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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 0-27628
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SUPERGEN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1841574
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
TWO ANNABEL LANE, SUITE 220, SAN RAMON, CA 94583
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (925) 327-0200
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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 PER SHARE
COMMON STOCK PURCHASE WARRANTS ($9.00 PER SHARE)
COMMON STOCK PURCHASE WARRANTS ($18.18 PER SHARE)
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of 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 (based on the closing sale price of the Common Stock as reported on
the Nasdaq Stock Market on March 7, 2000) was approximately $1,711,945,000. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. The number of outstanding shares of the Registrant's Common
Stock as of the close of business on March 7, 2000 was 28,275,506.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, and 13 of Part III incorporate information by reference
from the definitive proxy statement for the Registrant's Annual Meeting of
Stockholders to be held on May 30, 2000.
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SUPERGEN, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for Registrant's Common Equity and Related 17
Stockholder Matters.......................................
Item 6. Selected Financial Data..................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition 20
and Results of Operations.................................
Item 7A. Quantitative and Qualitative Disclosures of Market Risk..... 34
Item 8. Financial Statements and Supplementary Data................. 34
Item 9. Changes in and Disagreements with Accountants on Accounting 34
and Financial Disclosure..................................
PART III
Item 10. Directors and Officers of the Registrant.................... 34
Item 11. Executive Compensation...................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and 34
Management................................................
Item 13. Certain Relationships and Related Transactions.............. 34
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on 35
Form 8-K..................................................
SIGNATURES................................................................... S-1
PART I
ITEM 1. BUSINESS
OUR DISCLOSURE AND ANALYSIS IN THIS REPORT CONTAIN FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS PROVIDE OUR CURRENT EXPECTATIONS OR
FORECASTS OF FUTURE EVENTS. IN PARTICULAR, THESE INCLUDE STATEMENTS RELATING TO
FUTURE ACTIONS, FUTURE PERFORMANCE OR RESULTS OF CURRENT AND ANTICIPATED
CLINICAL TRIALS, PROSPECTIVE PRODUCTS OR PRODUCT APPROVALS, SALES EFFORTS, AND
FINANCIAL RESULTS. FROM TIME TO TIME, WE ALSO MAY PROVIDE ORAL OR WRITTEN
FORWARD-LOOKING STATEMENTS IN OTHER MATERIALS WE RELEASE TO THE PUBLIC. ANY OR
ALL OF OUR FORWARD-LOOKING STATEMENTS IN THIS REPORT AND IN ANY OTHER PUBLIC
STATEMENTS WE MAKE MAY TURN OUT TO BE WRONG. INACCURATE ASSUMPTIONS WE MIGHT
MAKE AND KNOWN OR UNKNOWN RISKS AND UNCERTAINTIES CAN AFFECT OUR FORWARD-LOOKING
STATEMENTS. CONSEQUENTLY, NO FORWARD-LOOKING STATEMENT CAN BE GUARANTEED AND OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY.
WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
YOU ARE ADVISED, HOWEVER, TO CONSULT ANY FURTHER DISCLOSURES WE MAKE ON RELATED
SUBJECTS IN OUR QUARTERLY REPORTS ON FORM 10-Q, CURRENT REPORTS ON FORM 8-K AND
ANNUAL REPORTS ON FORM 10-K. ALSO NOTE THAT WE PROVIDE A CAUTIONARY DISCUSSION
OF RISKS, UNCERTAINTIES AND POSSIBLY INACCURATE ASSUMPTIONS RELEVANT TO OUR
BUSINESS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--FACTORS AFFECTING FUTURE OPERATING RESULTS"
IN THIS REPORT. THESE ARE RISKS THAT WE THINK COULD CAUSE OUR ACTUAL RESULTS TO
DIFFER MATERIALLY FROM EXPECTED AND HISTORICAL RESULTS. OTHER RISKS BESIDES
THOSE LISTED IN THIS REPORT COULD ALSO ADVERSELY AFFECT US.
OVERVIEW
We are an emerging pharmaceutical company dedicated to the acquisition,
rapid development and commercialization of oncology therapies for solid tumors
and hematological malignancies. We seek to minimize the time, expense and
technical risk associated with drug commercialization by identifying and
acquiring pharmaceutical compounds in the later stages of development, rather
than committing significant resources to the research phase of drug discovery.
STRATEGY
Our primary objective is to become a leading supplier of oncology therapies
for solid tumors and hematological malignancies. Key elements of our strategy
include:
- LICENSING OR BUYING RIGHTS TO LEAD COMPOUNDS RATHER THAN ENGAGING IN PURE
DISCOVERY RESEARCH. We identify and seek to license or buy rights to
products or compounds that are typically in human clinical development. We
then seek to enhance and complete the product development and bring the
product to market. We believe that our approach minimizes the significant
financial investment required by pure discovery research and reduces the
risk of failure in developing a commercially viable product.
- CAPITALIZING ON OUR EXISTING CLINICAL EXPERTISE TO MAXIMIZE THE COMMERCIAL
VALUE OF OUR PRODUCTS. We intend to retain significant participation in
the commercialization of our proprietary products by funding and
undertaking human clinical development ourselves. We believe this will
allow us to maximize the commercial value of our products by either
directly marketing our products or licensing the products on more
favorable terms than would be available earlier in the development cycle.
Our management and clinical staff have significant experience in
developing oncology therapies and bringing products to market.
- UTILIZING TECHNOLOGIES TO DEVELOP PRODUCTS FOR IMPROVED DELIVERY AND
ADMINISTRATION OF EXISTING COMPOUNDS. We are focused on the application of
our technologies to the development of improved formulations of existing
anticancer agents, which will be marketed as brand name pharmaceuticals.
We believe that incorporating our technologies with these compounds will
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result in products with improved delivery and/or administration. The
development of these products is subject to the New Drug Application, or
NDA, approval process.
- EXPANDING THE SCOPE OF OUR DEVELOPMENT EFFORTS IN ONCOLOGY. We are
implementing a strategy to commercialize oncology products in a number of
therapies, such as immunotherapies and vaccines, photodynamic therapy and
biotechnology-based drugs, and other areas, such as diagnostic agents and
prophylaxis.
PRODUCTS AND PRODUCTS IN DEVELOPMENT
The following table outlines our products and products in development, their
indication or intended use, their therapeutic category and their regulatory
status:
COMPOUND INDICATION OR INTENDED USE THERAPEUTIC CATEGORY REGULATORY STATUS
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Rubitecan Pancreatic cancer Cancer Phase III
Myelodysplastic syndromes/Chronic Cancer Phase II
myelo-monocytic leukemia
Various other solid tumor cancers Cancer Phase II
Nipent Hairy cell leukemia Cancer Approved
Cutaneous T-cell lymphoma/ Cancer Phase II
Percutaneous T-cell lymphoma
Chronic lymphocytic leukemia Cancer Phase II
Low grade non-Hodgkin's, lymphoma Cancer Phase II
Graft-versus-host disease Immunological Phase I
Rheumatoid arthritis Immunological Phase I
Decitabine Myelodysplastic syndromes Cancer Phase II
Acute myeloid leukemia/Chronic Cancer Phase II
myeloid leukemia
Non-small cell lung cancer Cancer Phase I/II
Sickle cell anemia Hematological Phase I
RF1010 Anemia Hematological Phase II
RF1051 Diabetes/Obesity Metabolic Phase II
PZG Diabetes Metabolic Phase II
ONCOLOGY PRODUCTS AND PRODUCTS IN DEVELOPMENT
RUBITECAN
Rubitecan is an oral chemotherapy compound in the camptothecin class which
we licensed from the Stehlin Foundation for Cancer Research in 1997. Rubitecan
is a second-generation topoisomerase I inhibitor that causes single-strand
breaks in the DNA of rapidly dividing tumor cells. We believe that rubitecan may
have significant advantages over many existing anticancer drugs, including oral
dosing and a superior side effect profile. In particular, we believe that the
compound causes significantly less inhibition of bone marrow function, due in
part to its dosing schedule, which provides for a cycle of five days of
administration followed by two days of recovery. In clinical trials, the
observed side effects are mild to moderate hematological toxicities, low-grade
cystitis, infrequent and mild hair loss and gastrointestinal disorders. Finally,
as an oral drug that can be taken at home, rubitecan may provide patients with
additional convenience and improved quality of life, and may reduce healthcare
costs. We believe that rubitecan is a platform drug for leadership in the
treatment of a broad array of solid tumors and hematological malignancies. We
are seeking rapid development of rubitecan and hope to obtain expedited review
by the FDA of the drug for pancreatic cancer, for which there are limited
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treatment options. In addition to patent protection, we have orphan drug
designation for this disease which may provide us with seven years of marketing
exclusivity in the United States after FDA approval.
PANCREATIC CANCER
Pancreatic cancer is associated with high patient mortality, causing more
than 75,000 deaths annually in the United States and Europe. It is the fourth
leading cause of death by cancer in the United States with an average survival
time of four to five months following diagnosis. The current therapeutic
treatment options most commonly used to treat pancreatic cancer include
5-fluorouracil, or 5-FU, and Gemzar.
Results of a Phase II clinical trial conducted by the Stehlin Foundation
using rubitecan for treatment of pancreatic cancer indicate a favorable
comparison with historical treatment options in terms of quality of life,
survival data and tumor size reduction. The results of this Phase II trial
suggest that the median survival in the 60 evaluable patients who took at least
the required minimum eight week course of therapy was nearly nine months,
markedly greater than the average survival time of four to five months under
historical treatment methods. Overall, previously untreated patients who used
rubitecan survived much longer than those patients treated with Gemzar.
We are evaluating rubitecan in three separate stand-alone pivotal Phase III
clinical trials for pancreatic cancer. The trials are randomized, unblinded
studies being conducted in approximately 200 centers and are designed to include
up to 1,800 patients. The primary endpoint of these trials is survival. We
commenced these trials in November 1998 and we have over 700 patients currently
enrolled. If any one of these trials is successful, we anticipate filing an NDA
with the FDA by early 2001. The protocols are outlined as follows:
PROTOCOLS MAXIMUM PATIENTS
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Rubitecan or Gemzar in patients who have not undergone
chemotherapy 1,000
Rubitecan or 5-FU in patients who have failed Gemzar 400
Rubitecan or other therapies in patients who have failed
other prior therapies 400
MYELODYSPLASTIC SYNDROMES
Myelodysplastic syndromes, or MDS, are a group of conditions that have in
common abnormalities in the blood-producing cells of the bone marrow. The
conditions are fatal, although patients can live for several years after
diagnosis. Treatment of patients with MDS has generally proven disappointing.
The most common current treatment is management by supportive measures, such as
blood transfusion, or the administration of antibiotics to fight infections.
Hematopoietic growth factors also have been used to treat MDS.
We are conducting a Phase II study at the M.D. Anderson Cancer Center
enrolling patients with a diagnosis of MDS, as well as related conditions such
as chronic myeloid leukemia, or CML, and chronic myelo-monocytic leukemia. We
expect to enroll approximately 100 patients in this trial. Based on preliminary
positive results from this study, we are finalizing the protocol of a randomized
Phase III study comparing rubitecan to best supportive care. We expect to
commence patient enrollment for this study in the second quarter of 2000. The
principal endpoints will be response and clinical benefit. This planned Phase
III trial is designed to secure approval for this indication.
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OTHER POTENTIAL INDICATIONS
Studies have shown rubitecan to be active in more than 30 human and animal
tumor models in indications such as breast, lung, colorectal, ovarian and
prostate cancers. We are aggressively pursuing additional Phase II trials using
rubitecan both as a single therapeutic agent and in combination with other
anticancer agents in solid tumors and hematological malignancies. We intend to
make available to physicians copies of peer-reviewed medical journal articles
and other validated scientific information related to these trials. We believe
this will provide physicians with more up-to-date product information and will
better enable them to meet their patients' medical needs.
In addition, we are currently conducting pilot studies using rubitecan in
combination with other chemo-therapeutic agents. In studies to date, rubitecan
has not exhibited any of the cardiac, pulmonary, hepatic or renal toxicities
that limit the acute and/or chronic dosages of several chemotherapeutics. In
addition, some early studies suggest rubitecan could be used to treat cancer on
a chronic rather than acute basis.
In December 1999, we entered into license and research agreements with the
Clayton Foundation for Research and its technology transfer organization,
Research Development Foundation. Under the terms of the agreements, we acquired
worldwide rights to inhaled versions of formulations of camptothecins, including
rubitecan. Phase I clinical studies with inhaled rubitecan for the treatment of
lung cancer and pulmonary metastatic disease are currently underway at the M.D.
Anderson Cancer Center and the Baylor College of Medicine.
NIPENT
Nipent, generically known as pentostatin, inhibits a key enzyme in the DNA
synthesis process and results in cytotoxicity, primarily in lymphocytes. The
specific mechanism differs from other chemotherapy agents, therefore making
Nipent novel and unique. Nipent's preferential effect on lymphocytes, with
little effect on other normal tissue, creates an interest in this product for
the treatment of cancers of the lymphoid system and other hematologic cancers.
HAIRY CELL LEUKEMIA
We acquired Nipent from the Parke-Davis division of the Warner-Lambert
Company in 1996 and we are selling this drug in the United States for the
treatment of hairy cell leukemia, a type of B-lymphocytic leukemia.
Warner-Lambert retained a worldwide, royalty-free license to sell Nipent but has
agreed not to sell Nipent in North America through September 2006. In 1997,
Warner-Lambert further agreed to buy Nipent from us for all of its sales outside
the United States through at least October 2004. We are permitted to sell Nipent
outside of North America for diseases other than cancer until September 2006, at
which time we may sell the drug worldwide for any disease.
OTHER INDICATIONS
We believe that Nipent has a unique mechanism of action and Phase II trials
indicate that it may have activity in a variety of other hematologic cancers. In
oncology, we are pursuing treatments for lymphatic malignancies and disorders,
such as cutaneous T-cell lymphoma, chronic lymphocytic leukemia, low grade
non-Hodgkin's lymphoma and peripheral T-cell lymphoma. Nipent has received
orphan drug designation by the FDA for use against cutaneous T-cell lymphoma and
chronic lymphocytic leukemia. As with rubitecan, we are pursuing trials that
will lead to peer reviewed articles indicating efficacy of Nipent in various
leukemias.
In addition, Nipent has shown activity in various autoimmune diseases,
including graft-versus-host disease which is not responsive to standard
therapies, and rheumatoid arthritis. We estimate the United States markets for
both graft-versus-host disease and rheumatoid arthritis are larger than the
market
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for Nipent's current applications. We are conducting Phase I clinical trials in
both of these indications. If results from ongoing trials are consistent with
previously completed trials, we intend to pursue development of Nipent for both
of these diseases.
DECITABINE
Decitabine is an antimetabolite cytotoxic agent that we acquired from a
subsidiary of Teva Pharmaceuticals in September 1999. Decitabine is a pyrimidine
analog that has a mechanism of action that is unique from other chemically
related compounds, such as gemcitabine and cytosine arabinoside. Decitabine's
mechanism is related to DNA hypomethylation. Methylation of DNA is a major
mechanism regulating gene expression. Researchers have determined that an
increase in methylation of DNA results in blocking the activity of several genes
that regulate cell division and differentiation, known as "suppressor genes."
With suppressor genes blocked, cell division becomes unregulated, causing
cancer. In studies researchers have demonstrated that decitabine reduces the
methylation of DNA, leading to reexpression of suppressor genes and a resulting
redifferentiation and maturation of the cancer cells back to normal. Researchers
have also shown that decitabine treatment restores sensitivity of tumors to
treatment by drugs such as cisplatin by reversing drug resistance.
Researchers have shown decitabine to be effective in multiple Phase II
trials in the United States and Europe for treating MDS, CML and acute myeloid
leukemia. Based on positive results from these studies, we are finalizing the
protocol of a randomized Phase III study comparing decitabine to best supportive
care for MDS. We expect to commence patient enrollment for this study in 2000.
The principal endpoints will be response and clinical benefit. This planned
Phase III trial is designed to secure approval for this indication. Decitabine
has received orphan drug designation from the FDA for MDS.
In addition to MDS, clinical studies have shown that decitabine is effective
in a variety of other hematological malignancies such as acute myeloid leukemia
and CML. Preliminary results also suggest activity in solid tumors such as
non-small cell lung cancer. Phase I clinical trials with decitabine are underway
for this indication. Scientific data also suggests that decitabine may be
applicable for treatment of non malignant diseases such as sickle cell anemia.
Phase I clinical trials are underway for treatment of sickle cell anemia using
decitabine.
NON-ONCOLOGY PROPRIETARY PRODUCTS
We are developing certain non-oncology products, including RF 1010, RF 1051
and pyrazinoylguanidine, or PZG. RF 1010 is an analog of a naturally occurring
human non-androgenic hormone. We have conducted Phase II trials using RF 1010 to
treat various forms of anemia and neutropenia. These diseases destroy red and
white blood cells and thereby weaken the immune system, leaving patients
susceptible to infections that could result in serious illness or death.
RF 1051, which is a naturally occurring substance in humans, has applications
for treatment of diabetes and obesity. Our Phase II trials have indicated that
this proprietary oral drug may cause the body to store less fat or use more fat
to produce energy. We have received orphan drug designation for RF 1051 in the
treatment of Prader-Willi Syndrome, a type of genetic obesity. PZG is a product
for treatment of Type II, or adult-onset, diabetes. Animal studies and early
clinical studies of PZG suggest that it may help to control the blood sugar and
lipid abnormalities of diabetes, and may have utility in treating a lipid
disorder unrelated to diabetes called hypertriglyceridemia, obesity,
hypertension and the uremia of renal failure. We recently initiated a small,
well-defined and controlled Phase II study to characterize the hypoglycemic and
lipid-lowering effects of PZG in Type II diabetics.
TECHNOLOGIES
We are focused on the application of our technologies to the development of
improved formulations of existing anticancer agents, which will be marketed as
brand name pharmaceuticals. We
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believe that incorporating our technologies with these compounds will result in
products with improved delivery and/or administration. The development of these
products is subject to the NDA approval process.
EXTRA TECHNOLOGY
We have developed several applications for our proprietary Extra technology.
We believe this technology significantly improves the safety profile and
handling characteristics of several anticancer drugs currently on the market. In
March 1994, we acquired exclusive worldwide rights to the patented cyclodextrin
technology used in our Extra technology from Janssen Biotech, N.V. and others.
Many generic anticancer drugs are available only in a powder form that must
be mixed into a solution before injection into a vein. If successful, our Extra
technology will produce a ready-to-inject, stable solution that will ease
administration and save time by eliminating the potentially dangerous mixing
procedure. It could also provide safety benefits for those administering the
dose by reducing their risk of exposure to the drug. Moreover, we believe that
our ready-to-inject stable solutions may have a significantly longer shelf life
at room temperature than the mixed solutions. In addition, many existing
anticancer pharmaceuticals, including those under development by us, are potent
toxins that can cause serious irreversible damage to a patient's muscle or skin
should the drug accidentally leak during injection. We believe that our Extra
technology may increase the safety of these existing anticancer drugs by
shielding the tissue from the drug at the injection site. The drug is released
upon circulation within the bloodstream. We believe that each of these features
will result in our Extra products having a significant competitive advantage
over their counterparts currently on the market.
EXTRA PRODUCTS UNDER DEVELOPMENT
We filed an NDA for Mito Extra, our Extra formulation of mitomycin, in
December 1997, which was accepted by the FDA in February 1998. We are in the
process of responding to an FDA request for additional formulation,
manufacturing and clinical information. In addition, we are evaluating our Extra
technology for additional applications of other generic anticancer agents as
well as Nipent.
SPARTAJECT DRUG DELIVERY TECHNOLOGY
Spartaject drug delivery technology is a drug delivery system that
accommodates poorly water-soluble and water insoluble compounds by encapsulating
them with a fatty layer, known as a phospholipid. The Spartaject technology
involves coating particles of a drug that are of submicron or near micron size
with a membrane-forming phospholipid layer, thereby permitting the creation of a
suspension of the drug rather than a solution, and its intravenous injection
without the use of potentially toxic solubilizing agents. As a result, the
Spartaject technology may reduce toxicity created by other injectable forms of
delivery and potentially increase efficacy by facilitating delivery of compounds
whose prior intravenous delivery was impractical because of solubility-related
formulation difficulties.
SPARTAJECT PRODUCT UNDER DEVELOPMENT
Busulfan is currently marketed in an oral dosage form by Glaxo
Wellcome Inc. It is frequently used "off-label" as a bone marrow ablating agent
prior to bone marrow transplants. In 1998 we completed a Phase I clinical trial
of Spartaject busulfan at each of Johns Hopkins Oncology Center and Duke
University Medical Center. Additional Phase I clinical trials in pediatric bone
marrow ablation and neoplastic meningitis were initiated at St. Jude's
Children's Hospital and Duke University Medical Center.
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ORAL PRODRUG DELIVERY TECHNOLOGY
Oral prodrug delivery technology involves administering an inactive
compound, known as a prodrug, which is absorbed in the digestive tract and is
converted to an active agent in the liver by an enzyme located there. Oral
prodrug delivery technology could potentially enable the oral delivery of drugs
that are otherwise only used in an intravenous formulation. The resulting active
compounds may pass through the systemic circulation and act at peripheral sites.
We are applying the Oral prodrug delivery technology to compounds selected for
their potential either to serve as oral delivery agents for systemically active
chemotherapeutic or radiosensitizing drugs previously available only in
intravenous form.
ORAL PRODRUG DELIVERY PRODUCTS
5-FP, or 5-fluoro pyrimidinone, is a pyrimidinone based prodrug that is
converted to 5-FU, or 5-fluorouracil, by the liver. 5-FU is currently sold
generically only in an intravenous form. It is widely used in the treatment of
breast, colorectal and other cancers. We have completed a Phase I trial with
5-FP and are evaluating strategies regarding its further clinical development.
IPdR is a pyrimidinone based prodrug that converts into IUdR, a compound
that has been under investigation by the National Cancer Institute, or NCI, in
animals and humans as a potential agent to sensitize cancer cells to radiation.
We were recently awarded a Phase II Small Business Innovation Research Grant by
the NCI of up to approximately $750,000, which is designated to be used to bring
IPdR into Phase I trials.
GENERIC ANTICANCER DRUGS
As part of our Extra product development efforts we pursued development of
generic versions of existing anticancer agents. To date we have received
Abbreviated New Drug Application, or ANDA, approval for our generic mitomycin,
which we are selling in the United States. We believe that the total estimated
United States sales for generic anticancer products have decreased over the last
few years due to increased competition. We also believe sales for these generics
may continue to decrease as a result of competitive factors. These factors may
include reductions in the per unit sales price, the introduction of additional
generics as well as other cancer drugs, new formulations for these drugs and the
use of different therapies. Therefore, we currently intend to limit our
development of generic products to those that we feel either require minimal
effort to submit an ANDA and obtain marketing clearance or that offer
significant market opportunities.
STRATEGIC AND COLLABORATIVE RELATIONSHIPS
We identify and license or buy rights to products or compounds that are
typically in human clinical development. We then seek to enhance and complete
the product development and bring the product to market internally or through
collaborations with others. We have entered into a variety of strategic
relationships and licensing agreements in pursuing our business. Some of our
more significant relationships are as follows:
ABBOTT LABORATORIES
In December 1999, we entered into agreements with Abbott under which Abbott
will undertake to market and distribute our products and invest in shares of our
common stock. One of the agreements covers the development, marketing and
distribution of rubitecan. Under this agreement, we will co-promote rubitecan
with Abbott within the United States and Abbott has exclusive rights to market
rubitecan outside the United States. In the U.S. market, we will share profits
from product sales equally with Abbott. Outside of the U.S. market, Abbott will
pay us royalties and transfer fees based on product sales. We will remain
responsible for pursuing and funding the clinical development of rubitecan and
to obtain regulatory approval of the product in the United States, Canada and
the
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member states of the European Union. Abbott is responsible for obtaining
regulatory approval of the product in the other countries in the world. We will
retain responsibility for manufacturing, packaging, sterilization and labeling
of the product and Abbott shall be the exclusive distributor of the product
throughout the world.
In addition, under the agreements Abbott will purchase shares of our common
stock in an amount of up to $81.5 million in nine tranches over a period of time
and will make certain other cash payments to us which, when aggregated with the
equity investments, amount to approximately $150 million. The purchase price of
the securities will be determined based on the market price of our common stock
at the time of the purchase. Each equity investment and cash payment is tied to
and conditioned upon the achievement of certain milestones based on, among other
things, steps in the regulatory approval process both in the United States and
other countries in the international territory, the launch of the product in
particular territories and the target sales of the product. In January 2000
Abbott made a $26.5 million equity investment.
We also granted Abbott an option to purchase up to 49% of the shares of our
common stock outstanding at the time of the exercise. The exercise price of the
option is $85 per share, and the option expires in March 2003. Abbott's ability
to exercise the option is conditioned upon, among other things, the continued
effectiveness of the worldwide distribution agreement for rubitecan-related
products. In addition, Abbott has a right of first discussion with respect to
our product portfolio and a right of first refusal to acquire us.
We entered into a distribution agreement for Nipent in December 1999. Under
the terms of the Nipent distribution agreement, Abbott will become the exclusive
U.S. distributor for a period of five years. We retain U.S. marketing rights for
Nipent. In January 2000, Abbott made a $5 million cash payment to us in
connection with the granting of the exclusive distribution rights.
STEHLIN FOUNDATION FOR CANCER RESEARCH
In September 1997 we licensed the exclusive worldwide royalty-bearing rights
to rubitecan from the Stehlin Foundation for Cancer Research, a Houston, Texas
based cancer research clinic. The Stehlin Foundation was established in 1969 by
Dr. John S. Stehlin, Jr. M.D., a surgical oncologist, for the express purpose of
conducting basic research that can be applied directly to improving the
treatment of patients with cancer. All research is clinically oriented and
conducted at the Stehlin Foundation's facility in Houston, Texas. In
November 1999 we amended our agreement with the Stehlin Foundation to broaden
the definition of licensed compounds to include certain analogues of rubitecan.
Under these agreements we are required to seek commercial applications for
rubitecan. We are required to pay the Stehlin Foundation approximately
$10 million for research and must make cash royalty payments and cash or stock
milestone payments to the Stehlin Foundation as we develop and commercialize
rubitecan.
NEW DRUG DEVELOPMENT AND APPROVAL PROCESS
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of
pharmaceuticals and in our ongoing research and development activities. All of
our products will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic products are subject to
rigorous preclinical testing and clinical trials and other pre-marketing
approval requirements by the FDA and regulatory authorities in other countries.
In the United States, various federal, and in some cases state statutes and
regulations also govern or impact upon the manufacturing, safety, labeling,
storage, record-keeping and marketing of such products. The lengthy process of
seeking required approvals and the continuing need for compliance with
applicable statutes and regulations, require the expenditure of substantial
resources. Regulatory approval, when and if obtained, may be limited in scope
which may significantly limit the indicated uses for which a product may be
marketed. Further, approved drugs, as well as their
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manufacturers, are subject to ongoing review and discovery of previously unknown
problems with such products may result in restrictions on their manufacture,
sale or use or in their withdrawal from the market.
The process for new drug approval has many steps, including:
DRUG DISCOVERY. In the initial stages of drug discovery before a compound
reaches the laboratory, tens of thousands of potential compounds are randomly
screened for activity against an assay assumed to be predictive for particular
disease targets. This drug discovery process can take several years. Once a
company locates a "screening lead", or starting point for drug development,
isolation and structural determination may begin. The development process
results in numerous chemical modifications to the screening lead in an attempt
to improve the drug properties of the lead. After a compound emerges from this
process, the next steps are to conduct further preliminary studies on the
mechanism of action, further in vitro, or test tube, screening against
particular disease targets and finally, some in vivo, or animal, screening. If
the compound passes these barriers, the toxic effects of the compound are
analyzed by performing preliminary exploratory animal toxicology. If the results
demonstrate acceptable levels of toxicity, the compound emerges from the basic
research mode and moves into the preclinical phase.
PRECLINICAL TESTING. During the preclinical testing stage, laboratory and
animal studies are conducted to show biological activity of the compound against
the targeted disease, and the compound is evaluated for safety. These tests
typically take approximately three and one-half years to complete, and must be
conducted in compliance with Good Laboratory Practice, or GLP, regulations.
INVESTIGATIONAL NEW DRUG APPLICATION. During the preclinical testing, an
IND is filed with the FDA to begin human testing of the drug. The IND becomes
effective if not rejected by the FDA within 30 days. The IND must indicate the
results of previous experiments, how, where and by whom the new studies will be
conducted, the chemical structure of the compound, the method by which it is
believed to work in the human body, any toxic effects of the compound found in
the animal studies and how the compound is manufactured. All clinical trials
must be conducted in accordance with Good Clinical Practice, or GCP,
regulations. In addition, an Institutional Review Board, or IRB, comprised of
physicians at the hospital or clinic where the proposed studies will be
conducted, must review and approve the IND. The IRB also continues to monitor
the study. Progress reports detailing the results of the clinical trials must be
submitted at least annually to the FDA. In addition, the FDA may, at any time
during the 30-day period or at any time thereafter, impose a clinical hold on
proposed or ongoing clinical trials. If the FDA imposes a clinical hold,
clinical trials cannot commence or recommence without FDA authorization and then
only under terms authorized by the FDA. In some instances, the IND application
process can result in substantial delay and expense.
Some limited human clinical testing may be done under a Physician's IND in
support of an IND application and prior to receiving an IND. A Physician's IND
is an IND application that allows a single individual to conduct a clinical
trial. A Physician's IND does not replace the more formal IND process, but can
provide a preliminary indication as to whether further clinical trials are
warranted, and can, on occasion, facilitate the more formal IND process.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap.
PHASE I CLINICAL TRIALS. After an IND becomes effective, Phase I human
clinical trials can begin. These tests, involving usually between 20 and 80
healthy volunteers or patients, typically take approximately one year to
complete. The tests study a drug's safety profile, and may include the safe
dosage range. The Phase I clinical studies also determine how a drug is
absorbed, distributed, metabolized and excreted by the body, and the duration of
its action. Phase I/II trials are normally conducted for anticancer product
candidates.
9
PHASE II CLINICAL TRIALS. In Phase II clinical trials, controlled studies
are conducted on approximately 100 to 300 volunteer patients with the targeted
disease. The primary purpose of these tests is to evaluate the effectiveness of
the drug on the volunteer patients as well as to determine if there are any side
effects. These studies generally take approximately two years, and may be
conducted concurrently with Phase I clinical trials. In addition, Phase I/II
clinical trials may be conducted to evaluate not only the efficacy of the drug
on the patient population, but also its safety.
PHASE III CLINICAL TRIALS. This phase typically lasts about three years and
usually involves 1,000 to 3,000 patients. During the Phase III clinical trials,
physicians monitor the patients to determine efficacy and to observe and report
any reactions that may result from long-term use of the drug.
NEW DRUG APPLICATION. After the completion of all three clinical trial
phases, if there is substantial evidence that the drug is safe and effective, an
NDA is filed with the FDA. The NDA must contain all of the information on the
drug gathered to that date, including data from the clinical trials. NDAs are
often over 100,000 pages in length.
The FDA reviews all NDAs submitted before it accepts them for filing and may
request additional information rather than accepting an NDA for filing. In such
an event, the NDA must be resubmitted with the additional information and,
again, is subject to review before filing. Once the submission is accepted for
filing, the FDA begins an in-depth review of the NDA. Under the Federal Food,
Drug and Cosmetic Act, the FDA has 180 days in which to review the NDA and
respond to the applicant. The review process is often significantly extended by
FDA requests for additional information or clarification regarding information
already provided in the submission. The FDA may refer the application to an
appropriate advisory committee, typically a panel of clinicians, for review,
evaluation and a recommendation as to whether the application should be
approved. The FDA is not bound by the recommendation of an advisory committee.
If FDA evaluations of the NDA and the manufacturing facilities are favorable,
the FDA may issue either an approval letter or an approvable letter, which
usually contains a number of conditions that must be met in order to secure
final approval of the NDA. When and if those conditions have been met to the
FDA's satisfaction, the FDA will issue an approval letter, authorizing
commercial marketing of the drug for certain indications. If the FDA's
evaluation of the NDA submission or manufacturing facilities is not favorable,
the FDA may refuse to approve the NDA or issue a not approvable letter.
MARKETING APPROVAL. If the FDA approves the NDA, the drug becomes available
for physicians to prescribe. Periodic reports must be submitted to the FDA,
including descriptions of any adverse reactions reported. The FDA may request
additional studies (Phase IV) to evaluate long-term effects.
PHASE IV CLINICAL TRIALS AND POST MARKETING STUDIES. In addition to studies
requested by the FDA after approval, these trials and studies are conducted to
explore 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 NDA. 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 such 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.
Rubitecan has received orphan drug designation from the FDA.
10
APPROVALS OUTSIDE OF THE UNITED STATES. Steps similar to those in the
United States must be undertaken in virtually every other country comprising the
market for our products before any such product can be commercialized in those
countries. The approval procedure and the time required for approval vary from
country to country and may involve additional testing. There can be no assurance
that approvals will 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. There can be no assurance that the resulting prices would be
sufficient to generate an acceptable return to us.
FDA MODERNIZATION ACT OF 1997
The Food and Drug Administration Modernization Act of 1997, or FDAMA, was
enacted, 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. FDAMA establishes a statutory program for the approval of "fast track
products." The fast track provisions essentially codifies FDA's Accelerated
Approval regulations for drugs and biologics. A "fast track product" is defined
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 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 the clinical development
of the product. FDAMA specifies that the FDA must determine if the product
qualifies for fast track designation within 60 days of receipt of the sponsor's
request. Approval of an NDA for a fast track product can be based on an effect
on a clinical endpoint or on a surrogate endpoint that is reasonably likely to
predict clinical benefit. Approval of a fast track product may be subject to
post-approval studies to validate the surrogate endpoint or confirm the effect
on the clinical endpoint, and prior review of copies of all promotional
materials. If a preliminary review of the clinical data suggests efficacy, the
FDA may initiate review of sections of an application for a "fast track product"
before the application is complete. This "rolling review" is available if the
applicant provides a schedule for submission of remaining information and pays
applicable user fees. However, the Prescription Drug User Fees Act time period
does not begin until the complete application is submitted.
We intend to seek fast track designation to secure expedited review of
appropriate products. It is uncertain if fast track designation will be
obtained. We cannot predict the ultimate impact, if any, of the new fast track
process on the timing or likelihood of FDA approval of rubitecan or any of our
other potential products.
Physicians may prescribe drugs for uses that are not described in the
product's labeling for uses that differ from those tested by us and approved by
the FDA. Such "off-label" uses are common across medical specialties and may
constitute the best treatment for many patients in varied circumstances. The FDA
does not regulate the behavior of physicians in their choice of treatments. The
FDA does, however, restrict manufacturer's communications on the subject of
off-label use. Companies cannot actively promote FDA-approved drugs for
off-label uses, but a recent court decision now allows them to disseminate to
physicians articles published in peer-reviewed journals, like THE NEW ENGLAND
JOURNAL OF MEDICINE, that discuss off-label uses of approved products. To the
extent allowed by law, we intend to disseminate peer-reviewed articles on our
products to our physician customers.
EXTRA DRUG DEVELOPMENT
Each Extra product candidate contains an active drug substance which has
already been approved by the FDA and may already also have generic versions
approved by the FDA. The excipient for the Extra technology has also been
approved by the FDA in a non-oncology application. To gain approval to market,
we must provide data to the FDA to support the safety, efficacy and quality of
each Extra product, but these data may be more limited in scope and content than
would be required for a new chemical entity. While extensive clinical trials may
not be required, we will be required to provide
11
clinical data that demonstrate that the administration of our Extra formulation
results in the same presence of the drug in the body as that of the generic
version, within clinically acceptable statistical guidelines. Overall, the data
packages we will submit to the FDA for Extra product candidates may be smaller
than a typical NDA and may take less time to review.
We also expect that, after the safety and quality of the Extra technology
have been adequately demonstrated to the FDA, future Extra submissions will be
able to cross-refer to these data, further streamlining our submissions.
GENERIC DRUG DEVELOPMENT
For certain drugs that are generic versions of previously approved products,
there is an abbreviated FDA approval process. A sponsor may submit an
Abbreviated Application for:
- a drug product that is the "same" as the drug product listed in the
approved drug product list published by the FDA (the "listed drug") with
respect to active ingredient(s), route of administration, dosage form,
strength and conditions of use recommended in the labeling;
- a drug product that differs with regard to certain changes from a listed
drug if the FDA has approved a petition from a prospective applicant
permitting the submission of an Abbreviated Application for the changed
product; and
- a drug that is a duplicate of, or meets the monograph for, an approved
antibiotic drug.
An Abbreviated Application need not contain the clinical and preclinical
data supporting the safety and effectiveness of the product. The applicant must
instead demonstrate that the product is bioequivalent to the listed drug. FDA
regulations define bioequivalence as the absence of a significant difference in
the rate and the extent to which the active ingredient moiety becomes available
at the site of drug action when administered at the same molar dose under
similar conditions in an appropriately designed study. If the approved generic
drug is both bioequivalent and pharmaceutically equivalent to the listed drug,
the agency may assign a code to the product in an FDA publication that will
represent a determination by the agency that the product is therapeutically
equivalent to the listed drug. This designation will be considered by third
parties in determining whether the generic drug will be utilized as an
alternative to the listed drug.
SALES AND MARKETING
We currently have 18 employees focused on sales and marketing of our
products to hospitals in the United States. The large majority of these
hospitals are members of hospital buying groups. We have focused our efforts on
selling generic products to these groups since they control a significant
majority of the hospital business in the oncology and blood disorder
pharmaceutical market. We also market our products, including Nipent, to private
practice oncology clinics, oncology distributors and drug wholesalers.
Oncologists/hematologists, oncology nurses and oncology pharmacists are included
in each of these classes of customers.
Since acceptance of our products from each buying group can be time
consuming, there may be significant delays before we can win bids and generate
sales revenue. However, we have taken significant steps toward product
acceptance. A large number of these buying groups, including Premier Purchasing
Partners, Novation, Kaiser Permanente, and the Department of Veteran Affairs,
have given us approved vendor status. In addition, we have gained recognition as
an approved vendor in each state that requires registration or licensing before
bidding for those customers. We will continue to target these large buying
groups and, as we attain market share, bid with other buying groups while
seeking to minimize any price erosion that may occur.
12
There are approximately 5,000 private practice oncologists/hematologists in
the United States. These physicians usually purchase oncology products through
distributors, with whom we have developed relationships. The four major oncology
distributors in the United States are Oncology Therapeutic Network Joint
Venture, L.P., Florida Infusion Services, Inc., National Specialty
Services, Inc. and Priority Healthcare Corporation. These distributors control
approximately 60% of the private practice oncology clinics, which in turn
represent approximately 30% of the oncology-related pharmaceutical market. We
have taken significant steps in building relationships with these distributors,
all of which distribute Nipent. Our sales force will also continue to target the
important private practice oncology clinics within their assigned territories.
We also sell to large drug wholesalers that supply hospitals and hospital buying
groups.
Our sales group is divided into three regions. Each region is headed by a
manager with extensive industry experience who supervises specialty oncology
sales representatives. We plan to expand our sales force upon receipt of
additional approvals of our products under development. Our sales and marketing
group conducts direct sales, sponsors speakers' programs, works with
distributors, performs market research analysis, develops marketing strategies,
creates and implements educational and promotional programs, establishes pricing
and product advertising and maintains compliance with hospital and other buying
groups.
MANUFACTURING
We currently outsource manufacturing for all of our products to United
States and foreign suppliers. We expect to continue to outsource manufacturing
in the near term. We believe our current suppliers will be able to efficiently
manufacture our bulk proprietary and generic compounds in sufficient quantities
and on a timely basis, while maintaining product quality. We seek to maintain
quality control over manufacturing through ongoing inspections, rigorous review,
control over documented operating procedures and thorough analytical testing by
outside laboratories. We believe that our current strategy of outsourcing
manufacturing is cost-effective since we avoid the high fixed costs of plant,
equipment and large manufacturing staffs and conserve our resources.
The FDA must issue marketing clearance and deem a manufacturer acceptable
under current GMP before production of bulk proprietary, finished
pharmaceuticals or generic compounds for commercial sale may begin. Once a bulk
proprietary or generic compound is manufactured on our behalf, it is sent to one
or more domestic manufacturers that process it into the finished proprietary,
Extra or generic dosage forms. We currently follow these procedures for our
marketed products, Nipent and mitomycin. We then ship our finished proprietary
and generic products to an outside vendor for distribution to our customers.
We have entered agreements with a domestic entity for the future production
of our bulk generics required for both our Extra and generic dosage forms. We
have licensed from this manufacturer, on an exclusive basis, proprietary
fermentation technology for anticancer antibiotic agents. In the future, we may
adapt this proprietary fermentation technology to produce other bulk generics.
In December 1997, we received approval from the FDA to commercially
manufacture Nipent at our designated vendors' manufacturing site using our
proprietary manufacturing process. We believe we own sufficient bulk inventory
for the manufacture of Nipent to meet our clinical and commercial needs for the
near future. In April 1998, the FDA approved our application for the production
of bulk mitomycin using the fermentation technology described above.
We intend to continue evaluating our manufacturing requirements and may
establish or acquire our own facilities to manufacture our products for
commercial distribution if we feel doing so would reduce costs or improve
control and flexibility of product supply.
13
PATENTS AND PROPRIETARY TECHNOLOGY
We actively pursue a policy of seeking patent protection for our proprietary
products and technologies, whether developed in-house or from outside
acquisition. We have acquired licenses to or assignments of numerous United
States patents covering certain of our proprietary drugs and have received or
licensed patents related to our Extra, Spartaject and Oral Prodrug technologies.
In addition to pursuing patent protection in appropriate cases, we rely on
trade secret protection for our unpatented proprietary technology. We also
pursue a policy of having our employees and consultants execute proprietary
information agreements upon commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of the
relationship is confidential except in specified circumstances.
COMPETITION
There are many companies, both public and private, including well-known
pharmaceutical companies, that are engaged in the development and sale of
pharmaceutical products for some of the applications that we are pursuing. Our
competitors and probable competitors include Eli Lilly, Ortho-McNeil
Pharmaceutical, Amgen, Bristol-Myers Squibb and Immunex. These companies have
substantially greater financial, research and development, manufacturing and
marketing experience and resources than we do and represent substantial
long-term competition for us. These companies may succeed in developing
pharmaceutical products that are more effective or less costly than any we may
develop or market.
Factors affecting competition in the pharmaceutical industry vary depending
on the extent to which the competitor is able to achieve a competitive advantage
based on proprietary technology. If we are able to establish and maintain a
significant proprietary position with respect to our proprietary products,
competition will likely depend primarily on the effectiveness of the product and
the number, gravity and severity of its unwanted side effects as compared to
alternative products. Companies compete with respect to generic products
primarily on price and, to a lesser extent, on name recognition and the
reputation of the manufacturer in its target markets. Moreover, the number of
competitors offering a particular generic product could dramatically affect
price and gross margin for that product or an Extra product based on that
generic product. We may be at a disadvantage in competing with more established
companies based on price or market reputation. In addition, increased
competition in a particular generic market would likely lead to significant
price erosion for our generic products and Extra products based on such generic
products. This would have a negative effect on our sales and potential gross
profit margins. For example, we believe that the total estimated United States
sales for our proposed generic products, and generic products upon which we
propose to base our Extra products, have decreased in recent years due to
increased competition. We believe that sales volumes and unit prices of these
generics may continue to decrease as a result of competitive factors. These
factors include the introduction of additional generics and other cancer drugs,
the desire of some companies to increase their market share, new formulations
for those drugs and the use of different therapies.
Extensive research and development efforts and rapid technological progress
characterize the industry in which we compete. Although we believe that our
proprietary position may give us a competitive advantage with respect to our
proposed nongeneric drugs, we expect development of new products to continue.
Discoveries by others may render our current and potential products
noncompetitive. Our competitive position also depends on our ability to attract
and retain qualified scientific and other personnel, develop effective
proprietary products, implement development and marketing plans, obtain patent
protection and secure adequate capital resources.
14
EMPLOYEES
As of December 31, 1999, we had 77 full-time employees. We use consultants
and temporary employees to complement our staffing. Our employees are not
subject to any collective bargaining agreements, and we regard our relations
with employees to be good. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Operating Results."
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and their ages as of December 31, 1999 are as
follows:
NAME AGE POSITION
- ---- -------- ------------------------------------------
Joseph Rubinfeld, Ph.D.................... 67 Chief Executive Officer, President and
Director
Edward L. Jacobs.......................... 53 Executive Vice President, Commercial
Operations
Luigi Lenaz, M.D.......................... 58 Senior Vice President of Clinical Research
and Medical Affairs
Rajesh C. Shrotriya, M.D.................. 55 Executive Vice President and Chief
Scientific Officer
Ronald H. Spair........................... 44 Senior Vice President, Chief Financial
Officer and Secretary
Denis Burger, Ph.D........................ 56 Director
Lawrence J. Ellison....................... 55 Director
Walter J. Lack............................ 51 Director
Julius A. Vida, Ph.D...................... 71 Director
Daniel Zurr, Ph.D......................... 54 Director
JOSEPH RUBINFELD, PH.D. co-founded the Company in 1991. He has served as
Chief Executive Officer, President, and a director of the Company since our
inception and was Chief Scientific Officer from inception until September 1997.
Dr. Rubinfeld was one of the four initial founders of Amgen in 1980 and served
as Vice President and Chief of Operations until 1983. From 1987 to 1990, he was
a Senior Director at Cetus Corporation. From 1968 to 1980, Dr. Rubinfeld was
employed at Bristol-Myers Company International Division in a variety of
positions, most recently as Vice President and Director of Research and
Development. While at Bristol-Myers, Dr. Rubinfeld was instrumental in licensing
the original anticancer line of products for Bristol-Myers, including Mitomycin
and Bleomycin. Before that time, Dr. Rubinfeld was a research scientist with
several pharmaceutical and consumer product companies including Schering-Plough
Corporation and Colgate-Palmolive Co. He received his B.S. in chemistry from
C.C.N.Y., and his M.A. and Ph.D. in chemistry from Columbia University.
Dr. Rubinfeld has numerous patents and/or publications on a wide range of
inventions and developments, including the 10-second developer for Polaroid
film, manufacture of cephalosporins and the first commercial synthetic
biodegradable detergent. In 1984, Dr. Rubinfeld received the Common Wealth Award
for Invention.
EDWARD L. JACOBS became our Executive Vice President, Commercial Operations
in March 1999. Prior to joining us Mr. Jacobs served as Senior Vice President,
Commercial Operations at Sequus Pharmaceuticals, Inc. from November 1997 to
March 1999. Between January 1995 and November 1997, Mr. Jacobs served as
President and Chief Executive Officer of Trilex Pharmaceuticals Inc., now Titan
Pharmaceuticals. Prior to his association with Trilex, Mr. Jacobs served in a
variety of senior management positions with pharmaceutical companies, including
Chief Executive at Transplant
15
Therapeutics Inc., Vice President and General Manager of Syncor
International Inc., Vice President at NEORX Corporation, Business Director of
Pharmacia and Upjohn (Adria Labs, Inc.), and Johnson & Johnson (McNeil).
Mr. Jacobs received a B.A. in Political Science/Journalism from California State
University at Northridge.
LUIGI LENAZ, M.D. has served as our Senior Vice President of Clinical
Research and Medical Affairs since October 1997. Before joining us, he was
Senior Medical Director, Oncology Franchise Management for Bristol-Myers Squibb
from 1990 to 1997 and was Director, Scientific Affairs, Anti-Cancer for
Bristol-Myers Squibb from 1978 to 1990. Dr. Lenaz was a Post Doctoral Fellow at
both the Memorial Sloan-Kettering Cancer Center in New York and the National
Cancer Institute in Milan, Italy. He received his medical training at the
University of Bologna Medical School in Bologna, Italy.
RAJESH C. SHROTRIYA, M.D. has served as our Executive Vice President and
Chief Scientific Officer since October 1997 and as Senior Vice President and
Special Assistant to the President from January 1997 to September 1997. Before
joining us, Dr. Shrotriya was Vice President and Chief Medical Officer of MGI
Pharma, Inc., an oncology company, from August 1994 to October 1996. Previously
he spent 18 years at Bristol-Myers Squibb in a variety of positions most
recently as Executive Director, Worldwide CNS Clinical Research. Dr. Shrotriya
received his medical training in India at Grant Medical College in Bombay, Delhi
University and the Armed Forces Medical College in Poona.
RONALD H. SPAIR became our Senior Vice President and Chief Financial Officer
in August 1999. Prior to joining us, Mr. Spair was Chief Financial Officer of
Sparta Pharmaceuticals, Inc., a development stage pharmaceutical company, from
March 1996 until August 1999. He has worked in the biotechnology industry since
1990. From October 1993 until March 1996, Mr. Spair served as Vice President and
Chief Financial Officer of Lexin Pharmaceutical Corporation, a development stage
biopharmaceutical company. Before joining Lexin, Mr. Spair served as Vice
President, Chief Financial Officer and Assistant Secretary of Envirogen, Inc.,
an environmental biotechnology company, from May 1990 to August 1993. Mr. Spair
received a B.S. in Accounting and an M.B.A. from Rider College. He is a licensed
Certified Public Accountant in New Jersey.
ITEM 2. PROPERTIES.
Our principal administrative facility is currently located in leased general
office space in San Ramon, California, under a lease that expires on
January 31, 2002. Either the landlord or we may cancel the lease upon
substantial catastrophic damage to the property or its condemnation, and the
landlord has the right to move us, at its expense, to comparable facilities. We
have the right to extend the lease for one additional five-year period at the
fair market rental rate. In late 1998, we ended the lease for the office space
used in our sales and marketing efforts in Parsippany, New Jersey, and those
activities are now being coordinated from San Ramon. In April 1997, we purchased
an unimproved industrial building in Pleasanton, California, and located our
laboratory operations there upon substantial completion of the improvements in
December 1997. We believe the above properties are suitable for our operations.
The San Ramon office facility and Pleasanton laboratory facility are nearing
full utilization, therefore, we are attempting to locate additional office space
in the vicinity of the San Ramon and Pleasanton facilities and plan to secure
additional space during 2000.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our stockholders during the fiscal
quarter ended December 31, 1999.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR COMMON STOCK
Our common stock trades on the Nasdaq National Market under the symbol
"SUPG." The following table sets forth the high and low bid information for our
common stock for each quarterly period in the two most recent fiscal years as
reported on the Nasdaq National Market:
HIGH LOW
-------- --------
1998
Quarter ended March 31, 1998................................ $15.13 $11.69
Quarter ended June 30, 1998................................. 17.75 9.63
Quarter ended September 30, 1998............................ 12.50 5.13
Quarter ended December 31, 1998............................. 9.31 5.38
1999
Quarter ended March 31, 1999................................ $12.38 $ 8.19
Quarter ended June 30, 1999................................. 19.38 10.25
Quarter ended September 30, 1999............................ 24.00 14.81
Quarter ended December 31, 1999............................. 34.75 21.25
We also have one class of warrants trading on the Nasdaq National Market
under the symbol "SUPGW," and one class of warrants trading on the Nasdaq
Smallcap Market under the symbol "SUPGZ." The SUPGW warrants have an exercise
price of $9.00 per share and the SUPGZ warrants have an exercise price of $18.18
per share. We will redeem any outstanding SUPGW warrants on April 16, 2000 and
the SUPGZ warrants will expire on August 12, 2001.
HOLDERS OF RECORD
As of March 7, 2000, there were 593 holders of record of the common stock
and approximately 8,500 beneficial stockholders.
DIVIDENDS
We have never paid cash dividends on our capital stock and do not expect to
pay any dividends in the foreseeable future. we intend to retain future
earnings, if any, for use in our business.
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended December 31, 1999, we issued the following
securities:
- 28,799 shares of common stock in December 1999 to the Research Development
Foundation, the technology transfer organization of the Clayton Foundation
for Research, in connection with the acquisition of the worldwide rights
to inhaled formulations of camptothecins, including rubitecan, and
taxanes, including paclitaxel.
- 36,130 shares of common stock in December 1999 to the Clayton Foundation
for Research, in connection with research agreements relating to inhaled
formulations of camptothecins, including rubitecan, and taxanes, including
paclitaxel.
- 100,000 shares of common stock in December 1999 to AVI BioPharma, Inc. in
connection with the acquisition of 1,000,000 shares of AVI
BioPharma, Inc. common stock and the exclusive negotiating rights for the
United States market for Avicine.
17
The issuances of shares described above were in reliance on Section 4(2) of
the Securities Act of 1933, as amended.
We made no public solicitation in connection with the issuance of the above
mentioned securities nor were there any other offerees. We relied on
representation from the recipients of the securities that they purchased the
securities for investment for their own account and not with a view to, or for
resale in connection with, any distribution thereof and that they were aware of
our business affairs and financial condition and had sufficient information to
reach an informed and knowledgeable decision regarding their acquisition of the
securities.
USE OF PROCEEDS
On March 13, 1996, we commenced our initial public offering (the "IPO") of
4,025,000 units and an underwriters' over-allotment option consisting of 525,000
units at a public offering price of $6.00 per unit. We made this offering
pursuant to a registration statement on Form S-B (file no. 333-476 LA) filed
with the Securities and Exchange Commission. A unit consisted of one share of
Common Stock, $.001 par value per share, and a warrant to purchase one share of
Common Stock at $9.00. Of the units registered, 4,024,302 were sold. Paulson
Investment Company was the managing underwriter of the IPO. The aggregate gross
proceeds of the IPO (before deduction of underwriting discounts and commissions
and expenses of the offering and any exercises of the warrants) were
$24,146,000. We have not yet sold all of the shares registered for the exercise
of the warrants. There were no selling stockholders in the IPO.
We paid total expenses of $2,615,000 in connection with the IPO consisting
of underwriting discounts, commissions and expenses of $1,992,000 and other
expenses of $623,000. The net proceeds of the IPO through December 31, 1999,
including subsequent exercises of warrants to purchase common stock, were
$25,346,000.
From March 13, 1996, the effective date of the registration statement for
the IPO, to December 31, 1999 (our most recent fiscal year end), the approximate
amount of net proceeds used were:
Construction of plant, building and facilities.............. $ 1,246,000
Purchase and installation of machinery and equipment........ 295,000
Purchase of real estate..................................... 744,000
Working capital used in operations.......................... 18,784,000
Repurchase of common stock.................................. 3,557,000
Purchase of equity investment............................... 500,000
Acquisition of developed technology......................... 220,000
None of such payments consisted of direct or indirect payments to directors,
officers, 10% stockholders or affiliates, with the exception of:
- The payment to repurchase common stock, which was made to a stockholder
that, immediately prior to the repurchase, owned more than 10% of the our
then outstanding common stock; and
- Payments to directors and officers as compensation for services provided.
18
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth below is not necessarily indicative of results of
future operations and should be read in conjunction with the financial
statements and notes thereto appearing in Item 14 of Part IV of this Report.
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------- DECEMBER 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.................................. $ 4,744 $ 3,004 $ 1,802 $ 264 $ 13
Net loss................................... (36,985) (15,577) (15,996) (8,758) (2,729)
Basic and diluted net loss per share....... (1.58) (0.77) (0.85) (0.55) (0.22)
Total assets............................... 53,478 19,793 30,772 17,936 2,162
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT. THE
RESULTS DISCUSSED BELOW ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE
EXPECTED IN ANY FUTURE PERIODS. TO THE EXTENT THAT THE INFORMATION PRESENTED IN
THIS DISCUSSION ADDRESSES FINANCIAL PROJECTIONS, INFORMATION OR EXPECTATIONS
ABOUT OUR PRODUCTS OR MARKETS OR OTHERWISE MAKES STATEMENTS ABOUT FUTURE EVENTS,
SUCH STATEMENTS ARE FORWARD-LOOKING AND ARE SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
STATEMENTS MADE.
OVERVIEW
Since our incorporation in 1991 we have devoted substantially all of our
resources to our product development efforts. Our product revenues to date have
been limited and have been principally from sales of Nipent, which we are
marketing in the United States for the treatment of hairy cell leukemia. As a
result of our substantial research and development expenditures and minimal
product revenues, we have incurred cumulative losses of $92.9 million for the
period from inception through December 31, 1999. These losses included non-cash
charges of $18.4 million for the acquisition of in-process research and
development.
We seek to minimize the time, expense and technical risk associated with
drug commercialization by identifying and acquiring pharmaceutical compounds in
the later stages of development, rather than committing significant resources to
the research phase of drug discovery. During 1999, we acquired or licensed a
number of product candidates in clinical trials through our acquisition of
Sparta, our acquisition of decitabine from Pharmachemie and our license of
inhalation technology from the Research Development Foundation. These product
candidates will require significant additional expenditures to complete the
clinical development necessary to gain marketing approval from the FDA and
equivalent foreign regulatory agencies.
We are pursuing the clinical and regulatory development of our product
candidates internally and expect to continue to incur operating losses at least
through 2000 and into 2001. This is due primarily to projected increases in our
spending for the development of our product candidates, especially rubitecan,
which is in pivotal Phase III clinical trials. Our ability to become profitable
will depend upon a variety of factors, including regulatory approvals of our
products, the timing of the introduction and market acceptance of our products
and competing products, increases in sales and marketing expenses related to the
launch of rubitecan and our ability to control our costs.
As part of our strategy, we intend either to market our products ourselves
or co-promote these products with partners. In December 1999, we entered into an
alliance with Abbott under which Abbott will undertake to market and distribute
rubitecan and invest in shares of our common stock. We will co-promote rubitecan
with Abbott in the United States and Abbott has exclusive rights to market
rubitecan outside of the United States. In the U.S. market, we will share
profits from product sales equally with Abbott. Outside the U.S. market, Abbott
will pay us royalties and transfer fees based on product sales. We will remain
responsible for pursuing and funding the clinical development of rubitecan and
obtaining regulatory approval for the product in the United States, Canada and
the member states of the European Union.
In addition, we will receive a number of equity investments and cash
payments from Abbott which, when aggregated, amount to approximately
$150 million. Each equity investment and cash payment is conditioned upon the
achievement of developmental or sales milestones. We also granted Abbott an
option to purchase up to 49% of the shares of our common stock outstanding at
the time of exercise. The exercise price of the option is $85 per share, and the
option expires in March 2003. In January 2000, we received a $26.5 million
equity investment from Abbott related to the rubitecan agreement. In
20
December 1999, we also entered into a separate U.S. Distribution Agreement for
Nipent with Abbott, which has a minimum five-year term, and in January 2000 we
received a $5.0 million payment from Abbott under this agreement.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Net sales were $4.7 million in 1999 compared to $3.0 million in 1998. The
increase in net sales was due primarily to higher sales volumes of Nipent in
1999. Net sales of Nipent amounted to $4.2 million in 1999 compared to
$2.7 million in 1998. This volume increase resulted from a 110% sales increase
of Nipent under a supply agreement with the Warner-Lambert Company for sales
outside North America, together with a 43% increase in U.S. sales.
Gross margins were 57% in 1999 compared to 36% in 1998. The lower gross
margin in 1998 was due to a $667,000 charge to cost of sales for unabsorbed
fixed product manufacturing costs, as production of Nipent fell short of the
minimum level of production for which we were obligated to pay our contract
manufacturer. Margins on our product sales may not be indicative of future
margins due to variations in average selling prices and manufacturing costs.
Research and development expenses were $17.3 million in 1999 compared to
$10.5 million in 1998. The increased expense was primarily due to increased
clinical trial expenditures for rubitecan and Nipent, a corresponding increase
in the research and development staff, and increased charges for acquired
license rights. We expect research and development expenses to continue to
increase in the future as we pursue the clinical and regulatory development of
our products.
Selling, general and administrative expenses increased to $10.5 million in
1999 compared to $7.0 million in 1998. The increase was primarily due to
additional expenditures to support Nipent sales, including promotional
materials, trade shows, and speaker programs, as well as the costs associated
with the expansion of our sales and professional services staffs. Additionally,
higher compensation, legal, investor relations and business development expenses
in the administrative area, offset somewhat by a decrease in consulting fees,
contributed to the increase over 1998. We expect selling, general and
administrative expenses to continue to increase in the future as we receive
regulatory approvals for, and begin to market, our products.
Acquisition of in-process research and development amounted to
$10.9 million in 1999. This non-cash charge included $7.5 million related to
drug candidates under development by Sparta at the time of its acquisition by us
and $3.4 million related to the acquisition of decitabine from Pharmachemie. We
had no comparable charges for in-process research and development in 1998.
In March 1999, we entered into a credit arrangement with Tako Ventures LLC,
or Tako, granted Tako a security interest in our assets and issued Tako a
warrant to purchase 500,000 shares of unregistered common stock as a loan
commitment fee. In September 1999 we terminated this credit arrangement and
incurred an expense of $2.0 million. We had no comparable charges for 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net sales were $3.0 million in 1998 compared to $1.8 million in 1997. The
increase in net sales was due primarily to higher sales volumes of Nipent in
1998. This volume increase resulted principally from sales of Nipent under a
supply agreement for sales outside North America.
Gross margin was higher in 1998 due primarily to lower Nipent unit costs. In
1998, virtually all Nipent sales consisted of our own manufactured inventory. In
1997, sales of Nipent consisted entirely of inventory acquired from
Warner-Lambert Company and the relatively high unit cost of that inventory
affected our margins. The unit cost of manufactured Nipent has been, and is
expected to
21
continue to be, significantly lower than the unit cost assigned to the Nipent
inventory acquired from Warner-Lambert Company. This positive effect upon margin
was partially offset by lower selling prices for Nipent sold under the supply
agreement and a $667,000 charge to cost of sales for unabsorbed fixed product
manufacturing costs, as production of Nipent fell short of the minimum level of
production for which we were obligated to pay our contract manufacturer.
Research and development expenses were $10.5 million in 1998 compared to
$8.6 million in 1997. Product formulation and development costs associated with
rubitecan, Nipent and mitomycin contributed to the overall increase in expenses
in 1998. Costs attributable to expansion of the research and development staff
also contributed to the increase in research and development expense, as did our
investment of $200,000 in a related party in the first quarter of 1998.
Selling, general and administrative expenses were $7.0 million in 1998
compared to $5.0 million in 1997. This increase was primarily due to costs
reflecting the continued expansion of the sales and marketing group in 1998, as
we began media advertising for Nipent and expanded our participation at
strategic trade shows. Selling, general and administrative expenses also
increased due to consultancy costs relating to investor relations, patent
related legal fees, information technology services and higher personnel costs.
We incurred no charges for the acquisition of in-process research and
development in 1998 compared to $3.5 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and marketable securities totaled $27.6 million
at December 31, 1999 compared to $11.9 million at December 31, 1998. In
January 2000, we received a $26.5 million equity investment and a $5.0 million
cash payment from Abbott. Also in January 2000, 668,288 warrants were exercised
resulting in gross proceeds of $6.0 million.
During the year ended December 31, 1999, we raised an aggregate of
$36.4 million in cash through sales of our common stock to institutional
investors. Some of these transactions reflected discounts to the market price of
our stock at the transaction date. We believe that such discounted selling price
was reasonable in light of the volatility of our stock price, the magnitude of
the transactions and our capital needs at the time of the transactions.
The net cash used in operating activities of $23.6 million in 1999 primarily
reflected the net loss for the period of $37.0 million, offset by non-cash
charges related to the acquisition of in-process research and development,
acquisition of license rights and amortization of loan commitment fees.
We believe that our current cash, cash equivalents, marketable securities
and the funds received in January 2000 from Abbott, the warrant exercises and
the proceeds of this offering will satisfy our cash requirements at least
through December 31, 2001. Our primary planned uses of cash during that period
are:
- for research and development activities, including expansion of clinical
trials;
- to enhance sales and marketing efforts in advance of the potential launch
of rubitecan;
- to lease and improve new facilities and potentially enhance manufacturing
capabilities; and
- to finance possible acquisitions of complimentary products, technologies
and businesses.
On September 20, 1999, we issued a notice of redemption of warrants for the
purchase of shares of our common stock that we issued in connection with our
initial public offering. These warrants enable the holder to purchase shares of
our common stock at a price of $9.00 per share. As of January 31, 2000, there
were 3,062,452 of such warrants outstanding. We will redeem the warrants that
are outstanding as of April 16, 2000 at a price of $0.25 per warrant. We expect
that holders of the
22
warrants will choose to exercise these warrants rather than have them redeemed
if the price of our common stock trades above $9.00 per share during the period
immediately preceding April 16, 2000. The exercise of these warrants could
result in our receiving an additional $27.6 million in cash and issuing an
additional 3,062,452 shares of common stock.
During the third quarter of 1999, we terminated a promissory note issued to
Tako that provided us with a line of credit for up to $5.0 million. When this
promissory note was terminated, Tako's security interest in our assets was
eliminated.
We believe that our need for additional funding will increase in the future
and that our continued ability to raise additional funds from external sources
will be critical to our success. We continue to actively consider future
contractual arrangements that would require significant financial commitments.
If we experience currently unanticipated cash requirements, we could require
additional capital much sooner than presently anticipated. We may seek such
additional funding through public or private financings or collaborative or
other arrangements with third parties. We may not be able to obtain additional
funds on acceptable terms, if at all.
ACQUISITION OF IN-PROCESS RESEARCH AND DEVELOPMENT AND RELATED ASSETS
FACTORS CONSIDERED WHEN EVALUATING IPR&D
Acquired in-process research and development, or IPR&D, represents the value
assigned to research and development projects that were commenced but not yet
completed at the date of acquisition and which, if unsuccessful, have no
alternative future use in research and development activities or otherwise. In
accordance with Statement of Financial Accounting Standards No. 2 "Accounting
for Research and Development Costs," as interpreted by FASB Interpretation
No. 4, amounts assigned to acquired IPR&D meeting the above criteria must be
expensed at the date of consummation of the transaction. Accordingly, we record
a non-recurring charge for this acquired IPR&D at the date of acquisition.
The development of any of the acquired IPR&D into technologically feasible
and commercially viable products depends principally on the successful
performance of additional clinical trials. Though we currently expect that the
acquired IPR&D will be successfully developed, the proposed products may never
be commercially viable.
YEAR ENDED DECEMBER 31, 1999
SPARTA DRUG CANDIDATES
In August 1999, we completed our acquisition of Sparta, a biopharmaceutical
company engaged in developing technologies and drugs for the treatment of a
number of life-threatening diseases, including cancer, cardiovascular disorders,
chronic metabolic diseases and inflammation.
Approximately $7.5 million of the purchase price was allocated to acquired
IPR&D. The Sparta research and development programs were valued as follows:
Oral anticancer drug for the treatment of breast, colorectal
and other cancers (5-FP, a prodrug of 5-FU)............... $3,430,000
Chronic metabolic disease drug (PZG)........................ 1,380,000
Spartaject method for the delivery of certain anti-cancer
compounds................................................. 2,640,000
----------
$7,450,000
==========
23
- 5-FP, or 5-fluoro pyrimidinone, is a pyrimidinone-based prodrug that is
converted to 5-FU, or 5-fluorouracil by the liver. This drug candidate was
in Phase I clinical trials at the date of the acquisition. Prodrug
technology involves administering an inactive compound, known as a
prodrug, which is absorbed in the digestive tract and is converted to an
active agent in the liver by a localized enzyme.
- Animal studies and early clinical studies of PZG suggest that it may help
to control the blood sugar and lipid abnormalities of diabetes.
- Spartaject drug delivery technology is a drug delivery system that
accommodates poorly water-soluble and water insoluble compounds by
encapsulating them with a fatty (phospholipid) layer. Currently, there are
ongoing Phase I clinical trials applying the Spartaject drug delivery
technology to busulfan for use in bone marrow ablation and for the
treatment of neoplastic meningitis.
We identified and valued the purchased research and development through
extensive interviews and discussions with appropriate management and scientific
personnel. We also analyzed the data provided by Sparta concerning Sparta's
development projects, their respective stage of development, the time and
resources needed to complete them, their expected income generating ability,
target markets, and associated risks. Using an income approach that reflects the
present value of the projected free cash flows generated by each individual
IPR&D project identified, we focused on the income producing capabilities of the
acquired technologies and quantified the present value of the future economic
benefits expected to be derived from each. In the aggregate, we estimate that
the total remaining development costs necessary to advance the three drug
candidates through the regulatory process will be approximately $45 million. We
expect this regulatory development process to occur over several years with
potential product introductions through 2005. The effective tax rate utilized
for the analysis was 40%. The discount rate used to value Sparta's IPR&D was
31%. The discount rate considers an assumed weighted average cost of capital of
22% at the date of acquisition and a risk premium to reflect the risk associated
with the stage of development of each of the Sparta projects. Additional amounts
of the purchase consideration were recorded as intangible assets related to
existing licensing rights, acquired workforce and goodwill.
DECITABINE
In September 1999, we acquired worldwide rights to decitabine, a
chemotherapeutic agent owned by Pharmachemie. Decitabine has been successful in
multiple Phase II trials in the United States and Europe for treating
myelodysplastic syndromes, or MDS, chronic myeloid leukemia and acute myeloid
leukemia. The FDA has not granted marketing approval to use decitabine for the
treatment of any disease.
In the decitabine acquisition we issued 171,123 shares of unregistered
common stock valued at $3.4 million, which we charged to IPR&D. In assigning the
purchase price to IPR&D, we considered, among other factors, our intentions for
the future use of the acquired project, its stage of completion, the lack of
alternative future uses of the technology, and that no other tangible or
intangible assets were acquired. We believe decitabine has a unique mechanism of
action that may demonstrate its effectiveness in acute leukemias and other
hematological malignancies. We currently estimate that the completion of the
clinical trials and submission to the FDA of a New Drug Application could occur
in 2002 and the research and development costs to complete those processes will
be approximately $6.0 to $8.0 million. Revenues could begin with the
introduction of a product in 2002.
24
YEAR ENDED DECEMBER 31, 1997
In 1997, we incurred the following charges for the acquisition of IPR&D:
- $831,000 related to the acquisition of the generic anticancer drug
etoposide;
- a non-cash charge of $1.9 million for the acquisition of rubitecan; and
- $800,000, consisting of a non-cash charge of $750,000 and $50,000 of
additional cash expenses, for the acquisition of a patent royalty
agreement and other intellectual property related to our ongoing
obesity/diabetes product candidate, RF 1051.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, or SFAS 133. SFAS 133 establishes new accounting and
reporting standards for derivative financial instruments and for hedging
activities. SFAS 133 requires us to measure all derivatives at fair value and to
recognize them in the balance sheet as an asset or liability, depending on our
rights or obligations under the applicable derivative contract. We will adopt
SFAS 133 no later than the first quarter of fiscal year 2001. SFAS 133 is not
expected to have an impact on our consolidated results of operations, financial
position or cash flows.
RECENTLY ISSUED STAFF ACCOUNTING BULLETIN
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, or SAB. The SAB details the
criteria that must be met for recording revenue. In addition, the SAB also
provides guidance on the disclosures (both in footnotes and in Management's
Discussion and Analysis of Financial Condition and Results of Operations)
registrants should make about their revenue recognition policies and the impact
of events and trends on revenue. The SAB states that all registrants are
expected to apply the accounting and disclosures described in it no later than
the first fiscal quarter of the fiscal year beginning after December 15, 1999.
The application of SAB is not expected to have any effect on our financial
condition or results of operations.
UPDATE ON YEAR 2000 ISSUE
We did not experience any systems problems relating to the Year 2000 issue.
Upon review of our internal systems and after consultation with our vendors, we
determined that we did not have any material exposure to such computer problems
and that the software and systems required to operate our business were Year
2000 compliant. We do not expect to incur any material expenditures relating to
Year 2000 systems remediation.
FACTORS AFFECTING FUTURE OPERATING RESULTS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES FACING OUR COMPANY. OUR BUSINESS OPERATIONS MAY BE IMPAIRED BY
ADDITIONAL RISKS AND UNCERTAINTIES THAT WE DO NOT KNOW OF OR THAT WE CURRENTLY
CONSIDER IMMATERIAL.
OUR BUSINESS, RESULTS OF OPERATIONS OR CASH FLOWS MAY BE ADVERSELY AFFECTED
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR. IN SUCH CASE, THE TRADING PRICE OF
OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
THIS REPORT ALSO CONTAINS AND INCORPORATES BY REFERENCE FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT
OF CERTAIN FACTORS, INCLUDING THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS
REPORT.
25
IF THE RESULTS OF FURTHER CLINICAL TESTING INDICATE THAT OUR PROPOSED PRODUCTS
ARE NOT SAFE AND EFFECTIVE FOR HUMAN USE, OUR BUSINESS WILL SUFFER.
Most of our products are in the development stage and prior to their sale
will require the commitment of substantial resources. All of the potential
proprietary products that we are currently developing will require extensive
preclinical and clinical testing before we can submit any application for
regulatory approval. Before obtaining regulatory approvals for the commercial
sale of any of our products, we must demonstrate through pre-clinical testing
and clinical trials that our product candidates are safe and effective in
humans. Conducting clinical trials is a lengthy, expensive and uncertain
process. Completion of clinical trials may take several years or more. The
length of time generally varies substantially according to the type, complexity,
novelty and intended use of the product candidate. Our clinical trials may be
suspended at any time if we or the FDA believe the patients participating in our
studies are exposed to unacceptable health risks. We may encounter problems in
our studies which will cause us or the FDA to delay or suspend the studies. Our
commencement and rate of completion of clinical trials may be delayed by many
factors, including:
- ineffectiveness of the study compound, or perceptions by physicians that
the compound is not effective for a particular indication;
- inability to manufacture sufficient quantities of compounds for use in
clinical trials;
- failure of the FDA to approve our clinical trial protocols;
- slower than expected rate of patient recruitment;
- inability to adequately follow patients after treatment;
- unforeseen safety issues;
- lack of efficacy during the clinical trials; or
- government or regulatory delays.
The clinical results we have obtained to date do not necessarily predict
that the results of further testing, including later-stage controlled human
clinical testing, will be successful. If our trials are not successful, or are
perceived as not successful by the FDA or physicians, our business, financial
condition and results of operations will be harmed.
IF WE FAIL TO OBTAIN REGULATORY MARKETING APPROVALS IN A TIMELY MANNER, OUR
BUSINESS WILL SUFFER.
Even if we believe our trials are successful, the FDA may require additional
clinical testing and, therefore we would have to commit additional unanticipated
resources. The FDA has substantial discretion in the drug approval process. We
cannot assure you that we will obtain the necessary regulatory approvals to
market our products. The FDA and comparable agencies in foreign countries impose
substantial requirements for the introduction of both new pharmaceutical
products and generic products through lengthy and detailed clinical testing
procedures, sampling activities and other costly and time-consuming compliance
procedures. We have not yet received marketing approval for any of our
internally developed proprietary products. Our proprietary drugs and products
will require lengthy clinical trials along with FDA and comparable foreign
agency review as new drugs. Our generic drugs will also require regulatory
review and approval.
We cannot predict with certainty if or when we might submit for regulatory
review those products currently under development. Once we submit our potential
products for review, we cannot assure you that the FDA or other regulatory
agencies will grant approvals for any of our pharmaceutical products on a timely
basis or at all. Sales of our products outside the United States will be subject
to regulatory requirements governing clinical trials and marketing approval.
These requirements vary widely from country to country and could delay the
introduction of our products in those countries.
26
IF OUR RELATIONSHIP WITH ABBOTT IS NOT SUCCESSFUL, OUR BUSINESS COULD BE HARMED.
Our strategic relationship with Abbott is important to our success. However,
that relationship may not be successful. We cannot assure you that we will
receive any additional payments from Abbott or that the relationship will be
commercially successful. The transactions contemplated by our agreements with
Abbott, including the equity purchases and cash payments, are subject to
numerous risks and conditions. For example:
- we may fail to achieve clinical and sales milestones;
- rubitecan may fail to achieve regulatory approval domestically and
internationally;
- rubitecan may not be commercially successful;
- Abbott may fail to perform its obligations under our agreements, such as
failing to devote sufficient resources to marketing rubitecan; and
- our agreements with Abbott may be terminated in their entirety or on a
territory-by-territory basis against our will.
The occurrence of any of these events could severely harm our business.
WE HAVE GRANTED CERTAIN RIGHTS TO ABBOTT THAT COULD NEGATIVELY AFFECT YOUR
INVESTMENT.
We have granted Abbott an option to purchase shares of our common stock so
that upon its exercise Abbott will own up to 49% of our outstanding common
stock. Our ability to satisfy this contractual obligation is subject to a number
of conditions outside of our control, including:
- stockholder approval of an increase in the number of shares of our
authorized common stock;
- stockholder approval of a potential change in control under the rules of
the Nasdaq National Market; and
- clearance of the purchase by federal antitrust regulators.
If we do not satisfy any of these conditions, Abbott could terminate our
relationship. If we obtain all necessary approvals and Abbott exercises its
option, the stock ownership of our other stockholders will be diluted and Abbott
will have significant influence over us. Abbott's right to exercise this option,
and Abbott's share ownership after exercise, may discourage other parties from
acquiring us.
Abbott has a right of first discussion with respect to our product portfolio
and a right of first refusal to acquire us. These rights may discourage third
parties from bidding on any assets that we wish to sell or license and may
discourage acquisition bids. These provisions may limit the price that investors
might be willing to pay in the future for shares of our common stock.
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT, WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE, AND WE MAY NEED TO OBTAIN
ADDITIONAL FUNDING.
We incurred cumulative losses of $92.9 million for the period from inception
through December 31, 1999. These losses included non-cash charges of
$18.4 million for the acquisition of in-process research and development.
Currently we are not profitable and we expect to continue to incur substantial
operating losses at least through 2000 and into 2001. Our ability to achieve
profitability will depend primarily on our ability to obtain regulatory approval
for and successfully commercialize rubitecan. Our success will also depend, to a
lesser extent, on our ability to develop and obtain regulatory approval of
Nipent for indications other than hairy cell leukemia and to bring our
27
proprietary products to market. Our ability to become profitable will also
depend upon a variety of other factors, including the following:
- increases in the level of our research and development, including the
timing and costs of any expansion of clinical trials;
- regulatory approvals of competing products, or expanded labeling approvals
of existing products;
- increases in sales and marketing expenses related to the commercial launch
of rubitecan;
- delays in or inadequate commercial sales of rubitecan, once regulatory
approvals have been received; and
- expenditures associated with acquiring products, technologies or companies
and further developing these assets.
We cannot predict the outcome of these factors and we cannot assure you that we
will ever become profitable.
Even if we do become profitable, we may need substantial additional funding.
We expect that our rate of spending will accelerate as a result of increased
clinical trial costs and expenses associated with regulatory approval and
commercialization of our products now in development. We anticipate that our
capital resources will be adequate to fund operations and capital expenditures
at least through 2001. However, if we experience unanticipated cash requirements
during this period, we could require additional funds much sooner. Our business,
results of operations and cash flows will be adversely affected if we fail to
obtain adequate funding in a timely manner, or at all. We may receive funds from
the sale of equity securities, or the exercise of outstanding warrants and stock
options. Additionally, we may receive funds upon the achievement of certain
developmental and sales milestones pursuant to our agreement with Abbott.
However, we cannot assure you that any of those fundings will occur, or if they
occur, that they will be on terms favorable to us. Also, the dilutive effect of
those fundings could adversely affect our results per share.
WE HAVE LIMITED SALES AND MARKETING CAPABILITIES AND NO DISTRIBUTION
CAPABILITIES AND MAY NOT BE ABLE TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS.
We currently have limited sales and marketing resources and no distribution
capability. Although we have 18 sales and marketing personnel focusing on the
sale of our products to hospitals and hospital buying groups, we anticipate
relying on third parties to sell and market some of our primary products. For
instance, we will co-promote the potential sale of rubitecan with Abbott.
However, we may not be able to enter into additional sales and marketing
arrangements with others on acceptable terms, if at all. If our arrangements
with third parties are not successful, or if we are unable to enter into
third-party arrangements, then we may need to substantially expand our sales and
marketing force. We may not succeed in enhancing our sales and marketing
capabilities or have sufficient resources to do so. If we do develop such
capabilities, we will compete with other companies that have experienced and
well-funded sales and marketing operations. We currently rely on third parties
to distribute our products and expect to continue to do so in the future. If we
fail to establish successful sales and marketing capabilities or fail to enter
into successful marketing arrangements with third parties, or if our third party
distributors fail to perform their obligations, our business, financial
condition and results of operations will be materially and adversely affected.
IF WE FAIL TO COMPLY WITH THE GOVERNMENTAL REGULATIONS, OUR BUSINESS WILL
SUFFER.
All new drugs, including our products under development, are subject to
extensive and rigorous regulation by the FDA, and comparable agencies in state
and local jurisdictions and in foreign countries. These regulations govern,
among other things, the development, testing, manufacturing,
28
labeling, storage, premarket approval, advertising, promotion, sale and
distribution of our products. Satisfaction of these requirements typically takes
several years and the time needed to satisfy them may vary substantially, based
on the type, complexity and novelty of the pharmaceutical product. The effect of
government regulation may be to delay or to prevent marketing of our potential
products for a considerable period of time and to impose costly procedures upon
our activities. If regulatory approval of our products is granted, such approval
may impose limitations on the indicated uses for which our products may be
marketed. Further, even if regulatory approval is obtained for a product, later
discovery of previously unknown problems may result in restrictions of the
product, including withdrawal of the product from the market.
Among the conditions for FDA approval of all of our products in development
is the requirement that the manufacturer's (at either our facilities or those of
a third party manufacturer) quality control and manufacturing procedures conform
to current Good Manufacturing Practices, or GMPs, which must be followed at all
times. The FDA and foreign regulatory authorities strictly enforce GMP
requirements through periodic unannounced inspections. We cannot assure you that
the FDA will determine that our facilities and manufacturing procedures or any
third party manufacturer of our products will conform to GMP requirements.
Additionally, we or our third party manufacturer must pass a preapproval
inspection before we can obtain marketing approval for any of our products in
development. Failure to comply with applicable FDA and other regulatory
requirements can result in sanctions being imposed on us or the manufacturers of
our products including warning letters, product recalls or seizures,
injunctions, refusals to permit products to be imported into or exported out of
the United States, refusals of the FDA to grant premarket approval or to allow
us to enter into government supply contracts, withdrawals of previsouly approved
marketing applications, civil fines and criminal prosecutions.
The FDA's policies may change and additional government regulations may be
promolgated which could prevent or delay regulatory approval of our products. We
cannot predict the likelihood of adverse governmental regulation which may arise
from future legislative or administrative action, either in the United States or
abroad.
IF WE FAIL TO COMPETE EFFECTIVELY, PARTICULARLY AGAINST LARGER, MORE ESTABLISHED
PHARMACEUTICAL COMPANIES WITH GREATER RESOURCES, OUR BUSINESS WILL SUFFER.
Factors affecting competition in the pharmaceutical industry vary depending
on the extent to which the competitor is able to achieve a competitive advantage
based on proprietary technology. These factors include financial resources,
research and development capabilities, and manufacturing and marketing
experience and resources. If we are able to establish and maintain a significant
proprietary position with respect to our proprietary products, competition will
likely depend primarily on the effectiveness of our products, their acceptance
in the marketplace and their pricing and the number, gravity and severity of
their unwanted side effects as compared to alternative products.
Our competitors have substantially greater financial, research and
development, manufacturing and marketing experience and resources than we do and
represent substantial long-term competition for us. These competitors and
probable competitors include established companies such as Eli Lilly & Co.,
Ortho-McNeil Pharmaceutical, Amgen Inc., Bristol-Myers Squibb Company and
Immunex Corp. If these companies succeed in developing pharmaceutical products
that are more effective or less costly than any that we may develop or market,
our business will suffer.
29
THE PATENTS ON THE COMPOUNDS FOR WHICH WE ARE DEVELOPING GENERIC AND EXTRA
PRODUCTS ARE HELD BY THIRD PARTIES. IF THESE PATENTS ARE EXPANDED IN SCOPE OR DO
NOT EXPIRE WHEN ANTICIPATED, OUR BUSINESS COULD SUFFER.
We plan to develop and market several generic and Extra drugs based on
existing compounds, some of which are currently protected by one or more patents
held by others. If the existing patent protection for these drugs is maintained
or expanded, it is unlikely that we will be able to market our own generic and
Extra versions of those drugs without obtaining a license from the patent owner,
which may not be available on commercially acceptable terms, or at all.
WE DEPEND ON THIRD PARTIES FOR MANUFACTURING AND STORAGE OF OUR PRODUCTS AND OUR
BUSINESS MAY BE HARMED IF THE MANUFACTURE OF OUR PRODUCTS IS INTERRUPTED OR
DISCONTINUED.
We have no manufacturing facilities and we currently rely on third parties
for manufacturing activities related to all of our products. As we develop new
products and increase sales of our existing products, we must establish and
maintain relationships with manufacturers to produce and package sufficient
supplies of our finished pharmaceutical products, including rubitecan.
Our manufacturing strategy presents the following risks:
- delays in scale-up to quantities needed for multiple clinical trials could
delay clinical trials, regulatory submissions and commercialization of our
products in development;
- our current and future manufacturers are subject to ongoing periodic
unannounced inspection by the FDA and corresponding state agencies for
compliance with strictly enforced GMP regulations and similar foreign
standards, and we do not have control over our third-party manufacturers'
compliance with these regulations and standards;
- if we need to change to other commercial manufacturing contractors, the
FDA and comparable foreign regulators must approve these contractors prior
to our use. This would require new testing and compliance inspections. The
new manufacturers would have to be educated in, or themselves develop
substantially equivalent processes necessary for, the production of our
products. In addition, the FDA and comparable foreign regulators would
need to approve the new manufacturers;
- if market demand for our products increases suddenly, our current
manufacturers might not be able to fulfill our commercial needs, which
would require us to seek new manufacturing arrangements and may result in
substantial delays in meeting market demand; and
- we may not have intellectual property rights, or may have to share
intellecual rights, to any improvements in the manufacturing processes or
new manufacturing processes for our products.
Any of these factors could delay clinical trials or commercialization of our
products under development, interfere with current sales, entail higher costs
and result in our being unable to effectively sell our products.
In addition, we store the majority of the unpurified, bulk form of Nipent at
a single location. Improper storage, fire, natural disaster, theft or other
conditions at this location that may lead to the loss or destruction of the bulk
concentrate could adversely affect our business, results of operations and cash
flows. We are currently negotiating a long-term agreement with the vendor that
purifies our current supply of crude concentrate to continue its purification
services. However, we cannot assure you that we will be able to finalize the
agreement. If we are not able to do so, our supply of Nipent may be interrupted
while we seek to locate another facility and have that facility approved by the
FDA. The delay could adversely affect our business, results of operations and
cash flows.
30
We do not currently intend to manufacture any pharmaceutical products,
although we may choose to do so in the future. If we decide to manufacture
products, we would be subject to the regulatory risks and requirements described
above. We will also be subject to similar risks regarding delays or difficulties
encountered in manufacturing these pharmaceutical products and we will require
additional facilities and substantial additional capital. In addition, we have
only limited experience in manufacturing pharmaceutical products. We cannot
assure you that we would be able to manufacture any of these products
successfully in accordance with regulatory requirements and in a cost-effective
manner.
ASSERTING, DEFENDING AND MAINTAINING INTELLECTUAL PROPERTY RIGHTS COULD BE
DIFFICULT AND COSTLY AND FAILURE TO DO SO WILL HARM OUR ABILITY TO COMPETE AND
THE RESULTS OF OUR OPERATIONS.
If competitors develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, if our trade secrets
are disclosed or if we cannot effectively protect our rights to unpatented trade
secrets, our business will be harmed.
The pharmaceutical fields are characterized by a large number of patent
filings. A substantial number of patents have already been issued to other
pharmaceutical companies, research or academic institutions or others.
Competitors may have filed applications for or have been issued patents and may
obtain additional patents and proprietary rights related to products or
processes that compete with or are similar to ours. We may not be aware of all
of the patents potentially adverse to our interests that may have been issued to
others.
We actively seek patent protection for our proprietary products and
technologies. We have a number of United States patents and also have licenses
to, or assignments of, numerous patents issued both in the United States and
elsewhere. We may also license our patents outside the United States.
Limitations on patent protection outside the United States, and differences in
what constitutes patentable subject matter in countries outside the United
States, may limit the protection we have on patents or licenses of patents
outside the United States.
Litigation may be necessary to protect our patent position, and we cannot be
certain that we will have the required resources to pursue the necessary
litigation or otherwise to protect our patent rights. Our efforts to protect our
patents may fail. In addition to pursuing patent protection in appropriate
cases, we also rely on trade secret protection for unpatented proprietary
technology. However, trade secrets are difficult to protect. Our trade secrets
or those of our collaborators may become known or may be independently
discovered by others.
Our proprietary products are dependent upon compliance with numerous
licenses and agreements. These licenses and agreements require us to make
royalty and other payments, reasonably exploit the underlying technology of the
applicable patents, and comply with regulatory filings. If we fail to comply
with these licenses and agreements, we could lose the underlying rights to one
or more of these potential products, which would adversely affect our business,
results of operations and cash flows.
From time to time we receive correspondence inviting us to license patents
from third parties. Although we know of no pending patent infringement suits,
discussions regarding possible patent infringements or threats of patent
infringement litigation either related to patents held by us or our licensors or
our products or proposed products, there has been, and we believe that there
will continue to be, significant litigation in the pharmaceutical industry
regarding patent and other intellectual property rights. Claims may be brought
against us in the future based on patents held by others. These persons could
bring legal actions against us claiming damages and seeking to enjoin clinical
testing, manufacturing and marketing of the affected product. If we become
involved in any litigation, it could consume a substantial portion of our
resources, regardless of the outcome of the litigation. If any of these actions
are successful, in addition to any potential liability for damages, we could be
required to obtain a license to continue to manufacture or market the affected
product. We cannot assure you
31
whether we would prevail in any of these actions or that we could obtain any
licenses required under any of these patents on acceptable terms, if at all.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL, HIGHLY
SKILLED PERSONNEL REQUIRED FOR THE EXPANSION OF OUR ACTIVITIES, OUR BUSINESS
WILL SUFFER.
Our success is dependent on key personnel, including Dr. Rubinfeld, our
President and Chief Executive Officer, and members of our senior management and
scientific staff. To successfully expand our operations, we will need to attract
and retain additional, highly skilled individuals, particularly in the areas of
sales, marketing, clinical administration, manufacturing and finance. We compete
with other companies for the services of existing and potential employees. We
believe our compensation and benefits packages are competitive for our
geographical region and our industry group. However, we may be at a disadvantage
to the extent that potential employees may favor larger, more established
employers.
THE CONTINUING EFFORTS OF GOVERNMENT AND THIRD-PARTY PAYERS TO CONTAIN OR REDUCE
THE COSTS OF HEALTHCARE MAY ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY.
Our revenues and profitability may be affected by the continuing efforts of
governmental and third-party payers to contain or reduce the costs of health
care. We cannot predict the effect that these health care reforms may have on
our business, and it is possible that any of these reforms will adversely affect
our business. In addition, in both the United States and elsewhere, sales of
prescription pharmaceuticals are dependent in part on the availability of
reimbursement to the consumer from third-party payers, like government and
private insurance plans. Third-party payers are increasingly challenging the
prices charged for medical products and services. If our current and proposed
products are not considered cost-effective, reimbursement to the consumer may
not be available or be sufficient to allow us to sell products on a competitive
basis.
WE MAY BE SUBJECT TO PRODUCT LIABILITY LAWSUITS AND OUR INSURANCE MAY BE
INADEQUATE TO COVER DAMAGES.
Clinical trials or marketing of any of our current and potential products
may expose us to liability claims from the use of these products. We currently
carry product liability insurance. However, we cannot be certain that we will be
able to maintain insurance on acceptable terms for clinical and commercial
activities or that the insurance would be sufficient to cover any potential
product liability claim or recall. If we fail to have sufficient coverage, our
business, results of operations and cash flows could be adversely affected.
IF WE ARE UNABLE TO COMPLY WITH ENVIRONMENTAL LAWS AND REGULATIONS, OUR BUSINESS
MAY BE HARMED.
We are subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of hazardous materials and
waste products. We currently maintain a supply of several hazardous materials at
our facilities. In the event of an accident, we could be held liable for any
damages that result, and the liability could exceed our resources. While we
currently outsource our research and development programs involving the
controlled use of biohazardous materials, if in the future we conduct these
programs, we might be required to incur significant cost to comply with
environmental laws and regulations.
THE REDEMPTION OF OUR OUTSTANDING PUBLIC WARRANTS MAY CAUSE THE PRICE OF OUR
COMMON STOCK TO FALL AND MAY RESULT IN DILUTION.
On September 20, 1999, we issued a notice of redemption of warrants for the
purchase of shares of our common stock that we issued in connection with our
initial public offering. These warrants
32
enable the holder to purchase shares of our common stock at a price of $9.00 per
share. As of December 31, 1999, there were 3,730,740 of such warrants
outstanding. We will redeem the warrants that are outstanding as of April 16,
2000 at a price of $0.25 per share. We expect that holders of the warrants will
choose to exercise these warrants rather than have them redeemed if the price of
our common stock trades above $9.00 per share during the period immediately
preceding April 16, 2000. If these holders elect to sell the common stock issued
upon exercise of the warrants, the price of our common stock may fall.
Our issuance of common stock at a price of $9.00 per share may result in
dilution to other holders of common stock and may cause the price of our common
stock to fall. In addition, if the price of our common stock for the 30 day
trading period following April 16, 2000 is less than $19.46, or in some cases
$17.56, we may be required to issue additional shares of common stock to
investors that bought our common stock in privately negotiated transactions in
September 1999. Any such issuance would have a dilutive effect on holders of our
common stock.
ANTI-TAKEOVER PROVISIONS MAY PREVENT YOU FROM REALIZING A PREMIUM RETURN.
Anti-takeover provisions of our certificate of incorporation and bylaws make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. These provisions include:
- authorization of the issuance of up to 2,000,000 shares of our preferred
stock;
- elimination of cumulative voting; and
- elimination of stockholder action by written consent.
Our bylaws establish procedures, including notice procedures, with regard to
the nomination, other than by or at the direction of our board of directors, of
candidates for election as directors or for stockholder proposals to be
submitted at stockholder meetings.
We are also subject to Section 203 of the Delaware General Corporation Law,
an anti-takeover provision. In general, Section 203 of the Delaware General
Corporation Law prevents a stockholder owning 15% or more of a corporation's
outstanding voting stock from engaging in business combinations with a Delaware
corporation for three years following the date the stockholder acquired 15% or
more of a corporation's outstanding voting stock. This restriction is subject to
exceptions, including the approval of the board of directors and of the holders
of at least two-thirds of the outstanding shares of voting stock not owned by
the interested stockholder.
These provisions are expected to discourage different types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of our company to first negotiate with us.
We believe that the benefits of increased protection of our potential
ability to negotiate with the proponents of unfriendly or unsolicited proposals
to acquire or restructure us outweigh the disadvantages of discouraging those
proposals because, among other things, negotiation of those proposals could
result in an improvement of their terms.
BECAUSE CURRENT OFFICERS, DIRECTORS, AND ABBOTT OWN A LARGE PERCENTAGE OF OUR
STOCK, THESE STOCKHOLDERS MAY BE ABLE TO CONTROL US AND ALSO PREVENT POTENTIALLY
BENEFICIAL ACQUISITIONS OF OUR COMPANY BY OTHERS.
As of January 31, 2000, our officers, directors, Abbott and their affiliates
owned approximately 20% of the outstanding shares of our common stock, not
including stock issuable upon exercise of options or warrants. If these
stockholders were to exercise all of their options and warrants, they would
collectively own a majority of our common stock. These stockholders, if acting
together, may be able to
33
influence the election of our directors and other matters requiring approval by
our stockholders. This concentration of ownership may also delay or prevent a
third party from acquiring us. These stockholders may have interests that differ
from our other stockholders, particularly in the context of potentially
beneficial acquisitions of our company by others. For example, to the extent
that these stockholders are our employees, they may be less inclined to vote for
acquisitions of our company by others involving the termination of their
employment or diminution of their responsibilities or compensation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Due to the short-term nature of our interest bearing assets we believe that
our exposure to interest rate market risk is not significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All information required by this item is included on pages F-1 to F-22 in
Item 14 of Part IV of this Report and is incorporated into this item by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding our Board of Directors is incorporated by reference to
the section entitled "Election of Directors" appearing in our proxy statement
for the annual meeting of stockholders to be filed with the Commission by
April 30, 2000. Certain information with respect to persons who are or may be
deemed to be executive officers of the Registrant is set forth under the caption
"Executive Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is incorporated by reference to
the information set forth under the caption "Executive Compensation" in our
Proxy Statement for the Annual Meeting of Stockholders to be filed with the
Commission by April 30, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the information set forth under the
caption "Voting Securities of Principal Stockholders and Management" in our
Proxy Statement for the Annual Meeting of Stockholders to be filed with the
Commission by April 30, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
incorporated by reference to the information set forth under the caption
"Certain Transactions" in our Proxy Statement for the Annual Meeting of
Stockholders to be filed with the Commission by April 30, 2000.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS. The following financial statements of the
Company and the Report of Ernst & Young LLP, Independent Auditors, are
included in Part IV of this Report on the pages indicated:
PAGE
--------
Report of Ernst & Young LLP, Independent Auditors........... F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statement of Changes in Stockholders' Equity... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
2. FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
the notes thereto.
3. EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
(f)3.1 Certificate of Incorporation of the Registrant.
(m)3.2 Bylaws, as amended, of the Registrant.
(m)4.1 Specimen Common Stock Certificate.
(a)4.2 Form of Representative's Warrant.
(a)4.3 Form of Warrant Agreement dated March 11, 1996 (including
form of Common Stock Purchase Warrant).
(l)10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
(v)(s)10.2 1993 Stock Option Plan (as amended through February 20,
1999).
(i)(s)10.3 Forms of stock option agreements under the 1993 Stock Option
Plan.
(i)(s)10.4 1996 Directors' Stock Option Plan, as amended effective
February 3, 1997, and form of stock option agreement
thereunder.
(c)(s)10.5 Employees and Consultants Stock Option Agreement/Plan.
(n)(s)10.6 1998 Employee Stock Purchase Plan
(b)(q)10.7 Patent License and Royalty Agreement dated August 30, 1993
between the Registrant and The Jackson Laboratory.
(b)(q)10.8 Worldwide License Agreement dated March 1, 1994 between the
Registrant and Janssen Biotech, N.V.
(b)(q)10.9 Patent License Agreement dated March 1, 1994 between the
Registrant and Cyclex Inc.
(b)(q)10.10 Patent License and Royalty Agreement dated November 15, 1993
between the Registrant and The Long Island Jewish Medical
Center.
35
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
(b)(q)10.11 License Agreement dated February 1, 1995 between the
Registrant and Pharmos Corporation.
(i)10.12 Common Stock Sale/Repurchase Agreement dated August 6, 1997
between Israel Chemicals, Ltd. ("ICL") and the Registrant.
(m)10.13 First Amendment to Common Stock Sale/Repurchase Agreement
between ICL and the Registrant dated November 12, 1997.
(m)(s)10.14 Amended and Restated Employment, Confidential Information
and Invention Assignment Agreement dated January 1, 1998
between the Registrant and Joseph Rubinfeld.
(b)10.15 Consulting Agreement between the Registrant and Vida
International Pharmaceutical Consultants.
(d)10.16 Purchase and Sale Agreement dated as of September 30, 1996
between the Registrant and Warner-Lambert Company, a
Delaware corporation.
(e)(q)10.17 Asset Purchase Agreement dated January 15, 1997 between the
Registrant and Immunex Corporation, a Washington
corporation.
(e)10.18 Bishop Ranch Business Park Building Lease dated October 14,
1996 between the Registrant and Annabel Investment
Company, a California partnership.
(g)(q)10.19 License Agreement between Inflazyme Pharmaceuticals Ltd. and
the Registrant dated April 11, 1997.
(g)(q)10.20 Nonexclusive Supply Agreement between the Registrant and
Yunnan Hande Technological Development Co. Ltd. dated May
7, 1997.
(g)10.21 Assignment and Assumption Agreement between the Registrant
and R&S, LLC dated April 17, 1997.
(h)10.22 Convertible Secured Note, Option and Warrant Purchase
Agreement dated June 17, 1997 among the Registrant, Tako
Ventures, LLC and, solely as to Sections 5.3 and 5.5
thereof, Lawrence J. Ellison (the "Tako Purchase
Agreement").
(r)10.23 Amendment No. 1 to the Tako Purchase Agreement dated March
17, 1999.
(j)10.24 Form of Common Stock Purchase Agreement among the purchasers
and the Registrant dated August 29, 1997.
(j)(q)10.25 License Agreement between Stehlin Foundation for Cancer
Research and the Registrant dated September 3, 1997.
(j)10.26 Letter Agreement dated August 13, 1997 between the
Registrant and South Bay Construction, Inc.
(k)(q)10.27 Supply Agreement dated October 20, 1997 between the
Registrant and Warner-Lambert Company.
(l)10.28 Standard Industrial/Commercial Multi-Tenant Lease dated
October 13, 1997 between R&S, LLC and Quark Biotech, Inc.
(t)10.29 Registration Rights Agreement dated November 23, 1998.
(o)10.30 Agreement and Plan of Reorganization by and among the
Registrant, Royale Acquisition Corp., and Sparta
Pharmaceuticals, Inc. dated January 18, 1999.
(r)10.31 Stock Purchase Agreement between the Registrant and Tako
dated January 29, 1999.
36
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
(r)10.32 Standard Industrial/Commercial Multi-Tenant Lease dated
February 12, 1999 between the Registrant and Sea Cliff
Properties, a California general partnership (for the
premises at 1075 Serpentine Lane, Pleasanton, California,
Suite A).
(r)10.33 Standard Industrial/Commercial Multi-Tenant Lease dated
February 12, 1999 between the Registrant and Sea Cliff
Properties, a California general partnership (for the
premises at 1075 Serpentine Lane, Pleasanton, California,
Suite B).
(r)10.34 Secured Promissory Note Commitment dated March 25, 1999
issued by the Registrant to Tako Ventures LLC.
(r)10.35 Common Stock Purchase Warrant dated March 25, 1999.
(p)(q)10.36 Letter of Intent regarding Nipent Manufacturing.
(t)10.37 Common Stock Purchase Agreement dated November 23, 1998.
(u)(q)10.38 Know-How Transfer and Cooperation Agreement dated September
10, 1999 between the Registrant and Pharmachemie B.V.
(u)10.39 Agreement to Terminate and Release of Collateral dated
September 30, 1999 between the Registrant and Tako
Ventures, LLC.
(w)10.40 First Amendment to Agreement and Plan of Reorganization by
and among the Registrant, Royale Acquisition Corp. and
Sparta Pharmaceuticals, Inc. dated May 15, 1999
(x)10.41 Form of Warrant Agreement dated August 12, 1999 between the
Registrant and ChaseMellon Shareholder Services (including
form of Common Stock Purchase Warrant).
(y)10.42 Amended & Restated Registration Rights Agreement dated
September 1, 1999 between the Registrant and SMALLCAP
World Fund, Inc.
(y)10.43 Purchase Agreement dated September 15, 1999 between the
Registrant and The Tail Wind Fund Ltd., Carriage Partners,
LLC, and LBI Group Inc.
(y)10.44 Supplement Agreement dated September 23, 1999 between the
Registrant and the Tail Wind Fund, Ltd.
(y)10.45 Registration Rights Agreement dated September 15, 1999
between the Registrant and The Tail Wind Fund Ltd.,
Carriage Partners, LLC, and LBI Group Inc.
(y)10.46 Form of Warrant Agreement between Registrant and Clipperbay
& Co.
(y)10.47 Form of Warrant Agreement between Registrant and The Tail
Wind Fund Ltd., Carriage Partners, LLC, and LBI Group Inc.
(aa)(z)10.48 Common Stock and Option Purchase Agreement, dated
December 21, 1999 between the Registrant and Abbott
Laboratories
(aa)10.49 Form Registration Rights Agreement between the Registrant
and Abbott Laboratories
(aa)(z)10.50 Worldwide Sales, Distribution, and Development Agreement,
dated December 21, 1999 between the Registrant and Abbott
Laboratories
(aa)(z)10.51 U.S. Distribution Agreement, Dated December 21, 1999 between
the Registrant and Abbott Laboratories
(bb)10.52 Registration Rights Agreement dated December 15, 1999
between the Registrant and AVI BioPharma, Inc.
37
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
(bb)10.53 Subscription Agreement dated December 1, 1999 between the
Registrant and AVI BioPharma, Inc.
(bb)(z)10.54 Research Agreement (Camptothecin) dated November 15, 1999
between the Registrant and Clayton Foundation for Research
(bb)(z)10.55 Research Agreement (Paclitaxel) dated November 15, 1999
between the Registrant and Clayton Foundation for Research
(bb)(z)10.56 License Agreement (Camptothecin) dated November 15, 1999
between the Registrant and Research Development Foundation
(bb)(z)10.57 License Agreement (Paclitaxel) dated November 15, 1999
between the Registrant and Research Development Foundation
(cc)(q)10.57 Exclusive License Agreement, dated October 1, 1991, between
Sparta Pharmaceuticals, Inc. ("Sparta") and Yale
University ("Yale") and Subscription Agreement, dated
October 21, 1991, between Sparta and Yale
(cc)(q)10.57A Revised pages of Exhibit 10.1
(cc)(q)10.58 License Agreement, dated October 7, 1991, between Sparta and
The Research Foundation of State University of New York
(cc)(q)10.58A Revised pages of Exhibit 10.2
(dd)(q)10.59 Amended and Restated Sublicense Agreement, dated January 1,
1997, between Sparta and Research Triangle Pharmaceuticals
Ltd. ("RTP").
(ee)(q)10.60 License Agreement between PI Research Corporation
(predecessor in name to Lexin Pharmaceutical Corporation)
and the Trustees of The University of Pennsylvania dated
as of January 2, 1992 (Assigned to Sparta pursuant to the
Lexin Purchase)
(ff)(q)10.61 License Agreement, dated as of December 4, 1997, between
Sparta and the Estate of Karl H. Beyer, Jr.
(gg)(q)10.62 Exclusive License Agreement by and between Sparta and
Schering Corporation.
(gg)(q)10.63 Exclusive License Agreement by and between Sparta and
Schering-Plough Ltd.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
- ------------------------
(a) Incorporated by reference from the Registrant's Registration Statement on
Form SB-2 (Reg. No. 333-476-LA) filed with the Securities and Exchange
Commission January 18, 1996.
(b) Incorporated by reference from Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2 (Reg. No. 333-476-LA) filed with the
Securities and Exchange Commission February 26, 1996.
(c) Incorporated by reference from the Registrant's Report on Form S-8 filed
with the Securities and Exchange Commission on July 1, 1996.
(d) Incorporated by reference from the Registrant's Report on Form 8-K filed
with the Securities and Exchange Commission on October 15, 1996.
(e) Incorporated by reference from the Registrant's Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1997.
(f) Incorporated by reference from the Registrant's Proxy Statement filed with
the Securities and Exchange Commission on April 25, 1997.
38
(g) Incorporated by reference from the Registrant's Report on Form 10-Q filed
with the Securities and Exchange Commission on May 15, 1997.
(h) Incorporated by reference from the Registrant's Report on Form 8-K filed
with the Securities and Exchange Commission on July 2, 1997.
(i) Incorporated by reference from the Registrant's Report on Form 10-Q filed
with the Securities and Exchange Commission on August 13, 1997.
(j) Incorporated by reference from Amendment No. 2 on Form S-3 to the
Registrant's Registration Statement on Form SB-2 (Reg. No. 333-476-LA) filed
with the Securities and Exchange Commission on October 6, 1997.
(k) Incorporated by reference from the Registrant's Report on Form 8-K filed
with the Securities and Exchange Commission on October 31, 1997.
(l) Incorporated by reference from Amendment No. 3 on Form S-3 to the
Registrant's Registration Statement on Form SB-2 (Reg. No. 333-476-LA) filed
with the Securities and Exchange Commission on November 5, 1997.
(m) Incorporated by reference from the Registrant's Report on Form 10-K filed
with the Securities and Exchange Commission on March 19, 1998.
(n) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-58303) filed with the Securities and Exchange
Commission on July 1, 1998.
(o) Incorporated by reference from the Registrant's Report on Form 8-K filed
with the Securities and Exchange Commission on January 28, 1999.
(p) Incorporated by reference from the Registrant's Report on Form 10-Q filed
with the Securities and Exchange Commission on November 12, 1998.
(q) Confidential treatment has been previously granted for certain portions of
these exhibits. Omitted information has been separately filed with the
Securities and Exchange Commission.
(r) Incorporated by reference from the Registrant's Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1999.
(s) Indicates a management contract or compensatory plan or arrangement.
(t) Incorporated by reference from the Registrant's Report on Form 10-K/A filed
with the Securities and Exchange Commission on May 14, 1999.
(u) Incorporated by reference from the Registrant's Report on Form 10-Q filed
with the Securities and Exchange Commission on November 15, 1999.
(v) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-87369) filed with the Securities and Exchange
Commission on September 17, 1999.
(w) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-80517) filed with the Securities and Exchange
Commission on June 11, 1999.
(x) Incorporated by reference from the Registrant's Report on Form 8-A filed
with the Securities and Exchange Commission on August 12, 1999.
(y) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 (Reg. No. 333-88051) filed with the Securities and Exchange
Commission on September 29, 1999.
(z) Confidential treatment has been requested for certain portions of these
exhibits. Omitted information has been separately filed with the Securities
and Exchange Commission.
39
(aa) Incorporated by reference from the Registrant's Report on Form 8-K/A dated
December 22, 1999 filed with the Securities and Exchange Commission on
January 7, 2000.
(bb) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 (Reg. No. 333-95177) filed with the Securities and Exchange
Commission on January 21, 2000, as amended on March 16, 2000.
(cc) Incorporated by reference from Sparta's Registration Statement on Form S-l
(Reg. No. 33-72882) filed with the Securities and Exchange Commission on
December 14, 1993, or amendments thereto.
(dd) Incorporated by reference from Sparta's Report on Form 10-K filed with the
Securities and Exchange Commission on March 27, 1997.
(ee) Incorporated by reference from Sparta's Report on Form 10-Q/A filed with
the Securities and Exchange Commission on July 17, 1996.
(ff) Incorporated by reference from Sparta's Report on Form 10-K filed with the
Securities and Exchange Commission on March 23, 1998.
(gg) Incorporated by reference from Sparta's Report on Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1998.
(b) REPORTS ON FORM 8-K.
- Form 8-K dated September 20, 1999, filed on October 4, 1999, regarding
the Registrant's warrant redemption call.
- Forms 8-K and 8-K/A dated December 22, 1999, filed on December 23, 1999
and January 7, 2000, respectively, regarding the Registrant's
agreements entered into with Abbott Laboratories on December 21, 1999.
(c) EXHIBITS. See Item 14(a) above.
(d) FINANCIAL STATEMENT SCHEDULES. See Item 14(a) above.
40
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
SuperGen, Inc.
We have audited the accompanying consolidated balance sheets of
SuperGen, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. 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 consolidated financial position of SuperGen, Inc.
at December 31, 1999 and 1998 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 18, 2000
F-1
SUPERGEN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
-------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 22,546 $ 8,614
Marketable securities..................................... 5,008 3,299
Accounts receivable, net.................................. 1,754 712
Other receivables......................................... 5,000 --
Inventories............................................... 1,368 1,245
Prepaid expenses and other current assets................. 2,879 706
-------- --------
Total current assets.................................... 38,555 14,576
Property, plant and equipment, net.......................... 2,923 2,939
Developed technology at cost, net........................... 1,707 1,266
Goodwill and other intangibles, net......................... 2,036 --
Investment in stock of related parties...................... 5,938 500
Due from related party...................................... 450 450
Other assets................................................ 1,869 62
-------- --------
Total assets............................................ $ 53,478 $ 19,793
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 2,694 $ 2,451
Deferred revenue.......................................... 894 --
Accrued employee benefits................................. 955 524
-------- --------
Total current liabilities............................... 4,543 2,975
Deferred revenue............................................ 4,167 --
-------- --------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares
authorized;
none outstanding........................................ -- --
Common stock, $.001 par value; 40,000,000 shares
authorized; 25,477,770 and 20,969,953 shares issued and
outstanding at December 31, 1999 and 1998,
respectively............................................ 25 21
Additional paid in capital................................ 138,461 72,818
Deferred compensation..................................... (835) --
Accumulated other comprehensive loss...................... (5) (128)
Accumulated deficit....................................... (92,878) (55,893)
-------- --------
Total stockholders' equity.............................. 44,768 16,818
-------- --------
Total liabilities and stockholders' equity.............. $ 53,478 $ 19,793
======== ========
See accompanying notes to consolidated financial statements
F-2
SUPERGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net sales................................................... $ 4,744 $ 3,004 $ 1,802
Operating expenses:
Cost of sales............................................. 2,032 1,925 1,539
Research and development.................................. 17,346 10,511 8,583
Selling, general, and administrative...................... 10,517 7,046 4,952
Acquisition of in-process research and development........ 10,850 -- 3,506
-------- -------- --------
Total operating expenses................................ 40,745 19,482 18,580
-------- -------- --------
Loss from operations........................................ (36,001) (16,478) (16,778)
Interest income............................................. 1,016 901 782
Amortization of loan commitment fee......................... (2,000) -- --
-------- -------- --------
Net loss.................................................... $(36,985) $(15,577) $(15,996)
======== ======== ========
Basic and diluted net loss per share........................ $ (1.58) $ (0.77) $ (0.85)
======== ======== ========
Weighted average shares used in basic and diluted net loss
per share calculation..................................... 23,352 20,353 18,765
======== ======== ========
See accompanying notes to consolidated financial statements
F-3
SUPERGEN, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON ACCUMULATED
STOCK ADDITIONAL OTHER
------------------- PAID IN DEFERRED COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION LOSS DEFICIT TOTAL
-------- -------- ---------- ------------- -------------- ------------ --------
Balances at January 1, 1997......... 16,930 $ 17 $ 40,010 $ -- $ -- $(24,320) $ 15,707
Comprehensive loss:
Net loss........................ -- -- -- -- -- (15,996) (15,996)
Other comprehensive
loss--Unrealized loss on
investments................... -- -- -- -- (93) -- (93)
--------
Comprehensive loss................ (16,089)
Issuance of common stock and
warrants in connection with the
Tako Ventures, LLC private
placement, net of offering costs
of $268......................... 2,550 3 22,679 -- -- -- 22,682
Repurchase of common stock from
Israel Chemicals, Ltd, including
transaction costs of $26........ (740) (1) (7,891) -- -- -- (7,892)
Issuance of common stock in
connection with a private
placement, net of offering costs
of $4........................... 889 1 9,773 -- -- -- 9,774
Issuance of common stock for
acquisition of in-process
research and development........ 183 -- 1,875 -- -- -- 1,875
Issuance of common stock upon
exercise of warrants and stock
options......................... 366 -- 2,179 -- -- -- 2,179
Compensation expense from grants
of options to vendors and
acceleration of option
vesting......................... -- -- 331 -- -- -- 331
------ ---- -------- ----- ----- -------- --------
Balances at December 31, 1997....... 20,178 20 68,956 -- (93) (40,316) 28,567
Comprehensive loss:
Net loss........................ -- -- -- -- -- (15,577) (15,577)
Other comprehensive
loss--Unrealized loss on
investments................... -- -- -- -- (35) -- (35)
--------
Comprehensive loss................ (15,612)
Issuance of common stock in
connection with a private
placement, net of offering costs
of $368......................... 460 1 2,631 -- -- -- 2,632
Issuance of common stock for
acquisition of patent royalty
agreement and other intellectual
property........................ 75 -- 750 -- -- -- 750
Issuance of common stock upon
exercise of warrants and stock
options......................... 134 -- 190 -- -- -- 190
Issuance of common stock in
connection with employee stock
purchase plan................... 16 -- 103 -- -- -- 103
Issuance of common stock to Tako
Ventures, LLC................... 107 -- -- -- -- -- --
Compensation expense from grants
of options to vendors and
acceleration of option
vesting......................... -- -- 188 -- -- -- 188
------ ---- -------- ----- ----- -------- --------
Balances at December 31, 1998....... 20,970 21 72,818 -- (128) (55,893) 16,818
Comprehensive loss:
Net loss........................ -- -- -- -- -- (36,985) (36,985)
Other comprehensive
loss--Unrealized gain on
investments................... -- -- -- -- 123 -- 123
--------
Comprehensive loss................ (36,862)
Issuance of common stock and
warrants in connection with
private placements, net of
offering costs of $2,156........ 2,759 3 36,440 -- -- -- 36,443
Issuance of common stock for
acquisition of in-process
research and development and
license agreements.............. 280 -- 5,356 -- -- -- 5,356
Issuance of common stock to
Clayton Foundation in connection
with research agreements........ 36 -- 1,191 -- -- -- 1,191
Issuance of common stock to AVI
Biopharma, Inc.................. 100 -- 2,825 -- -- -- 2,825
Issuance of common stock and
warrants in connection with
acquisition of Sparta
Pharmaceuticals, Inc............ 429 -- 9,370 -- -- -- 9,370
Issuance of common stock upon
exercise of warrants and stock
options......................... 820 1 5,489 -- -- -- 5,490
Issuance of common stock in
connection with employee stock
purchase plan................... 23 -- 227 -- -- -- 227
Issuance of common stock to Tako
Ventures, LLC................... 61 -- 379 -- -- -- 379
Issuance of warrants to Tako
Ventures, LLC in connection with
promissory note................. -- -- 2,000 -- -- -- 2,000
Compensation expense from stock
option grants to consultants and
vendors......................... -- -- 1,419 -- -- 1,419
Deferred compensation............. -- -- 947 (947) -- -- --
Amortization of deferred
compensation.................... -- -- 112 -- -- 112
------ ---- -------- ----- ----- -------- --------
Balances at December 31, 1999....... 25,478 $ 25 $138,461 $(835) $ (5) $(92,878) $ 44,768
====== ==== ======== ===== ===== ======== ========
See accompanying notes to consolidated financial statements
F-4
SUPERGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Operating activities:
Net loss.................................................. $(36,985) $(15,577) $(15,996)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 910 585 470
Amortization of deferred compensation................... 112 -- --
Gain on sale of property and equipment.................. -- (19) --
Amortization of loan commitment fee..................... 2,000 -- --
Expense related to stock options and warrants granted to
non-employees......................................... 1,419 188 331
Non-cash charges related to acquisition of in-process
research and development.............................. 10,850 -- 2,625
Non-cash charges related to acquisition of license
agreements............................................ 916 -- --
Changes in operating assets and liabilities:
Accounts receivable................................... (1,005) (648) 57
Inventories........................................... (123) 183 146
Prepaid expenses and other assets..................... (2,166) (7) (599)
Accounts payable and other liabilities................ 467 1,520 (159)
Due to related parties................................ -- -- (334)
Amount due under asset purchase agreements............ -- -- (500)
-------- -------- --------
Net cash used in operating activities....................... (23,605) (13,775) (13,959)
Investing activities:
Purchase of marketable securities......................... (5,725) (5,363) (167)
Maturities of marketable securities....................... 2,240 2,077 --
Purchase of property and equipment........................ (457) (672) (2,556)
Sale of property and equipment............................ -- 96 --
Acquisition of Sparta Pharmaceuticals, net of cash
acquired................................................ 510 -- --
Acquisition of developed technology....................... -- -- (150)
Purchase of equity investment in related party............ (2,500) -- (500)
-------- -------- --------
Net cash used in investing activities....................... (5,932) (3,862) (3,373)
Financing activities:
Issuance of common stock, net of issuance costs........... 43,469 2,925 34,635
Repurchase of common stock................................ -- -- (7,892)
-------- -------- --------
Net cash provided by financing activities................... 43,469 2,925 26,743
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 13,932 (14,712) 9,411
Cash and cash equivalents at beginning of period............ 8,614 23,326 13,915
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 22,546 $ 8,614 $ 23,326
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Non-cash investing and financing activities:
Issuance of common stock related to acquistion of
developed technology.................................. $ 1,040 -- --
Issuance of common stock related to research
agreement............................................. 1,191 -- --
Issuance of common stock related to equity investment in
related party......................................... 2,825 -- --
See accompanying notes to consolidated financial statements
F-5
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
SuperGen, Inc. ("SuperGen", "we", "us" or the "Company") was incorporated in
California in March 1991. We changed our state of incorporation to Delaware in
1997. We are an emerging pharmaceutical company dedicated to the acquisition,
rapid development and commercialization of oncology therapies for solid tumors
and hematological malignancies. We operate in one industry segment -- the
pharmaceutical industry.
PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts of Sparta
Pharmaceuticals, Inc. ("Sparta") from August 12, 1999, the date of acquisition,
and two wholly-owned subsidiaries, which are immaterial.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results may differ from those estimates.
REVENUE RECOGNITION
Our net sales relate principally to two pharmaceutical products. We
recognize sales revenue upon shipments to customers, with allowances provided
for estimated returns and exchanges. Cash advance payments received in
connection with distribution agreements or research grants are deferred and
recognized ratably over the period of the respective agreements.
Our principal customers are clinics, hospitals and hospital buying groups in
the United States and drug distributors and wholesalers in the United States and
Europe. We do not require collateral from our customers.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents include bank demand deposits, certificates of
deposit, marketable securities with initial maturities of three months or less
and money market funds which invest primarily in U.S. government obligations and
commercial paper. These instruments are highly liquid and are subject to
insignificant market risk.
Marketable securities consist of corporate or government debt securities and
equity securities that have a readily ascertainable market value and are readily
marketable. These investments are reported at fair value. All marketable
securities are designated as available-for-sale, with unrealized gains and
losses included in equity.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. We incurred advertising costs of
$731,000 in 1999, $418,000 in 1998 and $227,000 in 1997.
F-6
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenditures, including direct and allocated
expenses, are charged to expense as incurred.
EQUITY INVESTMENTS
Equity investments in securities without readily determinable fair value are
either expensed upon acquisition or carried at cost, depending upon our estimate
of the near term viability of the investee and underlying net assets. We
periodically review those carried at cost and believe the amounts continue to be
realizable.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market value. Inventories were as follows at December 31 (in
thousands):
1999 1998
-------- --------
Raw materials............................................... $ 183 $ 210
Work in process............................................. 935 511
Finished goods.............................................. 250 524
------ ------
$1,368 $1,245
====== ======
Bulk materials for our primary pharmaceutical product must be purified at a
United States Food and Drug Administration (FDA) approved facility that meets
stringent Good Manufacturing Practices standards. We currently use a single
vendor to perform this manufacturing process using our own equipment located at
the vendor's site. We have contracted with a separate vendor to manufacture the
Nipent finished dosage at its approved facility. In addition, we store the
majority of our bulk raw materials at a single storage location. Although there
are a limited number of vendors who may be qualified to perform these services,
we believe that other vendors could be engaged to provide similar services on
comparable terms. However, the time required to locate and qualify other vendors
or replace lost bulk inventory could cause a delay in manufacturing that might
be financially and operationally disruptive.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of building,
equipment and furniture and fixtures is provided on a straight-line basis over
the estimated original useful lives of the respective assets, which range from 3
to 31 years. Manufacturing equipment is amortized to cost of sales on a
units-manufactured basis expected to approximate six years. Leasehold
improvements are amortized over the shorter of the life of the lease or their
estimated useful lives using the straight-line method.
F-7
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, plant and equipment consist of the following at December 31 (in
thousands):
1999 1998
-------- --------
Land and building.......................................... $ 1,983 $1,867
Equipment.................................................. 592 509
Furniture and fixtures..................................... 1,686 1,395
------- ------
Total property and equipment............................... 4,261 3,771
Less accumulated depreciation and amortization............. (1,338) (832)
------- ------
Property, plant and equipment, net......................... $ 2,923 $2,939
======= ======
DEVELOPED TECHNOLOGY
Developed technology related to the acquisition of Nipent is being amortized
to cost of sales on a units-manufactured basis over a period expected to
approximate six years. Developed technology related to other acquired products
is being amortized on a straight-line basis over five years. Accumulated
amortization was $379,000 and $155,000 at December 31, 1999 and 1998,
respectively. Recoverability of developed technology is periodically assessed
based upon expected future cash flows of the related product.
INTANGIBLE ASSETS
Intangible assets, including trademarks, covenants not to compete, acquired
workforce and customer lists, are stated at cost and amortized on a
straight-line basis over their estimated useful lives of six months to five
years. Goodwill, which represents the excess of acquisition cost over the net
assets acquired, is being amortized on a straight-line basis over five years. As
of December 31, 1999 accumulated amortization was $179,000.
MAJOR CUSTOMERS
Our major customers include a number of buying groups. The percentage of
sales of each of these major customers to total net sales for the years ended
December 31 were as follows:
1999 1998 1997
-------- -------- --------
Warner-Lambert Company..................................... 27% 20% --%
Customer A................................................. 15 10 10
Customer B................................................. 8 10 9
Customer C................................................. 8 6 16
Customer D................................................. 8 0 10
Customer E................................................. 7 16 12
Customer F................................................. 3 1 11
All others................................................. 24 37 32
--- --- ---
Total...................................................... 100% 100% 100%
=== === ===
F-8
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is computed by dividing net loss
by the weighted average number of shares outstanding during the year.
As we have reported operating losses each period since our inception, the
effect of assuming the exercise of options and warrants would be anti-dilutive
and, therefore, basic and diluted loss per share are the same. The anti-dilutive
securities that we have omitted from the calculation of basic net loss per
common share are disclosed in Notes 3 and 4.
STOCK-BASED COMPENSATION
We account for stock options under the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" as permitted by
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation." Accordingly, we do not record compensation expense
for stock option grants to employees when the exercise price equals or exceeds
the market price of the Company's common stock on the date of grant.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of ("SFAS 121"), the Company reviews long-lived assets, including
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. Under SFAS 121, an impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition is less than its carrying amount. Impairment,
if any, is assessed using discounted cash flows. Through December 31, 1999,
there have been no such losses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and is not anticipated to have an impact on our
results of operations or financial condition when adopted as we hold no
derivative financial instruments and do not currently engage in hedging
activities.
RECLASSIFICATIONS
We have reclassified certain prior year amounts, as well as amounts reported
in Forms 10-Q filed in 1999, to conform to the current year's presentation.
F-9
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. AVAILABLE-FOR-SALE-SECURITIES
The following is a summary of available-for-sale securities (in thousands):
UNREALIZED
AMORTIZED GAINS ESTIMATED
COST (LOSSES) FAIR VALUE
AT DECEMBER 31, 1999: --------- ---------- ----------
U.S. corporate debt securities.............................. $24,609 $ (10) $24,599
Marketable equity securities................................ 5,492 5 5,497
------- ----- -------
Total..................................................... $30,101 $ (5) $30,096
======= ===== =======
AT DECEMBER 31, 1998:
U.S. corporate debt securities.............................. $ 2,220 $ 2 $ 2,222
U.S. government debt securities............................. 1,223 11 1,234
Marketable equity security.................................. 167 (141) 26
------- ----- -------
Total..................................................... $ 3,610 $(128) $ 3,482
======= ===== =======
Balance sheet classification:
AT DECEMBER 31, 1999:
Amounts included in cash and cash equivalents............... $17,834 $ 4 $17,838
Marketable securities....................................... 5,017 (9) 5,008
Investment in stock of related parties...................... 5,325 113 5,438
Other assets................................................ 1,925 (113) 1,812
------- ----- -------
Total..................................................... $30,101 $(118) $30,096
======= ===== =======
AT DECEMBER 31, 1998:
Amounts included in cash and cash equivalents............... $ 157 $ -- $ 157
Marketable securities....................................... 3,286 13 3,299
Other assets................................................ 167 (141) 26
------- ----- -------
Total..................................................... $ 3,610 $(128) $ 3,482
======= ===== =======
Available-for-sale securities at December 31, by contractual maturity, are
shown below (in thousands):
ESTIMATED FAIR
VALUE
-------------------
1999 1998
-------- --------
Debt securities
Due in one year or less.................................. $22,846 $1,391
Due after one year through three years................... 1,753 2,065
------- ------
24,599 3,456
Marketable equity securities............................... 5,497 26
------- ------
Total.................................................... $30,096 $3,482
======= ======
Realized gains and losses on the sale of available-for-sale securities for
the years ended December 31, 1999 and 1998 were not material.
F-10
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY
COMMON STOCK
In September 1999, we issued 561,000 shares of unregistered common stock to
an institutional investor. As part of this transaction we also issued to the
investor three-year warrants to purchase 336,600 shares of our common stock at a
price of $20.00 per share. As partial compensation to the placement agent, we
issued 30,855 five-year warrants to purchase unregistered common stock at $20.00
per share. After deducting $500,000 in commissions and fees from the gross
proceeds of $9,099,000, the net proceeds from this transaction totaled
$8,599,000.
In September 1999, we issued 469,819 shares of unregistered common stock to
a group of institutional investors. As part of this transaction we also issued
to the investors three-year warrants to purchase 140,946 shares of our common
stock at a price of $22.50 per share. Additionally, the investors were issued
two-year warrants to purchase an aggregate of 140,946 shares of our common
stock, with 46,981, 46,981 and 46,984 warrants having exercise prices of $30,
$45 and $60 per share, respectively. As partial compensation to the placement
agent, we issued five-year warrants to purchase 26,161 shares of our common
stock at $22.075 per share. After deducting $495,000 in commissions and fees
from the gross proceeds of $8,250,000, the net proceeds from this transaction
totaled $7,755,000.
In September 1999, we issued 64,243 shares of unregistered common stock to
an institutional investor. As part of this transaction we also issued three-year
warrants to purchase 19,273 shares of our common stock at a price of $22.1875
per share. Additionally, the investor was issued two-year warrants to purchase
an aggregate of 19,273 shares of our common stock, with 6,244, 6,244 and 6,245
warrants having exercise prices of $30, $45 and $60 per share, respectively. As
partial compensation to the placement agent, we issued five-year warrants to
purchase 3,975 shares of our common stock at $22.01 per share. After deducting
$75,000 in commissions and fees from the gross proceeds of $1,250,000, the net
proceeds from this transaction totaled $1,175,000.
In August 1999, we issued 463,600 shares of registered common stock to an
institutional investor. As part of this transaction we also issued to the
investor three-year warrants to purchase 231,800 shares of common stock at a
price of $18.00 per share and granted registration rights in connection with
these warrants. As partial compensation to the placement agent, we issued 25,498
five-year warrants to purchase unregistered common stock at $18.00 per share.
After deducting $414,000 in commissions and fees from the gross proceeds of
$7,520,000, the net proceeds from this transaction totaled $7,106,000.
In May 1999, we issued 1,000,000 shares of registered common stock to an
institutional investor, for net proceeds totaling $9,728,000. In June 1999, we
issued 200,000 shares of registered common stock to two institutional investors.
The net proceeds from these two institutional investors totaled $2,080,000.
The stock issuance transactions noted above reflected discounts to the
market price of our stock at the transaction dates. These discounts resulted
from prior discussions with the investors and the selling prices per share were
based on a negotiated average market price. We believe that the selling prices
were reasonable in light of the volatility of our stock price, the magnitude of
the transactions, and our capital needs.
In December 1998, we closed a private placement and issued 460,000 shares of
unregistered restricted common stock for net proceeds of $2,632,000. We granted
registration rights in connection with this transaction. This transaction
reflected a discount of 4% to a weighted average stock price for
F-11
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
a specific period of time prior to the purchase. The method of calculation of
the purchase price and the related discount resulted from arms-length
negotiations with the purchaser, an institutional investor.
In December 1997, we entered into an agreement to acquire certain
intellectual property rights related to a compound in development in exchange
for shares of unregistered restricted common stock and $50,000 in cash. We did
not grant registration rights in connection with this transaction. In March
1998, this agreement was finalized and we issued 74,416 shares of unregistered
restricted common stock.
In September 1997, we issued 183,458 shares of unregistered restricted
common stock to acquire exclusive worldwide rights to a patented anticancer
compound, rubitecan. We did not grant registration rights in connection with
this transaction.
In August 1997, we closed a private placement for approximately $9.8
million. We issued a total of 888,907 shares of unregistered restricted common
stock for this placement in September and October 1997. We did not grant
registration rights in connection with this transaction. This transaction
reflected a discount of approximately 20% to the market price of our stock at
the time of the offering.
In August 1997, we executed a definitive agreement with Israel Chemicals
Ltd. ("ICL"), our largest stockholder at that time, and repurchased 740,000 of
the 2,571,000 shares of common stock then held by ICL for $10.63 per share, or a
total of $7.9 million, plus transaction costs. Under the terms of the agreement,
ICL relinquished all of its international marketing rights to our products and
released us from all residual obligations remaining from their strategic
investment in us.
In June 1997, we entered into an agreement with Tako Ventures, LLC ("Tako"),
an investment entity controlled by Lawrence J. Ellison, Founder and Chairman of
Oracle Corporation, for a private placement of unregistered restricted common
stock. Under this agreement, Tako purchased 1,700,000 shares of unregistered
restricted common stock in July 1997 for $15.3 million and was issued an option,
which it exercised in November 1997, to purchase 850,000 additional shares of
unregistered restricted common stock at $9.00 per share. Related offering costs
were $268,000. In connection with the purchases of stock under this agreement:
- Tako received warrants to acquire up to an additional 1,275,000 shares of
unregistered common stock at $13.50 per share. These warrants will expire
in June 2007.
- Tako received registration rights covering the shares issued and issuable
in connection with this agreement.
- For a period of five years from the date of the purchase Tako is subject
to restrictions regarding sales of the shares issued or issuable in
connection with this agreement.
- Mr. Ellison was granted a seat on our board of directors.
This agreement contains provisions regarding sales or issuances of stock
below a set minimum price of $9.00 per share during a two-year period commencing
June 1997. Sales or issuances of stock below the set minimum price would result
in adjustments to the exercise price of the Tako warrants and the issuance of
additional shares of common stock, at no cost to Tako. As the sales price of the
shares sold in the December 1998 private placement was below the set minimum
price, we issued an additional 107,333 shares to Tako and reduced the warrant
exercise price for 230,000 shares from $13.50 to $10.35.
F-12
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
The initial purchase of shares under this agreement reflected a discount to
market of approximately 20%. We have calculated the aggregate value of the
options and warrants issued in this transaction, using the Black Scholes
valuation model, to be approximately $6.7 million.
The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options and warrants that are fully transferable. The
options and warrants issued to Tako have characteristics significantly different
than those of traded options and warrants. In addition, valuation models such as
the Black-Scholes model require the input of highly subjective assumptions
including the expected stock price volatility. The significant inputs we used in
this valuation were volatility of 0.6, expected life of seven years, and a
risk-free interest rate of 4.5%. Changes in the subjective input assumptions can
materially affect the estimate of fair value of options and warrants. Therefore,
in our opinion, existing valuation models do not necessarily provide a reliable
single measure of the fair value of the option and warrants issued in this
transaction.
The stock purchase agreement with Tako also gave Tako certain rights to
participate in future sales of common stock at comparable terms and conditions.
In January 1999, Tako exercised its rights and purchased 61,350 shares of
unregistered common stock for a purchase price of $379,000, net of fees. Tako
was granted registration rights in connection with this transaction.
WARRANTS
At December 31, 1999, warrants to purchase the following shares of our
common stock were outstanding:
NUMBER OF SHARES EXERCISE PRICE ISSUE DATE EXPIRATION DATE
---------------- -------------- ---------- -----------------
Publicly traded....... 3,730,740 $ 9.00 1996 2001
220,124 18.18 1999 2001
Non-publicly traded... 99,050 5.00 1995 2000
278,500 7.20 1996 2001
1,045,000 13.50 1997 2007
230,000 10.35 1997 2007
500,000 11.00 1998 2004
1,143,575 12.00-655.31 1999 2001-2004
---------
Total................. 7,246,989
=========
In addition, upon exercise, the holders of the $7.20 warrants to purchase
278,500 shares will receive an additional warrant to acquire 278,500 shares at
$9.00 per share. These additional warrants will expire in 2001.
On September 20, 1999 we issued a notice of redemption of our 1996 publicly
traded $9.00 warrants. We will redeem any of these warrants that are outstanding
as of April 16, 2000 at a price of $0.25 per share. Under the terms of the
warrant agreement defining the rights of these warrants, all rights of warrant
holders other than the right to receive the redemption price per warrant equal
to $0.25 per warrant will terminate from and after April 16, 2000.
F-13
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
SHARES RESERVED FOR FUTURE ISSUANCE
We have reserved shares of common stock for future issuance as follows:
DECEMBER 31,
---------------------
1999 1998
--------- ---------
Stock options outstanding.............................. 3,359,963 3,232,176
Stock options, available for grant..................... 114,115 191,968
Warrants to purchase common stock...................... 7,246,989 5,623,563
Shares available for Employee Stock Purchase Plan...... 60,674 83,869
4. STOCK OPTION PLANS
We have 4,400,000 shares of common stock authorized for issuance upon the
grant of incentive stock options or nonstatutory stock options to employees,
directors, and consultants under our stock option plans. The number of shares to
be purchased, their price, and the terms of payment are determined by our Board
of Directors, provided that the exercise price for incentive stock options
cannot be less than the fair market value on the date of grant. The options
granted generally expire ten years after the date of grant and become
exercisable at such times and under such conditions as determined by the Board
of Directors (generally over a four or five year period).
A summary of our stock option activity and related information follows:
OPTIONS OUTSTANDING
-------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE FAIR
NUMBER OF EXERCISE OPTIONS VALUE AT
SHARES PRICE EXERCISABLE GRANT DATE
--------- -------- ----------- ------------
Balance at January 1, 1997....................... 1,906,000 $ 5.46 882,062
Granted at fair value............................ 949,000 14.65 $7.53
Exercised........................................ (161,250) 3.38
Forfeited........................................ (51,686) 11.50
---------
Balance at December 31, 1997..................... 2,642,064 8.80 1,384,425
Granted at fair value............................ 759,898 8.76 4.60
Exercised........................................ (134,489) 1.43
Forfeited........................................ (35,297) 10.40
---------
Balance at December 31, 1998..................... 3,232,176 9.08 1,825,972
Granted at fair value............................ 657,353 14.77 8.95
Granted at less than fair value.................. 124,000 12.56 8.76
Exercised........................................ (557,233) 6.68
Forfeited........................................ (96,333) 8.41
---------
Balance at December 31, 1999..................... 3,359,963 $10.72 2,113,791
=========
F-14
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTION PLANS (CONTINUED)
Information concerning the options outstanding at December 31, 1999 is as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING NUMBER EXERCISE
RANGE NUMBER PRICE CONTRACTUAL LIFE EXERCISABLE PRICE
- ----- --------- -------- ---------------- ----------- --------
$0.135 to $5.875........................ 681,386 $ 4.71 6.55 486,908 $ 4.43
6.00 to 6.50........................... 607,577 6.09 6.69 541,041 6.04
6.56 to 12.00.......................... 599,701 9.40 8.39 231,916 10.01
12.06 to 14.75......................... 640,699 13.47 7.50 451,229 13.44
14.94 to 17.50......................... 617,500 15.69 7.99 397,747 15.61
18.00 to 31.81......................... 213,100 24.14 9.84 4,950 21.37
--------- ---------
$0.135 to $31.81........................ 3,359,963 $10.72 7.55 2,113,791 $ 9.52
========= =========
During the year ended December 31, 1999, in connection with the grant of
certain stock options to employees and officers, we recorded deferred stock
compensation for financial statement reporting purposes of $947,000,
representing the difference between the exercise price and the deemed fair value
of our common stock for financial reporting purposes on the date the stock
options were granted. Deferred compensation is included as a component of
stockholders' equity and is being amortized to expense on a straight line basis
over four years, the vesting period of the options. During the year ended
December 31, 1999, we recorded amortization of deferred stock compensation
expense of $112,000.
Pro forma information regarding net loss and net loss per share is required
by FASB Statement 123. We calculated this pro-forma information using the fair
value method of accounting for employee stock options under that Statement. We
estimated the fair value for these options at the date of grant using the
Black-Scholes option valuation model with the following assumptions:
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Risk-free interest rate................................... 5.34% 5.39% 6.34%
Dividend yield............................................ -- -- --
Expected volatility....................................... 0.7 0.6 0.6
Expected life (in years).................................. 4.9 4.4 4.4
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting requirements and are fully
transferable. Employee stock options have characteristics significantly
different than those of traded options. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility, and changes in the subjective input assumptions can materially
affect the estimate of fair value of an employee stock option. Therefore, in our
opinion, existing option valuation models do not necessarily provide a reliable
single measure of the fair value of our employee stock options.
F-15
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTION PLANS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Pro forma net loss (in thousands).............. $(43,836) $(19,073) $(18,332)
Pro forma loss per share....................... (1.88) (0.94) (0.98)
5. ACQUISITION ACTIVITY AND RELATED IN-PROCESS RESEARCH AND DEVELOPMENT
SPARTA PHARMACEUTICALS, INC.
In August 1999, we completed our acquisition of Sparta
Pharmaceuticals, Inc., a biopharmaceutical company engaged in developing
technologies and drugs for the treatment of a number of life-threatening
diseases, including cancer, cardiovascular disorders, chronic metabolic
diseases, and inflammation.
On the effective date of the merger, Sparta became a wholly-owned subsidiary
of the Company. The Company issued 429,082 shares of its common stock, with a
fair value of $7,800,000, and 220,945 common stock warrants, with a fair value
of $1,558,000, to former Sparta stockholders. The Company assumed approximately
2.9 million options and warrants to purchase Sparta common stock and converted
such options to SuperGen options and warrants to acquire approximately 110,600
shares of SuperGen common stock. The $12,000 value of the options assumed is
included in the purchase price and as a component of stockholders' equity in the
consolidated financial statements. Additionally, the Company recorded
transaction related costs of approximately $262,000, which when aggregated with
the above consideration brings the total cost of the acquisition to $9,632,000.
The acquisition has been accounted for by the purchase method of accounting
and, accordingly, the results of operations of Sparta for the period from August
12, 1999 are included in the accompanying consolidated financial statements.
Assets acquired and liabilities assumed have been recorded at their estimated
fair values. Approximately $7,450,000 of the purchase price was allocated to
acquired in-process research and development ("IPR&D"). The Sparta research and
development programs currently in process were valued as follows:
Oral anticancer drug for the treatment of breast, colorectal
and other cancers (5-FP, a prodrug of 5-FU)............... $3,430,000
Chronic metabolic disease drug (PZG)........................ 1,380,000
Spartaject method for the delivery of certain anti-cancer
compounds................................................. 2,640,000
----------
$7,450,000
==========
Acquired in-process research and development represents the value assigned
in a purchase business combination to research and development projects of the
acquired business that were commenced but not yet completed at the date of
acquisition and which, if unsuccessful, have no alternative future use in
research and development activities or otherwise. In accordance with Statement
of Financial Accounting Standards No. 2 "Accounting for Research and Development
Costs," as interpreted by FASB Interpretation No. 4, amounts assigned to
acquired in-process research and development meeting the above criteria must be
charged to expense at the date of consummation of
F-16
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITION ACTIVITY AND RELATED IN-PROCESS RESEARCH AND DEVELOPMENT
(CONTINUED)
the purchase business combination. Accordingly, we recorded a non-recurring
charge for this acquired in-process research and development at the date of
acquisition.
The allocation of the purchase price for Sparta resulted in goodwill of
approximately $1.4 million and intangibles and work force value of $500,000.
Goodwill and intangibles will be amortized over five years and work force value
over six months.
The following unaudited pro forma financial summary is presented as if the
operations of the Company and Sparta were combined as of January 1, 1999. The
unaudited pro forma combined results are not necessarily indicative of the
actual results that would have occurred had the acquisition been consummated at
that date, or of the future operations of the combined entities. Nonrecurring
charges, such as the acquired in-process research and development charge of
$7,450,000 are not reflected in the following pro forma financial summary:
PRO FORMA FINANCIAL SUMMARY
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
----------- ----------
(UNAUDITED)
(IN THOUSAND, EXCEPT PER
SHARE AMOUNTS)
Net sales.............................................. $ 5,032 $ 3,617
Net loss............................................... (31,514) (19,639)
Basic and diluted net loss per share................... $ (1.35) $ (0.96)
DECITABINE
In September 1999, we acquired the worldwide rights to decitabine, a
chemotherapeutic agent owned by Pharmachemie B.V., a subsidiary of Teva
Pharmaceuticals. Decitabine is a pyrimidine analog that has a mechanism of
action that is unique from other chemically related compounds, such as
gemcitabine and cytosine arabinoside. Decitabine's mechanism is related to DNA
hypomethylation. The FDA has not granted marketing approval to use decitabine
for the treatment of any disease.
The acquisition involved an exchange of 171,123 shares of unregistered
SuperGen common stock valued at $3,400,000, which we charged to IPR&D. In
assigning the purchase price to IPR&D, we considered, among other factors, our
intentions for the future use of the acquired project, its stage of completion,
the lack of alternative future uses of the technology, and that no other
tangible or intangible assets were acquired.
OTHER ACQUISITIONS
In December 1999, we entered into license and research agreements with the
Clayton Foundation for Research and its technology transfer organization,
Research Development Foundation. Under the terms of the agreements, we acquired
worldwide rights to inhaled versions of formulations of camptothecins, including
rubitecan, and taxanes, including paclitaxel (Taxol). The license rights were
acquired for 28,799 shares of common stock with an aggregate value of $916,000,
which we charged to research and development. The Clayton Foundation agreed to
perform the research in exchange for 36,130 shares of common stock. As the
research had not started as of December 31, 1999, the aggregate value of the
shares of $1,191,000 has been included in prepaid expenses and other current
assets.
F-17
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITION ACTIVITY AND RELATED IN-PROCESS RESEARCH AND DEVELOPMENT
(CONTINUED)
In July 1999, we acquired the Surface Safe product line from Aldorr Inc., a
medical technology development company. Surface Safe is a two-step towelette
disposable cleaning system used to decontaminate work surfaces where
chemotherapeutic preparation is conducted. Aldorr assigned us patents and
trademarks related to the Surface Safe product line and granted us an
irrevocable, exclusive, worldwide, perpetual and royalty-free license to use the
licensed know-how and any other intellectual property owned or licensed by
Aldorr related to the Surface Safe product line. Aldorr will provide technology
transfer assistance over a brief transitional period and has agreed not to
compete with us in this marketplace for a period of five years. We also obtained
a customer list from Aldorr. The aggregate value of the 79,546 shares of our
unregistered common stock paid to Aldorr was estimated to be $1,040,000, and was
allocated to the covenant not to compete, the customer list, trademark, and the
developed technology based on estimated fair values on the acquisition date. The
recorded assets will be amortized over five years.
In December 1997, we entered into an agreement to acquire certain
intellectual property rights related to a compound in development in exchange
for $1,000,000 in shares of unregistered SuperGen common stock (which was valued
at $750,000 for accounting purposes) and $50,000 in cash. We recorded the total
consideration as a charge to in-process research and development in 1997 and
issued 74,416 shares of unregistered common stock in March 1998.
In September 1997, we acquired exclusive worldwide rights to a patented
anticancer compound, rubitecan, from the Stehlin Foundation for Cancer Research
("Stehlin"). We paid consideration of $2,500,000 in shares of SuperGen common
stock (which constituted 183,458 shares of such stock, was valued at $1,875,000
for accounting purposes and was recorded as a charge for the acquisition of
in-process research and development). We also agreed to make monthly cash
payments to Stehlin of $100,000 until the earlier of the date of FDA marketing
approval of rubitecan or four years. We paid Stehlin $1,200,000 in 1999,
$1,300,000 in 1998, and $600,000 in 1997. Our agreement with Stehlin also calls
for additional payments in SuperGen common stock upon the achievement of
specified milestones and royalties on any product sales.
In November 1999, we amended our agreement with Stehlin to broaden the
definition of licensed compounds to include certain analogues of rubitecan.
Under these agreements, we increased our monthly cash payments to $200,000 and
are required to seek commercial applications for rubitecan. We are required to
pay the Stehlin Foundation approximately $10 million for research and must make
cash royalty payments and cash or stock milestone payments to the Stehlin
Foundation as we develop and commercialize rubitecan.
In May 1997, we entered into a supply agreement for an ongoing source of
bulk paclitaxel, an anticancer drug currently sold by Bristol-Myers Squibb
Company under the tradename Taxol. Under this agreement we paid $400,000 in 1997
and we charged that payment to research and development expense. We have no
further obligation to this supplier although we may purchase bulk paclitaxel
from them in the future.
In January 1997, we purchased from Immunex Corporation the rights to its
version of the generic anticancer drug etoposide. The acquisition included the
Abbreviated New Drug Application, Immunex's inventory of the product, records
relating to the production of etoposide, and data, information and know-how
relating to the manufacture, testing, storage and regulatory status of
etoposide. We paid approximately $1,315,000 in cash of which we allocated
$334,000 to inventory and $150,000 to
F-18
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITION ACTIVITY AND RELATED IN-PROCESS RESEARCH AND DEVELOPMENT
(CONTINUED)
developed technology. We recorded the remainder of the purchase price as a
charge for the acquisition of in-process research and development.
6. AGREEMENTS WITH ABBOTT LABORATORIES
In December 1999, we entered into agreements with Abbott Laboratories
("Abbott") under which Abbott will undertake to market and distribute our
products, and invest in shares of our common stock.
One agreement covers the development, marketing and distribution of
rubitecan. Under this agreement, we will co-promote rubitecan with Abbott within
the United States and Abbott has exclusive rights to market rubitecan outside
the United States. In the U.S. market, we will share profits from product sales
equally with Abbott. Outside of the U.S. market, Abbott will pay us royalties
and transfer fees based on product sales. We will remain responsible for
pursuing and funding the clinical development of rubitecan and to obtain
regulatory approval of the product in the United States, Canada and the member
states of the European Union. Abbott is responsible for obtaining regulatory
approval of the product in the other countries in the world. We will retain
responsibility for manufacturing, packaging, sterilization and labeling of the
product and Abbott shall be the exclusive distributor of the product throughout
the world.
In addition, under the agreements Abbott will purchase shares of our common
stock in an amount of up to $81.5 million in nine tranches over a period of time
and will make other cash payments to us which, when aggregated with the equity
investments, amount to approximately $150 million. The purchase price of the
common stock acquired by Abbott will be determined based on the market price of
our common stock on the purchase date. In January 2000, Abbott made a $26.5
million equity investment in connection with the first of the nine tranches.
Each subsequent equity investment and cash payment is conditioned upon the
achievement of certain regulatory and product sale milestones.
We also granted Abbott an option to purchase up to 49% of the shares of our
common stock outstanding at the time of the exercise. The exercise price is $85
per share, and the option expires in March 2003. Abbott's ability to exercise
the option is conditioned upon, among other things, the continued effectiveness
of the worldwide distribution agreement for rubitecan-related products. In
addition Abbott has a right of first discussion with respect to our product
portfolio and a right of first refusal to acquire us.
Under the terms of the December 1999 Nipent distribution agreement, Abbott
will become the exclusive U.S. distributor of Nipent for a period of five years.
We retain U.S. marketing rights for Nipent. In accordance with this agreement,
in January 2000, Abbott made a $5 million cash payment to the Company. This
amount is included in other accounts receivable and deferred revenue at
December 31, 1999.
7. RELATED PARTY TRANSACTIONS
In December 1999, we entered into an agreement with AVI BioPharma Inc.
("AVI") whereby we acquired one million shares of AVI common stock, which
amounted to approximately seven and one half percent (7.5%) of AVI's outstanding
common stock, for $2.5 million cash and 100,000 shares of our common stock at
$28.25 per share. As part of the agreement, we also acquired exclusive
negotiating rights through February 2000 for the United States market for
Avicine, AVI's proprietary
F-19
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
cancer vaccine currently in late-stage clinical testing against a variety of
solid tumors. Avicine is a non-toxic immunotherapy that neutralizes the effect
of a tumor-associated antigen on cancer cells, while stimulating the body's
immune system to react against the foreign tumor. The president of AVI is a
member of our Board of Directors. The president and chief executive officer of
SuperGen is a member of the Board of Directors of AVI.
In March 1999, we entered into a promissory note with Tako, whereby Tako
agreed to advance us up to $5,000,000 through December 31, 1999. Advances under
this agreement would be secured by substantially all our assets. In connection
with this transaction, we issued Tako a five-year warrant to acquire 500,000
shares of unregistered common stock at an exercise price of $11.00 per share. We
calculated the value of the warrant at $2,000,000 using the Black-Scholes
valuation model. In September 1999, we terminated this promissory note thereby
releasing any security interest that Tako had in our assets. The value of the
warrant was charged to expense in 1999.
At the beginning of 1998, we had consulting agreements with two
stockholders, who were both then directors of the Company. Both individuals
resigned their directorships in 1998 and we made no payments in 1998 pursuant to
their consulting agreements. In August 1997, we advanced $240,000 to one of
these individuals as payment for services to be performed under the terms of his
consulting agreement for the ensuing two years. Of the total payments made to
this director/stockholder in 1997 of $356,000, $156,000 was included in general
and administrative expenses. In September 1998, the Board of Directors
terminated this consulting agreement and forgave the amount due relating to
services not yet rendered, and we charged the remaining $200,000 to general and
administrative expense in 1998.
Formerly, two SuperGen directors were directors of a privately-held company
conducting research and development work partially funded by SuperGen. We
provided research funding to this company of $245,000 in 1998, and $325,000 in
1997. In addition, we own less than 1% of this company as of December 31, 1999
and 1998. We carry our investment in this company at no value.
At December 31, 1999 and 1998, we owned 10% of another privately-held
company performing research and development work almost exclusively for SuperGen
as well as selling SuperGen certain research supplies. We paid this company
$448,000 in 1999, $331,000 in 1998, and $464,000 in 1997 for services and
supplies. We carry our investment in this company at no value.
Two SuperGen director/stockholders are directors and stockholders of a
privately-held development stage biotechnology company headquartered in Israel.
In June 1997, we made an equity investment of $500,000 in this company's
preferred stock, which represents less than 1% of the outstanding shares as of
December 31, 1999. We carry our investment in this company at cost. In
November 1997, we leased approximately one-third of the laboratory square
footage at the SuperGen Pharmaceutical Research Institute to this company for
$3,000 per month for three years, plus its pro-rata share of specified common
expenses. We also completed certain building and laboratory improvements and
purchased furniture on behalf of this company for a total of approximately
$750,000, which is to be reimbursed. As of December 31, 1999 and 1998, $450,000
of the amount to be reimbursed was unpaid and is classified as due from related
party.
F-20
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
We lease our administrative facilities under a noncancelable operating
lease, which may be renewed for one period of five years. Future minimum rentals
under all operating leases with terms greater than one year are as follows (in
thousands):
YEAR ENDING DECEMBER 31,
- ------------------------
2000........................................................ $ 310
2001........................................................ 380
2002........................................................ 273
2003........................................................ 272
2004 and thereafter......................................... 723
------
$1,958
======
Rent expense was $283,000 in 1999, $259,000 in 1998, and $155,000 in 1997.
We maintain an employment contract with one key employee requiring payments
of $750,000 in 2000.
We also have entered into technology license agreements allowing us access
to certain technologies. These agreements generally require royalty payments
based upon the sale of approved products incorporating the technology under
license. No sales of such products have occurred as of December 31, 1999.
We have also entered into manufacturing and service agreements for certain
manufacturing services, the supply of research materials and the performance of
specified research studies. These agreements require payments based upon the
performance of the manufacturing entity, delivery of the research materials or
the completion of the studies.
9. INCOME TAXES
The significant components of our deferred tax assets at December 31 are as
follows (in thousands):
1999 1998
-------- --------
Net operating loss carryforwards........................ $ 32,810 $ 16,140
Purchased in-process technology......................... 1,720 1,930
Research and development credit carryforwards........... 2,370 1,090
Capitalized research and development.................... 5,260 920
Other................................................... 220 50
-------- --------
Total deferred tax assets............................... 42,380 20,130
Valuation allowance..................................... (42,380) (20,130)
-------- --------
Net deferred tax assets................................. $ -- $ --
======== ========
The valuation allowance increased by $22,250,000 during 1999, and by
$6,030,000 during 1998.
As of December 31, 1999 we had net operating loss carryforwards for federal
income tax purposes of approximately $94,000,000 expiring in the years 2008
through 2019. At December 31, 1999, we had
F-21
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
research and development credit carryforwards for federal income tax purposes of
approximately $1,800,000 which expire in the years 2008 through 2014.
Because of the "change in ownership" provisions of the Tax Reform Act of
1986, utilization of certain of our tax net operating loss carryforwards and tax
credit carryforwards are subject to an annual limitation. As a result of the
annual limitation, a portion of these carryforwards will expire before
ultimately becoming available to reduce future income tax liabilities.
10. EMPLOYEE BENEFIT PLANS
In December 1996, we adopted a 401(k) Profit Sharing Plan (the "401(k)
Plan") for all eligible employees with over six months of service. We may be
obligated to make contributions to the plan to comply with statutory
requirements. Voluntary employee contributions to the 401(k) Plan may be matched
50% by the Company, up to 3% of each participant's annual compensation. Our
expense relating to contributions made to employee accounts under the 401(k)
Plan was approximately $120,000 in 1999, $102,000 in 1998, and $97,000 in 1997.
In May 1998 we established the 1998 Employee Stock Purchase Plan ("ESPP")
and reserved 100,000 shares of common stock for issuance thereunder. Employees
participating in the ESPP are granted the right to purchase shares of common
stock at a price per share that is the lower of:
- 85% of the fair market value of a share of common stock on the first day
of an offering period or,
- 85% of the fair market value of a share of common stock on the last day of
that offering period.
In 1999, we issued 9,022 and 14,173 shares through the ESPP at $15.19 and
$6.38, respectively. In 1998, we issued 16,131 shares through the ESPP at $6.38
per share.
11. SUBSEQUENT EVENT
On February 18, 2000, we entered into an agreement with AMUR
Pharmaceuticals, Inc. ("AMUR") to purchase their patents and patent applications
in exchange for 15,000 shares of our common stock and 200,000 warrants to
purchase our common stock. The warrants have a term of two years and an exercise
price of $40.00 per share. The transaction is subject to several conditions,
including our board approval and AMUR board and shareholder approval.
F-22
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 on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, on this
16th day of March, 2000.
SUPERGEN, INC.
By: /s/ JOSEPH RUBINFELD
-----------------------------------------
Joseph Rubinfeld
CHIEF EXECUTIVE OFFICER, PRESIDENT AND
DIRECTOR
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each such person whose signature
appears below constitutes and appoints, jointly and severally, Joseph Rubinfeld
and Ronald H. Spair, his attorneys-in-fact, each with the power of substitution,
for him in any and all capacities, to sign any amendments 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 do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
Chief Executive Officer,
/s/ JOSEPH RUBINFELD President and Director
------------------------------------------- (Principal Executive March 16, 1999
(Joseph Rubinfeld) Officer)
/s/ RONALD H. SPAIR Chief Financial Officer
------------------------------------------- (Principal Financial and March 16, 1999
(Ronald H. Spair) Accounting Officer)
/s/ DENIS BURGER
------------------------------------------- Director March 16, 1999
(Denis Burger)
/s/ LAWRENCE J. ELLISON
------------------------------------------- Director March 16, 1999
(Lawrence J. Ellison)
/s/ WALTER J. LACK
------------------------------------------- Director March 16, 1999
(Walter J. Lack)
/s/ JULIUS A. VIDA
------------------------------------------- Director March 16, 1999
(Julius A. Vida)
/s/ DANIEL ZURR
------------------------------------------- Director March 16, 1999
(Daniel Zurr)
S-1