public offering of 3,250,000 shares of its common stock.
4. The Registrant filed a Current Report on Form 8-K dated December 3,
2001 to report, pursuant to Item 5 (Other Events) and Item 7 (Final
Statements, Pro Forma Financial Information and Exhibits), the
Company's filing of the form of Underwriting Agreement by and among
the Company and Deutsche Banc Alex. Brown Inc. and Credit Suisse First
Boston Corporation, as representatives of the several underwriters, to
be used in connection with the proposed public offering.
5. The Registrant filed a Current Report on Form 8-K dated December 4,
2001 to report, pursuant to Item 5 (Other Events) and Item 7 (Final
Statements, Pro Forma Financial Information and Exhibits), its
announcement of the pricing of the public offering of 3,500,000 shares
of common stock (plus an optional 525,000 shares for over-allotments)
at a price of $46.75 per share.
(c) Exhibits. The following exhibits are filed as part of, or incorporated by
reference into, this report:
Exhibit
Number Description
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated May 1, 1998, between
Northwest NeuroLogic, Inc., NBI Acquisition Corporation and the
Registrant (6)
2.2 Form of Milestone Warrant pursuant to the Agreement and Plan of
Reorganization dated May 1, 1998 (6)
3.1 Restated Certificate of Incorporation (1)
39
3.2 Bylaws (1)
3.3 Certificate of Amendment of Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of warrant issued to existing warrant holders (1)
4.3 Information and Registration Rights Agreement dated September 15, 1992,
as amended (1)
4.4* Registration Rights Agreement dated May 28, 1998, between certain
investors and the Registrant (6)
4.5 Amended and Restated Preferred Shares Rights Agreement by and between
the Registrant and American Stock Transfer & Trust Company, as Rights
Agent, dated as of January 11, 2002 (19)
4.6 Stock Purchase Agreement dated December 20 through 23, 1999, between
Neurocrine Biosciences, Inc. and each of the Purchasers named
therein (10)
10.1 Purchase and Sale Agreement and Escrow Instructions between
MS Vickers II, LLC and the Registrant dated February 13, 1997 (3)
10.2 1992 Incentive Stock Plan, as amended (16)
10.3 1996 Employee Stock Purchase Plan, as amended (16)
10.4 1996 Director Stock Option Plan, as amended and form of stock option
agreement (12)
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 May 24, 2000 (4) (11)
10.7 Employment Agreement dated March 1, 1997, between the Registrant and
Paul W. Hawran, as amended May 24, 2000 (4) (11)
10.8 Consulting Agreement dated September 25, 1992, between the Registrant
and Wylie A. Vale, Ph.D. (1)
10.9 Consulting Agreement effective January 1, 1992, between the Registrant
and Lawrence J. Steinman, M.D. (1)
10.10 License Agreement dated July 17, 1992, by and between The Salk
Institute for Biological Studies and the Registrant (1)
10.11 License Agreement dated November 16, 1993, by and between The Salk
Institute for Biological Studies and the Registrant (1)
10.12 License Agreement dated October 19, 1992, by and between the Board of
Trustees of the Leland Stanford Junior University and the
Registrant (1)
10.13 Agreement dated January 1, 1995, by and between the Registrant and
Janssen Pharmaceutica, N.V. (1)
10.14* Research and License Agreement dated October 15, 1996, between the
Registrant and Eli Lilly and Company (2)
10.15* Lease between Science Park Center LLC and the Registrant dated
July 31, 1997 (5)
10.16* Option Agreement between Science Park Center LLC (Optionor) and the
Registrant dated July 31, 1997 (Optionee) (5)
10.17* Construction Loan Agreement Science Park Center LLC and the Registrant
dated July 31, 1997 (5)
10.18 Secured Promissory Note Science Park Center LLC and the Registrant
dated July 31, 1997 (5)
40
10.19* Operating Agreement for Science Park Center LLC between Nexus
Properties, Inc. and the Registrant dated July 31, 1997 (5)
10.20 Form of incentive stock option agreement and nonstatutory stock option
agreement for use in connection with 1992 Incentive Stock Plan (1)
10.21* Patent License Agreement dated May 7, 1998, between the US Public
Health Service and the Registrant (6)
10.22* Patent License Agreement dated April 28, 1998, between and among Ira
Pastan, David Fitzgerald and the Registrant (6)
10.23* Sub-License and Development Agreement dated June 30, 1998, by and
between DOV Pharmaceuticals, Inc. and the Registrant (6)
10.24* Warrant Agreement dated June 30, 1998, between DOV Pharmaceuticals,Inc.
and the Registrant (6)
10.25* Warrant Agreement dated June 30, 1998, between Jeff Margolis and the
Registrant (6)
10.26* Warrant Agreement dated June 30, 1998, between Stephen Ross and the
Registrant (6)
10.27* Collaboration and License Agreement dated January 1, 1999, by and
between American Home Products Corporation acting through its
Wyeth-Ayerst Laboratories Division and the Registrant (7)
10.28 Employment Agreement dated October 1, 1998, between the Registrant and
Margaret Valeur-Jensen, as amended May 24, 2000 (7) (11)
10.29 Employment Agreement dated January 1, 1998, between the Registrant and
Bruce Campbell, as amended May 24, 2000 (7) (11)
10.30* Agreement by and among Dupont Pharmaceuticals Company, Janssen
Pharmaceutica, N.V. and Neurocrine Biosciences, Inc. dated
September 28, 1999 (9)
10.31* Amendment Number One to the Agreement between Neurocrine Biosciences,
Inc. and Janssen Pharmaceutica, N.V. dated September 24, 1999 (9)
10.32* License Agreement between the Registrant and Taisho Pharmaceutical Co.,
Ltd. dated July 21, 2000 (11)
10.33** Amendment No. 1 dated November 30, 2000 to the License Agreement
between the Registrant and Taisho Pharmaceutical Co., Ltd. dated
July 21, 2000 (13) (15)
10.34* 2001 Stock Option Plan (14)
10.35* Collaboration and License Agreement between the Registrant and Glaxo
Group Limited dated July 20, 2001. (17)
10.36 Employment Agreement dated October 17, 2001, between the Registrant and
Henry Pan, M.D., Ph.D. (18)
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney
- ----------
(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 10-K for the
fiscal year ended December 31, 1996 filed on March 31, 1997
(3) Incorporated by reference to the Company's amended Quarterly Report on
Form 10-Q filed on August 15, 1997
(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 Quarterly Report on Form
10-Q filed on November 14, 1997
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed on August 14, 1998
(7) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1998 filed on March 31, 1999
41
(8) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed on August 11, 1999
(9) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed on November 12, 1999
(10) Incorporated by reference to the Company's Report on Form S-3 filed on
January 20, 2000
(11) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed on August 11, 2000
(12) Incorporated by reference to the Company's Report on Form S-8 filed on
August 17, 2000
(13) Incorporated by reference to the Company's Report on Form 8-K filed on
December 15, 2000
(14) Incorporated by reference to the Company's Report on Form S-8 filed on
March 15, 2001
(15) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended December 31, 2000 filed on March 30, 2001
(16) Incorporated by reference to the Company's Report on Form S-8 filed on
July 16, 2001
(17) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed on August 14, 2001
(18) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed on November 13, 2001
(19) Incorporated by reference to the Company's Report on Form 8-K filed on
January 14, 2002
* Confidential treatment has been granted with respect to certain
portions of the exhibit
** Confidential treatment has been requested with respect to certain
portions of the exhibit
(d) Financial Statement Schedules. See Item 14 (a)(2) above.
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 26, 2002
42
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gary A. Lyons and Paul 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 March 26 2002
- --------------------------- Officer and Director
(Principal Executive Officer)
Gary A. Lyons
/s/ Paul W. Hawran Chief Financial Officer March 26, 2002
- --------------------------- (Principal Financial and
Paul W. Hawran Accounting Officer)
/s/ Joseph A. Mollica Chairman of the March 26, 2002
- --------------------------- Board of Directors
Joseph A. Mollica.
/s/ Richard F. Pops Director March 26, 2002
- ---------------------------
Richard F. Pops
/s/ Stephen A. Sherwin Director March 26, 2002
- ---------------------------
Stephen A. Sherwin
/s/ Lawrence Steinman Director March 26, 2002
- ---------------------------
Lawrence Steinman
/s/ Wylie W. Vale Director March 26, 2002
- ---------------------------
Wylie W. Vale
43
NEUROCRINE BIOSCIENCES, INC.
INDEX TO THE FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors ..................... F-2
Balance Sheets ........................................................ F-3
Statements of Operations .............................................. F-4
Statements of Stockholders' Equity .................................... F-5
Statements of Cash Flows .............................................. F-6
Notes to the Financial Statements ..................................... F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Neurocrine Biosciences, Inc.
We have audited the accompanying balance sheets of Neurocrine
Biosciences, Inc. as of December 31, 2001 and 2000, and the related statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 2001. 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 auditing standards generally
accepted in the United States. 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, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
San Diego, California
January 25, 2002
F-2
NEUROCRINE BIOSCIENCES, INC
Balance Sheets
(in thousands, except for par value and share totals)
December 31,
--------- ---------
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 163,888 $ 21,078
Short-term investments, available-for-sale ........... 156,094 143,592
Receivables under collaborative agreements ........... 9,949 5,974
Other current assets ................................. 1,584 1,761
--------- ---------
Total current assets .............................. 331,515 172,405
Property and equipment, net .............................. 12,088 11,300
Licensed technology and patent applications costs, net ... 188 362
Other non-current assets ................................. 2,559 1,895
--------- ---------
Total assets ...................................... $ 346,350 $ 185,962
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 1,539 $ 1,065
Accrued liabilities .................................. 15,753 11,135
Deferred revenues .................................... 5,382 1,172
Current portion of long-term debt .................... 149 149
Current portion of capital lease obligations ......... 1,938 1,438
--------- ---------
Total current liabilities ......................... 24,761 14,959
Long-term debt, net of current portion ............... -- 162
Capital lease obligations, net of current portion .... 3,600 2,121
Deferred rent ........................................ 2,196 1,646
Deferred revenues .................................... 4,417 2,890
Other liabilities .................................... 983 976
--------- ---------
Total liabilities ................................. 35,957 22,754
Commitments and contingencies (See Note 6) ............... -- --
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding ...... -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized; issued and outstanding shares were
30,347,744 in 2001 and 25,314,470 in 2000 ......... 30 25
Additional paid-in capital ........................... 420,018 233,565
Deferred compensation ................................ (1,815) (59)
Notes receivable from stockholders ................... (381) (104)
Accumulated other comprehensive loss ................. (69) 261
Accumulated deficit .................................. (107,390) (70,480)
--------- ---------
Total stockholders' equity ........................ 310,393 163,208
--------- ---------
Total liabilities and stockholders' equity ........ $ 346,350 $ 185,962
========= =========
See accompanying notes.
F-3
NEUROCRINE BIOSCIENCES, INC.
Statements of Operations
(in thousands, except loss per share data)
Years Ended December 31,
---------------------------------------
2001 2000 1999 (1)
----------- ----------- -----------
Revenues:
Sponsored research and development ........ $ 16,880 $ 6,881 $ 12,662
Milestones and license fees ............... 22,937 6,345 3,000
Grant income and other revenues ........... 1,425 1,362 1,129
----------- ----------- -----------
Total revenues ......................... 41,242 14,588 16,791
Operating expenses:
Research and development .................. 74,267 40,227 29,169
General and administrative ................ 10,857 9,962 7,476
----------- ----------- -----------
Total operating expenses ............... 85,124 50,189 36,645
Loss from operations .......................... (43,882) (35,601) (19,854)
Other income and expenses:
Interest income ........................... 6,978 6,276 3,082
Interest expense .......................... (316) (228) (231)
Equity in NPI losses and other
adjustments, net ........................ - - (885)
Other income .............................. 430 1,047 1,066
----------- ----------- -----------
Loss before taxes ............................. (36,790) (28,506) (16,822)
Income taxes .................................. 120 302 -
----------- ----------- -----------
Net loss ...................................... $(36,910) $(28,808) $(16,822)
=========== =========== ===========
Loss per common share:
Basic and diluted ......................... $ (1.42) $ (1.30) $ (0.88)
=========== =========== ===========
Shares used in the calculation of loss
per common share - basic and diluted....... 26,028 22,124 19,072
=========== =========== ===========
- ----------
(1) Sponsored research and development includes $491 in revenue from a related
party for the year ended December 31, 1999.
See accompanying notes.
F-4
NEUROCRINE BIOSCIENCES, INC.
Statements of Stockholders' Equity
(in thousands)
Common stock Additional
----------------------- paid-in Deferred
Shares Amount capital compensation
-------------------------------------------------
BALANCE AT DECEMBER 31, 1998 ...................... 18,931 $19 $ 97,064 $ (187)
Net loss ............................................... - - - -
Unrealized loss on short-term investments .............. - - - -
Comprehensive loss ..................................... - - - -
Issuance of common stock from option exercises ......... 307 - 1,507 -
Issuance of common stock pursuant to the Employee
Stock Purchase Plan .................................. 42 - 213 -
Issuance of common stock, net of offering costs ........ 2,328 3 39,293 -
Amortization of deferred compensation, net ............. - - 721 (224)
-------------------------------------------------
BALANCE AT DECEMBER 31, 1999 ...................... 21,608 22 138,798 (411)
Net loss ............................................... - - - -
Unrealized gain on short-term investments .............. - - - -
Comprehensive loss ..................................... - - - -
Issuance of common stock from exercise of warrants ..... 23 - - -
Issuance of common stock for notes ..................... 6 - 1 -
Issuance of common stock from option exercises ......... 354 - 2,328 -
Issuance of common stock pursuant to the Employee
Stock Purchase Plan .................................. 98 - 1,339 -
Issuance of common stock, net of offering costs ........ 3,225 3 90,353 -
Payments received on stockholder notes ................. - - - -
Reversal of accrued 12/99 private placement costs ...... - - 182 -
Amortization of deferred compensation, net ............. - - 564 352
-------------------------------------------------
BALANCE AT DECEMBER 31, 2000 ...................... 25,314 25 233,565 (59)
Net loss ............................................... - - - -
Unrealized loss on short-term investments .............. - - - -
Comprehensive loss ..................................... - - - -
Issuance of common stock from exercise of warrants ..... 43 - 1,902 -
Issuance of common stock for notes ..................... 7 - 277 -
Issuance of common stock from option exercises ......... 781 1 2,436 -
Issuance of common stock pursuant to the Employee
Stock Purchase Plan .................................. 178 - 3,382 -
Issuance of common stock, net of offering costs ........ 4,025 4 175,558 -
Amortization of deferred compensation, net ............. - - 2,898 (1,756)
-------------------------------------------------
BALANCE AT DECEMBER 31, 2001 ...................... 30,348 $30 $420,018 $(1,815)
=================================================
F-5
NEUROCRINE BIOSCIENCES, INC.
Statements of Stockholders' Equity
(in thousands)
Notes Accumulated
receivable other Total
from comprehensive Accumulated stockholders'
stockholders income (Loss) deficit equity
-----------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $(119) $ 31 $ (24,850) $ 71,958
Net loss - - (16,822) (16,822)
Unrealized loss on short-term investments - (295) - (295)
------------
Comprehensive loss - - - (17,117)
Issuance of common stock from option exercises - - - 1,507
Issuance of common stock pursuant to the Employee
Stock Purchase Plan - - - 213
Issuance of common stock, net of offering costs - - - 39,296
Amortization of deferred compensation, net - - - 497
-----------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 (119) $(264) (41,672) 96,354
Net loss - - (28,808) (28,808)
Unrealized gain on short-term investments - 525 - 525
------------
Comprehensive loss - - - (28,283)
Issuance of common stock from exercise of warrants - - -
Issuance of common stock for notes - - - 1
Issuance of common stock from option exercises - - - 2,328
Issuance of common stock pursuant to the Employee
Stock Purchase Plan - - - 1,339
Issuance of common stock, net of offering costs - - - 90,356
Payments received on stockholder notes 15 - - 15
Reversal of accrued 12/99 private placement costs - - - 182
Amortization of deferred compensation, net - - - 916
-----------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 (104) 261 (70,480) 163,208
Net loss - - (36,910) (36,910)
Unrealized loss on short-term investments - (330) - (330)
------------
Comprehensive loss - - - (37,240)
Issuance of common stock from exercise of warrants - - - 1,902
Issuance of common stock for notes (277) - - -
Issuance of common stock from option exercises - - - 2,437
Issuance of common stock pursuant to the Employee
Stock Purchase Plan - - - 3,382
Issuance of common stock, net of offering costs - - - 175,562
Amortization of deferred compensation, net - - - 1,142
-----------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $(381) $ (69) $(107,390) $310,393
===========================================================
See accompanying notes.
F-5 (con't)
NEUROCRINE BIOSCIENCES, INC.
Statements of Cash Flows
(in thousands)
Years Ended December 31,
--------------------------------------
2001 2000 1999
----------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ..................................................... $ (36,910) $ (28,808) $ (16,822)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in NPI losses and other adjustments, net .......... - - 885
Depreciation and amortization ............................ 2,651 2,198 2,066
Loss on abandonment of assets ............................ 198 80 133
Deferred revenues ....................................... 5,737 3,907 (14)
Deferred rent ........................................... 597 868 748
Non-cash compensation expense ........................... 4,024 2,677 497
Change in operating assets and liabilities:
Accounts receivable and other current assets .......... (3,798) (4,020) (752)
Other non-current assets .............................. (322) 1,014 (357)
Accounts payable and accrued liabilities .............. 5,967 3,439 3,360
----------- ----------- -------=---
Net cash used in operating activities ........................ (21,856) (18,645) (10,256)
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of short-term investments .......................... (175,886) (151,582) (87,728)
Sales/maturities of short-term investments ................... 163,054 78,348 68,562
Purchases of property and equipment, net ..................... (3,805) (2,440) (2,061)
----------- ----------- -----------
Net cash used in investing activities ........................ (16,637) (75,674) (21,227)
CASH FLOW FROM FINANCING ACTIVITIES
Issuance of common stock ..................................... 179,486 93,360 41,016
Proceeds received from long-term obligations ................. 3,483 1,741 981
Principal payments on long-term obligations .................. (1,666) (984) (957)
Payments received on notes receivable from stockholders ...... - 15 -
----------- ----------- -----------
Net cash provided by financing activities .................... 181,303 94,132 41,040
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ......... 142,810 (187) 9,557
Cash and cash equivalents at beginning of the year ........... 21,078 21,265 11,708
----------- ----------- -----------
Cash and cash equivalents at end of the year ................. $ 163,888 $ 21,078 $ 21,265
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Supplemental disclosures of cash flow information:
Interest paid .............................................. $ 312 $ 228 $ 231
=========== =========== ===========
Taxes paid ................................................. $ 120 $ 302 $ -
=========== =========== ===========
See accompanying notes.
F-6
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2001
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities. Neurocrine Biosciences, Inc. (the Company or
Neurocrine) incorporated in California in 1992 and reincorporated in Delaware in
1996. Since the Company was founded, it has been engaged in the discovery and
development of novel pharmaceutical products for neurologic and endocrine
diseases and disorders. Many of its product candidates address some of the
largest pharmaceutical markets in the world, including insomnia, anxiety,
depression, cancer, multiple sclerosis and diabetes.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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.
Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three months or less when purchased, to be cash equivalents.
Short-Term Investments Available-for-Sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
reported in comprehensive income. 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 interest 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 interest income or expense. 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.
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash,
cash equivalents and short-term investments. The Company has established
guidelines to limit its exposure to credit expense by placing investments with
high credit quality financial institutions, diversifying its investment
portfolio and placing investments with maturities that maintain safety and
liquidity.
During the years ended December 31, 2001, 2000 and 1999, the Company
had collaborative research agreements that accounted for 97%, 91% and 93%,
respectively, of total revenue.
Property and Equipment. Property and equipment are stated at cost and
depreciated over the estimated useful lives of the assets (generally three to
seven years) using the straight-line method. Amortization of leasehold
improvements is computed over the shorter of the lease term or the estimated
useful life of the related assets.
Licensed Technology and Patent Application Costs. Licensed technology
consists of worldwide licenses to patents related to the Company's platform
technology, which are capitalized at cost and amortized over periods of seven to
eleven years. These costs are regularly reviewed to determine that they include
costs for patent applications the Company is pursuing. Costs related to
applications that are not being actively pursued are generally written-off.
Assets written-off during 2001 had a net book value of $19,000. Accumulated
amortization at December 31, 2001 and 2000 was $841,000 and $753,000,
respectively.
Impairment of Long-Lived Assets. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," if indicators of
impairment exist, the Company assesses the recoverability of the affected
long-lived assets by determining whether the carrying value of such assets can
be recovered through undiscounted future operating cash flows. If impairment is
indicated, the Company measures the amount of such impairment by comparing the
carrying value of the asset to the present value of the expected future cash
flows associated with the use of the asset. While the Company's current and
historical operating and cash flow losses are indicators of impairment, the
Company believes the future cash flows to be received from the long-lived assets
will exceed the assets' carrying value, and accordingly the Company has not
recognized any impairment losses through December 31, 2001.
F-7
Fair Value of Financial Instruments. Financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable, and accrued
liabilities, are carried at cost, which management believes approximates fair
value because of the short-term maturity of these instruments.
Industry Segment and Geographic Information. The Company operates in a
single industry segment - the discovery and development of therapeutics for the
treatment of neurologic and endocrine diseases and disorders. The Company has no
foreign operations for the years ended December 31, 2001, 2000 and 1999.
Revenue Recognition. Revenues under collaborative research agreements
and grants are recognized as research costs are incurred over the period
specified in the related agreement or as the services are performed. These
agreements are on a best-efforts basis and do not require scientific achievement
as a performance obligation and provide for payment to be made when costs are
incurred or the services are performed. All fees are nonrefundable to the
collaborators. Up-front, nonrefundable payments for license fees and advance
payments for sponsored research revenues received in excess of amounts earned
are classified as deferred revenue and recognized as income over the period
earned. Milestone payments are recognized as revenue upon achievement of
pre-defined scientific events. Revenues from government grants are recognized
based on a percentage-of-completion basis as the related costs are incurred. The
Company recognizes revenue only on payments that are nonrefundable and when the
work is performed.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides guidance in applying generally accepted accounting
principles to revenue recognition in financial statements, including the
recognition of nonrefundable up-front fees received in conjunction with a
research and development arrangement. The adoption of this pronouncement was
required effective with the fourth quarter of 2000.
As required by the adoption of SAB 101, the Company reviewed all
up-front payments, license fees and milestones received in the current and prior
years. Up-front payments have been received for program cost reimbursements
incurred during a negotiation period. License fees are received in exchange for
a grant to use the Company's proprietary technologies on an as-is basis for the
term of the collaborative agreement. Milestones are received for specific
scientific achievements determined at the beginning of the collaboration. These
achievements are remote and unpredictable at the onset of the collaboration and
are based on the success of scientific efforts.
Based on that review, the Company determined that $4.2 million of
license fees received during 2000 were subject to the adoption of SAB No. 101.
All other fees received relate to agreements under which the research portion of
the collaboration has been completed or the agreements have been terminated
entirely. In accordance with Accounting Principles Board (APB) Opinion No. 20,
the adoption of SAB No. 101 was recognized by including the cumulative effect of
the change in accounting principle in the net loss for the fourth quarter of
2000. The otherwise reported net loss for the year ended December 31, 2000 was
increased by approximately $3.8 million. These license fee revenues were
deferred and will be amortized as income through 2005.
Research and Development Expenses. Research and development costs are
expensed as incurred. Such costs include: personnel expenses, contractor fees,
laboratory supplies, facilities, miscellaneous expenses and allocations of
corporate costs. These expenses are incurred during proprietary research and
development activities, as well as providing services under collaborative
research agreements and grants. Research and development expenses relating to
collaborative agreements and grants were approximately $24.9 million, $10.1
million and $7.2 million during 2001, 2000 and 1999, respectively.
Stock-Based Compensation. As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has elected to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations in
F-8
accounting for stock-based employee compensation. Deferred compensation is
recorded for employee options 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. The deferred compensation is amortized over the vesting period of the
options.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation - An Interpretation of APB Opinion No. 25". This
interpretation clarifies the definition of employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective and the Company adopted the interpretation on July 1, 2000. The
adoption did not have a material impact on the Company's results of operations.
Deferred charges for options granted to non-employees has been
determined in accordance with SFAS No. 123 and Emerging Issues Task Force (EITF)
96-18, "Accounting For Equity Instruments that Are Issued to Other Than
Employees For Acquiring in Conjunction with Selling, Goods or Services," as the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. Deferred charges for
options granted to non-employees are periodically remeasured as the underlying
options vest and are included in deferred compensation in the financial
statements.
Earnings (Loss) Per Share. The Company computes net loss per share in
accordance with SFAS No. 128, "Earnings Per Share." Under the provisions of SFAS
No. 128, basic net income (loss) per share is computed by dividing the net
income (loss) for the period by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) for the period by the weighted average number
of common and common equivalent shares outstanding during the period.
Potentially dilutive securities composed of incremental common shares issuable
upon the exercise of stock options and warrants, were excluded from historical
diluted loss per share because of their anti-dilutive effect. Dilutive common
stock equivalents would include the dilutive effects of common stock options,
warrants for common stock, and restricted stock that has not yet fully vested.
Potentially dilutive securities totaled 2.0 million, 2.6 million and 642,000 for
the years ended December 31, 2001, 2000 and 1999, respectively, and were
excluded from the diluted earnings per share because of their anti-dilutive
effect.
Comprehensive Income. Comprehensive income is calculated in accordance
with SFAS No. 130, "Comprehensive Income." SFAS No. 130 requires the disclosure
of all components of comprehensive income, including net income and changes in
equity during a period from transactions and other events and circumstances
generated from non-owner sources. The Company's other comprehensive income
consisted of gains and losses on short-term investments and is reported in the
statements of stockholders' equity.
Reclassifications. Certain reclassifications have been made to prior
year amounts to conform to the presentation for the year ended December 31,
2001.
Impact of Recently Issued Accounting Standards. In June 2001, the FASB
issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 supercedes APB No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises," and requires that all business combinations be accounted
for by a single method -- the purchase method. SFAS No. 141 also provides
guidance on the recognition of intangible assets identified in a business
combination and requires enhanced financial statement disclosures. SFAS No. 142
adopts a more aggregate view of goodwill and bases the accounting for goodwill
on the units of the combined entity into which an acquired entity is integrated.
In addition, SFAS No. 142 concludes that goodwill and intangible assets that
have indefinite useful lives will not be amortized but rather will be tested at
least annually for impairment. Intangible assets that have finite lives will
continue to be amortized over their useful lives. SFAS No. 141 is effective for
all business combinations initiated after June 30, 2001. The adoption of SFAS
No. 142 is required for fiscal years beginning after December 15, 2001, except
F-9
for the nonamortization and amortization provisions, which are required for
goodwill and intangible assets acquired after June 30, 2001. The adoption of
SFAS No. 141 had no impact on the Company's financial position or results of
operations. The Company will adopt SFAS No. 142 in the first quarter of 2002 and
believes that the adoption will not have a material impact on its financial
position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which establishes one accounting
model to be used for long-lived assets to be disposed of by sale and broadens
the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001. The Company
will adopt SFAS No. 144 in the first quarter of 2002 and believes that the
adoption will not have a material impact on its financial position or results of
operations.
Note 2. SHORT-TERM INVESTMENTS
Cash, cash equivalents, and short-term investments totaled $320.0
million and $164.7 million as of December 31, 2001 and 2000, respectively. The
following is a summary of short-term investments classified as
available-for-sale securities (in thousands):
--------- ---------- ---------- ---------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
December 31, 2001
US Government securities ..... $ 6,000 $ 17 $ -- $ 6,017
Corporate debt securities .... 150,163 -- (86) 150,077
--------- ---------- ---------- ---------
Total securities .... $156,163 $ 17 $ (86) $156,094
========= ========== ========== =========
December 31, 2000
US Government securities ..... $ 2,000 $ -- $ (3) $ 1,997
Corporate debt securities .... 141,331 264 -- 141,595
--------- ---------- ---------- ---------
Total securities .... $143,331 $ 264 $ (3) $143,592
========= ========== ========== =========
The amortized cost and estimated fair value of debt securities by
contractual maturity at December 31, 2001 are shown below (in thousands):
Amortized Estimated
Cost Fair Value
--------- ----------
Due in 12 months or less ........................ $113,597 $113,618
Due between 12 months and 44 months ............. 42,566 42,476
--------- ----------
$156,163 $156,094
========= ==========
The following table presents certain information related to
sales of available-for-sale securities (in thousands):
Years Ended December 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
Proceeds from sales .................... $163,054 $ 78,348 $ 68,562
Gross realized gains on sales .......... $ 583 $ 304 $ 4
Gross realized losses on sales ......... $ (870) $ (32) $ (150)
F-10
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 and 2000 consist of the
following (in thousands):
-------- --------
2001 2000
-------- --------
Land ............................ $ 4,661 $ 5,003
Furniture and fixtures .......... 1,583 2,051
Equipment ....................... 12,734 11,179
Leasehold improvements .......... 1,238 1,113
-------- --------
20,216 19,346
Less accumulated depreciation ... (8,128) (8,046)
-------- --------
Property and equipment, net ..... $ 12,088 $ 11,300
======== ========
Furniture and equipment under capital leases were $10.3 million and
$8.5 million at December 31, 2001 and 2000, respectively. Accumulated
depreciation of furniture and equipment under capital leases totaled $5.0
million and $5.0 million at December 31, 2001 and 2000, respectively. The
Company entered into $3.5 million of additional capital leases during 2001 and
$1.8 million during 2000.
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities at December 31, 2001 and 2000 consist of the
following (in thousands):
-------- --------
2001 2000
-------- --------
Accrued employee benefits ........ $ 2,438 $ 2,992
Accrued professional fees ........ 1,300 1,229
Accrued development costs ........ 11,150 6,199
Other accrued liabilities ........ 865 715
-------- --------
$ 15,753 $ 11,135
======== ========
NOTE 5. DEBT
During 1997, the Company partially financed the purchase of land under
a five-year note payable for approximately $747,000, which bears interest at a
floating rate of prime plus one quarter percent (5.00% and 9.75% at December 31,
2001 and 2000, respectively). The note is repayable in equal monthly
installments beginning February 1998. At December 31, 2001, the balance of the
note was $149,000, which is scheduled for repayment in the year 2002.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Capital Lease Obligations. The Company has financed certain equipment
under capital lease obligations, which expire on various dates through the year
2005 and bear interest at rates between 6.0% and 9.6%. The lease commitments are
repayable in monthly installments.
Operating Leases. In September 1998, the Company leased an expanded
laboratory and office complex under a 15-year operating lease from the Science
Park Center, LLC, of which the Company owns a minority interest. The lease
contains a 4% per year escalation in base rent fees, effective with each
anniversary, and generally requires the Company to pay taxes, insurance and
maintenance.
Rent expense is recognized on a straight-line basis resulting in
deferred rent of $2.2 million and $1.6 million at December 31, 2001 and 2000,
respectively. Rent expense was $1.7 million, $2.5 million and $2.7 million for
F-11
the years ended December 31, 2001, 2000 and 1999, respectively. Sublease income
was $698,000, $1.2 million and $1.2 million for the years ended December 31,
2001, 2000 and 1999, respectively.
The Company subleases a portion of the space to an unrelated party. The
sublease will expire in March 2002. Future minimum sublease income to be
received under non-cancelable subleases at December 31, 2001 will be
approximately $90,000 for the year ending December 31, 2002.
Licensing and Research Agreements. The Company has entered into
licensing agreements with various universities and research organizations, which
are cancelable at the option of the Company with terms ranging from 0-180 days
written notice. Under the terms of these agreements, the Company has received
licenses to research tools, know-how and technology claimed, in certain patents
or patent applications. The Company is required to pay fees, milestones and/or
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 pay expenses arising from the
prosecution and maintenance of the patents covering the licensed technology. Due
to the uncertainty of the pharmaceutical development process, the Company
continually reassesses the value of the license agreements and cancels them as
research efforts are discontinued on these programs. If all licensed and
research candidates are successfully developed, the Company may be required to
pay milestone payments of approximately $13.8 million over the lives of these
agreements, in addition to sales royalties ranging from 1% - 6%. Due to the
uncertainties of the development process, the timing and probability of the
milestone and royalty payments cannot be accurately estimated.
Clinical Development Agreements. The Company has entered into
agreements with various vendors for the pre-clinical and clinical development of
its product candidates, which are cancelable at the option of the Company for
convenience or performance, with terms ranging from 0-180 days written notice.
Under the terms of these agreements, the vendors provide a variety of services
including conduct of pre-clinical development research, manufacture of clinical
compounds, enrollment of patients, monitoring of studies, data analysis and
regulatory filing assistance. Payments under these agreements typically include
fees for services and reimbursement of expenses. Some agreements may also
include incentive bonuses for time-sensitive activities. The timing of payments
due under these agreements were estimated based on current schedules of clinical
studies in progress.
Repayment schedules for commitments and contractual obligations at
December 31, 2001 are as follows (in thousands):
Licenses &
Capital Operating Research Development
Leases Leases Agreements Agreements
-------------------------------------------------
Fiscal Year:
2002 ......................... $ 2,277 $ 2,626 $ 884 $ 26,330
2003 ......................... 1,749 2,731 507 17,422
2004 .... .................... 1,504 2,841 263 4,355
2005 ......................... 686 2,954 20 -
2006 ......................... - 3,072 10 -
Thereafter ................... - 23,854 40 -
-------------------------------------------------
Total minimum payments ....... $ 6,216 $38,078 $ 1,724 $ 48,107
Less: amounts representing
interest ..................... (678)
---------
Future minimum payments ...... 5,538
Less: current portion ....... (1,938)
---------
Future payments on capital
lease obligations ............ $ 3,600
=========
F-12
NOTE 7. SCIENCE PARK CENTER, LLC
In May 1997, the Company along with two unrelated parties formed a
limited liability company in order to construct an office and laboratory
facility. Science Park Center LLC (the LLC), is a California limited liability
company, of which the Company owns a nominal minority interest. In relation to
the construction of the facility, the Company sold a parcel of land to the LLC
in exchange for a note receivable in the amount of $3.5 million plus interest of
8.25%. The sales price was established by the fair market value of the parcel at
the time of sale.
During 1998, the LLC constructed a laboratory and office facility and
leased the facility to the Company under a 15-year operating lease. The Company
has the option to purchase the facility at any time during the term of the
lease at the unamortized cost of the first mortgage.
Based on the structure of the arrangement with the LLC, this operating
lease is commonly referred to as a "synthetic lease." A synthetic lease is a
form of off-balance sheet financing under which an unrelated third party funds
up to 100% of the costs for the acquisition and/or construction of the facility
into an LLC and leases the facility to a lessee. At least 3% of the third party
funds represent at-risk equity and must remain at-risk to qualify as an
operating lease. A synthetic lease is treated as an operating lease for
accounting purposes and a financing lease for tax purposes. The Company selected
the synthetic lease for financing advantages. The Company periodically reviews
the fair value of the property leased to determine potential accounting
ramifications.
For accounting purposes, the sale of land to the LLC does not qualify
as a sale under SFAS No. 98 "Accounting for Leases," and therefore, the entire
amount of the note receivable is included in land and interest payments from the
LLC and offset rent expenses recorded by the Company. The amount included in
land at December 31, 2001 and 2000 was $3.2 million and $3.5 million,
respectively. The interest income from the LLC note offset the Company's
facilities expenses by approximately $298,000, $304,000 and $331,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
If at any time the third party fails to maintain at least 3% at-risk
equity, the Company will need to consolidate the LLC, which will result in debt
and equity being recorded in its financial statements. The following are the
unaudited, condensed balance sheets and statements of income for the LLC:
Science Park Center, LLC
Balance Sheets
(unaudited, in thousands)
December 31,
------- -------
2001 2000
------- -------
Current assets ................................. $ 240 $ 230
Building, net .................................. 14,038 14,564
Land ........................................... 3,485 3,485
Deferred rent .................................. 2,196 1,646
------- -------
Total assets ................................... $19,959 $19,925
======= =======
Current liabilities ............................ $ 112 $ 5
Notes payable to Neurocrine .................... 3,161 3,502
Building loan .................................. 14,280 14,444
Distribution payable ........................... 1,695 991
------- -------
Total liabilities .............................. 19,248 18,942
Retained earnings .............................. 711 983
------- -------
Total liabilities and shareholders' equity ..... $19,959 $19,925
======= =======
F-13
Science Park Center, LLC
Statements of Income
(unaudited, in thousands)
Years Ended December 31,
------ ------ ------
2001 2000 1999
------ ------ ------
Rental income ...................... $3,076 $3,076 $3,087
Operating expenses ................. 632 635 622
Interest expense, net .............. 1,366 1,293 1,329
Income taxes ....................... 10 5 7
------ ------ ------
Net income ......................... $1,068 $1,143 $1,129
====== ====== ======
The Company receives disbursements from the LLC from retained earnings
above and beyond the at-risk equity of the unrelated parties. The LLC accrues
the disbursements payable to Neurocrine on a monthly basis and periodically
makes cash payments to reduce those payables. The disbursements due Neurocrine
are offset against rent expense recorded by the Company. Disbursements recorded
by the Company for the years ended December 31, 2001, 2000 and 1999 were $1.1
million, $723,000 and $855,000, respectively.
Note 8. STOCKHOLDERS' EQUITY
Common Stock Issuances. From inception through 2001, the Company has
issued common stock in various private and public offerings, as well as to
corporate collaborators, at prices between $5.00 and $46.75 per share resulting
in aggregate net proceeds of approximately $384.1 million. This total includes a
December 2001 public offering, in which the Company sold 4.0 million shares of
its common stock at $46.75 per share. The net proceeds generated from this
transaction were $175.6 million.
Options. The Company has authorized 8.0 million shares of common stock for
issuance upon exercise of options or stock purchase rights granted under the
1992 Incentive Stock Option Plan, 1996 Director Option Plan, 1997 NNL Stock
Option Plan and 2001 Stock Option Plan (collectively, the Option Plans). The
Option 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 the Option 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 plans. Of the shares available for future issuance under
the Option Plans, 3.9 million are outstanding grants and 909,000 remain
available for future grant.
A summary of the Company's stock option activity, and related
information for the years ended December 31 follows (in thousands, except for
weighted average exercise price data):
2001 2000 1999
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------ ------------------ ------------------
Outstanding at January 1 ..... 3,911 $12.75 3,158 $ 5.91 2,793 $6.02
Granted ...................... 980 31.17 1,136 29.66 1,142 6.03
Exercised .................... (850) 6.14 (354) 6.56 (412) 4.79
Canceled ..................... (158) 19.09 (29) 11.69 (365) 6.52
------------------ ----------------- ------------------
Outstanding at December 31 ... 3,883 $18.59 3,911 $12.75 3,158 $5.91
================== ================= ==================
F-14
A summary of options outstanding as of December 31, 2001 follows (in
thousands, except for weighted average remaining contractual life and weighted
average exercise price data):
Options Outstanding Options Exercisable
-------------------------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Outstanding Remaining Average Exercisable Average
Range of as of Contractual Exercise As of Exercise
Exercise Prices 12/31/01 Life Price 12/31/01 Price
-------------------------------------------------------------- --------------------------
$ 0.02 to $ 4.88 642 4.2 $ 3.42 540 $ 3.29
$ 4.94 to $ 7.00 615 6.5 5.94 445 6.08
$ 7.01 to $10.25 602 5.6 8.21 565 8.13
$11.19 to $27.00 640 8.4 21.05 156 19.47
$27.60 to $34.50 698 9.0 32.22 166 33.69
$34.98 to $52.83 686 9.1 37.06 131 37.15
-------------------------------------------------------------- --------------------------
$ 0.02 to $52.83 3,883 7.2 $18.59 2,003 $11.27
The weighted average fair values (computed using Black-Scholes) of the
options granted during 2001, 2000 and 1999 were $20.54, $20.51 and $3.75,
respectively.
Pro forma information regarding net loss 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 2001, 2000 and 1999,
respectively: risk-free interest rates of 4.4%, 5.0% and 6.4%; a dividend yield
of 0.0% (for all years); volatility factors of the expected market price of the
Company's common stock of .80, .81 and .74; and a weighted average expected life
of the option of 5 years (for all years presented).
For purposes of pro forma disclosures, the estimated fair value of the
options granted is amortized to expense over the options' vesting period. The
pro forma effect on net losses for 2001, 2000 and 1999 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. The Company's reported and pro forma information for the years ended
December 31, 2001, 2000 and 1999 follows (in thousands, except for loss per
share data):
2001 2000 1999
---------- ---------- ----------
Net loss as reported .......... $(36,910) $(28,808) $(16,822)
Loss per share
(basic and diluted) .......... $ (1.42) $ (1.30) $ (0.88)
Pro forma net loss ............ $(44,188) $(31,057) $(18,303)
Pro forma loss per share
(basic and diluted) .......... $ (1.70) $ (1.40) $ (0.96)
Employee Stock Purchase Plan. The Company has reserved 525,000 shares
of common stock for issuance under the 1996 Employee Stock Purchase Plan, as
amended on May 24, 2001 (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 enrollment date or on the date on which the shares are purchased.
As of December 31, 2001, 369,000 shares have been issued pursuant to the
Purchase Plan.
Warrants. The Company has outstanding warrants to purchase 376,000
shares of common stock at the following exercise prices. At December 31, 2001,
all outstanding warrants were exercisable.
Warrants Outstanding at
Exercise Prices December 31, 2001 Expiration
- --------------------------------------------------------------------
$ 8.04 15,000 11/2006
$10.50 301,000 03/2006
$41.41 60,000 11/2006
---------
376,000
=========
F-15
The following shares of common stock are reserved for future issuance
at December 31, 2001 (in thousands):
Stock option plans .................... 4,792
Employee stock purchase plan .......... 156
Warrants .............................. 376
---------
Total ................................. 5,324
=========
Note 9. SIGNIFICANT COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
GlaxoSmithKline. In July 2001, the Company announced a worldwide
collaboration with GlaxoSmithKline (GSK) to develop and commercialize CRF
antagonists for psychiatric, neurological and gastrointestinal diseases. Under
the terms of this agreement, the Company and GSK will conduct a collaborative
research program for up to five years and collaborate in the development of
Neurocrine's current lead compounds, as well as novel back-up candidates and
second generation compounds identified through the collaborative research. In
addition, the Company will be eligible to receive milestone payments as
compounds progress through the research and development process, royalties on
future product sales and co-promotion rights in the U.S. under some conditions.
GSK may terminate the agreement at its discretion upon prior written notice to
the Company. In such event, the Company may be entitled to certain payments and
all product rights would revert to Neurocrine. The total collaborative value of
the GSK collaboration is the largest in Neurocrine's history. For the year ended
December 31, 2001, the Company recognized $19.2 million in revenue under the GSK
agreement. At December 31, 2001, the Company had $6.9 million of deferred
license fees and sponsored research revenues that will be amortized over the
life of the agreement and as services are performed, respectively.
Taisho Pharmaceutical Co., Ltd. In December 1999, the Company entered
into an agreement with Taisho Pharmaceutical Co., Ltd. (Taisho), providing to
them an exclusive option to obtain European, Asian and North American
development and commercialization rights for Neurocrine's altered peptide ligand
product, NBI-6024, for Type 1 diabetes in exchange for a $2.0 million option
fee. In July 2000, Taisho exercised its option as to Europe and Asia, and in
December 2000, Taisho exercised its option as to North America. Together with
Taisho, the Company formed a steering committee to oversee the worldwide
development of NBI-6024. The Company will receive license fees, milestone
payments, and reimbursement of 100% of worldwide development expenses. In
addition, the Company will receive payments on product sales for the term of the
patents covering NBI-6024, subject to adjustment for payments to third parties.
Taisho may terminate the agreement at its discretion upon prior written notice
to us. In such event, all product rights would revert to the Company. For the
years ended December 31, 2001 and 2000, the Company recognized $16.6 million and
$7.1 million, respectively, in revenue under the Taisho agreement. No revenue
was recognized in 1999. As of December 31, 2001, the Company had $2.9 million of
deferred license fees and sponsored research revenues that will be amortized
over the life of the agreement and as services are performed, respectively.
Wyeth-Ayerst Laboratories. Effective January 1999, the Company entered
into a collaboration and license agreement with Wyeth-Ayerst Laboratories
(Wyeth-Ayerst) relating to the research, development and commercialization of
compounds that control excitatory amino acid transporters for the treatment of
neurodegenerative and psychiatric diseases. The Company has granted Wyeth-Ayerst
exclusive and non-exclusive rights to different portions of the Company's
excitatory amino acid transporters technology as well as exclusive rights to any
products developed during the collaboration. These licenses are for the term of
the patents licensed. The Company will receive royalties on product sales for
the terms of the patents covering the collaboration products, subject to
adjustments for royalties payable to other parties and for competition. The
Company will also receive royalties for products that are not the subject of
issued patents. The Company also has the option to co-promote collaboration
products in Canada and the United States under some conditions. Wyeth-Ayerst may
terminate the agreement if they decide that the research is not successful, if
they decide to stop the program or if Neurocrine is acquired by another company.
The agreement may also be terminated by either party for the other party's
failure to meet its obligations under the agreement or bankruptcy. For the years
ended December 31, 2001, 2000 and 1999, the Company recognized $3.4 million,
$3.0 million and $6.0 million, respectively, in revenues under the Wyeth-Ayerst
agreement.
F-16
The three-year term of the sponsored research under the Wyeth-Ayerst
agreement was scheduled to terminate January 1, 2002. However, in December 2001,
the Company and Wyeth-Ayerst agreed to extend the term of the sponsored research
for a period of three months during which time Neurocrine and Wyeth-Ayerst will
discuss a further extension. In connection with the three-month extension, the
Company received $375,000 of sponsored research funding.
Eli Lilly and Company. In October 1996, the Company entered into a
research and license agreement with Eli Lilly and Company (Eli 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, and CRF R2
agonists for central nervous system diseases and disorders. Under the agreement,
the Company received and recognized three years of sponsored research and
development payments totaling $17.2 million. The Company also is entitled to
milestone payments for certain development and regulatory accomplishments. The
Company will have the option to receive co-promotion rights and share profits
from commercial sales of select products that result from the collaboration in
the U.S. or receive royalties on U.S. product sales. The Company will receive
royalties on product sales for the rest of the world.
In October 1999, the funded portion of the research program concluded
as scheduled. The Company believes Eli Lilly is not planning any specific future
development efforts. Therefore, no further payments are anticipated under this
agreement. For the year ended December 31, 1999, the Company recognized $3.2
million in revenue under the Eli Lilly agreement. No revenues were recognized
for the years ended December 31, 2001 and 2000.
Janssen Pharmaceutica, N.V. In January 1995, the Company entered into
the first of two research and development agreements with Janssen Pharmaceutica,
N.V. (Janssen) to collaborate in the discovery, development and
commercialization of small molecule CRF R1 antagonists for the treatment of
anxiety, depression and substance abuse. Under the January 1995 agreement,
Janssen funded three years of research at Neurocrine and received exclusive
licenses to all CRF R1 antagonist compounds developed during the term of the
funded research or during the year thereafter. The collaborative research
portion of the first Janssen agreement was completed as scheduled in 1997. In
September 1999, together with Janssen, the Company entered into an amended
agreement to expand the collaborative research and development efforts to
identify additional small molecule CRF antagonists for the treatment of
psychiatric disorders. In connection with the amended Janssen agreement, the
Company received an initial payment and two years of additional research funding
for our scientists working in collaboration with Janssen. All collaboration
products identified under the 1999 agreement are subject to the same terms and
conditions as the products arising under the 1995 agreement. This additional
research was completed in February 2001. The 1999 agreement provides that in
August 2001 Neurocrine was to receive either a $3.5 million milestone payment
from Janssen or exclusive rights to the first generation back-up compounds. The
Company agreed to postpone the August event to allow Janssen to complete certain
studies with the back-up program compounds. In March 2002, Janssen notified us
that it had discontinued development of the backup compound and elected to
terminate both the 1995 and 1999 agreements. As a result, exclusive rights to
all of the first generation CRF R1 antagonist compounds developed thereunder
reverted to Neurocrine. We do not expect additional payments of any kind under
the Janssen agreement.
For the years ended December 31, 2001, 2000 and 1999, the Company
recognized $525,000, $3.0 million and $2.4 million, respectively, in revenues
under terms of the Janssen agreements.
Novartis. In January 1996, the Company entered into an agreement with
Novartis under which Novartis paid the Company $5.0 million in up-front license
fees and was obligated to provide the Company with $7.0 million in research and
development funding during the first two years of the agreement. For the years
ended December 31, 2000 and 1999, the Company recognized $90,000 and $3.6
million in revenue under the Novartis agreement.
F-17
On July 7, 1999, Novartis exercised its right to terminate the
agreement, effective January 7, 2000. As a result, the Company reacquired the
worldwide rights to its multiple sclerosis compound.
Note 10. Related Party Transactions
Neuroscience Pharma, Inc. In March 1996, the Company along with a group
of Canadian institutional investors (the Canadian Investors) established
Neuroscience Pharma, Inc. (NPI). The Company's contribution was to license
certain technology and Canadian marketing rights to NPI. The Canadian Investors
contributed approximately $9.5 million in cash in exchange for shares of NPI
preferred stock (the Preferred Shares), which was convertible into shares of the
Company's common stock at the option of the Canadian Investors. In addition, the
Canadian Investors received warrants exercisable for 383,875 shares of the
Company's common stock at an exercise price of $10.50 per share and may be
eligible to receive additional warrants upon the attainment of certain
additional funding. As of December 31, 2001, 82,691 warrants have been
exercised.
During 1997 and 1998, the Canadian Investors converted their Preferred
Shares to shares of the Company's Common Stock. As a result, the Company
recorded an investment in NPI equal to the market value of Common Stock issued
in exchange for the Preferred Shares and has recognized its proportionate share
of the NPI net losses in accordance with the equity method of accounting. Equity
in NPI losses totaled $764,000 in 1999.
During 1996, the Company entered into a sponsored research agreement
with NPI. The terms of the agreement called for NPI to fund additional research
efforts on technologies licensed to NPI by the Company. Associated with the
costs of research on those certain programs, the Company recognized revenues of
$491,000 during 1999.
The Preferred Shares were redeemable for cash at the Company's option.
The redemption feature of the Preferred Shares limited their value to the
balance of cash and cash equivalents maintained by NPI. Consequently, the
Company reduced the value of its NPI investment by $647,000 during 1999. The
balance of the Company's investment in NPI was $0 at December 31, 1999.
In December 1999, the Company sold its investment in NPI in exchange
for cash, receivables and potential royalties on worldwide sales resulting from
certain of NPI's future products. The Company recorded a gain of $526,000 on the
sale of this investment. The gain was calculated using the total consideration
of cash and receivables, less the carrying value of the NPI investment. No value
was assigned to potential royalties on future product sales due to the
uncertainty of this event. This transaction, as well as those discussed above,
is included in "Equity in NPI losses and other adjustments, net" reported on the
Statements of Operations.
Note 11. Income Taxes
At December 31, 2001, the Company had Federal and California income tax
net operating loss carry-forwards of approximately $76.0 million and $23.8
million, respectively. The Federal and California tax loss carry-forwards will
begin to expire in 2010 and 2003, respectively, unless previously utilized. The
Company also has Federal and California research tax credit carry-forwards of
approximately $1.3 million and $5.7 million, respectively, which will begin to
expire in 2007 and 2012, respectively, unless previously utilized. The Company
has Federal Alternative Minimum Tax credit carry-forwards of approximately
$257,000, which will carry-forward indefinitely.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of
the Company's net operating loss and credit carry-forwards may be limited
because of cumulative changes in ownership of more than 50%. However, the
Company does not believe such changes will have a material impact upon the
utilization of these carry-forwards.
F-18
Significant components of the Company's deferred tax assets as of
December 31, 2001 and 2000 are shown below. A valuation allowance of $45.7
million and $27.2 million at December 31, 2001 and 2000, respectively, have been
recognized to offset the net deferred tax assets as realization of such assets
is uncertain. Amounts are shown in thousands as of December 31, of the
respective years:
2001 2000
----------- ----------
Deferred tax assets:
Net operating loss carry-forwards ........ $ 27,975 $ 16,487
Tax credit carry-forwards ................ 13,283 8,140
Capitalized research and development ..... 3,733 2,098
Other, net ............................... 729 479
----------- -----------
Total deferred tax assets ................ 45,720 27,204
Valuation allowance ...................... (45,720) (27,204)
----------- ----------
Net deferred tax assets .................. $ - $ -
=========== ==========
The provision for income taxes on earnings subject to income taxes
differs from the statutory Federal rate at December 31, 2001, 2000 and 1999, due
to the following:
2001 2000 1999
--------- -------- --------
Federal income taxes at 34% ................ $(12,582) $(9,692) $(5,719)
State income tax, net of Federal benefit ... (1,736) - -
Tax effect on non-deductible expenses ...... (4,202) 335 932
Increase in valuation allowance ............ 18,520 9,357 4,787
--------- -------- --------
$ - $ - $ -
========= ======== ========
NOTE 12. RETIREMENT PLAN
The Company has a 401(k) defined contribution savings plan (the 401(k)
Plan). The 401(k) Plan is for the benefit of all qualifying employees and
permits employees voluntary contributions up to 20% of base salary limited by
the IRS-imposed maximum. On January 1, 2001, the Company began matching 50% of
employee contributions up to 6% of eligible compensation, which cliff vests over
four years. Employer contributions were $359,000 for the year ended December 31,
2001. No employer contributions were made in 2000 and 1999.
NOTE 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for
the years ended December 31, 2001 and 2000 (unaudited, in thousands, except for
earnings (loss) per share data):
------------------------------------------- ----------
Quarters Ended
------------------------------------------- Year Ended
Mar 31 Jun 30 Sep 30 Dec 31 Dec 31
------------------------------------------- ----------
Fiscal Year Ended 2001
Revenues ........................ $ 3,488 $ 3,328 $21,593 $ 12,833 $ 41,242
Operating expenses .............. 17,567 18,920 20,400 28,237 85,124
Net income (loss) ............... (11,463) (13,344) 2,507 (14,610) (36,910)
Earnings (loss) per share:
Basic ........................ $ (0.45) $ (0.52) $ 0.10 $ (0.53) $ (1.42)
Diluted ...................... $ (0.45) $ (0.52) $ 0.09 $ (0.53) $ (1.42)
Shares used in the calculation
of earnings (loss) per share:
Basic ........................ 25,407 25,498 25,816 27,371 26,028
Diluted ...................... 25,407 25,498 27,972 27,371 26,028
F-19
------------------------------------------------------------ -------------
Quarters Ended
------------------------------------------------------------ Year Ended
Mar 31 Jun 30 Sep 30 Sep 30 Dec 31 Dec 31
As Reported Restated (1)
------------------------------------------------------------ -------------
Fiscal Year Ended 2000
Revenues ........................... $ 2,778 $ 2,942 $ 5,323 $ 2,426 $ 6,442 $ 14,588
Operating expenses ................. 10,004 10,322 15,008 15,008 14,855 50,189
Net Loss ........................... (6,047) (5,192) (8,135) (11,032) (6,537) (28,808)
Loss per share -
Basic and Diluted ............... $ (0.28) $ (0.24) $ (0.37) $ (0.50) $ (0.29) $ (1.30)
Shares used in the calculation of
loss per share:
Basic and Diluted ............... 21,771 21,897 22,032 22,032 22,789 22,124
- ----------
(1) During the fourth quarter of 2000, the Company adopted SAB 101, Revenue
Recognition in Financial Statements. SAB 101 provides, among other revenue
items, guidance in the recognition of nonrefundable, up-front fees received
in conjunction with a research and development arrangement. The result of
the adoption of SAB 101 was to reduce recognition of license fee revenues
reported during the third quarter of 2000 by $2.9 million. These revenues
were deferred and will be recognized as income, ratably over the estimated
lives of the respective agreements. The adoption of SAB 101 did not require
an adjustment for revenues recorded prior to December 31, 1999.
F-20