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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, 2000
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)
4140 DUBLIN BLVD., SUITE 200, DUBLIN, CA 94568
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (925) 560-0100
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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 ($18.18 PER SHARE)
(Title of Class)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 15, 2001) was approximately $297,608,035. 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 15, 2001 was 33,448,945.
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, 2001.
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SUPERGEN, INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II
Item 5. Market for Registrant's Common Equity and Related 20
Stockholder Matters.......................................
Item 6. Selected Financial Data..................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition 22
and Results of Operations.................................
Item 7A. Quantitative and Qualitative Disclosures About Market 36
Risk......................................................
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements with Accountants on Accounting 36
and Financial Disclosure..................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 37
Item 11. Executive Compensation...................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and 37
Management................................................
Item 13. Certain Relationships and Related Transactions.............. 37
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 37
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, SUCH AS THE TIMING OF FILING OF A NEW DRUG APPLICATION FOR
RUBITECAN, FUTURE PERFORMANCE OR RESULTS OF CURRENT AND ANTICIPATED CLINICAL
TRIALS, PROSPECTIVE PRODUCTS AND THEIR POTENTIAL APPLICATIONS, PRODUCT
APPROVALS, SALES EFFORTS, OUR ESTIMATES OF POTENTIAL MARKET SIZES, 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. FOR EXAMPLE, WE MAY EXPERIENCE UNFORESEEN DELAYS
OR COMPLICATIONS IN CONNECTION WITH OUR RUBITECAN AND OTHER TRIALS AND THE
RELATED FILING OF NEW DRUG APPLICATIONS FOR THESE COMPOUNDS. 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.
1
- 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
result in products with improved delivery and/or administration. The
development of these products is subject to the New Drug Application
("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.
SUMMARY OF PRODUCTS AND PRODUCTS IN DEVELOPMENT
The following table outlines our cancer products and cancer products in
development, their indication or intended use, their therapeutic category, and
their regulatory status. (Non-oncological products are summarized in text
below):
THERAPEUTIC REGULATORY
PRODUCT CATEGORY COMPOUND INDICATION OR INTENDED USE CATEGORY STATUS
- ------------------- -------------------- ---------------------------- -------------- -----------
Cytotoxic Agent Rubitecan Pancreatic cancer Cancer Phase III
(Oral) Myelodysplastic syndromes/ Cancer Phase II
Acute myeloid leukemia/
Chronic myeloid leukemia
Various other solid tumors Cancer Phase I/II
Cytotoxic Agent/ Nipent-Registered Trademark- Hairy cell leukemia Cancer Approved
Immunosuppressant Cutaneous T-cell lymphoma/ Cancer Phase IV
Peripheral T-cell lymphoma
Chronic lymphocytic leukemia Cancer Phase IV
Low grade non-Hodgkin's Cancer Phase IV
lymphoma
Graft-versus-host disease Immunological Phase
II/III
Rheumatoid arthritis Immunological Phase I
Hypomethylating Decitabine Myelodysplastic Cancer Phase III
Agent syndromes
Acute myeloid leukemia/ Cancer Phase II
Chronic myeloid leukemia
Non-small cell lung cancer Cancer Phase I/II
Sickle cell anemia Hematological Phase I/II
Vaccine Avicine-TM- Colorectal cancer Cancer Phase III
Stem Cell Purging 4-HC PBPC transplants in Acute Cancer Phase
Agent myeloid leukemia II/III
Radio-sensitizers Lucanthone Brain tumors Cancer Phase I
IPdR Solid tumors Cancer Phase I
Prodrugs 5-FP Solid tumors Cancer Phase I
CZ 112 Solid tumors Cancer Phase I
IPdR Solid tumors Cancer Phase I
Formulation Spartaject busulfan Neoplastic meningitis Cancer Phase I
Technologies Spartaject rubitecan Solid tumors Cancer Pre-clinical
Mito Extra Solid tumors Cancer NDA filed
Cremophor-free Solid tumors Cancer Pre-clinical
paclitaxel
Inhaled paclitaxel Solid tumors Cancer Pre-clinical
2
THERAPEUTIC REGULATORY
PRODUCT CATEGORY COMPOUND INDICATION OR INTENDED USE CATEGORY STATUS
- ------------------- -------------------- ---------------------------- -------------- -----------
Inhaled rubitecan Solid tumors Cancer Phase I
Generic Anti-Cancer Mitomycin Solid tumors Cancer Approved
Agents Paclitaxel Solid tumors Cancer ANDA filed
Daunorubicin Solid tumors Cancer ANDA filed
Anti-angiogenesis VEGF Solid tumors Cancer Pre-clinical
ONCOLOGY PRODUCTS AND PRODUCTS IN DEVELOPMENT
1. 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, efficacy, 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 franchise drug for leadership in the
treatment of a broad array of solid tumors and hematological malignancies. We
are seeking rapid development of rubitecan and anticipate expedited review by
the United States Food and Drug Administration ("FDA") of the drug for
pancreatic cancer, for which there are limited 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 ("5-FU") and Gemzar.
In May 2000, we presented data from a Phase II study of rubitecan at a
meeting of the American Society of Clinical Oncology ("ASCO"). This data
demonstrated rubitecan's efficacy in pancreatic cancer patients who had failed
previous chemotherapy. Of the 45 patients with measurable disease, one-third
either experienced a reduction in the size of their tumor, or disease
stabilization, meaning that the tumor did not continue to grow. Median survival
for these fifteen patients was approximately ten months, while thirty-six
percent of the patients survived more than twenty months after starting
rubitecan treatment.
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 1,600 patients
currently
3
enrolled. If any one of these trials is successful, we anticipate filing an NDA
with the FDA during the second half of 2001. The protocols are outlined as
follows:
MAXIMUM
PROTOCOLS PATIENTS
- ------------------------------------------------------------ --------
Rubitecan or Gemzar in patients who have not undergone
chemotherapy 1,000
Rubitecan or 5-FU in patients who have failed Gemzar
(enrollment completed) 400
Rubitecan or other therapies in patients who have failed
other prior therapies 400
MYELODYSPLASTIC SYNDROMES
Myelodysplastic syndromes ("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 current standard of care 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 and acute myeloid 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 registration seeking study.
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 more than 25 additional Phase
I/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 chemotherapeutic 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.
2. Nipent
Nipent, generically known as pentostatin or deoxycoformycin, inhibits a key
enzyme in the DNA synthesis process and results in cytotoxicity, primarily in
lymphocytes. The specific mechanism differs from other chemotherapy agents.
Nipent's most unique feature is its selectivity for lymphocytes, with little
effect on bone morrow or normal tissues, which creates an interest in this
product for the treatment of cancers of the lymphoid system and other
hematologic malignancies.
HAIRY CELL LEUKEMIA
We acquired Nipent from the Parke-Davis division of the Warner-Lambert
Company (now Pfizer) 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
4
least October 2004. We did not receive any revenue from international sales in
2000. 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 IV 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, bone marrow transplantation, and rheumatoid arthritis. We estimate
the United States markets for both graft-versus-host disease and rheumatoid
arthritis are larger than the market for Nipent's current applications. We are
conducting Phase I clinical trials in both of these indications and have
targeted acute graft-versus-host disease for a registration seeking Phase II/III
program currently in preparation. We are also developing an oral formulation of
Nipent, suitable for rheumatoid arthritis and other chronic immune disorders.
3. Decitabine
Decitabine is a potent hypomethylating agent which we acquired from
Pharmachemie B.V., a subsidiary of Teva Pharmaceuticals, in September 1999.
Decitabine is a pyrimidine analog that has a mechanism of action which is
different 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.
MYELODYSPLASTIC SYNDROMES
Researchers have shown decitabine to be effective in multiple Phase II
trials in the United States and Europe for treating myelodysplastic syndromes.
Based on positive results from these studies, we are currently initiating a
randomized Phase III study in 160 patients comparing decitabine to best
supportive care for MDS. The principal endpoints are time to acute myeloid
leukemia or death. This Phase III trial is designed to secure approval for this
indication. Decitabine has received orphan drug designation from the FDA for
MDS.
OTHER INDICATIONS
In addition to MDS, Phase I/II studies have shown that decitabine is
effective in a variety of other hematological malignancies such as acute myeloid
leukemia and chronic myeloid leukemia. Preliminary results also suggest activity
in solid tumors such as non-small cell lung cancer. Phase II clinical trials
with decitabine are underway for this indication. Phase I results also suggest
that decitabine may be applicable for treatment of non-malignant diseases such
as sickle cell anemia. Phase II clinical trials are underway for treatment of
sickle cell anemia using decitabine.
5
4. Avicine
In July 2000, we acquired the exclusive United States sales and marketing
rights to Avicine from AVI BioPharma, Inc. ("AVI"). Avicine is a therapeutic
cancer vaccine in late-stage clinical development, and has completed five
clinical studies in more than 200 patients.
COLORECTAL CANCER
Results from a Phase II human study using Avicine as a treatment for
advanced colorectal cancer showed that patients who responded to the peptides in
the vaccine, in the words of the study author, "exhibited significant survival
benefits" compared to patients treated with chemotherapy alone. With the
assistance of leading oncologists and the FDA, AVI has developed a Phase III
protocol for Avicine as a first-line treatment for metastatic colorectal cancer,
which is currently being initiated.
5. Lucanthone and 4-HC
Lucanthone is a topoisomerase II inhibitor that we licensed in May 2000 from
Dr. Robert Bases of the Albert Einstein College of Medicine. Researchers are
currently evaluating lucanthone as a radio-sensitizer in a Phase I study of
patients with brain tumors.
4-HC is a cyclophosphamide analogue which will be studied by the Eastern
Cooperative Oncology Group cooperative study group as a purging agent in acute
myeloid leukemia in a randomized double-blind placebo-controlled Phase III study
in 170 patients. This study is being funded by the National Cancer Institute
("NCI"). We have agreed to hold the Investigational New Drug application ("IND")
and provide drug supply for the study and would be in the position to file an
NDA if the results are favorable. The study is scheduled to start later in 2001.
6. Generic Anticancer Drugs
We have pursued development of generic versions of existing anticancer
agents as part of our Extra product development efforts. To date, we have
received Abbreviated New Drug Application ("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.
PACLITAXEL
We filed an ANDA for generic paclitaxel with the FDA in August 1998 and
filed responses to a letter from the FDA concerning our application in
October 2000. We anticipate an approval later in 2001.
DAUNORUBICIN
We filed an ANDA for generic daunorubicin with the FDA in December 1998. We
filed responses to a letter from the FDA concerning our application in
February 2001 and are awaiting a response.
6
FORMULATION TECHNOLOGY, PRODRUGS, AND OTHER PRODUCTS
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 result in products with improved delivery and/or
administration. The development of these products is subject to the NDA approval
process.
1. 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.
2. Spartaject-TM- 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 PRODUCTS 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 both Johns Hopkins Oncology Center and Duke University
Medical Center. A Phase I clinical trial in pediatric bone marrow ablation was
initiated at St. Jude's Children's Hospital.
7
Spartaject busulfan is currently also being developed for intrathecal
treatment of neoplastic meningitis with a Phase I study ongoing at Duke
University Medical Center.
We are also developing Spartaject rubitecan, an intravenous formulation,
which is suitable for patients who cannot swallow an oral medication. This is
currently in pre-clinical phase.
3. 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 radio sensitizing drugs previously available only in
intravenous form.
PRODRUG DELIVERY PRODUCTS
- CZ 112 is an oral prodrug for rubitecan we licensed from the Stehlin
Foundation in November 1999 after initial Phase I testing. We are
currently completing additional pre-clinical tumor model studies prior to
deciding further clinical development.
- 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 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.
4. Cremophor-Free Paclitaxel
In January and October 2000 we were issued two United States patents for a
Cremophor-free formulation of paclitaxel. We believe that these patents have
important clinical and strategic implications as such a formulation obviates the
need of pre-medication, which is currently required with the use of paclitaxel.
We believe that the lack of pre-medication will prove to be a major competitive
advantage in the paclitaxel market, which industry reports estimate to be
$1.6 billion.
5. Inhaled Cancer Drugs
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 paclitaxel and
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.
6. Surface Safe-Registered Trademark-
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
8
decontaminate any work surface where chemotherapeutic preparation is conducted.
The first towelette contains chemicals recommended by the Centers for Disease
Control and the Occupational Safety Health Administration to clean work
surfaces. The second towelette is used to deactivate the chemicals used in the
first towelette, in order to prevent damage to work surfaces through its potent
oxidizing process. We launched Surface Safe in the United States in March 2001
and intend to launch the product in other countries in the near future.
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:
1. Abbott Laboratories
In December 1999, we entered into three agreements with Abbott Laboratories
("Abbott") under which Abbott will undertake to market and distribute our
products, Nipent and rubitecan, 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 United States market, we will share profits from
product sales equally with Abbott. Outside of the United States 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 is obligated to purchase shares of
our common stock in an amount of up to $81.5 million in nine tranches over a
period of time. In addition, Abbott is obligated to 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 Nipent distribution agreement, beginning March 1,
2000, Abbott became the exclusive United States distributor of Nipent for a
period of five years. We retain United States marketing rights for Nipent. In
accordance with this agreement, in January 2000, Abbott made a $5 million cash
payment to us in connection with the granting of the exclusive distribution
rights.
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2. Stehlin Foundation for Cancer Research--Rubitecan
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.
3. AVI BioPharma, Inc.--Avicine
In July 2000, we finalized an agreement with AVI BioPharma, Inc. to obtain
the United States marketing rights for Avicine, AVI's proprietary 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. Avicine has completed five clinical
studies in more than 200 patients.
Under the terms of the agreement, we will be responsible for United States
marketing and sales of Avicine, and AVI will be responsible for product
manufacturing. In addition, we obtained the right of first discussion with
respect to all of AVI's oncology compounds. Both companies will share clinical
development and regulatory costs for the FDA approval process, and profits will
be split equally. SuperGen and AVI will jointly determine the optimum
development strategy for the international marketplace and will share all
profits received.
We made equity investments totaling $22 million in AVI in the form of cash
and SuperGen common stock. As part of the agreement, we have an option to
acquire an additional 10% of AVI's common stock. This option is exercisable for
a three-year period commencing on the earlier of the date the FDA accepts the
NDA submitted for Avicine, or the date on which the closing price of AVI's
common stock exceeds the option exercise price.
4. Peregrine Pharmaceuticals--VEGF (Anti-Angiogenesis)
In February 2001, we completed a transaction to license a platform
drug-targeting technology known as Vascular Targeting Agent ("VTA") from
Peregrine Pharmaceuticals, formerly known as Techniclone Corp. The licensed
technology is specially related to Vascular Endothelial Growth Factor ("VEGF").
Terms of the agreement include an up-front equity investment in Peregrine of
$600,000 and subsequent milestone payments, that ultimately could total
$8 million. In addition, we will pay royalties to Peregrine based on the net
revenues of any drugs commercialized using the VEGF technology.
The VTA technology is a proprietary platform designed to specifically target
a tumor's blood supply and subsequently destroy the tumor with various attached
therapeutic agents.
Dr. Phillip Thorpe, Professor of Pharmacology at the University of Texas,
Southwestern Medical Center, and the inventor of the VTA technology, has
demonstrated proof of principle with this technology in several animal models.
The results of Dr. Thorpe's studies have been published in several peer-reviewed
scientific journals. The next step in the development process is filing an IND
application based on Dr. Thorpe's study data.
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5. Non-Oncology Proprietary Products
We are currently seeking strategic alliances and licensing agreements for
further development of certain non-oncology products, including RF 1010, RF
1051, pyrazinoylguanidine ("PZG"), AM 454, and SUPG032.
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 diabetes.
We have also recently acquired the intellectual property of AMUR
Pharmaceuticals, Inc. ("Amur"), a company with the proprietary rights to AM 454,
which can potentially prevent the onset of type 2 diabetes according to
pre-clinical animal studies, and rights to a 20K growth hormone, with potential
for treatment of type 2 diabetes. Amur's technology is based on a new
water-soluble class of hormones.
Another product in our portfolio is SUPG032, a recombinant human protein
currently in pre-clinical phase, that has shown activity against reperfusion
injury.
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 pre-clinical 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 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.
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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 pre-clinical phase.
PRE-CLINICAL TESTING. During the pre-clinical 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 ("GLP"), regulations.
INVESTIGATIONAL NEW DRUG APPLICATION. During the pre-clinical 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 ("GCP") regulations.
In addition, an Institutional Review Board ("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.
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
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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.
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
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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 ("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 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.
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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 pre-clinical
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 27 employees focused on sales and marketing of our
products to cancer hospitals and clinics in the United States. The large
majority of these hospitals are members of hospital buying groups. We have
focused our efforts on selling to these groups since they control a significant
majority of the 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.
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
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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 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 Good Manufacturing Practices ("GMP's") before production of active
pharmaceutical ingredients, finished pharmaceuticals, or proprietary and generic
drugs for commercial sale may begin. Once a 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 outside
vendors for distribution to our customers.
We have entered agreements with a domestic entity for the future production
of our generic compounds 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 one of 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 and commercial distribution of mitomycin for injection.
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.
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
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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, Berlex, Bristol-Myers Squibb, Immunex, and others. 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.
EMPLOYEES
As of December 31, 2000, we had 91 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."
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EXECUTIVE OFFICERS AND MANAGEMENT TEAM
Our current executive officers and their ages are as follows:
NAME AGE POSITION
- ---- -------- ------------------------------------------
Chief Executive Officer, President and
Joseph Rubinfeld, Ph.D.................... 68 Director
Senior Vice President, Chief Medical
Karl L. Mettinger, M.D., Ph.D............. 57 Officer
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.
KARL METTINGER, M.D., PH.D., joined SuperGen in August 2000 as Senior Vice
President and Chief Medical Officer. Prior to coming to SuperGen, Dr. Mettinger
was at IVAX Corporation/Baker Norton Pharmaceuticals for 11 years, where he
served in a number of senior management positions, including Executive Director,
Clinical Research; Senior Director, Clinical Research; and, Medical Director.
Prior to IVAX, Dr. Mettinger was Deputy General Manager and Medical Director of
Hematology Operations at KABI (currently Pharmacia). He was also an associate
professor at the Karolinska Institute in Stockholm. Dr. Mettinger obtained his
medical training at the University of Lund, and his Ph.D. in Hematology at the
Karolinska Institute.
18
In addition, our management team includes the following individuals, with
their relevant experience and years of industry service:
NAME TITLE EXPERIENCE
- ----------------------------- ----------------------------- -----------------------------
Frank Brenner V.P., National Accounts Adria Laboratories, Lederle
International, Cetus
Corporation--26 years
L. Robert Cohen V.P., Investor Relations and Pfizer, Johnson & Johnson,
Finance Prudential-Bache
Securities--32 years
Timothy Enns V.P., Marketing Upjohn, Adria, Sequus--20
years
Ashok Gore, Ph.D. V.P., Pharmaceutical Bristol-Myers Squibb,
Operations Smithkline Beecham, Knoll
Pharmaceuticals--31 years
Frederick Grab, Ph.D. V.P., Compliance and Bristol-Myers Squibb, Adria
Regulatory CMC Laboratories, Wyeth
Laboratories--32 years
Audrey Jakubowski, Ph.D. V.P., Regulatory Affairs Bristol-Myers Squibb,
DuPont--22 years
Samuel Jason, CPA Controller Coopers & Lybrand, Viacom,
Mervyn's-- 20 years
R. David Lauper, Pharm.D., V.P., Professional Services Bristol-Myers Squibb, Cetus-
FAPh.A. Chiron--26 years
Robert Marshall V.P., Sales OTN, IVEDCO, Syncor, Adria
Laboratories, NeoRx--30
years
Lawrence Romel V.P., Clinical Operations Onyx, Sequus, Neurex,
Kendall--20 years
Howard Sands, Ph.D. V.P., Pre-Clinical Research Sparta Pharmaceuticals,
DuPont--25 years
Simeon Wrenn, Ph.D. V.P., Biotechnology American Home Products,
American Cyanamid, Purdue
Frederick, Centocor--22
years
ITEM 2. PROPERTIES.
Our principal administrative facility is currently located in leased general
office space, containing approximately 50,000 square feet, in Dublin,
California, under a lease that expires in November 2010. Our laboratory
operations are located in an industrial building in Pleasanton, California. We
also possess a five year lease, commencing in July 2001, to a 10,000 square foot
office/warehouse space that is adjacent to our laboratory facility. We believe
the above properties are suitable for our operations in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are currently not subject to any material 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, 2000.
19
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
-------- --------
2000
Quarter ended March 31, 2000................................ $77.31 $27.50
Quarter ended June 30, 2000................................. 49.00 19.13
Quarter ended September 30, 2000............................ 39.00 17.38
Quarter ended December 31, 2000............................. 23.69 10.63
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 Smallcap Market
under the symbol "SUPGZ." The warrants have an exercise price of $18.18 per
share. The SUPGZ warrants will expire on August 12, 2001.
HOLDERS OF RECORD
As of March 15, 2001, there were 511 holders of record of the common stock
and approximately 23,000 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, 2000, we issued the following
securities:
- 46,613 shares of common stock in December 2000 to the Clayton Foundation
for Research, in connection with research agreements relating to inhaled
formulations of camptothecins, including rubitecan, and taxanes, including
paclitaxel.
The issuance of shares described above was made in reliance on a federal
registration exemption afforded under Section 4(2) of the Securities Act of
1933. 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 recipient of the securities that it purchased the
securities for investment for its 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.
20
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, 2000,
including subsequent exercises of warrants to purchase common stock, were
$63,397,000.
From March 13, 1996, the effective date of the registration statement for
the IPO, to December 31, 2000 (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.......................... 56,835,000
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.
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.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenue................................... $ 7,089 $ 4,744 $ 3,004 $ 1,802 $ 264
Net loss........................................ (35,283) (36,985) (15,577) (15,996) (8,758)
Basic and diluted net loss per share............ (1.04) (1.58) (0.77) (0.85) (0.55)
Total assets.................................... 163,333 53,478 19,793 30,772 17,936
Total stockholders' equity...................... 149,945 44,768 16,818 28,567 15,707
Long-term obligations........................... -- -- -- -- --
Cash dividends per share........................ -- -- -- -- --
21
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 $128.2 million for the
period from inception through December 31, 2000. These losses included non-cash
charges of $20.0 million for the acquisition of in-process research and
development.
During 2000, we significantly increased our cash, cash equivalents, and
marketable securities to approximately $131 million at December 31, 2000. We
raised approximately $61 million through a public offering of our common stock,
received over $31 million in connection with our corporate partnering
transactions with Abbott Laboratories, and received approximately $49 million
through the exercise of our publicly traded warrants issued at the time of our
initial public offering ("SUPGW" warrants), the related underwriters unit
purchase warrants, private warrants, and stock options.
The level of expenditures related to ongoing clinical trials has increased
significantly throughout the year as we expand the number of clinical trials and
increase the patient accrual into these trials. We expect to initiate additional
clinical trials during 2001 with rubitecan, Nipent, decitabine, and Avicine. To
support these additional trials, we expect to increase our clinical development
staff which, when combined with the increased clinical trial activity, will
result in increased costs over the level expended in 2000. During 2000 we added
four veteran medical and pharmaceutical executives to our clinical research
team: Karl L. Mettinger, M.D., Ph.D., as Senior Vice President, Chief Medical
Officer; Lawrence A. Romel as Vice President, Clinical Operations; Jorge F.
DiMartino, M.D., Ph.D., as Associate Director, Clinical Research; and Charlene
P. Holt, M.D., as Medical Director of Commercial Operations.
Our partner, AVI BioPharma, Inc. has informed us that they intend to
initiate a Phase III clinical trial with Avicine, their therapeutic vaccine for
colorectal cancer. We will share U.S. developmental and regulatory approval
costs for Avicine and upon commercialization in the U.S. we will split all U.S.
profits. AVI and SuperGen will jointly determine the optimum development
strategy for the international marketplace and will share all profits received.
In addition to up front equity investments totaling $22 million in cash and
SuperGen stock, we are obligated to make additional payments to AVI based on
successful achievement of developmental, regulatory approval, and
commercialization milestones over the next several years that could total
$80 million. As part of this agreement, we obtained the right of first
discussion to all of AVI's oncology compounds and an option to acquire an
additional 10% of AVI's common stock. Avicine will require significant
additional expenditures to complete the clinical development necessary to gain
marketing approval from the FDA and equivalent foreign regulatory agencies.
We also acquired all of the intellectual property of AMUR
Pharmaceuticals, Inc. during the third quarter of 2000 in exchange for a
combination of common stock and warrants to purchase common
22
stock. Amur's proprietary technology is based on a new water-soluble class of
hormones. Investigation of these hormones determined that a specific portion,
phosphocholine, confers water solubility to the hormones. Amur's previously
conducted research and development has shown that phosphocholine may be attached
to other compatible molecules representing a novel patented drug delivery
technology. We have recorded a $1,585,000 charge associated with this technology
acquisition in 2000.
Sales of Nipent during 2000 were significantly higher than 1999 levels
despite the absence of European sales in 2000. U.S. sales of Nipent in 2000
totaled approximately $5,794,000, compared to $2,983,000 in 1999.
In addition to the activities described above, we are pursuing the clinical
and regulatory development of our other product candidates internally and expect
to continue to incur operating losses at least through 2001. This is due
primarily to projected increases in our spending for the development of our
product candidates. 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 late 1999, we entered into an
alliance with Abbott Laboratories under which Abbott will undertake to market
and distribute rubitecan. 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.
At the end of 2000, we relocated our corporate headquarters from a 9,500
square foot office in San Ramon, California, to a newly-constructed office space
containing 50,000 square feet in Dublin, California.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Revenues were $7.1 million in 2000 compared to $4.7 million in 1999.
Revenues in 2000 included $5.8 million in sales of Nipent exclusively in the
U.S. marketplace. Worldwide Nipent revenues of $4.3 million in 1999 included
$3.0 million in U.S. sales and $1.3 million in sales to the European distributor
for Nipent. We have recorded no European sales in 2000. Unlike our Nipent sales
efforts in the U.S. market where we call on clinicians directly, our role in
Europe is currently limited to that of a supplier. As such, we do not have a
direct influence on Nipent sales at the clinical level, making their timing and
magnitude difficult to predict and dependent on the efforts of our European
distributor. Based on this existing relationship, it is our expectation that
current inventory levels at our distributor in Europe will continue to result in
low order requirements over the next several quarters. Revenues in 2000 also
included recognition of $833,000 in revenues related to the Nipent distribution
arrangement with Abbott Laboratories, recognition of $50,000 in revenue
associated with the completion of a clinical trial for busulfan in Europe, and
recognition of $103,000 in grant revenues from the National Institutes of
Health/National Cancer Institute relating to the development of IPdR.
Cost of sales as a percentage of net sales revenues was 27% in 2000 compared
to 43% in 1999. The improvement in cost of sales percentage was due primarily to
the absence in 2000 of sales to the European distributor for Nipent, as such
sales were made at a lower unit selling price under a supply agreement for sale
outside North America. Current margins may not be indicative of future margins
due to possible variations in average selling prices and manufacturing costs.
23
Research and development expenses were $31.4 million in 2000 compared to
$17.3 million in 1999. The increased expense was due primarily to a broader
clinical development program along with its associated costs, expansion of the
research and development staff, and a significant increase in the accrual rates
of patients into our ongoing clinical trials.
Selling, general and administrative expenses were $16.0 million in 2000
compared to $10.5 million in 1999. This increase was due primarily to costs
associated with the expansion of the sales, professional services, information
technology and general and administrative staffs together with increased costs
associated with trade shows, speakers' programs and symposiums, investor
relations, business development consulting and legal fees.
Acquisition of in-process research and development totaled $1.6 million in
2000 and resulted from the acquisition of the intellectual property of AMUR
Pharmaceuticals, Inc. In 1999, acquisition of in-process research and
development totaled $10.9 million, which included $7.5 million relating to the
acquisition of the drug candidates of Sparta Pharmaceuticals, Inc. and
$3.4 million relating to the license of decitabine from Pharmachemie.
Interest income was $8.2 million in 2000 compared to $1.0 million in 1999.
The increase was due to the greater cash balances available for investment as a
result of our Abbott corporate partnership, our March 2000 follow-on offering of
common stock, and the exercise of our SUPGW warrants and related underwriters'
unit purchase warrants that we issued in connection with our initial public
offering in 1996.
Amortization of loan commitment fees totaled $2.0 million in 1999. This
charge was related to a credit arrangement that existed during 1999. We had no
such credit arrangement in 2000 and consequently incurred no such charges during
the period.
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.
24
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
("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.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and both short and long term marketable
securities totaled $130.6 million at December 31, 2000, compared to
approximately $29.4 million at December 31, 1999. In January 2000, we received a
$26.5 million equity investment and a $5.0 million cash payment from Abbott.
During 2000, we raised approximately $61.3 million through a follow-on offering
of our common stock and we received $48.8 million through the exercises of our
publicly traded warrants, related underwriters' unit purchase warrants, private
warrants, and stock options.
The net cash used in operating activities of $26.1 million in 2000 primarily
reflected the net loss for the period of $35.3 million and the restriction of
$3.2 million as collateral for our building lease letter of credit, offset by
the receipt of $5.0 million from Abbott Laboratories relating to the Nipent
distribution agreement, non cash charges related to the acquisition of
in-process research and development of $1.6 million, and an increase in accounts
payable and other liabilities of $5.5 million.
In September 2000, our Board authorized a stock repurchase plan to acquire,
in the open market, an aggregate of up to one million shares of our common stock
at prices not to exceed $22 per share or $20 million in total. During the year
ended December 31, 2000, we repurchased 184,500 shares of common stock at a cost
of approximately $2.4 million. In March 2001, our Board authorized the
repurchase of up to two million shares under this plan.
We believe that our current cash, cash equivalents and marketable securities
will satisfy our cash requirements at least through December 31, 2002. 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 potentially enhance manufacturing capabilities;
- to repurchase shares of common stock under our stock repurchase plan; and
- to finance possible acquisitions of complimentary products, technologies
and businesses.
In addition to our commitments to develop rubitecan under our agreements
with Abbott, we are also obligated to potentially expend up to a total of
$88 million in milestone and development related payments to AVI and Peregrine
for development of Avicine and VEGF technologies. Our total commitments under
the lease for our new corporate headquarters totals $22 million.
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.
25
ACQUISITION OF IN-PROCESS RESEARCH AND DEVELOPMENT AND RELATED ASSETS
FACTORS CONSIDERED WHEN EVALUATING IPR&D
Acquired in-process research and development ("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, 2000
In September 2000, we acquired all of the intellectual property of Amur in
exchange for 37,795 shares of our common stock and two-year warrants to purchase
200,000 shares of our common stock at $40.00 per share. Amur's proprietary
technology is based on a new water-soluble class of hormones. Investigation of
these hormones determined that a specific portion, phosphocholine, confers water
solubility to the hormones. Amur's previously conducted research and development
has shown that phosphocholine may be attached to other compatible molecules
representing a novel patented drug delivery technology. We recorded a charge of
$1,585,000 in connection with this acquisition.
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.
The total cost of the acquisition was approximately $9.6 million, and
consisted of the issuance of 429,082 shares of our common stock and 220,945
common stock warrants to the former Sparta stockholders. 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
==========
- 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.
- Animal studies and early clinical studies of PZG suggest that it may help
to control the blood sugar and lipid abnormalities of diabetes.
26
- 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 an NDA 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.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, which is required to be adopted in years beginning after June 30, 2000.
Because of the Company's minimal use of derivatives, we do not anticipate that
the adoption of the new Statement will have a significant effect on our earnings
or the financial position.
RECENTLY ISSUED STAFF ACCOUNTING BULLETIN
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 provides guidance on the
recognition, presentation and disclosure of
27
revenue in financial statements, and is effective in the fourth quarter of 2000.
SAB 101 did not have a material impact on our results of operations, financial
position or cash flows for the year ended December 31, 2000.
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.
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
pre-clinical 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;
- failure of our contract research organization to devote sufficient time
and resources to our studies or to comply with strictly enforced GCP
standards or otherwise satisfy their contractual obligations;
- 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
28
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.
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;
- the contract research organization performing some of the clinical
research services for our rubitecan development program may fail to
perform its obligations under our agreements harming our clinical approval
activities;
- 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 a potential change in control under the rules of
the Nasdaq National Market; and
29
- 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 $128.2 million for the period from
inception through December 31, 2000. Currently we are not profitable and we
expect to continue to incur substantial operating losses at least through 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 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 to complete or expand our 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 2002. 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.
30
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 27 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.
OUR STRATEGIC RELATIONSHIPS WITH AVI AND PEREGRINE COULD CAUSE US TO EXPEND
SIGNIFICANT MONEY ON DEVELOPMENT COSTS WITH NO ASSURANCE OF FINANCIAL RETURN.
Under our strategic relationships with AVI and Peregrine, in exchange for
marketing and other rights, we have agreed to make equity investments, fund
clinical development activities, and pay license fees. The compounds underlying
these strategic relationships may prove to be ineffective, may fail to receive
regulatory approvals, may be unprotectable by patents or other intellectual
property rights, or may otherwise not be commercially viable. If these strategic
relationships are not successful our business 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, labeling, storage,
pre-market 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, 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 pre-approval 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,
31
injunctions, refusals to permit products to be imported into or exported out of
the United States, refusals of the FDA to grant pre-market approval or to allow
us to enter into government supply contracts, withdrawals of previously approved
marketing applications, civil fines and criminal prosecutions.
We and our contract research organizations are also required to comply with
current GCP regulations and guidelines enforced by the FDA for all of our
products in clinical development. FDA enforced GCPs through periodic inspections
of study sponsors, principal investigators, and study sites. If we or our
contract research organizations fail to comply with applicable GCPs, the
clinical data generated in our studies may be deemed unreliable and FDA may
require us to perform additional studies before approving our marketing
applications. We cannot assure you that FDA will determine that any of our
studies for products in clinical development comply with GCPs.
The FDA's policies may change and additional government regulations may be
promulgated 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, Berlex, Bristol-Myers Squibb Company, Immunex Corp
and others. 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.
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.
32
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
intellectual 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. For example,
the party that currently purifies our Nipent finished product has sought
bankruptcy protection. While we currently anticipate that our needs will be
satisfied in the coming year and we are seeking alternate sources of supply, we
may be unable to locate replacement sources, and the sources that we may locate
may not provide us with similar reliability or pricing and our business could
suffer.
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 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
33
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 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.
34
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.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. We do not
have a detailed disaster recovery plan. Our facilities in the state of
California are currently subject to electrical blackouts as a consequence of a
shortage of available electrical power. In the event these blackouts continue or
increase in severity, they could disrupt the operations of our affected
facilities. In addition, we do not carry sufficient business interruption
insurance to compensate us for losses that may occur and any losses or damages
incurred by us could have a material adverse effect on our business.
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.
35
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 December 31, 2000, our officers, directors, Abbott and their
affiliates owned approximately 8.8% 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 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, which consist
primarily of certificates of deposit, U.S. corporate obligations, and U.S.
government obligations, we believe that our exposure to interest rate market
risk would not significantly affect our operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All information required by this item is included on pages F-1 to F-20 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.
36
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, 2001. 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, 2001.
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, 2001.
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, 2001.
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.
37
3. EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
(f)3.1 Amended and Restated 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.
(cc)(s)10.2 1993 Stock Option Plan (as amended through July 11, 2000).
(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.
(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.
(f)10.15 Office Building Lease dated June 23, 2000 between the
Registrant and Koll Dublin Corporate Center, L.P..
(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.
38
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
(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.
(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.
(q)(u)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
39
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
(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.
(z)(q)10.48 Common Stock and Option Purchase Agreement, dated
December 21, 1999 between the Registrant and Abbott
Laboratories
(z)10.49 Form Registration Rights Agreement
(z)(q)10.50 Worldwide Sales, Distribution, and Development Agreement,
dated December 21, 1999 between the Registrant and Abbott
Laboratories
(z)(q)10.51 U.S. Distribution Agreement, Dated December 21, 1999 between
the Registrant and Abbott Laboratories
(aa)10.52 Registration Rights Agreement dated December 15, 1999
between the Registrant and AVI BioPharma, Inc.
(aa)10.53 Subscription Agreement dated December 1, 1999 between the
Registrant and AVI BioPharma, Inc.
(aa)(q)10.54 Research Agreement (Camptothecin) dated November 15, 1999
between the Registrant and Clayton Foundation for Research
(aa)(q)10.55 Research Agreement (Paclitaxel) dated November 15, 1999
between the Registrant and Clayton Foundation for Research
(bb)(q)10.56 License Agreement (Camptothecin) dated November 15, 1999
between the Registrant and Research Development Foundation
(bb)(q)10.57 License Agreement (Paclitaxel) dated November 15, 1999
between the Registrant and Research Development Foundation
(q)10.58 Amendment No. 1 to License Agreement dated November 1, 1999
between the Registrant and the Stehlin Foundation for
Cancer Research
10.59 United States of America Sales, Distribution and Development
Agreement dated April 4, 2000 between the Registrant and
AVI BioPharma, Inc.
10.60 Common Stock and Warrant Purchase Agreement Dated April 4,
2000 between the Registrant and AVI BioPharma, Inc.
(dd)10.61 Registration Rights Agreement dated April 4, 2000 between
the registrant and AVI BioPharma, Inc.
40
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
10.62 Asset Purchase Agreement dated February 18, 2000 between the
Registrant and AMUR Pharmaceuticals, Inc.
10.63 Patent and Intellectual Property Assignment Agreement dated
September 27, 2000 between the Registrant and AMUR
Pharmaceuticals, Inc.
(dd)10.64 Registration Rights Agreement dated September 27, 2000
between the registrant and AMUR Pharmaceuticals, Inc.
(dd)10.65 Warrant Agreement dated December 23, 1998 between the
Registrant and Jesup & Lamont Securities Corporation
(dd)10.66 Warrant Agreement dated October 4, 1999 between the
Registrant and Paulson Investment Company, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- ------------------------
(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 Report on Form 10-Q filed
with the Securities and Exchange Commission on August 11, 2000.
(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.
41
(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.
(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) 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.
(aa) 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.
(bb) Incorporated by reference from Amendment No. 1 to the Registrant's
Registration Statement on Form S-3 (Reg. No. 333-95177) filed with the
Securities and Exchange Commission on March 16, 2000.
(cc) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-44736) filed with the Securities and Exchange
Commission on August 29, 2000.
(dd) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 (Reg. No. 333-52326) filed with the Securities and Exchange
Commission on December 20, 2000.
(b) REPORTS ON FORM 8-K.
- Form 8-K dated December 21, 2000, filed on January 3, 2001, regarding
the Registrant's relocation of its corporate headquarters and the
hiring, promotion, and resignation of various Company vice-presidents.
(c) EXHIBITS. See Item 14(a) above.
(d) FINANCIAL STATEMENT SCHEDULES. See Item 14(a) above.
42
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, 2000 and 1999, 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, 2000. 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, 2000 and 1999 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 14, 2001
F-1
SUPERGEN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
--------------------
2000 1999
--------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 70,731 $ 22,546
Marketable securities..................................... 21,044 5,008
Accounts receivable....................................... 2,023 1,754
Other receivables......................................... 1,350 5,000
Inventories............................................... 1,648 1,368
Prepaid expenses and other current assets................. 2,520 2,879
--------- --------
Total current assets.................................... 99,316 38,555
Marketable securities -- non-current........................ 38,828 1,812
Investment in stock of related parties...................... 13,250 5,938
Due from related parties.................................... 371 450
Property, plant and equipment, net.......................... 5,438 2,923
Developed technology at cost, net........................... 1,264 1,707
Goodwill and other intangibles, net......................... 1,588 2,036
Restricted cash............................................. 3,212 --
Other assets................................................ 66 57
--------- --------
Total assets............................................ $ 163,333 $ 53,478
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 8,024 $ 2,694
Deferred revenue.......................................... 1,000 894
Accrued employee benefits................................. 1,197 955
--------- --------
Total current liabilities............................... 10,221 4,543
Deferred revenue -- non-current............................. 3,167 4,167
--------- --------
Total liabilities....................................... 13,388 8,710
--------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares
authorized; none outstanding............................ -- --
Common stock, $.001 par value; 150,000,000 shares
authorized; 33,383,723 and 25,477,770 shares issued and
outstanding at December 31, 2000 and December 31, 1999,
respectively............................................ 33 25
Additional paid in capital................................ 287,677 138,461
Deferred compensation..................................... (197) (835)
Accumulated other comprehensive loss...................... (9,407) (5)
Accumulated deficit....................................... (128,161) (92,878)
--------- --------
Total stockholders' equity.............................. 149,945 44,768
--------- --------
Total liabilities and stockholders' equity.............. $ 163,333 $ 53,478
========= ========
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,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Net sales revenue......................................... $ 6,102 $ 4,744 $ 3,004
Other revenue............................................. 987 -- --
-------- -------- --------
Total revenue........................................... 7,089 4,744 3,004
Operating expenses:
Cost of sales............................................. 1,641 2,032 1,925
Research and development.................................. 31,387 17,346 10,511
Selling, general, and administrative...................... 15,964 10,517 7,046
Acquisition of in-process research and development........ 1,585 10,850 --
-------- -------- --------
Total operating expenses................................ 50,577 40,745 19,482
-------- -------- --------
Loss from operations........................................ (43,488) (36,001) (16,478)
Interest income............................................. 8,205 1,016 901
Amortization of loan commitment fee......................... -- (2,000) --
-------- -------- --------
Net loss.................................................... $(35,283) $(36,985) $(15,577)
======== ======== ========
Basic and diluted net loss per share........................ $ (1.04) $ (1.58) $ (0.77)
======== ======== ========
Weighted average shares used in basic and diluted net loss
per share calculation..................................... 33,822 23,352 20,353
======== ======== ========
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, 1998..... 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
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
Comprehensive loss:
Net loss.................... -- -- -- -- -- (35,283) (35,283)
Other comprehensive loss --
Unrealized loss on
investments............... -- -- -- -- (9,402) -- (9,402)
--------
Comprehensive loss............ (44,685)
Issuance of common stock in
connection with follow-on
public offering, net of
offering costs of $606...... 1,465 1 61,303 -- -- -- 61,304
Issuance of common stock upon
exercise of warrants and
stock options............... 5,239 5 48,823 -- -- -- 48,828
Issuance of common stock to
Abbott Laboratories......... 933 1 26,499 -- -- -- 26,500
Issuance of common stock to
AVI BioPharma, Inc., net of
offering costs of $45....... 348 1 12,128 -- -- -- 12,129
Issuance of common stock for
acquisition of in-process
research and development.... 38 -- 1,460 -- -- -- 1,460
Issuance of common stock to
Clayton Foundation in
connection with research
agreements.................. 47 -- 740 -- -- -- 740
Issuance of common stock in
connection with employee
stock purchase plan......... 21 -- 410 -- -- -- 410
Compensation expense from
stock option grants to
consultants and vendors..... -- -- 657 -- -- -- 657
Amortization of deferred
compensation................ -- -- -- 230 -- -- 230
Reversal of deferred
compensation due to employee
termination................. -- -- (408) 408 -- -- --
Repurchase of common stock.... (185) -- (2,396) -- -- -- (2,396)
------- --- -------- ----- ------- --------- --------
Balances at December 31, 2000... 33,384 $33 $287,677 $(197) $(9,407) $(128,161) $149,945
======= === ======== ===== ======= ========= ========
See accompanying notes to consolidated financial statements
F-4
SUPERGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Operating activities:
Net loss.................................................. $(35,283) $(36,985) $(15,577)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................ 667 506 562
Amortization of intangible assets....................... 891 404 23
Amortization of deferred compensation................... 230 112 --
Amortization of deferred revenue........................ (894) -- --
(Gain) loss on sale or disposal of property and
equipment............................................. 13 -- (19)
Amortization of loan commitment fee..................... -- 2,000 --
Expense related to stock options and warrants granted to
non-employees......................................... 657 1,419 188
Non-cash charges related to acquisition of in-process
research and development.............................. 1,585 10,850 --
Non-cash charges related to acquisition of license
agreements............................................ -- 916 --
Changes in operating assets and liabilities:
Accounts receivable................................... (269) (1,005) (648)
Inventories........................................... (280) (123) 183
Prepaid expenses and other assets..................... 1,090 (2,166) (116)
Due from related parties.............................. (371) -- 109
Other receivables..................................... 3,650 -- --
Restricted cash....................................... (3,212) -- --
Accounts payable and other liabilities................ 5,447 467 1,520
-------- -------- --------
Net cash used in operating activities....................... (26,079) (23,605) (13,775)
Investing activities:
Purchases of marketable securities........................ (62,755) (5,725) (5,363)
Sales or maturities of marketable securities.............. 10,163 2,240 2,077
Purchase of equity investment in related party............ (5,000) (2,500) --
Purchase of property and equipment........................ (2,745) (457) (672)
Sale of property and equipment............................ -- -- 96
Acquisition of Sparta Pharmaceuticals, net of cash
acquired................................................ -- 510 --
-------- -------- --------
Net cash used in investing activities....................... (60,337) (5,932) (3,862)
Financing activities:
Issuance of common stock, net of issuance costs........... 136,997 43,469 2,925
Repurchase of common stock................................ (2,396) -- --
-------- -------- --------
Net cash provided by financing activities................... 134,601 43,469 2,925
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 48,185 13,932 (14,712)
Cash and cash equivalents at beginning of period............ 22,546 8,614 23,326
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 70,731 $ 22,546 $ 8,614
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Non-cash investing and financing activities:
Issuance of common stock related to acquisition of
developed technology.................................. $ -- $ 1,040 --
Issuance of common stock related to research
agreement............................................. 740 1,191 --
Issuance of common stock related to equity investment in
related party......................................... 12,174 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.
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 accounting
principles generally accepted in the United States 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 shipment and related transfer of title 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 accumulated other comprehensive loss in equity.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. We incurred advertising costs of
$806,000 in 2000, $731,000 in 1999, and $418,000 in 1998.
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
carried at cost. 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):
2000 1999
-------- --------
Raw materials............................................... $ 176 $ 183
Work in process............................................. 720 935
Finished goods.............................................. 752 250
------ ------
$1,648 $1,368
====== ======
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):
2000 1999
-------- --------
Land and building........................................... $2,433 $1,983
Leasehold improvements...................................... 1,566 239
Equipment................................................... 741 592
Furniture and fixtures...................................... 2,605 1,447
------ ------
Total property and equipment................................ 7,345 4,261
Less accumulated depreciation and amortization.............. (1,907) (1,338)
------ ------
Property, plant and equipment, net.......................... $5,438 $2,923
====== ======
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 $672,000 and $379,000 at December 31, 2000 and 1999,
respectively.
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, 2000 and 1999, accumulated amortization was $630,000 and
$179,000, respectively.
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:
2000 1999 1998
-------- -------- --------
Customer A................................................. 25% 15% 10%
Customer B................................................. 21 8 0
Customer C................................................. 12 7 16
Customer D................................................. 8 8 10
Warner-Lambert Company..................................... 0 27 20
All others................................................. 34 35 44
--- --- ---
Total...................................................... 100% 100% 100%
=== === ===
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.
F-8
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 grant stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of the grant.
We account for stock option grants in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations because the alternative fair value accounting provided under
FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123")
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of our
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.
Stock-based compensation arrangements to non-employees are accounted for in
accordance with FAS 123 and EITF 96-18, using a fair value approach, and the
compensation costs of such arrangements are subject to re-measurement over their
vesting terms, as earned.
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 ("FAS 121"), we review 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, 2000, there have
been no such losses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, which is required to be adopted in years beginning after June 30, 2000.
Because of the Company's minimal use of derivatives, we do not anticipate that
the adoption of the new Statement will have a significant effect on our earnings
or the financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements, and
is effective in the fourth quarter of 2000. SAB 101 did not have a material
impact on our results of operations, financial position or cash flows for the
year ended December 31, 2000.
RECLASSIFICATIONS
We have reclassified certain prior year amounts 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):
GROSS
UNREALIZED
AMORTIZED GAINS ESTIMATED
COST (LOSSES) FAIR VALUE
--------- ---------- ----------
AT DECEMBER 31, 2000:
U.S. corporate debt securities........................ $124,054 $ 349 $124,403
U.S. government debt securities....................... 3,848 7 3,855
Marketable equity security............................ 22,666 (9,763) 12,903
-------- ------- --------
Total............................................... $150,568 $(9,407) $141,161
======== ======= ========
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
======== ======= ========
Balance sheet classification:
AT DECEMBER 31, 2000:
Amounts included in cash and cash equivalents......... $ 68,553 $ (14) $ 68,539
Marketable securities, current........................ 21,024 20 21,044
Investment in stock of related parties................ 22,499 (9,749) 12,750
Marketable securities, non-current.................... 38,492 336 38,828
-------- ------- --------
Total............................................... $150,568 $(9,407) $141,161
======== ======= ========
AT DECEMBER 31, 1999:
Amounts included in cash and cash equivalents......... $ 17,834 $ 4 $ 17,838
Marketable securities, current........................ 5,017 (9) 5,008
Investment in stock of related parties................ 5,325 113 5,438
Marketable securities, non-current.................... 1,925 (113) 1,812
-------- ------- --------
Total............................................... $ 30,101 $ (5) $ 30,096
======== ======= ========
Available-for-sale securities at December 31, by contractual maturity, are
shown below (in thousands):
ESTIMATED FAIR VALUE
---------------------
2000 1999
--------- ---------
Debt securities
Due in one year or less................................ $ 89,583 $22,846
Due after one year through three years................. 38,675 1,753
-------- -------
128,258 24,599
Marketable equity securities............................. 12,903 5,497
-------- -------
Total.................................................. $141,161 $30,096
======== =======
F-10
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. AVAILABLE-FOR-SALE-SECURITIES (CONTINUED)
Realized gains and losses on the sale of available-for-sale securities for
the years ended December 31, 2000, 1999, and 1998 were not material.
3. STOCKHOLDERS' EQUITY
FOLLOW-ON OFFERING OF COMMON STOCK
In March 2000, we concluded a public follow-on offering of our common stock.
We issued 1,465,000 shares of registered stock, resulting in net proceeds to the
Company of approximately $61,300,000.
PRIVATE PLACEMENTS
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.
F-11
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
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 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 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 our common stock and issuance of
warrants. This agreement contains provisions regarding sales or issuances of
stock below a set minimum price during a specified time period. Sales or
issuances of stock below the set minimum price will 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 minimum price, we issued an
additional 107,333 shares in 1999 to Tako and reduced the warrant exercise price
for 230,000 shares from $13.50 to $10.35.
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.
STOCK REPURCHASE PLAN
In September 2000, the SuperGen Board of Directors authorized a stock
repurchase plan to acquire, in the open market, an aggregate of up to 1,000,000
shares of our common stock, at prices not to exceed $22.00 per share or
$20,000,000 in total. During the year ended December 31, 2000, we repurchased
184,500 shares of our common stock at a cost, net of commissions, of $2,396,000.
All shares repurchased have been retired.
F-12
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
At December 31, 2000, warrants to purchase the following shares of our
common stock were outstanding:
NUMBER OF EXERCISE ISSUE EXPIRATION
SHARES PRICE DATE DATE
--------- ------------------- -------- ----------------
Publicly traded................. 200,406 $ 18.18 1999 2001
Non-publicly traded............. 5,000 7.20 1996 2001
1,045,000 13.50 1997 2007
230,000 10.35 1997 2007
500,000 11.00 1998 2004
684,753 12.00--20.00 1999 2002--2004
235,167 22.01--60.00 1999 2001--2004
90,376 90.12--655.31 1999 2001--2002
---------
Total........................... 2,990,702
=========
In addition, upon exercise, the holders of the $7.20 warrants to purchase
5,000 shares will receive an additional warrant to acquire 5,000 shares at $9.00
per share. These additional warrants were exercised in February 2001.
In September 1999, we issued a notice that we would redeem our 1996 publicly
traded $9.00 warrants ("SUPGW" warrants) outstanding at April 16, 2000 at $0.25
per warrant. At the redemption date, over 99.9% of the outstanding SUPGW
warrants were exercised, resulting in proceeds of approximately $33,600,000 in
2000.
STOCK RESERVED FOR FUTURE ISSUANCE
We have reserved shares of common stock for future issuance as follows:
DECEMBER 31,
----------------------
2000 1999
--------- ----------
Stock options outstanding................................... 3,290,145 3,359,963
Stock options available for grant........................... 1,536,191 114,115
Warrants to purchase common stock........................... 2,990,702 7,246,989
Shares available for Employee Stock Purchase Plan........... 39,970 60,674
--------- ----------
7,857,008 10,781,741
========= ==========
4. STOCK OPTION PLANS
We have 6,463,000 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 the
Company's 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
F-13
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTION PLANS (CONTINUED)
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 the Company's 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, 1998................. 2,642,064 $ 8.80
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
Granted at fair value...................... 971,320 26.14 18.78
Exercised.................................. (710,742) 10.02
Forfeited.................................. (330,396) 21.26
---------
Balance at December 31, 2000............... 3,290,145 $14.36 2,164,066
=========
Information concerning the options outstanding at December 31, 2000 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 $5.88................. 456,271 $ 4.64 5.65 438,071 $ 4.59
6.00 to 7.94.................... 633,304 6.20 5.71 588,914 6.15
8.25 to 12.38................... 564,998 10.70 8.04 261,193 10.65
12.44 to 14.94.................. 437,639 13.65 8.04 243,633 14.11
15.00 to 22.13.................. 584,173 16.20 7.26 496,905 15.85
22.63 to 68.00.................. 613,760 32.13 9.35 135,350 30.28
--------- ---------
$0.135 to $68.00................ 3,290,145 $14.36 7.37 2,164,066 $11.01
========= =========
F-14
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTIONS PLANS (CONTINUED)
Pro forma information regarding net loss and net loss per share is required
by FAS 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,
------------------------------
2000 1999 1998
-------- -------- --------
Risk-free interest rate................................... 5.90% 5.34% 5.39%
Dividend yield............................................ -- -- --
Expected volatility....................................... 0.8 0.7 0.6
Expected life (in years).................................. 5.0 4.9 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.
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,
------------------------------
2000 1999 1998
-------- -------- --------
Pro forma net loss (in thousands)...................... $(39,922) $(40,148) $(19,073)
Pro forma loss per share............................... (1.18) (1.72) (0.94)
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 years ended
December 31, 2000 and 1999, we recorded amortization of deferred stock
compensation expense of $230,000 and $112,000, respectively. During the year
ended December 31, 2000, we reversed $408,000 of deferred compensation,
representing the value of unvested stock options forfeited upon the departure of
an officer of the Company.
5. ACQUISITION ACTIVITY AND RELATED IN-PROCESS RESEARCH AND DEVELOPMENT
AMUR PHARMACEUTICALS, INC. INTELLECTUAL PROPERTY
In September 2000, we acquired all of the intellectual property of AMUR
Pharmaceuticals, Inc. ("Amur") in exchange for 37,795 shares of our common stock
and two-year warrants to purchase 200,000 shares of our common stock at $40.00
per share. Amur's proprietary technology is based on a
F-15
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITION ACTIVITY AND RELATED IN-PROCESS RESEARCH AND DEVELOPMENT
(CONTINUED)
new water-soluble class of hormones. Investigation of these hormones determined
that a specific portion, phosphocholine, confers water solubility to the
hormones. Amur's previously conducted research and development has shown that
phosphocholine may be attached to other compatible molecules representing a
novel patented drug delivery technology.
Research using this technology had commenced but required extensive
pre-clinical development and had not fully demonstrated its technological
feasibility. Accordingly, we recorded a charge of $1,585,000 to acquired in
process research and development ("IPR&D") in September 2000.
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 SuperGen. We issued 429,082 shares of our 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. We 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 was included in the purchase
price and as a component of stockholders' equity in the consolidated financial
statements. Additionally, we recorded transaction related costs of approximately
$262,000, which when aggregated with the above consideration brought the total
cost of the acquisition to $9,632,000.
The acquisition was accounted for by the purchase method of accounting and,
accordingly, the results of operations of Sparta for the period from
August 1999 are included in the accompanying consolidated financial statements.
Assets acquired and liabilities assumed were recorded at their estimated fair
values. Approximately $7,450,000 of the purchase price was allocated to acquired
IPR&D. The Sparta research and development programs currently in process were
valued as follows:
5-FP........................................................ $3,430,000
PZG......................................................... 1,380,000
SPARTAJECT-TM- drug delivery method......................... 2,640,000
----------
$7,450,000
==========
We recorded this acquired IPR&D to expense 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 are being amortized over five years. The work force
value was amortized 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,
F-16
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITION ACTIVITY AND RELATED IN-PROCESS RESEARCH AND DEVELOPMENT
(CONTINUED)
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 THOUSANDS, 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)
RUBITECAN
In September 1997, we acquired exclusive worldwide rights to a patented
anticancer compound, rubitecan, from the Stehlin Foundation for Cancer Research
("Stehlin"). 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. 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 accordance with these
agreements, we paid Stehlin $2,400,000 in 2000, $1,200,000 in 1999, and
$1,300,000 in 1998.
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, which has received "orphan drug" status from the
FDA, is currently in clinical testing for acute leukemias and other
hematological malignancies. Each year, over 50,000 new cases of acute leukemias
and hematological malignancies are reported in the United States. 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.
F-17
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITION ACTIVITY AND RELATED IN-PROCESS RESEARCH AND DEVELOPMENT
(CONTINUED)
SURFACE SAFE-TM- PRODUCT LINE ACQUISITION
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, Inc. The aggregate value of the 79,546 shares of
our unregistered common stock paid to Aldorr, Inc. 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 are being amortized over five years.
OTHER ACQUISITIONS
In December 1999, we entered into a licensing and research agreement with
the Clayton Foundation for Research and its technology transfer organization,
Research Development Foundation. Under the terms of the agreement, we acquired
worldwide rights to inhaled versions of formulations of camptothecins, including
rubitecan, and taxanes, including paclitaxel (Taxol-Registered Trademark-). 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, which we valued at $1,191,000. As the research had not started at
December 31, 1999, the total was included in prepaid expenses and other assets
at that date. The amount was charged to research and development expense in
2000. In December 2000, we issued an additional 46,613 shares of common stock to
the Clayton Foundation in connection with the second year of research. These
shares were valued at $740,000 and the total was included in prepaid expenses at
December 31, 2000.
6. AGREEMENTS WITH ABBOTT LABORATORIES
In December 1999, we entered into three agreements with Abbott Laboratories
("Abbott") under which Abbott will undertake to market and distribute our
products, Nipent and rubitecan, 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.
F-18
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. AGREEMENTS WITH ABBOTT LABORATORIES (CONTINUED)
In addition, under the agreements Abbott is obligated to purchase shares of
our common stock in an amount of up to $81.5 million in nine tranches over a
period of time. Abbott is also obligated to make other cash payments, related to
the achievement of milestones, 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 Nipent distribution agreement, beginning March 1,
2000, Abbott became 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, Abbott made a $5 million cash payment to the Company. This amount was
included in other accounts receivable and deferred revenue at December 31, 1999.
The payment is being recognized as other revenue ratably over the term of the
agreement. The unamortized balance of $4,167,000 is included in current and
non-current deferred revenue at December 31, 2000.
7. RELATED PARTY TRANSACTIONS
AVI BIOPHARMA, INC.
In December 1999, we entered into an agreement with AVI BioPharma, Inc.
("AVI"). The chief executive officer 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. Under the terms of the agreement, 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. We also acquired
exclusive negotiating rights for the United States market for Avicine, AVI's
proprietary 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.
In July 2000, we finalized an agreement with AVI to obtain the U.S.
marketing rights for Avicine. We issued 347,826 shares of our common stock along
with $5 million in cash to AVI as payment for our investment, in exchange for
1,684,211 shares of AVI common stock. As part of this agreement, we obtained the
right of first discussion to all of AVI's oncology compounds and an option to
acquire an additional 10% of AVI's common stock for $35.625 per share. This
option is exercisable for a three-year period commencing on the earlier of the
date the FDA accepts the NDA submitted for Avicine or the date on which the
closing price of AVI's common stock exceeds the option exercise price. We have
accounted for the investment in AVI under the cost method as our ownership is
less
F-19
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
than 20% of AVI's outstanding shares. No value has been ascribed to the option
as neither of the measurements have been achieved as of December 31, 2000.
Avicine will require significant additional expenditures to complete the
clinical development necessary to gain marketing approval from the FDA and
equivalent foreign regulatory agencies. As part of this agreement, we are
obligated to make additional payments to AVI based on successful achievement of
developmental, regulatory approval, and commercialization milestones over the
next several years that could total $80 million.
AMUR PHARMACEUTICALS, INC.
Two SuperGen directors were formerly directors of AMUR
Pharmaceuticals, Inc., a privately-held company conducting research and
development work partially funded by SuperGen. We provided research funding to
Amur of $245,000 in 1998. The president of Amur performed consulting services
for SuperGen and was paid $152,000 in 2000 and $68,000 in 1999 for these
consulting services. In addition, in September 1999 this individual was granted
an option to purchase 5,000 shares of SuperGen stock. Using the Black-Scholes
option valuation model, this option was valued at $44,000 and amortized to
expense over one year.
We owned less than 1% of Amur as of December 31, 1999, and carried our
investment in Amur at no value. In September 2000, we acquired all of the
intellectual property of Amur in exchange for 37,795 shares of our common stock
and two-year warrants to purchase 200,000 shares of our common stock at $40.00
per share (see Note 5).
QUARK BIOTECH, INC.
Two SuperGen director/stockholders are directors and stockholders of Quark
Biotech, Inc. ("QBI"), a privately-held development stage biotechnology company
headquartered in Israel. In June 1997, we made an equity investment of $500,000
in QBI's preferred stock, which represents less than 1% of the company's
outstanding shares as of December 31, 2000. Our investment in QBI is carried at
cost and is included in "Investment in stock of related parties." In
November 1997, we leased approximately one-third of the laboratory square
footage at the SuperGen Pharmaceutical Research Institute ("SPRI") to QBI 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 QBI for a total of approximately $750,000, of
which $300,000 was reimbursed by QBI in 1997. In the first quarter of 2000, we
terminated the lease with QBI and we took possession of the entire laboratory
space and related property, plant, and equipment at SPRI.
OTHER
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.
F-20
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
At December 31, 2000, we owned 10% of a privately-held company performing
research and development work almost exclusively for SuperGen as well as selling
SuperGen certain research supplies. We paid this company $360,000 in 2000,
$448,000 in 1999, and $331,000 in 1998 for services and supplies. We carry our
investment in this company at no value.
8. COMMITMENTS AND CONTINGENCIES
We lease our primary administrative facility under a 10 year non-cancellable
operating lease, which may be renewed for an additional five-year period. The
terms of the lease require us to establish and maintain two irrevocable and
unconditional letters of credit to secure our obligations under the lease. The
financial institution issuing the letters of credit requires us to collateralize
our potential obligations under the lease by assigning to the institution
approximately $3.2 million in certificates of deposit. The certificates of
deposit are included in the balance sheet under "Restricted cash." Upon
achievement of certain milestones and the passage of time, the amounts of the
letters of credit are subject to reduction or elimination.
We are also leasing additional office space in a building adjacent to our
laboratory facility under two leases which both terminate in 2006. Part of the
space has been subleased under a non-cancellable lease terminating at the same
time as our master lease.
Future minimum rentals and sublease income under all operating leases with
terms greater than one year are as follows (in thousands):
MINIMUM
RENTAL SUBLEASE
YEAR ENDING DECEMBER 31, OBLIGATIONS INCOME
- ------------------------ ----------- --------
2001..................................................... $ 1,998 $152
2002..................................................... 2,129 158
2003..................................................... 2,204 164
2004..................................................... 2,266 171
2005 and thereafter...................................... 13,246 222
------- ----
$21,843 $867
======= ====
Rent expense, net of 2000 sublease income of $110,000, was $481,000 in 2000,
$283,000 in 1999, and $259,000 in 1998. We received no sublease income in 1999
or 1998.
We 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, 2000.
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. No such payments were required as of
December 31, 2000.
F-21
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The significant components of our deferred tax assets at December 31 are as
follows (in thousands):
2000 1999
-------- --------
Net operating loss carryforwards........................ $ 47,445 $ 32,810
Purchased in-process technology......................... 2,222 1,720
Research and development credit carryforwards........... 2,892 2,370
Capitalized research and development.................... 6,689 5,260
Other................................................... 1,992 220
-------- --------
Total deferred tax assets............................... 61,240 42,380
Valuation allowance..................................... (61,240) (42,380)
-------- --------
Net deferred tax assets................................. $ -- $ --
======== ========
The valuation allowance increased by $18,860,000 during 2000, and
$22,250,000 during 1999.
As of December 31, 2000 we have net operating loss carryforwards for federal
income tax purposes of approximately $134,000,000 expiring in the years 2005
through 2020. At December 31, 2000, we had research and development credit
carryforwards for federal income tax purposes of approximately $2,000,000, which
expire in the years 2007 through 2020.
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
We have 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
$144,000 in 2000, $120,000 in 1999, and $102,000 in 1998.
In 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 2000, we issued 8,554 and 12,150 shares through the ESPP at $24.17 and
$16.74, respectively. In 1999, we issued 9,022 and 14,173 shares through the
ESPP at $15.19 and $6.38, respectively. As of December 31, 2000, 39,970 shares
are reserved for future issuance under the ESPP.
F-22
SUPERGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the years
ended December 31, 2000 and 1999:
QUARTER ENDING
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
2000
- ------------------------------------------
Net sales................................. $ 695 $ 2,861 $ 450 $ 2,096
Cost of sales............................. 124 650 163 703
Net loss.................................. (7,539) (7,908) (9,893) (9,943)
Basic and diluted net loss per share...... (0.27) (0.24) (0.30) (0.30)
1999
- ------------------------------------------
Net sales................................. $ 916 $ 1,424 $ 736 $ 1,668
Cost of sales............................. 708 484 131 708
Net loss.................................. (4,867) (5,299) (18,214) (8,605)
Basic and diluted net loss per share...... (0.23) (0.25) (0.78) (0.34)
F-23
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
23rd day of March, 2001.
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 Joseph Rubinfeld his attorney-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 said
attorney-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
--------- ----- ----
/s/ JOSEPH RUBINFELD Chief Executive Officer, President
------------------------------------ and Director (Principal Executive, March 23, 2001
Joseph Rubinfeld Financial and Accounting Officer)
/s/ DENIS BURGER
------------------------------------ Director March 23, 2001
Denis Burger
/s/ THOMAS V. GIRARDI
------------------------------------ Director March 23, 2001
Thomas V. Girardi
/s/ WALTER J. LACK
------------------------------------ Director March 23, 2001
Walter J. Lack
/s/ JAMES S.J. MANUSO
------------------------------------ Director March 23, 2001
James S.J. Manuso
/s/ DANIEL ZURR
------------------------------------ Director March 23, 2001
Daniel Zurr
S-1