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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-28150
NEUROCRINE BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0525145
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
10555 SCIENCE CENTER DRIVE, SAN DIEGO, CA 92121
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (858) 658-7600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 15, 2000 totaled approximately $527.6 million based
on the closing stock price as reported by the Nasdaq National Market. As of
March 15, 2000, there were 21,830,471 shares of the Registrant's Common Stock,
$.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated by
reference from the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 24, 2000 (the "Proxy Statement"), which will be
filed with the Securities and Exchange Commission within 120 days after the
close of the Registrant's fiscal year ended December 31, 1999.
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PART I
ITEM 1. BUSINESS
GENERAL
Neurocrine Biosciences, Inc. (the "Company") was incorporated in California
on January 17, 1992 and was reincorporated in Delaware in March 1996. The
Company is a neuroscience-based company focused on the discovery and development
of novel therapeutics for neuropsychiatric, neuroinflammatory and
neurodegenerative diseases and disorders. The Company's neuroscience, endocrine
and immunology disciplines provide a unique biological understanding of the
molecular interaction between central nervous, immune and endocrine systems for
the development of therapeutic interventions for anxiety, depression, insomnia,
stroke, malignant brain tumors, multiple sclerosis, obesity and diabetes.
The following Business section contains forward-looking statements
concerning the continuation of the Company's strategic alliances and the receipt
of payments thereunder, the identification of drug targets and selection of lead
compounds for clinical development, the commencement and successful conclusion
of clinical trials, the receipt of regulatory approvals, and the potential
development of future commercial products. Such forward-looking statements
necessarily involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, without limitation, that research
funding and development will continue under the Company's collaborations, that
research and development candidates will successfully proceed through
pre-clinical and early stage clinical trials, that development candidates will
prove effective for treatment in humans in later stage clinical trials, the
timely receipt of regulatory clearances required for clinical testing,
manufacturing and marketing of products, the potential adverse impact of
competitive technologies, products, and intellectual property rights of third
parties, and the failure to achieve product development and commercialization
goals. Actual results and the timing of certain events could differ materially
from those indicated in the forward-looking statements as a result of these and
other factors. See "Risk Factors."
Neurocrine currently has five programs in clinical development. The
Company's CRF receptor antagonist project is currently in Phase II clinical
development with its partner, Janssen Pharmaceutica, N.V. ("Janssen"), for
anxiety/depression. In 1999 the Company completed a Phase II clinical trial in
transient insomnia with a GABA receptor subtype agonist and a second Phase II
clinical trial with Neurocrine's Altered Peptide Ligand (APL) compound in
patients with multiple sclerosis. The Company is currently conducting a Phase
I/II trial with its IL-4 Fusion Toxin for glioblastoma (malignant brain tumors)
and a Phase I safety and dose escalating clinical study with its APL compound
for Type I Diabetic patients.
PRODUCTS UNDER DEVELOPMENT
The following table summarizes Neurocrine's most advanced products in
research and clinical development. This table is qualified in its entirety by
reference to the more detailed descriptions appearing elsewhere in this Form
10-K.
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Program Indication Status* Commercial Rights
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CRF Receptor Antagonist Anxiety/Depression Phase II Janssen/
Neurocrine
GABA Receptor Subtype Insomnia Phase II Neurocrine
Agonist
IL-4 Fusion Toxin Glioblastoma Phase I/II Neurocrine
Altered Peptide Ligand Multiple Sclerosis Phase II Neurocrine
Altered Peptide Ligand Diabetes Phase I Neurocrine/
Taisho*
GnRH Antagonist Endometriosis Development Neurocrine
CRF Receptor Antagonist Anxiety/Depression Development Neurocrine
Stroke
Excitatory Amino Acid Neurodegenerative Research Wyeth-Ayerst /
Transporters Diseases Neurocrine
Melanocortin Receptor Obesity Research Neurocrine
Antagonist
Chemokine Antagonist Inflammatory Research Neurocrine
Disorders
Orexin Sleep Disorders Research Neurocrine
Urocortin/CRF Agonist Obesity Research Lilly
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*Subject to exercise of Option Agreement by Taisho. See discussion of
Strategic Alliances regarding Taisho on page 13.
"Research" indicates identification and evaluation of compounds in in vitro
and animal models.
"Development" indicates that lead compounds have been discovered that meets
certain in vitro and in vivo criteria. These compounds may undergo
structural modification and more extensive evaluation prior to
selection for preclinical development.
"Phase I" indicates that Neurocrine and/or its collaborative partner is
conducting clinical trials to determine safety, the maximally
tolerated dose and pharmacokinetics of the compound in human
volunteers.
"Phase II" indicates that Neurocrine and/or its collaborative partner is
conducting clinical trials in humans to determine safety and efficacy
in an expanded patient population.
NEUROCRINE'S RESEARCH AND DEVELOPMENT PROGRAMS
CORTICOTROPIN RELEASING FACTOR ("CRF"). Corticotropin releasing factor, the
central regulator of the body's overall response to stress, affects multiple
systems by functioning both as an endocrine factor and a neurotransmitter. CRF
acts as a hormone at the pituitary gland causing the secretion of the steroid
cortisol from the adrenal glands resulting in a number of metabolic effects,
including suppression of the immune system. CRF also functions as a
neurotransmitter in the brain and plays a critical role in coordinating
psychological and behavioral responses to stress such as increased heart rate,
anxiety, arousal and reduced appetite. In addition to neuroendocrine and
neurotransmitter roles, accumulating evidence suggests that CRF may also
integrate actions between the immune and central nervous systems in response to
physiological and psychological stressors.
The body has several mechanisms to regulate the effects of CRF. The
Company's cloning of human CRF receptors and binding proteins suggests that the
diverse functions of CRF are mediated through distinct receptor subtypes which
are differentially distributed in specific brain areas and in tissues outside of
the central nervous system. These targets may offer a mechanism to modulate
specific actions of CRF without affecting the broad range of its activities.
There are several diseases and disorders such as anxiety, depression and
substance abuse in which CRF levels are increased. The deleterious effects of
high levels of CRF may be countered by the administration of selective CRF
receptor antagonists.
Anxiety. Anxiety is among the most commonly observed group of CNS
disorders, which includes phobias or irrational fears, panic attacks,
obsessive-compulsive disorders and other fear and tension syndromes. Estimates
by the National Institute of Mental Health suggest that the most commonly
diagnosed forms of anxiety disorders may affect 10% of the United States
population. Of the pharmaceutical agents that are currently marketed for the
treatment of anxiety disorders, a class of compounds known as the
benzodiazepines, which includes Valium, is the most frequently prescribed. In
spite of their therapeutic efficacy, several side effects limit the utility of
these anti-anxiety drugs. Most problematic among these are drowsiness, ataxia
(the inability to stand up), amnesia, drug dependency and withdrawal reactions
following the cessation of therapy.
Neurocrine is developing a new class of therapeutics that targets
stress-induced anxiety. In view of the evidence implicating CRF in
anxiety-related disorders, Neurocrine is developing small molecule CRF receptor
antagonists as anti-anxiety agents that block the effects of overproduction of
CRF. The Company believes that these compounds represent a class of molecules
based on a novel mechanism of action that may offer the advantage of being more
selective, thereby providing increased efficacy with reduced side effects. In
animal studies used to evaluate anti-anxiety drugs, Neurocrine scientists have
demonstrated the efficacy of its clinical compound candidates following oral
administration without evidence of apparent side effects. Neurocrine currently
has two CRF development programs. In the more advanced program, Neurocrine's
corporate partner, Janssen, selected a CRF-1 receptor antagonist drug candidate
for preclinical testing in 1996, commenced and completed Phase I clinical trials
on the compound in late 1998 and initiated a Phase II open label study in 1999.
Preliminary safety and efficacy results on 20 patients in this study were shown
to have an improvement in widely accepted measures of anxiety and depression. In
addition to the CRF program partnered with Janssen, Neurocrine is conducting an
independent CRF program focused on a series of chemical compounds that are
proprietary to Neurocrine. Neurocrine plans to select a lead clinical candidate
from this program in 2000. There can be no assurance that CRF antagonist
compounds will be effective and safe therapeutics for the treatment of anxiety,
depression or any other conditions. Results in animal models of anxiety are not
necessary predictive of efficacy in human clinical trials and there can be no
assurance that in larger placebo-controlled clinical trials these compounds will
demonstrate clinical efficacy in humans. In addition, no assurance can be given
that Janssen will successfully complete Phase II clinical testing or progress to
later clinical trials in a timely manner.
Depression. Depression is one of a group of neuropsychiatric disorders that
includes extreme feelings of elation and despair, loss of body weight, decreased
aggressiveness and sexual behavior, and loss of sleep. This condition is
believed to result from a combination of environmental factors, including
stress, as well as an individual's biochemical vulnerability, which is
genetically predetermined. The biochemical basis of depression is thought to
involve elevated secretion of CRF and abnormally low levels of other
neurotransmitters in the brain such as serotonin. Clinical reports indicate that
at least 25 million people worldwide experience major depressive disorders and
another 45 million people experience other depressive disorders. In the United
States 6% of the population is affected by major depression. The most frequent
prescribed antidepressant therapies are selective serotonin reuptake inhibitors
(SSRIs) such as Prozac, Zoloft, Paxil and Celexa which act to increase the
levels of serotonin and several other chemicals in the brain. Because these
drugs affect a wide range of neurotransmitters, they have been associated with a
number of side effects. While newer, more selective drugs offer some safety
improvement, side effects remain problematic. Another limitation to most
existing antidepressant therapies is slow onset of action.
Neurocrine and its corporate partner, Janssen are developing small molecule
therapeutics to block the effects of overproduction of CRF for the treatment of
depression. The Company has developed several distinct chemical series of CRF
receptor antagonists. Janssen selected a drug candidate in 1996 for preclinical
testing, commenced Phase I clinical trials on the compound in late 1997 and
completed these in 1998. In late 1998 a Phase II open label trial was initiated
in patients with major depression. No assurance can be given that Janssen will
successfully complete Phase II clinical testing of this candidate or that the
Phase II data will support continuation of the program and additional clinical
trials.
Stroke. Stroke is an acute neurologic event caused by blockage or rupture
of vessels, which supply blood to the brain leading to nerve cell death.
Neuronal damage progresses over a period of four to six hours. According to the
National Institutes of Health ("NIH") estimates, approximately 500,000 patients
experience a stroke in the United States each year, with an approximately equal
incidence in the rest of the world. Stroke results in an estimated 150,000
fatalities each year, making it the leading cause of death behind heart disease
and cancer, and an estimated additional 150,000 stroke victims suffer permanent
neurological damage. Survivors of stroke are at significantly increased risk of
suffering another episode. Current treatments for stroke consist of surgery,
steroid therapy and anti-platelet therapy. These treatments may help increase
blood flow but do not affect the secondary mechanisms which cause nerve cell
death.
Neurocrine believes its CRF receptor antagonist program may have utility in
the treatment of stroke. Preliminary experiments in animal models of stroke show
enhancement of neuronal survival following treatment with a CRF receptor
antagonist. Results obtained in animals are not necessarily predictive of
results obtained in humans, and no assurance can be given that the Company will
successfully complete pre-clinical development of CRF antagonist drug candidates
appropriate for stroke and enter into or complete clinical trials in a timely
manner, if at all.
GABA SUBTYPE RECEPTOR AGONISTS. The term "insomnia" is used to describe all
conditions related to the perception of inadequate or non-restful sleep by the
patient. According to a Gallup Survey conducted on behalf of the National Sleep
Foundation, 49% of all Americans say that they have trouble sleeping. Often
undiagnosed or dismissed, insomniacs have trouble falling asleep, remaining
asleep or staying awake. Insomnia was also shown to be related to the age and
sex of the individuals, the prevalence of which is higher in older individuals
and females. While insomnia is reported to be a major problem in the adult
population worldwide, only approximately 10% of such patients seek prescription
sleeping medications for their condition. This fact may result from the
perceived side effect profile of currently marketed sedative-hypnotics.
In the recent past, the majority of patients treated for insomnia have
utilized non-benzodiazepine compounds, which show an improved side effect
profile over the benzodiazepine class of sedative-hypnotics utilized during the
1980's. However, currently marketed products continue to exhibit certain
unfavorable side effects, including synergy with other CNS depressants
(especially alcohol), the development of tolerance upon repeat dosing, rebound
insomnia following discontinuation of dosing, hangover effects the next day, and
impairment of psychomotor performance and memory. Memory impairment, which can
include amnesia for events occurring prior to and after drug administration, is
of particular concern in the elderly whose cognitive function may already be
impaired by the aging process. The elderly population, which represent a large
portion of the insomnia market, would especially benefit from a novel
therapeutic with an improved safety profile, rapidity of onset, and decrease in
memory impairment.
In 1998 the Company signed an exclusive worldwide licensing agreement with
DOV Pharmaceuticals, Inc. for a compound in clinical development for the
treatment of insomnia. The compound, NBI-34060, works through the activation of
the benzodiazepine site on a GABA receptor subtype. It is through this mechanism
that the currently marketed therapeutics produces their sleep-promoting effects.
However, NBI-34060, a next generation compound, is chemically distinct from the
benzodiazepines with a potentially improved pharmacokinetic profile and receptor
subtype selectivity, which may reduce the side effects characteristic of the
currently marketed products.
Receptor binding studies and preclinical animal studies on NBI-34060
indicate that it is a highly potent GABAA receptor agonist specific for the Type
1 site. In animal studies, NBI-34060 shows a reduced tolerance to sedation,
suggesting a lower potential for abuse, and a reduced tendency to potentiate the
deleterious effects of alcohol. In addition, in animal models NBI-34060 appears
to be devoid of next day hangover effects and is expected to have a considerably
reduced amnestic potential.
Prior to licensure of NBI-34060 by the Company, Dov Pharmaceuticals
conducted an NBI-34060 Phase I clinical study. The study was designed to
determine the safety and tolerance of NBI-34060, and provide a preliminary
evaluation of the sedative-hypnotic potential in 42 normal volunteers as
reflected in self-ratings of drowsiness, disruption of memory, and impairment of
psychomotor performance. NBI-34060 was well tolerated, with no serious or
unexpected adverse events ("AEs") reported. The only consistently reported side
effect was drowsiness, indicating strong potential for the sedative-hypnotic
properties of the compound. In the first quarter of 1999, Neurocrine completed a
Phase Ib clinical trial in 30 healthy volunteers to further explore the safety
and kinetic profile of NBI-34060. As demonstrated in the first Phase I trail,
NBI-34060 demonstrated an acceptable safety profile. The Company recently
completed a Phase II placebo-controlled multi-center clinical study evaluating
the efficacy of NBI-34060 in 228 subjects with transient insomnia. The data from
this study indicate that NBI-34060 is safe and effective in helping subjects
with transient insomnia achieve rapid sleep without the next day residual
effects associated with most currently marketed sleep hypnotics. Statistical
significance was reached for the primary clinical endpoint Latency to Persistent
Sleep (LPS) with patients receiving NBI-34060 achieving sleep in a median LPS of
9 minutes compared to a median LPS in the placebo group of 23 minutes.
Additional Phase II studies, including dose evaluation in chronic insomnia, will
be conducted in 2000. There can be no assurance that the side effects and
efficacy profile of NBI-34060 seen in the Company's animal models and Phase I
and II trials will be confirmed in additional trials or that the results of
future trials will warrant further study.
ALTERED PEPTIDE LIGANDS. In North America, 5% of adults, more than
two-thirds of them women, suffer from autoimmune diseases (including multiple
sclerosis, rheumatoid arthritis, Type I diabetes, systemic lupus erythematosus,
and thyroiditis). The body's immune system employs highly specific T cells that
recognize and attack foreign antigens that invade the body. Occasionally,
certain T cells arise that inappropriately recognize the body's own tissues as
foreign. While virtually every individual possesses these self-reactive T cells,
in only a fraction of these people do the immune cells actually attack healthy
tissue and cause an autoimmune disease. In a healthy individual, the activity of
these self-reactive T cells is held in check by other T cells that regulate
their function (regulatory T cells). If a defect in regulatory T cell function
occurs, or the environment favors the activity of self-reactive T cells, an
autoimmune disease results. While it is not clear what triggers the immune
attack, a current hypothesis suggests that people who are genetically
predisposed to autoimmune diseases come in contact with certain infectious
viruses or bacteria. In the process of controlling the infection, the immune
system targets an antigen on the infectious agent that resembles a self-antigen.
These cells then begin to attack self-tissue, resulting in autoimmune disease.
Thus, a failure in regulation of the immune system at the level of dysfunctional
regulatory T cells predisposes an individual to autoimmune disease. Current
reasoning suggests that the development of immune specific drugs that suppress
the action of self-reactive T cells and/or restore the function of regulatory T
cells might prove advantageous for the prevention/cure or treatment of an
autoimmune disease.
The T cells involved in the autoimmune disease achieve specificity in their
various functions via their cell surface molecules known as T cell antigen
receptors ("TCR"). Each T cell expresses its own specific TCR on its surface. T
cells recognize antigens, whether foreign or self-derived in the context of a
MHC molecule. This then represents the ligand that hooks up and binds to such a
TCR. In this manner, a peptide fragment can send a signal to the T cell via an
antigen-specific TCR that binds specifically to this antigen. After receiving
this signal through its TCR, the T cell will divide, proliferate, secrete
cytokines and/or destroy healthy cells.
If the structure of such a peptide fragment is altered, such that it binds
to its specific TCR with much less affinity, this altered peptide ligand ("APL")
sends an incomplete signal to the T cell. This incomplete or altered signal can
trick a T cell and prevent it from dividing, proliferating, secreting cytokines
and/or destroying normal cells. Indeed, if such an APL can be designed to
prevent "killer" T cells from destroying healthy cells, it would represent a
very useful antigen-specific therapy to prevent the onset of an autoimmune
disease.
Multiple Sclerosis ("MS"). Multiple sclerosis is a chronic immune mediated
disease characterized by recurrent attacks of neurologic dysfunction due to
damage in the central nervous system ("CNS"). The classic clinical features of
MS include impaired vision and weakness or paralysis of one or more limbs.
Patients develop a slow, steady deterioration of neurologic function over an
average duration of approximately 30 years. The cause of MS is unknown but
immunologic or infectious factors have been implicated. According to the
National Multiple Sclerosis Society, there are an estimated 350,000 cases of
multiple sclerosis in the United States and an equal number of patients in
Europe with approximately 20,000 new cases diagnosed worldwide each year.
Currently available treatments for MS offer only limited efficacy. Steroids have
been used to reduce the severity of acute flare-ups and speed recovery.
Experimental therapy with other immunosuppressive agents has shown limited
success. Betaseron (a form of beta-interferon) has been shown to delay the onset
of flare-ups of the symptoms in patients and has been approved for marketing by
the United States Food and Drug Administration ("FDA"). In addition, Avonex, a
similar form of beta-interferon, and Copaxone, a peptide polymer, have received
FDA approval for relapsing remitting MS. In clinical trial with the
beta-interferon products, these therapies slowed progression of disease in MS
patients, yet lead to a variety of side effects including "flu-like" symptoms.
Neurocrine's cofounder, Dr. Lawrence Steinman, identified the dominant
invading T cell in the brains of patients who had died of MS. Dr. Steinman
further identified the dominant target or recognition site on the myelin sheath
to which invading T cells bind. Neurocrine has exclusively licensed this
technology and has designed altered peptide ligands, which resemble native
disease-causing molecules of the myelin sheath. These molecules have been
altered to attract and bind to disease-causing T cells and inhibit their
destructive capabilities. Neurocrine's altered peptide ligand for the treatment
of MS, NBI-5788, has been shown to reverse disease in animal models of MS and
decrease the production of cytokines such as gamma interferon and tumor necrosis
factor-alpha which contribute to the disease. These same molecules demonstrate
the ability to silence pathogenic T cells from MS patients in vitro. Together
with Novartis Pharmaceuticals Corporation ("Novartis"), the Company's former
collaborative partner for this program, Neurocrine filed an IND and received
approval in 1996 to commence clinical trials. The Company and Novartis
subsequently completed Phase I clinical trials, and two Phase II clinical trials
were initiated in 1999 in North America and Europe. In July 1999 while the Phase
II trials were underway, Novartis exercised its right to terminate the
collaboration with the Company effective January 2000. Subsequently, the Data
and Safety Monitoring Board for the study recommended that administration of
study drug be discontinued based on certain reports of patients experiencing
systemic hypersensitivity-type reactions. Neurocrine and Novartis continued to
evaluate all of the enrolled patients in the study through December 1999 in
accordance with the Protocol. Neurocrine reacquired all rights to the program
from Novartis on January 7, 2000 and initiated data analysis. No assurance,
therefore, can be given that Neurocrine will initiate or complete additional
Phase II or Phase III studies or that results of any such studies will warrant
additional clinical development of potential product.
Type I Diabetes. Utilizing its experience in the development of APL for
Multiple Sclerosis, Neurocrine has extended this approach to Type I or
juvenile-onset diabetes. Like MS, in Type I diabetes the immune system has
erroneously targeted healthy tissue, in this case the pancreatic cells
responsible for the production of insulin. Type I diabetes is one of the most
prevalent chronic conditions in North America, afflicting approximately one
million patients in 1999. Diabetics suffer from a number of complications of the
disease including heart disease, circulatory problems, kidney failure,
neurologic disorders and blindness. Current therapy for Type I diabetes consists
of daily insulin injections to regulate blood glucose levels.
The Company believes that an altered peptide ligand specific for autoimmune
T cells involved in diabetes may stop the destruction of the insulin secreting
cells in pre-diabetic patients, thus allowing them to delay or avoid chronic
insulin therapy. Working with a leading Diabetologist at the Barbara Davis
Center for Childhood Diabetes at the University of Colorado, Neurocrine
scientists have engineered one of the dominant pancreatic antigens which is no
longer recognized by the pathogenic immune cell. In preclinical models this APL,
NBI-6024, was capable of eliciting a protective immune response by generating
cells that secrete factors capable of regulating the destructive cells reducing
the incidence of diabetes. In addition, experiments using immune cells derived
from the blood of Type 1 diabetes patients indicate that NBI-6024 is recognized
by immune cells response to insulin, suggesting that it may have the potential
to intervene in the disease process in humans. Neurocrine is currently
conducting an NBI-6024 Phase I safety and dose escalating clinical program in
diabetic patients. In January 2000, Neurocrine announced that it had entered
into an agreement with Taisho Pharmaceuticals Co., Ltd. ("Taisho") providing to
Taisho an exclusive option to obtain European and Asian rights to NBI-6024,
Neurocrine's APL Diabetes product. There can be no assurance that Taisho will
elect to exercise its option with respect to the technology or that the results
of the Company's preclinical studies in animals and cells derived from Type I
diabetes patients will be predictive of the results the Company will see
treating Type I diabetes patients.
IL-4 FUSION TOXIN. IL-4 receptors are highly expressed in malignant brain
tumors as well as in cancers of the breast, kidney, lung, colon, stomach, ovary,
prostate, and in melanoma and mesothelioma. Immunotoxins are a novel form of
anticancer therapy under investigation in a variety of clinical settings.
Immunotoxin therapeutics are designed to carry a cellular toxin, such as
Pseudomonas exotoxin, to a target antigen, expressed on cancer cells. Targeted
immunotoxins have several theoretical advantages over conventional chemotherapy
in that they may be extremely selective and potent and effective in
chemotherapy-resistant T cells.
Malignant brain tumors, both primary and metastatic, are a major cause of
cancer death. Despite current therapeutic options such as surgery, radiation,
and chemotherapy, the median survival rate for malignant brain cancer is only in
the range of 9-12 months. Approximately 17,400 new cases of primary brain cancer
and 75,000 cases of metastatic brain tumor are diagnosed in the United States
each year, with comparable incidence numbers in Europe. According to the
American Cancer Society, the incidence of malignant brain tumors is rising.
Glioblastoma (grade 4 astrocytoma) is the most common primary malignant brain
tumor. These tumors arise within the brain and generally remain confined to the
brain. The clinical course of glioblastoma is characterized by relentless loss
of vital neurological functions and death within approximately twelve months.
In 1998, the Company exclusively licensed from the National Institutes of
Health an immunotoxin compound, NBI-3001 or IL-4 Fusion Toxin. IL-4 Fusion Toxin
was designed as a result of collaboration between the FDA and the National
Cancer Institute. IL-4 Fusion Toxin is a chimeric protein in which interleukin 4
(IL-4), a cell growth factor has been joined together with Pseudomonas exotoxin,
a toxin that can kill cells. The IL-4 portion of the Fusion Toxin preferentially
binds to human cancer cells because the cancer cells express elevated levels of
high affinity receptors for IL-4 on their surface, while IL-4 receptor
expression is absent or undetectable in normal brain tissue. Once the IL-4
portion of the IL-4 Fusion Toxin targets the toxin to the cancer cells, the
Pseudomonas exotoxin portion of the molecule preferentially kills the cancer
cells.
In the preclinical setting, NBI-3001 has been found to be highly cytotoxic
to brain tumor cell lines in vitro, and exhibits anti-tumor activity in in vivo
models of brain tumor. A Phase I safety trial with NBI-3001 has been completed
under an Investigator sponsored IND in which 9 patients with recurrent malignant
glioblastoma were treated. Results were presented at The Society for
Neuro-Oncology Meeting in an abstract entitled "A Circularly Permuted
Interleukin-4 Pseudomonas Exotoxin for Treatment of Malignant Gliomas." In this
study, NBI-3001 produced no evident systemic or neurological toxicities as
documented by serum chemistry, hematology screen including liver panels and
neurological examinations. While a physician-IND clinical trial does not replace
the need for Company-sponsored clinical trials, the Company felt that this study
provided a preliminary indication that further clinical trials were warranted.
In 1999 the Company initiated a Phase I/II trial of NBI-3001 in patients with
recurrent glioblastoma in which the primary endpoints are safety and tumor
regression. The Company intends to complete enrollment of this trial in early
2000, and if results warrant, commence a Phase III efficacy trial for NBI-3001
in 2000. In October 1999, the FDA granted Fast Track Designation to the Company
for NBI-3001. Fast Track Designation allows the Company to accelerate its
clinical program for NBI-3001 and expedite receipt of regulatory approvals. No
assurance can be given that the Company will successfully complete clinical
testing or progress to later clinical trials in a timely manner, or at all.
In conjunction with the Company's clinical studies in glioblastoma, the
Company and others are investigating the safety and efficacy of IL-Fusion Toxin
in in vitro models of different cancers and by different routes of
administration. Research teams from the FDA and NIH have published results with
IL-4 Fusion Toxin demonstrating a high level of binding and destruction of
malignant tumor cells obtained from patients with colon cancer, breast cancer,
gastric cancer, prostate cancer, kidney cancer, lymphoma, melanoma and malignant
brain tumors. The Company is also conducting pre-clinical research in this area.
There can be no assurance that the results of the in vitro models will be
indicative of results in animal models, that IL-4 Fusion Toxin will prove safe
or efficacious in any of these settings or that the Company will initiate
clinical trials in cancers other than glioblastoma.
GONADOTROPIN-RELEASING HORMONE (GNRH) RECEPTOR. Gonadotropin-releasing
hormone is a hypothalamic decapeptide that stimulates the secretion of the
pituitary gonadotropins, luteinizing hormone (LH) and follicle-stimulating
hormone (FSH). The gonadotropins, in turn, are necessary for gonadal steroid
production and normal reproductive function. Chronic administration of GnRH
superagonist peptides has been found to cause down regulation of the GnRH
receptor resulting in a paradoxical reduction in circulating levels of
testosterone or estrogen, equivalent to surgical castration or oophorectomy,
respectively. This reversible shutdown of the reproductive endocrine axis has
proven clinically useful in treating hormone dependent proliferative diseases
such as endometriosis, prostate carcinoma, and breast cancer, and resulted in
several peptide drugs such as Lupron(R) and Zoladex(R), with an estimated market
in excess of $1 billion. However, current peptide agonist based drugs have
several drawbacks. They require 3-4 weeks before the regulatory activities are
observed, and during this period their stimulatory effects can result in a
worsening of the disease. Being peptides they also require subcutaneous
injection or nasal administration and are expensive to manufacture.
The Company has screened its small molecule library and has conducted
structure activity studies aimed at producing a small molecule GnRH antagonist.
Several series of small molecule compounds have been identified and are being
evaluated as candidates for further development. There can be no assurance that
the Company's work in this area will lead to clinical candidates or that any
such clinical candidates will be found to be safe and efficacious.
EXCITATORY AMINO ACID TRANSPORTERS ("EAATs"). EAATs serve as novel targets
for the development of drugs, which modulate toxic levels of glutamate in the
brain. Neurotransmitter transporters play an important role in regulating the
levels of neurotransmitters, and some of the most successful CNS drugs are ones
that selectively target these transporters. For example, the Selective Serotonin
Reuptake Inhibitors ("SSRIs") such as Prozac selectively inhibit the serotonin
transporter modulating the serotonin levels for therapeutic benefit. Similarly,
Neurocrine is targeting the EAATs to selectively modulate the levels of the
excitatory neurotransmitter glutamate to produce a therapeutic benefit in
disorders where glutamate levels are abnormal such as in stroke, head trauma,
retinal ischemia, schizophrenia and other neurodegenerative and psychiatric
disorders. Neurocrine has entered into collaboration with American Home Products
Corporation acting through its Wyeth-Ayerst Laboratories Division
("Wyeth-Ayerst") focusing on modulating glutamate transporter function as a
novel strategy for the treatment of neurodegenerative disorders. Neurocrine and
Wyeth-Ayerst will target the EAATs to selectively modulate the levels of the
excitatory neurotransmitter glutamate to produce a therapeutic benefit in
disorders where glutamate levels are abnormal. These activities will include
basic research to understand the function and regulation of the transporters,
the identification of suitable chemical hits, along with the identification and
characterization of chemical and biological leads. There can be no assurance
that the Company and Wyeth-Ayerst will be successful in demonstrating EAATs as
therapeutic targets or that they will identify any product candidates for
pre-clinical or subsequent clinical development.
MELANOCORTIN RECEPTOR ANTAGONISTS. Melanocortin receptors are involved in
the control of endocrine, autonomic and central nervous system function. To
date, a family of five melanocortin receptor subtypes has been identified;
several of which have been cloned by the Company's consultants and scientists.
One of the melanocortin receptor subtypes, MC4, has recently been identified as
an important regulating mechanism for appetite, body weight and insulin
secretion which represents a novel target for the treatment of obesity and
diabetes. This technology combined with Neurocrine's expertise in obesity,
anorexia nervosa and diabetes provides additional avenues for the discovery of
effective therapies for the treatment of other endocrine functions and brain
disorders. There can be no assurance that the Company's research in this area
will lead to product candidates.
CHEMOKINES. Chemokines are immune/inflammatory mediators considered central
to the trafficking of leukocytes. Restricted and sub-type specific expression of
their receptors in different pathologies and on T lymphocytes, dendritic cells
and CNS tissue, suggests a role for these mediators in diseases characterized by
CNS inflammation and leukocyte invasion. All ligand-receptor interactions lead
to migration of the cell types expressing the receptor, hinting at a central
role for these molecules in the recruitment/invasion of the diseased tissue by
these cells and their potential role in the ensuing destruction. Antagonism of
this effect may, therefore, be of benefit. In addition to an in-depth program of
discovery research, the Company has decided to screen our library against these
receptor systems in order to identify small molecule antagonists. Since
chemokines are large proteins and have multiple interaction sites with their
receptors, the design of specific, high-affinity competitive antagonists will be
required. Antagonists are being tested in inflammatory animal models including
experimental autoimmune encephalomyelitis (EAE, for MS), arthritis, and
diabetes.
Given the complexity of the chemokine area, Neurocrine has focused on the
more recently discovered receptors in an attempt to generate small molecule
antagonists. To that end, numerous chemokine receptors have been expressed,
screened against the Company's small molecule library, and structure activity
studies undertaken. There can be no assurance that the Company's research in
this area will lead to product candidates.
OREXIN. The orexins consist of two small peptides (28 and 33 amino acids)
that are expressed in the brain and have been linked to a variety of activities
including, the control of feeding, cardiovascular regulation, water intake and
sleep. There are two closely related receptors (1 and 2) for the orexin peptides
that are expressed in different areas of the brain and most likely mediate
different functions of the orexin peptides. Both orexin receptor agonists
(narcolepsy) and antagonists (insomnia) may have potential value for drug
development. Narcolepsy is characterized by excessive daytime sleepiness and
abnormal REM sleep and affects 0.02% to 0.06% of the population in the United
States and Western Europe. As discussed above, insomnia affects 49% of all
Americans. The Company has screened a small molecule library to identify
agonists and antagonists for the orexin receptors and is in the process of
optimizing the compounds that resulted from the screens and using these
compounds to further characterize the orexin system. There can be no assurance
that the Company's research in this area will lead to product candidates.
CRF BINDING PROTEIN/ UROCORTIN AGONIST. The body has several mechanisms to
regulate the effects of CRF. CRF-binding protein ("CRF-BP") binds to CRF and
holds it in an inactive state, tightly regulating levels of CRF in certain brain
regions. Neurocrine scientists have found that there are significant decreases
in CRF levels in the brain areas that are affected in Alzheimer's disease. In
spite of reduced CRF concentrations, CRF-BP levels are not decreased in these
areas suggesting that CRF-BP may be a novel target for drug intervention.
Consequently, in 1996 Neurocrine and its partner Eli Lilly and Company
("Lilly"), initiated a 3 year research collaboration to screen and optimize
CRF-BP antagonists to displace CRF from the binding protein to selectively raise
the concentration of CRF in brain areas involved in learning and memory
processes. In October 1999, the funded research portion of the program was
completed as scheduled and Lilly has retained control of the program. No
assurance can be given that Lilly will successfully identify suitable candidate
compounds for development in a timely manner, or at all.
Similarly, agonists of the CRF-2 receptor may represent a therapeutic
strategy to elevate CRF and a related neuropeptide urocortin. Preliminary data
indicates that CRF and urocortin may act as central regulators of both appetite
and metabolism. Neurocrine has evaluated CRF-BP antagonists and CRF-2 receptor
agonists in various animal models of obesity and have shown effects of reduced
food intake and weight loss. In 1996 Neurocrine and its partner Eli Lilly and
Company, initiated a 3 year research collaboration to screen and optimize small
molecule compounds for evaluation in confirmatory preclinical studies. In
October 1999, the funded research portion of the program was completed as
scheduled and Lilly has retained control of the program. No assurance can be
given that Lilly will successfully identify CRF and urocortin agonists suitable
as anti-obesity therapeutics in a timely manner, or at all.
BUSINESS STRATEGY
The Company's strategy is to utilize its understanding of the biology of
the central nervous, immune and endocrine systems to identify and develop novel
therapeutics. There are five key elements to the Company's business strategy:
TARGET MULTIPLE PRODUCT PLATFORMS. The Company believes certain central
nervous system drug targets, such as CRF, EAATs and MCH represent significant
market opportunities in psychiatric, neurologic and metabolic disorders.
Immunological targets, such as altered peptide ligands, offer therapeutic
strategies related to autoimmune diseases. Neurogenomics and chemokines allow
the Company to combine its neuroscience and immunology expertise with new drug
discovery technologies to identify novel gene-related product or gene therapy
opportunities.
IDENTIFY NOVEL NEUROSCIENCE AND IMMUNOLOGY DRUG TARGETS FOR THE DEVELOPMENT
OF THERAPEUTICS WHICH ADDRESS LARGE UNMET MARKET OPPORTUNITIES. Neurocrine
employs molecular biology as an enabling discipline to identify novel drug
targets such as receptors, genes and gene-related products. The Company uses
advanced technologies, including combinatorial chemistry, high-throughput
screening, gene sequencing and bioinformatics, to discover and develop novel
small molecule therapeutics for diseases and disorders of the central nervous
and immune systems including anxiety, depression, Alzheimer's disease, multiple
sclerosis, neurodegeneration, diabetes, obesity and insomnia.
LEVERAGE STRATEGIC ALLIANCES TO ENHANCE DEVELOPMENT AND COMMERCIALIZATION
CAPABILITIES. Neurocrine intends to leverage the development, regulatory and
commercialization expertise of its corporate partners to accelerate the
development of its potential products, while retaining commercial or
co-promotion rights in North America. The Company intends to further leverage
its resources by continuing to enter into strategic alliances and novel
financing mechanisms to enhance its internal development and commercialization
capabilities.
To date, Neurocrine has entered into strategic alliances with Janssen
focusing on CRF receptor antagonists to treat anxiety, depression, and substance
abuse; with Novartis to develop altered peptide ligands for the treatment of MS;
and with Lilly to collaborate in the discovery, development and
commercialization of CRF-BP antagonists and CRF agonists for the treatment of
central nervous system disorders including obesity and dementias such as
Alzheimer's disease. In 1999 the Company entered into a collaboration agreement
with Wyeth-Ayerst to research, develop and commercialize compounds which
modulate EAATs for the treatment of neurodegenerative and psychiatric diseases.
In addition, in 1999 Neurocrine entered into three technology alliances
with other companies to enhance its drug discovery and development capabilities.
The first alliance is with Array Biopharma Inc. to design and synthesize a
focused library around small molecules targeted at the G protein-coupled
receptor superfamily. The second alliance is with Arena Pharmaceuticals
involving the application of Arena's constitutive activation technology to three
Neurocrine orphan G-coupled receptors. The third alliance is with Trega
Biosciences, Inc. directed to screening of Trega's proprietary chemical
libraries.
OUTSOURCE CAPITAL INTENSIVE AND NON-STRATEGIC ACTIVITIES. Neurocrine
intends to focus its resources on research and development activities by
outsourcing its requirements for manufacturing, preclinical testing and clinical
monitoring activities. The Company utilizes contract current Good Manufacturing
Processes ("cGMP") manufacturing for clinical programs including the NBI-34060
program for insomnia, the APL ligand programs for MS and Diabetes and the IL-4
Fusion Toxin program. Neurocrine believes that availability of skilled contract
manufacturers and contractors will allow the Company to focus on its core
discovery and development programs to generate additional product opportunities.
ACQUIRE COMPLEMENTARY RESEARCH AND DEVELOPMENT DRUG CANDIDATES. Neurocrine
plans to continue to selectively acquire rights to products in various stages of
research and clinical development in the fields of neurology and immunology to
take advantage of the development and future commercialization capabilities it
is developing in cooperation with its strategic partners. In 1998, the Company
licensed from the National Institutes of Health an IL-4 Fusion Toxin which is
currently in Phase I/II clinical trials for recurrent glioblastoma. In May 1998,
the Company acquired Northwest NeuroLogic, Inc. (NNL), and the intellectual
property surrounding the EAATs 1 through 5 and Melanocortin receptors. In
addition, the scientific founders of NNL, Drs. Roger Cone and Susan Amara, of
the Vollum Institute became exclusive consultants to the Company. Also in June
1998, the Company exclusively licensed worldwide commercial rights from DOV
Pharmaceuticals, Inc. for a compound for the treatment of insomnia.
TECHNOLOGY
Neurocrine utilizes advanced technologies to enhance its drug discovery
capabilities and to accelerate the drug development process. These technologies
include:
HIGH-THROUGHPUT SCREENING ("HTS"). Neurocrine has assembled a chemical
library of diverse, low molecular weight organic molecules for lead compound
identification. The Company has implemented robotics screening capabilities
linked to its library of compounds that facilitate the rapid identification of
new drug candidates for multiple drug targets. The Company believes that the
utilization of high-throughput screening and medicinal and peptide chemistry
will enable the rapid identification and optimization of lead molecules.
COMBINATORIAL CHEMISTRY. Recent developments in both computational and
combinatorial chemistry have shown that it is now possible to design small
libraries focused around hits emerging from HTS both to evaluate rapidly the
quality of such hits and also subsequently optimize the selected hits into
advanced lead candidates. The approach involves learning from the set of hits as
a whole and using this information to design libraries of compounds that may be
structurally independent of the original hits. Neurocrine has acquired the
necessary technologies to facilitate the process of library design, parallel
synthesis and rapid purification and characterization of compounds. Neurocrine
will use the same process to supplement the corporate compound library with
structures relevant for internal projects and hence improve the likelihood that
HTS will discover a meaningful array of useful hits.
MOLECULAR MODELING. Neurocrine uses an array of medicinal chemistry,
computational and combinatorial tools to facilitate the drug discovery process.
At the start of a new project, when there is relatively little known about the
selected molecular target, it is necessary to analyze screening data using
relatively crude 2-dimensional descriptors of molecular properties. Thus, the
BCUT methodology, introduced by Professor Perleman (Kansas), allows Company
chemists to search large virtual libraries of novel, readily synthesizable
compounds and select for parallel synthesis only those which match the
collective properties of the screening hits. Later in the project, once more
robust data becomes available, the BCUT filter is combined with computational
more intensive 3-dimensional searches such as using CATALYST-derived (MSI)
pharmacophore models. Other such tools in concert with medicinal chemistry
intuition and detailed pharmacokinetic measurements can then be used to turn
potent ligands into truly drug-like molecules ready for pre-clinical
development.
MOLECULAR BIOLOGY. Neurocrine scientists have utilized novel techniques for
examination of gene expression in a variety of cellular systems. The company has
developed a sophisticated technique to evaluate the type and quantity of genes
in various cellular systems prior to the isolation of genes. Neurocrine has also
developed unique expression vectors and cell lines that allow for the highly
efficient protein expression of specific genes.
GENE SEQUENCING. Neurocrine applies integrated automated DNA sequencing and
gene identification technology in its Neurogenomics program. The systems
utilized by Neurocrine allow for extended gene analysis in a rapid,
high-throughput format with independent linkage into a sequence identification
database. Neurocrine has optimized gene sequencing instrumentation for
"differential display," a technique that may facilitate the rapid identification
of novel genes.
BIOINFORMATICS. Neurocrine's Neurogenomics program creates a significant
amount of genetic sequence information. Applied genomics relies on information
management systems to collect, store and rapidly analyze thousands of gene
sequences. Neurocrine has developed a bioinformatics system, which the Company
believes will allow it to identify novel genes, which are involved in
neurodegeneration. Data are collected by automated instruments and stored and
analyzed by Neurocrine using customized computational tools. To date,
Neurocrine's molecular biologists have identified over 4,500 novel genes.
STRATEGIC ALLIANCES
The Company's business strategy is to utilize strategic alliances and novel
financing mechanisms to enhance its development and commercialization
capabilities. To date, Neurocrine has completed the following alliances:
JANSSEN PHARMACEUTICA, N.V. In January 1995, Neurocrine entered into a
research and development agreement with Janssen to collaborate in the discovery,
development and commercialization of small molecule CRF receptor antagonists
focusing on the treatment of anxiety, depression and substance abuse (the
"Original Janssen Agreement"). The collaboration utilizes Neurocrine's expertise
in cloning and characterizing CRF receptor subtypes, CRF pharmacology and
medicinal chemistry. Pursuant to the Janssen Agreement, the Company has received
$2.0 million in license payments. In addition, Johnson & Johnson Development
Corporation ("JJDC") purchased $5.0 million of the Company's Common Stock. In
1996 Janssen selected a clinical candidate from the compounds discovered in
connection with the Original Janssen Agreement and commenced clinical trials in
Europe. The collaborative research portion of the Original Janssen Agreement was
completed as scheduled in 1997. In September 1999, the Company and Janssen
elected to expand their research and development efforts to identify additional
small molecule CRF antagonists for the treatment of psychiatric disorders (the
"Expanded Janssen Agreement'). In connection with the Expanded Janssen
Agreement, Neurocrine received an initial payment and will receive two years of
research funding for the Company's scientists working in collaboration with
Janssen.
Under both the Original Janssen Agreement and Expanded Janssen Agreement,
Neurocrine is entitled to receive up to $10.0 million in milestone payments for
the indications of anxiety, depression, and substance abuse, and up to $9.0
million in milestone payments for other indications, in each case upon
achievement of certain development and regulatory goals. As of December 31,
1999, the Company has received $11.6 million in sponsored research, $3.5 million
in milestones, $2.0 million in license fees and $500,000 for prior research
under the agreements. Janssen is responsible for funding all clinical
development and marketing activities, including reimbursement to Neurocrine for
its promotional efforts, if any. The Company has granted Janssen an exclusive
worldwide license to manufacture and market products developed under the
Original Janssen Agreement and Expanded Janssen Agreement. The Company is
entitled to receive royalties on Janssen product sales throughout the world. The
Company has certain rights to co-promote such products in North America. There
can be no assurance that the Company and its corporate partner will be
successful in developing, receiving regulatory approvals or commercializing any
potential products discovered under the Janssen agreements. As a result, there
can be no assurance that any product development milestone or royalty payments
will be made.
DUPONT PHARMACEUTICALS COMPANY. In September 1999, the Company and Janssen
entered into a three-way license agreement with Dupont Pharmaceuticals Company
("Dupont") relating to certain patents and patent applications owned by the
parties covering a series of small molecule CRF antagonist compounds. In
connection with this agreement, Dupont received exclusive rights to a subset of
CRF receptor antagonist compounds independently discovered by Neurocrine. Dupont
will make milestone payments to Neurocrine in the event Dupont achieves certain
developmental and regulatory milestones and pay a royalty to Neurocrine in the
event such compounds are successfully commercialized. There can be no assurance
that Dupont will elect to develop these compounds, or that if Dupont so elects,
that it will be successful and the Company will receive any milestone or royalty
payments.
WYETH-AYERST LABORATORIES. Effective January 1999, the Company entered into
a Collaboration and License Agreement with Wyeth-Ayerst Laboratories (the
"Wyeth-Ayerst Agreement") relating to the research, development and
commercialization of compounds which modulate excitatory amino acid transporters
("EAATs") for the treatment of neurodegenerative and psychiatric diseases.
Pursuant to the Wyeth-Ayerst Agreement, Wyeth-Ayerst will provide the Company
with up to $11.5 million in research and development funding. The initial term
of the funded research will be three years, subject to earlier termination or
extension upon achievement of certain benchmarks upon mutual agreement of the
parties. The Company is also entitled to receive up to $69.2 million in
milestones upon achievement of certain research, development and regulatory
events. As of December 31, 1999 the Company had received a total of $3.0 million
in research and development funding and $3.0 million in milestone payments under
the Wyeth-Ayerst Agreement.
In addition, under certain circumstances the Company may have the
opportunity to co-promote products with Wyeth-Ayerst in the United States and
Canada. There can be no assurance that the Company and Wyeth-Ayerst will be
successful in research and drug discovery based on this technology, that any
pre-clinical and clinical drug candidates arising from the collaboration will
generate commercial product candidates that have viable clinical, regulatory and
intellectual property profiles or that any commercial products arising from the
collaboration will enjoy market acceptance. Therefore, there can be no assurance
that any milestones or royalty income will be payable to the Company under its
agreement with Wyeth-Ayerst.
TAISHO PHARMACEUTICAL CO., LTD. In December 1999, Neurocrine entered into
an exclusive agreement (the "Taisho Agreement") with Taisho Pharmaceutical Co.,
Ltd. providing to Taisho an exclusive option to obtain European and Asian
development and commercialization rights for Neurocrine's altered peptide ligand
product, NBI-6024, for Type I Diabetes. In the event Taisho exercises its option
under the Taisho Agreement, Taisho and Neurocrine will form a steering committee
to oversee the worldwide development of NBI-6024 Neurocrine will receive option
fees, license fees, milestone payments and reimbursement of 50% of worldwide
development expenses. In addition, Neurocrine will receive royalties on product
sales in Europe and Japan. Neurocrine has retained all rights to NBI-6024 in
North America. There can be no guarantee that Taisho will exercise its option to
receive rights to NBI-6024 or that following exercise of the option that
Neurocrine and Taisho will be successful in developing and commercializing
NBI-6024. There can be no assurance therefore, that Neurocrine will receive any
milestone or royalty income under the Taisho Agreement.
NOVARTIS PHARMACEUTICALS COMPANY. In January 1996, the Company entered into
a binding letter agreement with Ciba-Geigy (which subsequently became Novartis)
to develop altered peptide ligand therapeutics for the treatment of Multiple
Sclerosis based upon the Company's drug development candidates and expertise in
immunology and protein chemistry. In July 1999, Novartis exercised its right
under the Novartis Agreement to terminate the collaboration effective January 7,
2000. Pursuant to the termination provisions of the agreement, Novartis was
required to continue all funding commitments relating to the collaborative
program, including costs to complete the ongoing Phase II study. In December
1999, the Phase II study was completed and the locked database delivered to the
Company. On January 7, 2000 the Company reacquired the rights to the program and
initiated analysis of the data. No assurance, therefore, can be given that
Neurocrine will initiate or complete additional Phase II or Phase III studies or
that results of any such studies will warrant additional clinical development of
potential product.
ELI LILLY AND COMPANY. In October 1996, Neurocrine entered into a research
and license agreement (the "Lilly Agreement") with Eli Lilly and Company to
collaborate in the discovery, development and commercialization of CRF binding
protein ligand inhibitors for the treatment of central nervous system disorders
including obesity and dementias such as Alzheimer's disease and CRF-2 agonists
for CNS mediated diseases and disorders. Under the Lilly Agreement, Neurocrine
was entitled to receive 3 years of funded research payments. Neurocrine has
received $17.7 million in research payments under the Lilly Agreement, of which
$3.2 million was received in 1999. In October 1999, the funded portion of the
research program concluded as scheduled. The Company has granted Lilly an
exclusive worldwide license to manufacture and market CRF binding protein ligand
antagonists and CRF-2 agonist products. At its option, Neurocrine is entitled to
receive a portion of the profits resulting from sales of products for the
treatment of dementia in the United States (subject to the Company's obligation
to pay a portion of the development costs for such product). There can be no
assurance that Lilly's continued research under the Lilly Agreement will be
successful in discovering any potential products or that Lilly will be
successful in developing, receiving regulatory approvals, or commercializing any
potential products that may be discovered. As a result there can be no assurance
that any product development milestone, royalty, or profit sharing payments will
be made.
NEUROSCIENCE PHARMA INC. In March 1996, Neurocrine formed Neuroscience
Pharma, Inc. ("NPI"), a research and development company. Neurocrine licensed to
NPI certain technology and Canadian marketing rights to the Company's
Neurosteroid and Neurogenomics programs in exchange for 49% of the outstanding
Common Stock of NPI. A group of Canadian institutional investors invested
approximately $9.5 million in NPI in exchange for Preferred Stock of NPI, which
could be exchanged for shares of Neurocrine's Common Stock. During 1997 and 1998
these investors exchanged the Preferred Stock for an aggregate of 1,279,758
shares of Company's Common Stock. In connection with their initial investment in
NPI, such investors also received warrants exercisable for 383,875 shares of the
Company's Common Stock and are eligible to receive additional warrants in the
future in the event that NPI receives certain Canadian government incentives for
research activities. In December 1999, the Company sold its interest in NPI.
RISK FACTORS
ALL OF THE COMPANY'S PRODUCT CANDIDATES ARE AT AN EARLY STAGE OF
DEVELOPMENT. All of the Company's product candidates are in research or
development. Neurocrine has not requested or received regulatory approval to
commercialize any product from the United States Food and Drug Administration
("FDA") or any other regulatory body. Any products that may result from the
Company's research and development programs are not expected to be commercially
available for the foreseeable future, if at all.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Such reasons include the possibilities that the potential products
will:
o be found ineffective or cause harmful side effects during preclinical
testing or clinical trials
o fail to receive necessary regulatory approvals
o be difficult to manufacture on a large scale
o be uneconomical or fail to achieve market acceptance
o be precluded from commercialization by proprietary rights of third
parties
The Company's product candidates require significant additional research
and development efforts. Neurocrine cannot guarantee that:
o regulatory authorities will approve the continued development of the
Company's development candidates
o clinical development of any of the Company's development candidates
will successfully proceed through clinical trials
o later stage clinical trials of the Company's development candidates
will show that they are effective in treatment humans
o required regulatory approvals will be obtained on a timely basis, if
at all
o any products for which approval is obtained will be approved for the
indications requested or be commercially successful
If any of these potential problems occurs, the Company's business would be
materially affected and the price of the Company's stock could decline.
THE COMPANY IS DEPENDENT ON STRATEGIC ALLIANCES. The Company is dependent
upon its corporate partners to provide adequate funding for certain of its
programs. Under these arrangements, the Company's corporate partners are
responsible for (i) selecting compounds for subsequent development as drug
candidates, (ii) conducting preclinical testing and clinical trials and
obtaining required regulatory approvals for such drug candidates, and/or (iii)
manufacturing and commercializing any resulting drugs. If the Company's partners
fail to select a compound the Company has discovered for subsequent development,
fail to gain the requisite regulatory approvals or fail to successfully
commercialize such products it will have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
strategy for development and commercialization of its products is dependent upon
entering into additional arrangements with research collaborators, corporate
partners and others, and upon the subsequent success of these third parties in
performing their obligations. There can be no assurance that the Company will be
able to enter into additional strategic alliances on favorable terms, or at all.
If the Company fails to enter into additional strategic alliances, it would have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company cannot control the amount and timing of resources that its
corporate partners devote to the Company's partnered programs or potential
products. If any of the Company's corporate partners breach or terminate their
agreements with the Company or otherwise fail to conduct their collaborative
activities in a timely manner, the preclinical testing, clinical development or
commercialization of product candidates will be delayed, and the Company will be
required to devote additional resources to product development and
commercialization, or terminate certain development programs. The Company's
strategic alliances with Janssen, Lilly, Taisho and Wyeth-Ayerst are subject to
termination by Janssen, Lilly, Taisho or Wyeth-Ayerst, respectively. There can
be no assurance that Janssen, Lilly, Taisho or Wyeth-Ayerst will not elect to
terminate its strategic alliance with the Company prior to its scheduled
expiration. In addition, if the Company's corporate partners effect a merger
with a third party, there can be no assurance that the strategic alliances will
not be terminated or otherwise materially adversely affected. The termination of
any current or future strategic alliances could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company's corporate partners may develop, either alone or with others, products
that compete with the development and marketing of the Company's products.
Competing products, either developed by the Company's corporate partners or to
which the Company's corporate partners have rights, may result in their
withdrawal of support with respect to all or a portion of the Company's
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that disputes will not arise in the future with respect to the
ownership of rights to any products or technology developed with corporate
partners. These and other possible disagreements with the Company's corporate
partners could lead to delays in the collaborative research, development or
commercialization of certain of the Company's product candidates or could
require or result in litigation or arbitration, which would be time-consuming
and expensive, and would have a material adverse effect on the Company's
business, financial condition and results of operations.
THE COMPANY HAS NO MANUFACTURING CAPABILITIES AND RELIES ON THIRD PARTY
CONTRACTORS. The Company has in the past utilized, and intends to continue to
utilize, third party manufacturing for the production of material for use in the
Company's clinical trials and for the potential commercialization of the
Company's future products. The Company has no experience in manufacturing
products for commercial purposes and does not have any manufacturing facilities.
Consequently, the Company is solely dependent on contract manufacturers for all
production of products for development and commercial purposes. In the event
that the Company is unable to obtain or retain third-party manufacturing, it
will not be able to commercialize its products as planned. The manufacture of
the Company's products for clinical trials and commercial purposes is subject to
cGMP regulations promulgated by the FDA. No assurance can be given that the
Company's third-party manufacturers will comply with cGMP regulations or other
regulatory requirements now or in the future. The Company's current dependence
upon third parties for the manufacture of its products may adversely affect the
Company's profit margin, if any, on the sale of the its future products and its
ability to develop and deliver products on a timely and competitive basis.
THE COMPANY HAS NO MARKETING OR SALES FORCE; THE COMPANY'S PRODUCTS WILL BE
SUBJECT TO SALES AND PHARMACEUTICAL PRICING CONTROLS. The Company has retained
certain marketing or co-promotion rights in North America to certain of its
products under development, and plans to establish its own North American
marketing and sales organization. The Company currently has no experience in
marketing or selling pharmaceutical products and does not have a marketing and
sales staff. In order to achieve commercial success for any product candidate
approved by the FDA, the Company must either develop a marketing and sales force
or enter into arrangements with third parties to market and sell its products.
There can be no assurance that the Company will successfully develop such
experience or that it will be able to enter into marketing and sales agreements
with others on acceptable terms, if at all. If the Company develops its own
marketing and sales capabilities, it will compete with other companies that
currently have experienced and well funded marketing and sales operations. To
the extent that the Company enters into co-promotion or other marketing and
sales arrangements with other companies, any revenues it receives will be
dependent on the efforts of others, and there can be no assurance that such
efforts will be successful.
The Company's business may be materially adversely affected by the
continuing efforts of government and third party payers to contain or reduce the
costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar government control in such jurisdictions. In addition, an
increasing emphasis on managed care in the United States has put, and will
continue to put, pressure on pharmaceutical pricing. Such initiatives and
proposals, if adopted, could decrease the price that Neurocrine receives for any
products it may develop and sell in the future, and thereby have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, to the extent that such proposals or initiatives have a
material adverse effect on other pharmaceutical companies that may be corporate
partners or prospective corporate partners for certain the Company's potential
products, the Company's ability to commercialize the its potential products may
be materially adversely affected.
The Company's ability to commercialize pharmaceutical products may depend
in part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health insurers and other third-party payers. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third-party payers are increasingly challenging the prices charged
for medical products and services. There can be no assurance that any
third-party insurance coverage will be available to patients for any products
the Company develops. Government and other third-party payors are increasingly
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new therapeutic products, and by refusing, in some cases,
to provide coverage for uses of approved products for disease indications for
which the FDA has not granted marketing approval. If government and third party
payors do not provide adequate coverage and reimbursement levels for the
Company's products, the market acceptance of the Company's products would be
materially adversely affected.
THE COMPANY FACES INTENSE COMPETITION. The biotechnology and pharmaceutical
industries are subject to rapid and intense technological change. The Company
faces, and will continue to face, competition in the development and marketing
of its product candidates from academic institutions, government agencies,
research institutions and biotechnology and pharmaceutical companies.
Competition may arise from other drug development technologies, methods of
preventing or reducing the incidence of disease, including vaccines, and new
small molecule or other classes of therapeutic agents. There can be no assurance
that developments by others will not render the Company's product candidates or
technologies obsolete or noncompetitive.
The Company is developing products for the treatment of anxiety disorders
and depression which will compete with well-established products including
Valium(R), marketed by Hoffman-La Roche, Inc., Prozac(R) marketed by Eli Lilly &
Co., Zoloft(R) marketed by Pfizer, Paxil(R) marketed by Smith Kline Beecham and
Celexa(R) marketed by Forrest Labs. Certain technologies under development by
other pharmaceutical companies could result in treatments for these and other
diseases and disorders. In addition, a number of companies are conducting
research on molecules to block CRF to treat anxiety and depression.
The Company is also developing a non-benzodiazepine GABA-A agonist for the
treatment of Insomnia. Ambien(R) and Sonata(R) are non-benzodiazepine GABA-A
agonists currently marketed for the treatment of Insomnia by
Searle/Sanofi-Synthelabo and American Home Products, respectively.
Guilford Pharmaceuticals, Inc. has developed Gliadel(R) which has been
approved for use as an adjunct to surgery to prolong survival in patients with
recurrent multiforme glioblastoma for whom surgical resection is indicated and
will compete with the Company's IL-4 Fusion toxin product NBI-3001.
Temozolomide(R) marketed by Schering Plough may also compete with NBI-3001.
Products that may be competitive with NBI-5788 APL for Multiple Sclerosis
include Betaseron(R) and Avonex(R), similar forms of beta-interferon marketed by
Berlex BioSciences and Biogen, Inc., respectively. Copaxone(R), a peptide
polymer marketed by Teva, has also been approved for the marketing in the United
States and certain other countries for the treatment of relapsing remitting
multiple sclerosis.
There are a number of competitors to products in the Company's research
pipeline. Tacrine(R), marketed by Warner-Lambert Co., and Aricept(R), marketed
by Pfizer Inc, have been approved for the treatment of Alzheimer's dementia.
Sales of these drugs may reduce the available market for any product Neurocrine
develops for these indications. Other biotechnology and pharmaceutical companies
are developing compounds to treat obesity. In the event that one or more of
these products and/or programs are successful, the market for the Company's
products may be reduced or eliminated.
In addition, if the Company receives regulatory approvals for its products,
manufacturing efficiency and marketing capabilities are likely to be significant
competitive factors. At the present time, the Company has no commercial
manufacturing capability, sales force or marketing experience. In addition, many
of the Company's competitors and potential competitors have substantially
greater capital resources, research and development resources, manufacturing and
marketing experience and production facilities than the Company does. Many of
these competitors also have significantly greater experience than the Company in
undertaking preclinical testing and clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals.
THE COMPANY'S SUCCESS IS DEPENDENT ON PATENTS AND PROPRIETARY RIGHTS. The
Company's success will depend on the Company's ability to obtain patent
protection for the Company's products, preserve the Company's trade secrets,
prevent third parties from infringing upon the Company's proprietary rights, and
operate without infringing upon the proprietary rights of others, both in the
United States and internationally. Because of the substantial length of time and
expense associated with bringing new products through the development and
regulatory approval processes in order to reach the marketplace, the
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes.
Accordingly, Neurocrine intends to seek patent protection for the Company's
proprietary technology and compounds. There can be no assurance as to the
success or timeliness in obtaining any such patents, that the breadth of claims
obtained, if any, will provide adequate protection of the Company's proprietary
technology or compounds, or that the Company will be able to adequately enforce
any such claims to protect its proprietary technology and compounds. Since
patent applications in the United States are confidential until the patents
issue, and publication of discoveries in the scientific or patent literature
tend to lag behind actual discoveries by several months, the Company cannot be
certain that it was the first creator of inventions covered by pending patent
applications or that it was the first to file patent applications for such
inventions. Litigation, which could result in substantial cost, may be necessary
to enforce the Company's patent and license rights.
The degree of patent protection afforded to pharmaceutical inventions is
uncertain and any patents that may issue with regard to the Company's potential
products will be subject to this uncertainty. There can be no assurance that
competitors will not develop competitive products outside the protection that
may be afforded by the claims of the Company's patents. Other potential products
that the Company may develop may be novel and therefore would not be covered by
composition of matter patent claims. In addition, the Company is aware of a
number of patent applications, both domestic and European, relating to
neurological compounds, and in particular CRF receptor antagonist potential
therapeutics, that have been filed by or are controlled by other entities,
including the Company's competitors and potential competitors. There can be no
assurance that the Company's potential products can be commercialized without a
license to any patents which may issue from such applications.
The Company may be required to obtain licenses to patents or proprietary
rights of others. As the biotechnology industry expands and more patents are
issued, the risk increases that the Company's potential product may require
licenses of third party technologies. No assurance can be given that any
licenses required under any patents or proprietary rights of third parties would
be made available on acceptable terms, or at all. If Neurocrine does not obtain
such licenses, it could encounter delays in product introductions to design
around such patents, or it could find that the development, manufacture or sale
of products requiring such licenses could be foreclosed. Litigation may be
necessary to defend against or assert such claims of infringement to enforce the
Company's issued patents and to protect the Company's trade secrets or know-how,
or to determine the scope and validity of the proprietary rights of others. In
addition, interference proceedings declared by the United States Patent and
Trademark Office may be necessary to determine the priority of inventions with
respect to the Company's patent applications or those of the Company's
licensors. Litigation or interference proceedings could result in substantial
costs to and diversion of effort by, and may have a material adverse impact on,
us. In addition, there can be no assurance that the Company's efforts would be
successful.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain the Company's competitive position, which it seeks to protect, in part,
by confidentiality agreements with the Company's commercial partners,
collaborators, employees and consultants. The Company has invention or patent
assignment agreements its employees and certain, but not all, commercial
partners and consultants. There can be no assurance that a person not bound by
an invention assignment agreement will not develop relevant inventions. There
can be no assurance that binding agreements will not be breached, that the
Company will have adequate remedies for any breach, or that its trade secrets
will not otherwise become known or be independently discovered by competitors.
As is commonplace in the biotechnology industry, the Company employs
individuals who were previously employed at other biotechnology or
pharmaceutical companies, including the Company's competitors or potential
competitors. To the extent the Company's employees are involved in research
areas at the Company which are similar to those areas in which they were
involved at their former employer, the Company may be subject to claims that
such employees and/or the Company have inadvertently or otherwise used or
disclosed the alleged trade secrets or other proprietary information of the
former employers. Litigation may be necessary to defend against such claims,
which could result in substantial costs and be a distraction to management, and
which may have a material adverse effect on the Company, even if the Company is
successful in defending such claims.
THE COMPANY AND ITS PRODUCTS ARE SUBJECT TO STRICT GOVERNMENT REGULATION.
Regulation by government authorities in the United States and foreign countries
is a significant factor in the development, manufacture and marketing of the
Company's proposed products and in the Company's ongoing research and product
development activities. All of the Company's products will require regulatory
approval by government agencies prior to commercialization. In particular, human
therapeutic products are subject to rigorous preclinical testing and clinical
trials and other approval procedures of the FDA and similar regulatory
authorities in foreign countries. Various federal and state statutes and
regulations also govern or influence testing, manufacturing, safety, labeling,
storage and record-keeping related to such products and their marketing. The
process of obtaining these approvals and the subsequent substantial compliance
with appropriate federal and state statutes and regulations require the
expenditure of substantial time and financial resources. If the Company or the
Company's collaborators or licensees fail to obtain, or encounter delays in
obtaining or maintaining, regulatory approvals it could adversely affect the
marketing of any products the Company develops, the Company's ability to receive
product or royalty revenues and the Company's liquidity and capital resources.
Preclinical testing is generally conducted in laboratory animals to
evaluate the potential safety and the efficacy of a product. The results of
these studies are submitted to the FDA as a part of an Investigational New Drug
Application ("IND"), which must be approved before clinical trials in humans can
begin. Typically, clinical evaluation involves a time consuming and costly
three-phase process.
Phase I Clinical trials are conducted with a small number of subjects
to determine the early safety profile, the pattern of drug
distribution and metabolism.
Phase II Clinical trials are conducted with groups of patients afflicted
with a specific disease in order to determine preliminary
efficacy, optimal dosages and expanded evidence of safety.
Phase III Large-scale, multi-center, comparative trials are conducted with
patients afflicted with a target disease in order to provide
enough data to demonstrate with substantial evidence the efficacy
and safety required by the FDA.
The FDA closely monitors the progress of each of the three phases of
clinical trials and may, at its discretion, re-evaluate, alter, suspend or
terminate the testing based upon the data which have been accumulated to that
point and its assessment of the risk/benefit ratio to the patient.
The results of preclinical testing and clinical trials are submitted to the
FDA in the form of a New Drug Application ("NDA") or Biologics License
Application ("BLA") for approval to commence commercial sales. In responding to
an NDA or BLA, the FDA may grant marketing approval, request additional
information or deny the application if the FDA determines that the application
does not satisfy its regulatory approval criteria. There can be no assurance
that approvals will be granted on a timely basis (or at all). If approved, there
can be no assurance that such approval will include acceptable labeling to
adequately commercialize the product. Similar regulatory procedures must also be
complied with in countries outside the United States.
The results from preclinical testing and early clinical trials may not be
predictive of results obtained in later clinical trials. As a result, there can
be no assurance that clinical trials the Company conducts or the Company's
corporate partners conduct will demonstrate sufficient safety and efficacy to
obtain the requisite regulatory approvals or will result in marketable products
or marketable indications. In addition, late stage clinical trials are often
conducted with patients having the most advanced stages of disease. During the
course of treatment, these patients can die or suffer other adverse medical
effects for reasons that may not be related to the pharmaceutical agent being
tested but which can nevertheless adversely affect clinical trial results. A
number of companies in the biotechnology and pharmaceutical industries have
suffered significant setbacks in advanced clinical trials, even after promising
results in earlier trials. If the Company's drug candidates are not shown to be
safe and effective in clinical trials, the resulting delays in developing other
compounds and conducting related preclinical testing and clinical trials, as
well as the potential need for additional financing, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The rate of completion of clinical trials the Company or its corporate
partners conduct may be delayed by many factors, including slower than expected
patient recruitment or unforeseen safety issues. Any delays in, or termination
of, the clinical trials for the Company's products would have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company or its Company's corporate partners
will be permitted by regulatory authorities to undertake clinical trials for the
Company's products or, if such trials are conducted, that any of the Company's
product candidates will prove to be safe and efficacious or will receive
regulatory approvals.
THERE CAN BE NO ASSURANCE THAT THE COMPANY'S PRODUCTS WILL ACHIEVE MARKET
ACCEPTANCE. The commercial success of the Company's products that are approved
for marketing will depend upon their acceptance by the medical community as safe
and effective. Factors the Company believes will materially affect the market
acceptance of the Company's products are timing of receipt of marketing
approvals, safety and efficacy of the product, emergence of equivalent or
superior products and cost effectiveness of the product
THE COMPANY WILL REQUIRE ADDITIONAL FUNDING. The Company will require
substantial additional funding in order to continue the Company's research and
product development programs, including preclinical testing and clinical trials
of the Company's product candidates, for operating expenses, and for the pursuit
of regulatory approvals for product candidates. The Company may require
additional funding for establishing manufacturing and marketing capabilities in
the future. The Company believes that its existing capital resources, together
with interest income and future payments due under strategic alliances, will be
sufficient to satisfy the Company's current and projected funding requirements
through 2003. However, such resources might be insufficient to conduct research
and development programs as planned. The Company's future capital requirements
will depend on many factors, including:
o continued scientific progress in its research and development programs,
o the magnitude of the Company's R&D programs,
o progress with preclinical testing and clinical trials,
o the time and costs involved in obtaining regulatory approvals,
o the costs involved in filing and prosecuting patent applications and
enforcing patent claims,
o competing technological and market developments,
o the establishment of additional strategic alliances,
o the cost of manufacturing facilities and of commercialization activities
and arrangements, and
o the cost of product in-licensing and any possible acquisitions.
The Company's cash reserves and other liquid assets together with funding
that may be received under the Company's strategic alliances, and interest
income earned thereon, might be inadequate to satisfy the Company's capital and
operating requirements.
The Company intends to seek additional funding through strategic alliances,
and may seek additional funding through public or private sales of the Company's
securities, including equity securities. In addition, the Company has obtained
equipment leases and may continue to pursue opportunities to obtain additional
debt financing in the future. However, additional equity or debt financing might
not be available on reasonable terms, if at all. Any additional equity
financings would be dilutive to the Company's stockholders. If adequate funds
are not available, the Company may be required to curtail significantly one or
more of the Company's research and development programs and/or obtain funds
through arrangements with corporate partners or others that may require us to
relinquish rights to certain of the Company's technologies or product
candidates.
THE COMPANY DEPENDS ON KEY MANAGEMENT AND EMPLOYEES. The Company is highly
dependent on the principal members of its management and scientific staff. The
loss of any of these people could impede the achievement of the Company's
development objectives. Furthermore, recruiting and retaining qualified
scientific personnel to perform research and development work in the future will
also be critical to the Company's success. The Company might be unable to
attract and retain personnel on acceptable terms given the competition among
biotechnology, pharmaceutical and health care companies, universities and
non-profit research institutions for experienced scientists. In addition, the
Company relies on members of its Scientific Advisory Board and a significant
number of consultants to assist us in formulating the its research and
development strategy. All of the Company's consultants and members of the
Scientific Advisory Board are employed by employers other than the Company. They
may have commitments to, or advisory or consulting agreements with, other
entities that may limit their availability to the Company.
POTENTIAL PRODUCT LIABILITY EXPOSURE AND LIMITED INSURANCE COVERAGE. The
use of any of the Company's potential products in clinical trials, and the sale
of any approved products, may expose the Company to liability claims. These
claims might be made directly by consumers, health care providers,
pharmaceutical companies or others selling such products. The Company has
obtained limited product liability insurance coverage for the Company's clinical
trials in the amount of $5.0 million per occurrence and $5 million in the
aggregate. The Company intends to expand or insurance coverage to include the
sale of commercial products if marketing approval is obtained for products in
development. However, insurance coverage is becoming increasingly expensive, and
the Company might not be able to maintain insurance coverage at a reasonable
cost or in sufficient amounts to protect us against losses due to liability. The
Company may be unable to obtain commercially reasonable product liability
insurance for any products approved for marketing. A successful product
liability claim or series of claims brought against the Company could have a
material adverse effect on the Company's business and cause the Company's stock
price to fall.
THE COMPANY'S ACTIVITIES INVOLVE HAZARDOUS MATERIALS. The Company's
research activities involve the controlled use of hazardous materials. The
Company can not eliminate the risk of accidental contamination or injury from
these materials. In the event of an accident, the Company may be held liable for
any resulting damages, which may materially and adversely affect the Company's
financial condition and results of operations.
THE PRICE OF THE COMPANY'S COMMON STOCK IS VOLATILE. The market prices for
securities of biotechnology and pharmaceutical companies have historically been
highly volatile, and the market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies (See price information on page 24). The following factors
may have an adverse effect on the Company's stock price:
o fluctuations in operating results
o announcements of technological innovations or new therapeutic products
by the Company or others
o clinical trial results
o developments concerning strategic alliance agreements,
o government regulation
o developments in patent or other proprietary rights
o public concern as to the safety of the Company's drugs
o future sales of substantial amounts of the Company's Common Stock by
existing stockholders
o comments by securities analysts and general market conditions
The realization of any of the risks described in these "Risk Factors" could
cause the Company's stock price to fall dramatically.
POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's
Certificate of Incorporation provides for staggered terms for the members of the
Company's Board of Directors and does not provide for cumulative voting in the
election of Directors. In addition, the Company's Board of Directors has the
authority, without further action by the stockholders, to fix the rights and
preferences of, and issue shares of, Preferred Stock. In April 1997, the Company
adopted a Stockholder Rights Plan, commonly referred to as a "Poison Pill".
Further, the Company is subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, restricts certain
transactions and business combinations between a corporation and a stockholder
owning 15% of more of the corporation's outstanding voting stock for a period of
three years from the date the stockholder becomes an interested stockholder. The
Stockholder Rights Plan, staggered board terms, lack of cumulative voting,
Preferred Stock provisions and other provisions of the Company's charter and
Delaware corporate law may discourage certain types of transactions involving an
actual or potential change in control of the Company.
SCIENTIFIC ADVISORY BOARD
Neurocrine has assembled a Scientific Advisory Board that currently
consists of 12 individuals. Members of the Scientific Advisory Board are leaders
in the fields of neurobiology, immunology, endocrinology, psychiatry and
medicinal chemistry. Scientific Advisory Board members meet at least yearly to
advise the Company in the selection, implementation and prioritization of its
research programs. Certain members meet more frequently to advise the Company
with regard to its specific programs.
The Scientific Advisory Board presently consists of the following
individuals:
SUSAN G. AMARA, PH.D., a Senior Scientist and Professor, Vollum Institute
for Advanced Biomedical Research is an expert on the cellular and molecular
biology of neurotransmitter transporters, excitatory amino acid transporter
structure and regulation and signaling roles of neurotransmitter transporters.
FLOYD E. BLOOM, M.D., is Chairman of the Department of Neuropharmacology at
The Scripps Research Institute. Dr. Bloom is an internationally recognized
expert in the fields of neuropharmacology and neurobiology. He is the current
editor of the journal, Science.
MICHAEL BROWNSTEIN, M.D., Ph.D., is Chief of the Laboratory of Cell Biology
at the National Institute of Mental Health. He is a recognized expert in
molecular pharmacology as it applies to the field of neuroendocrinology, where
he has defined many of the pharmaceutically important neurotransmitter receptors
and transporter systems.
ROGER D. CONE, PH.D., a senior scientist at the Vollum Institute for
Advanced Biomedical Research, is an international expert on the neuroendocrine
system, with particular expertise on the melanocortin system and the
hypothalamic control of energy homeostasis. Dr. Cone is an editor of the
journal, Endocrinology.
STEPHEN M. HEDRICK, PH.D., is Professor and Chairman of Cell Biology at the
University of California, San Diego. Dr. Hedrick is an expert in T cell
immunology and co-discovered the first T cell receptor genes and identified the
regions responsible for antigen binding. He is an editor for the Journal of
Immunology.
FLORIAN HOLSBOER, M.D., PH.D., is Director at the Max Planck Institute fur
Psychiatrie. Dr. Holsboer is an international expert on the role of
glucocorticoids and neuropeptides, particularly CRF, in neuropsychiatric
disorders. He coordinates the efforts of several hundred scientists and
clinicians at the Max Planck Institute, a major European neuropsychiatric
institute.
GEORGE F. KOOB, PH.D., is a Member of the Department of Neuropharmacology
at The Scripps Research Institute and an Adjunct Professor in the Departments of
Psychology and Psychiatry at the University of California, San Diego. Dr. Koob
is an internationally recognized behavioral pharmacology expert on the role of
peptides in the central nervous system, the neurochemical basis of addiction and
in the development of preclinical behavioral procedures for the screening of
anxiolytic and antidepressant drugs and memory enhancers.
CHARLES B. NEMEROFF, M.D., PH.D., is Chairman and Professor of the
Department of Psychiatry and Behavioral Sciences at Emory University School of
Medicine. Dr. Nemeroff is an internationally recognized expert on the effects of
neuropeptides on behavior and their relevance in clinically important conditions
such as depression, anxiety and schizophrenia, and has published over 400
articles on this subject.
THOMAS ROTH, PH.D., is the Head of the Division of Sleep Disorder Research
at the Henry Ford Hospital Research Institute. Dr. Roth is an internationally
recognized expert in the field of sleep research. His areas of specialization
are sleep homeostasis and neuropharmacology of sleep.
LAWRENCE J. STEINMAN, M.D., is Chief Scientific Advisor, Neuroimmunology of
the Company and a member of Neurocrine's Founding Board of Scientific and
Medical Advisors and its Executive Committee.
WYLIE W. VALE, PH.D., is Chief Scientific Advisor, Neuroendocrinology of
the Company and a member of Neurocrine's Founding Board of Scientific and
Medical Advisors and its Executive Committee. See "Item 10 -- Executive Officers
and Directors of the Registrant."
STANLEY J. WATSON, JR., M.D., PH.D., is Professor and Associate Chair for
Research in the Department of Psychiatry and Co-Director of the Mental Health
Research Institute at the University of Michigan. Dr. Watson is a recognized
expert in neuropeptides and their receptors and their role in psychiatric
diseases and behavior. Dr. Watson is also a member of the Institute of Medicine
of the National Academy of Sciences.
Each of the members of the Scientific Advisory Board have signed consulting
agreements that contain confidentiality provisions and restrict the members of
the Scientific Advisory Board from competing with the Company for the term of
the agreement. Each member of the Scientific Advisory Board receives either a
per diem consulting fee or a retainer fee. Each member also has received stock
or stock options in the Company, which vest over time. All members of the
Scientific Advisory Board are full-time employees of a university or research
institute that has regulations and policies which limit the ability of such
personnel to act as part-time consultants or in other capacities for any
commercial enterprise, including the Company. A change in these regulations or
policies could adversely affect the relationship of the Scientific Advisory
Board member with the Company.
INSURANCE
The Company maintains product liability insurance for clinical trials. The
Company intends to expand its insurance coverage to include the sale of
commercial products if marketing approval is obtained for products in
development. However, insurance coverage is becoming increasingly expensive, and
no assurance can be given that the Company will be able to maintain insurance
coverage at a reasonable cost or in sufficient amounts to protect the Company
against losses due to liability. There can also be no assurance that the Company
will be able to obtain commercially reasonable product liability insurance for
any products approved for marketing. A successful product liability claim or
series of claims brought against the Company could have a material adverse
effect on its business, financial condition and results of operations.
EMPLOYEES
As of December 31, 1999, the Company had 151 employees, consisting of 142
full-time and 9 part-time employees. Of the full-time employees, 50 hold Ph.D.,
M.D., or equivalent degrees. None of the Company's employees are represented by
a collective bargaining arrangement, and the Company believes its relationship
with its employees is good. The Company is highly dependent on the principal
members of its management and scientific staff. The loss of services of any of
these personnel could impede the achievement of the Company's development
objectives. Furthermore, recruiting and retaining qualified scientific personnel
to perform research and development work in the future will also be critical to
the Company's success. There can be no assurance that the Company will be able
to attract and retain personnel on acceptable terms given the competition among
biotechnology, pharmaceutical and health care companies, universities and
non-profit research institutions for experienced scientists. In addition, the
Company relies on members of its Scientific Advisory Board and a significant
number of consultants to assist the Company in formulating its research and
development strategy.
ITEM 2. PROPERTIES
The Company leases approximately 93,000 square feet of space at its
headquarters facility, of which approximately 65% is laboratory facilities
dedicated to research and development. The facility was constructed in 1998 and
is under lease through August 2013. The Company has sublet approximately 13,000
square feet of this facility through August 2000. In addition, the Company
leases approximately 19,000 square feet of laboratory and office space, which
has been sublet to a third party. The lease and sublease on this property expire
in June 2000. The Company's facilities are located in San Diego, California.
The Company believes that its property and equipment are generally well
maintained, in good operating condition and adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
System under the symbol NBIX since the Company's initial public offering on May
23, 1996. Prior to that time there was no established public trading market for
the Company's Common Stock. The following table sets forth for the periods
indicated the high and low sale price for the Common Stock as reported by the
Nasdaq National Market. These prices do not include retail markups, markdowns or
commissions.
1999 1998
------------- --------------
High Low High Low
------------- --------------
1st Quarter ................. $7.50 $4.88 $10.13 $7.56
2nd Quarter ................. 5.88 4.00 9.06 7.38
3rd Quarter ................. 5.94 3.75 8.13 4.00
4th Quarter ................. 29.63 5.38 8.00 4.13
As of March 15, 2000, there were approximately 160 stockholders of record
of the Company's Common Stock. The Company has not paid any cash dividends on
its Common Stock since its inception and does not anticipate paying cash
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Financial
Statements of the Company, which have been audited by Ernst & Young LLP, whose
reports appear elsewhere herein. The information presented below should be read
in conjunction with the Company's Financial Statements and Notes thereto
included elsewhere in this Form 10-K. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The following tables set forth certain financial data with respect to the
Company (in thousands, except per share data). The selected financial data
should be read in conjunction with the consolidated financial statements and
notes thereto.
1999 1998(1) 1997 1996 1995
------- ------- ------- ------ ------
STATEMENT OF OPERATIONS DATA
Revenues
Sponsored research and development ........ $12,171 $8,751 $14,985 $9,092 $3,000
Sponsored research and development from
related party ......................... 491 3,610 -- -- --
Milestones and license fees ............... 3,000 2,500 10,250 9,000 2,750
Grant income and other revenues ........... 1,129 1,176 909 1,124 356
------- ------- ------- ------ ------
Total revenues ............................ 16,791 16,037 26,144 19,216 6,106
Operating expenses
Research and development .................. 29,169 21,803 18,758 12,569 7,740
General and administrative ................ 7,476 6,594 5,664 3,697 2,728
Write-off of acquired in-process research
and development and licenses .......... -- 4,910 -- -- --
------- ------- ------- ------ ------
Total operating expenses .................. 36,645 33,307 24,422 16,266 10,468
Income (loss) from operations ................... (19,854) (17,270) 1,722 2,950 (4,362)
Interest income, net ................... 2,851 4,000 3,931 2,598 839
Other income (expense) ................. 1,066 504 818 574 177
Equity in NPI net losses and other
adjustments ......................... (885) (7,188) (1,130) -- --
------- ------- ------- ------ ------
Net income (loss) before income taxes ........... (16,822) (19,954) 5,341 6,122 (3,346)
Income taxes ........................... -- 1 214 248 --
------- ------- ------- ------ ------
Net income (loss) ............................... $(16,822) $(19,955) $5,127 $5,874 $(3,346)
======== ======== ====== ====== =======
Earnings per share
Basic ..................................... $(0.88) $(1.10) $ 0.30 $ 0.39 $ (0.29)
Diluted ................................... (0.88) (1.10) 0.28 0.36 (0.29)
Shares used in calculation of earnings per share
Basic ..................................... 19,072 18,141 16,930 14,971 11,684
Diluted ................................... 19,072 18,141 18,184 16,127 11,684
BALANCE SHEET DATA
Cash, cash equivalents and short-term investments $ 91,098 $ 62,670 $ 75,092 $ 69,920 $ 18,696
Total assets .................................... 109,222 80,529 91,903 77,957 24,012
Long-term debt and capital lease obligations .... 2,139 2,247 722 847 1,631
Accumulated deficit ............................. (41,672) (24,850) (4,895) (10,022) (15,895)
Total stockholders' equity ...................... 96,354 71,958 83,152 72,767 19,225
- ----------
(1) Includes results of operations and financial position of Northwest
NeuroLogic, Inc. from May 28, 1998, the date of acquisiton (See Note 8 of
the Notes to the Consolidated Financial Statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations of Neurocrine Biosciences, Inc. ("Neurocrine" or the
"Company"), as well as the preceding sections of this Annual Report on Form
10-K, contain forward-looking statements which involve risks and uncertainties,
pertaining generally to the expected continuation of the Company's collaborative
agreements, the receipt of research payments thereunder, the future achievement
of various milestones in product development and the receipt of payments related
thereto, the potential receipt of royalty and profit-sharing payments, the
anticipated dates of commencement of selection of development candidates and the
commencement of clinical trials, the successful continuation of the Company's
research and development programs and the potential development of future
products, the period of time the Company's existing capital resources will meet
its funding requirements, and the Company's financial results of operations.
Actual results could differ materially from those anticipated in such
forward-looking statements as a result of various factors, including those set
forth below, and those outlined in the Business section of Item 1.
OVERVIEW
Since the founding of the Company in January 1992, Neurocrine has been
engaged in the discovery and development of novel pharmaceutical products for
diseases and disorders of the central nervous and immune systems. To date,
Neurocrine has not generated any revenues from the sale of products, and does
not expect to generate any product revenues for the foreseeable future. Revenues
are expected to come from the Company's strategic alliances. Neurocrine has
incurred a cumulative deficit of approximately $41.7 million as of December 31,
1999 and expects to incur additional operating losses in the future, which may
be potentially greater than losses in prior years.
Since inception, Neurocrine has primarily financed its operations through
proceeds received from the sale of its Common Stock in various private and
public offerings, as well as revenues received under corporate collaborations.
The Company operates in a single business segment and has no foreign operations.
RESULTS OF OPERATIONS
The Company's revenues for the year ended December 31, 1999 were $16.8
million compared with $16.0 million in 1998, and $26.1 million in 1997. Although
similar in amount, revenues for 1999 and 1998 have a different composition
resulting from several significant events. During 1999, the Company entered into
a collaborative agreement with Wyeth-Ayerst ("Wyeth") and agreed to a two-year
extension of its 1995 collaboration with Janssen Pharmaceutica, Inc.
("Janssen"). Revenues received in 1999 under the new agreements consisted of
$5.4 million of sponsored research and development funding and $3.0 million in
milestone achievements.
The increase in 1999 revenues generated by the new agreements was offset by
a decline of in revenues received under the Eli Lily, Novartis and NPI
collaborations that were concluded during the year. Revenues in 1998 for
sponsored research and development funding and milestone achievements under
these agreements were $5.0 million and $2.3 million, respectively.
Revenues recorded during 1997 included the initiation of the Eli Lily
collaboration and the final year of sponsored research funding under the 1995
Janssen agreement. Revenues in 1997 for sponsored research and development
funding and milestone achievements under these and the Novartis agreements were
higher than those recorded in 1999 by $12.2 million and $5.3 million,
respectively.
Research and development expenses increased to $29.2 million during 1999
compared with $21.8 million in 1998 and $18.8 million in 1997. Increased
expenses reflect advancement of the Company's drug candidates through
progressive clinical development phases. The Company expects to incur
significant increases in future periods as later phases of development typically
involve an increase in the scope of studies and number of patients treated.
General and administrative expenses increased to $7.5 million during 1999
compared with $6.6 million in 1998 and $5.7 million in 1997. Increased expenses
resulted from additional professional services, including patent and legal
services, to support the Company's expanded clinical development efforts. The
Company anticipates similar increases in general and administrative expenses in
the future as these efforts continue.
During 1998, the Company wrote-off acquired in-process research and
development costs of $4.9 million. This amount included the acquisition of NNL
and the in-licensing of drug candidates for the Company's insomnia and
glioblastoma programs. Both of the in-licensed programs are currently under
clinical development.
Interest income decreased to $3.1 million during 1999 compared with $4.2
million for 1998 and $4.1 million in 1997. The decrease in 1999 compared with
1998 and 1997 primarily resulted from lower investment balances. Management
anticipates an increase in interest income during future periods resulting from
cash reserves generated by the sale of the Company's Common Stock in December
1999 and increased revenues from anticipated collaborations.
In December 1999, the Company sold its investment in NPI. The Company's
proportionate share of NPI operating losses during 1999, 1998 and 1997 were
$764,000, $3.4 million and $1.1 million, respectively. In addition, the Company
recorded a write-down in the investment value of $646,000 during 1999 and $3.8
million during 1998 relating to the decline in cash redemption value of the NPI
Preferred Shares.
Net loss for 1999 was $16.8 million or $0.88 per share compared to net loss
of $20.0 million or $1.10 per share for 1998 and net income of $5.1 million or
$0.30 per share for 1997. Management expects to incur similar operating losses
in the next two to three years as its clinical development efforts continue to
grow.
To date, the Company's revenues have come principally from funded research
and achievements of milestones under corporate collaborations. The nature and
amount of these revenues from period to period may lead to substantial
fluctuations in the results of year-to-date revenues and earnings. Accordingly,
results and earnings of one period are not predictive of future periods.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had cash, cash equivalents and
short-term investments of $91.1 million compared with $62.7 at December 31,
1998. The Company invests its excess cash primarily in investment grade debt
instruments, marketable debt securities of U.S. government agencies and
high-grade commercial paper. Management has established guidelines relative to
diversification and maturities that are intended to maintain safety and
liquidity. The primary market risk associated with such investments is
vulnerability to changes in short-term and long-term U.S. prime interest rates.
For further information regarding the Company's investments, see Notes 1 and 2
of the Notes to the Consolidated Financial Statements.
Net cash used by operating activities during 1999 was $10.3 million
compared with $10.7 million in 1998 and net cash provided of $11.0 million in
1997. The decrease in cash used in operations during 1999 compared with 1998,
resulted primarily from increased sponsored research and milestone revenues
received under the Company's collaborations during 1999. The increase in cash
used during 1998 compared with 1997, resulted primarily from higher sponsored
research and milestone revenues received under the Company's collaborations
during 1997, which included a $5.0 million lump sum payment from Eli Lilly, in
addition to lower operating expenses. Management anticipates current year
operating activities to use approximately 40% more cash than prior years as
clinical development efforts continue to grow.
Net cash used by investing activities during 1999 was $21.2 million
compared with net cash provided of $4.7 million in 1998 and net cash used of
$7.2 million in 1997. The cash used by investing activities during 1999 resulted
primarily from purchase of short-term investments. The cash provided in
investing activities during 1998 compared with cash used in 1997 resulted from
the sale of short-term investments. During 2000, the Company expects to maintain
the majority of its investment positions. Capital equipment purchases are
expected to be $2.4 million of which $2.0 million will be financed through
leasing arrangements.
Net cash provided by financing activities during 1999 was $41.0 million
compared with $1.9 million and $659,000 during 1998 and 1997, respectively. Cash
provided during 1999 resulted from net proceeds received from the private sale
of the Company's Common Stock and exercise of employee stock options. Cash
provided during 1998 resulted from capital lease financing of equipment
purchases. Cash provided during 1997 resulted from the issuance of the Company's
Common Stock upon the exercises of stock options and warrants and proceeds
received from a note payable used to finance the purchase of land. Management
expects current year financing arrangement for equipment leasing and equity
issuances to provide cash similar to that of 1998.
In December 1999, Neurocrine signed an exclusive agreement with Taisho
Pharmaceutical Co. LTD ("Taisho") providing Taisho an option to obtain European
and Asian commercialization rights for Neurocrine's altered peptide ligand (APL)
for diabetes (NBI-6024). Neurocrine would retain all rights in the rest of the
world, including North America..
In September 1999, the Company signed an amendment to its 1995 agreement
with Janssen Pharmaceutica, N.V. ("Janssen"). The amendment provides for a new
sponsored research period designed to identify new corticotropin-releasing
factor ("CRF") receptor antagonists which will be subject to the terms of the
original agreement signed in 1995. The term of the amendment is from April 1999
through February 2001. Under the agreement, the Company will receive $5.0
million in sponsored research funding, up to $3.5 million in milestone
achievements, $500,000 for research already conducted under this certain
technology and reimbursement of all outside and third party costs associated
with the project. As of December 31, 1999, the Company has received $1.9 million
in sponsored research and the $500,000 payment for prior research.
In March 1999, the Company entered into an agreement with Wyeth-Ayerst
Laboratories, the pharmaceutical division of American Home Products Corporation,
on the research, development and commercialization of compounds, which modulate
EAATs for the treatment of neurodegenerative and psychiatric diseases.
The Wyeth-Ayerst Agreement, valued at up to $81 million if a product is
commercialized, includes: sharing proprietary technologies, funding for
research, payments for milestones reached, plus royalties on sales from products
resulting from the collaboration. Under the terms of the agreement, Neurocrine
expects to receive three to five years of funding for research and development
as well as worldwide royalties on commercial sales of products that result from
the collaboration. Wyeth-Ayerst will also provide Neurocrine with access to
chemical libraries for screening within the collaborative field. As of December
31, 1999, the Company has received $3.0 million in sponsored research payments
and $3.0 million for the achievement of four milestones.
The Company believes that its existing capital resources, together with
interest income and future payments due under the strategic alliances, will be
sufficient to satisfy its current and projected funding requirements at least
through the year 2003. However, no assurance can be given that such capital
resources and payments will be sufficient to conduct its research and
development programs as planned. The amount and timing of expenditures will vary
depending upon a number of factors, including progress of the Company's research
and development programs.
Neurocrine will require additional funding for the continuation of its
research and product development programs, for progress with preclinical testing
and clinical trials, for operating expenses, for the pursuit of regulatory
approvals for its product candidates, for the costs involved in filing and
prosecuting patent applications and enforcing or defending patent claims, if
any, the cost of product in-licensing and any possible acquisitions, and may
require additional funding for establishing manufacturing and marketing
capabilities in the future. The Company may seek to access the public or private
equity markets whenever conditions are favorable. The Company may also seek
additional funding through strategic alliances and other financing mechanisms,
potentially including off-balance sheet financing. There can be no assurance
that adequate funding will be available on terms acceptable to the Company, if
at all. If adequate funds are not available, the Company may be required to
curtail significantly one or more of its research or development programs or
obtain funds through arrangements with collaborative partners or others. This
may require the Company to relinquish rights to certain of its technologies or
product candidates.
Neurocrine expects to incur operating losses over the next several years as
its research, development, preclinical testing and clinical trial activities
increase. To the extent that the Company is unable to obtain third party funding
for such expenses, the Company expects that increased expenses will result in
increased losses from operations. There can be no assurance that the Company's
products under development will be successfully developed or that its products,
if successfully developed, will generate revenues sufficient to enable the
Company to earn a profit.
INTEREST RATE RISK
The Company is exposed to changes in interest rates its long-term debt.
Under its current policies, the Company does not use interest rate derivative
instruments to manage exposure to interest rate changes.
During 1997, the Company partially financed the purchase of land under a 5
year note payable for approximately $747,000, which bears interest at a floating
rate of prime plus one quarter percent (8.75% and 8.00% at December 31, 1999 and
1998, respectively). The note is repayable in equal monthly installments
beginning February 1998. At December 31, 1999, the balance of the note was $
461,000. The repayment schedule for the note is $149,000 for each year 2000
through 2002 and $13,000 in the year 2003.
The Company believes that a hypothetical 100 basis point adverse move in
interest rates along the entire interest rate yield curve would not materially
effect the fair value of interest sensitive financial instruments nor the costs
associated with the long-term debt.
IMPACT OF YEAR 2000
Beginning in 1998, the Company conducted a program to address the impact of
the Year 2000 on the processing of date sensitive information by our computer
systems and software ("IT Systems"), embedded systems in our non-computer
equipment ("Non-IT Systems") and relationships with certain third parties.
Assessment, testing, and remediation of the Company's critical systems were
completed in mid-October 1999. Based on survey responses and Year 2000 website
statements, the Company also assessed Year 2000 readiness of third parties with
which it has significant relationships. Contingency plans were formulated for
each of the Company's critical systems and third party relationships, which were
deficient in compliance criteria.
The total costs, both out-of-pocket and internal, of the Company's Year
2000 program were estimated at $175,000 and were funded with available cash.
There are no further costs anticipated. Other internal systems projects were not
significantly deferred as a result of the Year 2000 readiness program, because
much of the Year 2000 assessment and remediation efforts were integrated into
the Company's routine maintenance and upgrade programs. To date, there have been
no material adverse effects caused by the January 1, 2000 date change on the
Company's IT and Non-IT Systems, third party relationships, nor its results of
operations.
CAUTION ON FORWARD-LOOKING STATEMENTS
The Company's business is subject to significant risks, including but not
limited to, the risks inherent in its research and development activities,
including the successful continuation of the Company's strategic collaborations,
the successful completion of clinical trials, the lengthy, expensive and
uncertain process of seeking regulatory approvals, uncertainties associated both
with the potential infringement of patents and other intellectual property
rights of third parties, and with obtaining and enforcing its own patents and
patent rights, uncertainties regarding government reforms and of product pricing
and reimbursement levels, technological change and competition, manufacturing
uncertainties and dependence on third parties. Even if the Company's product
candidates appear promising at an early stage of development, they may not reach
the market for numerous reasons. Such reasons include the possibilities that the
product will be ineffective or unsafe during clinical trials, will fail to
receive necessary regulatory approvals, will be difficult to manufacture on a
large scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk is contained in
Item 7. Management Discussion and Analysis--Interest Rate Risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the list of the Company's Financial Statements filed with this Form
10-K under Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Information required by this item will be contained in the Company's Notice
of 2000 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 1999. Such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be contained in the Company's Notice
of 2000 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 1999. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be contained in the Company's Notice
of 2000 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 1999. Such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be contained in the Company's Notice
of 2000 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 1999. Such information is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1. List of Financial Statements. The following financial statements
of Neurocrine Biosciences, Inc. and Report of Ernst & Young LLP,
Independent Auditors, are included in this report: Report of
Ernst & Young LLP, Independent Auditors Consolidated Balance
Sheet as of December 31, 1999 and 1998 Consolidated Statement of
Operations for the years ended December 31, 1999, 1998 and 1997
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 Consolidated Statement of
Cash Flows for the years ended December 31, 1999, 1998 and 1997
Notes to the Consolidated Financial Statements
2. List of all Financial Statement schedules. All schedules are
omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or
notes thereto.
3. List of Exhibits required by Item 601 of Regulation S-K. See part
(c) below.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter
ended December 31, 1999.
(c) Exhibits. The following exhibits are filed as part of, or incorporated by
reference into, this report:
- --------------------------------------------------------------------------------
Exhibit
Number Description
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated May 1, 1998, between
Northwest NeuroLogic, Inc. NBI Acquisition Corporation and the
Registrant (7)
2.2 Form of Warrant pursuant to the Agreement and Plan of Reorganization
dated May 1, 1998. (7)
3.1 Restated Certificate of Incorporation (1)
3.2 Bylaws (1)
3.3 Certificate of Amendment of Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of warrant issued to existing warrant holders (1)
4.3 Information and Registration Rights Agreement dated September 15,
1992, as amended to date (1)
4.4 Form of Series A warrant issued in connection with the execution by
the Registrant of the Unit Purchase Agreement (see below) (1)
4.5 New Registration Rights Agreement dated March 29, 1996 among the
Registrant and the investors signatory thereto (1)
4.6 Letter of Intent between Northwest NeuroLogic, Inc. and the Registrant
dated February 27, 1998 (6)
4.7* Registration Rights Agreement dated May 28, 1998, between certain
investors and the Registrant (7)
4.8 Amended and Restated Rights Agreement by and between the Registrant
and American Stock Transfer & Trust Company, as Rights Agent, dated as
of July 19, 1999. (9)
4.9 Stock Purchase Agreement dated December 20 through 23, 1999, between
Neurocrine Biosciences, Inc. and each of the Purchasers named therin.
(11)
10.1 Purchase and Sale Agreement and Escrow Instructions between MS Vickers
II, LLC and the Company dated February 13, 1997 (3)
10.2 1992 Incentive Stock Plan, as amended (10)
10.3 1996 Employee Stock Purchase Plan (1)
10.4 1996 Director Stock Option Plan and form of stock option agreement (1)
10.5 Form of Director and Officer Indemnification Agreement (1)
10.6 Employment Agreement dated March 1, 1997, between the Registrant and
Gary A. Lyons, as amended (4)
10.7 Employment Agreement dated March 1, 1997, between the Registrant and
Errol B. De Souza, as amended (4)
10.8 Employment Agreement dated March 1, 1997, between the Registrant and
Paul W. Hawran (4)
10.9 Employment Agreement dated March 1, 1997, between the Registrant and
Stephen Marcus, MD (4)
10.10 Consulting Agreement dated September 25, 1992, between the Registrant
and Wylie A. Vale, Ph.D. (1)
10.11 Consulting Agreement effective January 1, 1992, between the Registrant
and Lawrence J. Steinman, MD (1)
10.12 Lease Agreement dated June 1, 1993, between the Registrant and
Hartford Accident and Indemnity Company, as amended (1)
10.13 Exclusive License Agreement dated as of July 1, 1993, by and between
the Beckman Research Institute of the City of Hope and the Registrant
covering the treatment of nervous system degeneration and Alzheimer's
disease (1)
10.14 Exclusive License Agreement dated as of July 1, 1993, by and between
the Beckman Research Institute of the City of Hope and the Registrant
covering the use of Pregnenolone for the enhancement of memory (1)
10.15 License Agreement dated May 20, 1992, by and between The Salk
Institute for Biological Studies and the Registrant (1)
10.16 License Agreement dated July 17, 1992, by and between The Salk
Institute for Biological Studies and the Registrant (1)
10.17 License Agreement dated November 16, 1993, by and between The Salk
Institute for Biological Studies and the Registrant (1)
10.18 License Agreement dated October 19, 1992, by and between the Board of
Trustees of the Leland Stanford Junior University and the Registrant
(1)
10.19 Agreement dated January 1, 1995, by and between the Registrant and
Janssen Pharmaceutica, N.V. (1)
10.20 Letter Agreement dated January 19, 1996, by and between the Registrant
and Ciba-Geigy Limited (1)
10.21* Unit Purchase Agreement dated March 29, 1996, by and between
Neuroscience Pharma, Inc. the Registrant and the investors signatory
thereto (1)
10.22* Exchange Agreement dated March 29, 1996, by and between Neurocrine
Biosciences (Canada), Inc., the Registrant and the investors signatory
thereto (1)
10.23* Research and Development Agreement dated March 29, 1996, by and
between Neurocrine Biosciences (Canada), Inc. and Nueorscience Pharma,
Inc. (1)
10.24* Intellectual Property and License Grants Agreement dated March 29,
1996, by and between the Registrant and Neurocrine Biosciences
(Canada), Inc. (1)
10.25* Development and Commercialization Agreement dated December 20, 1996,
by and between Ciba-Geigy Ltd. And the Registrant (2)
10.26* Letter and Purchase Order dated June 7, 1996, by and between
Ciba-Geigy and the Registrant (2)
10.27 ThirdLease Amendment dated June 6, 1996, by and between Talcott Realty
I Limited Partnership and the Registrant (2)
10.28* Research and License Agreement dated October 15, 1996, between the
Registrant and Eli Lilly and Company (2)
10.29* Lease between Science Park Center LLC and the Registrant dated
July 31, 1997. (5)
10.30* Option Agreement between Science Park Center LLC (Optionor) and the
Registrant (Optionee) dated July 31, 1997. (5)
10.31* Construction Loan Agreement Science Park Center LLC and the Registrant
dated July 31, 1997. (5)
10.32 Secured Promissory Note Science Park Center LLC and the Registrant
dated July 31, 1997.(5)
10.33* Operating Agreement for Science Park Center LLC between Nexus
Properties, Inc. and the Registrant dated July 31, 1997. (5)
10.34 Form of incentive stock option agreement and nonstatutory stock option
agreement for use in connection with 1992 Incentive Stock Plan (1)
10.35* Patent License Agreement dated May 7, 1998, between the US Public
Health Service and the Registrant (7)
10.36* Patent License Agreement dated April 28, 1998, between and among Ira
Pastan, David Fitzgerald and the Registrant (7)
10.37* Sub-License and Development Agreement dated June 30, 1998, by and
between DOV Pharmaceutical, Inc. and the Registrant (7)
10.38* Warrant Agreement dated June 30, 1998, between DOV Pharmaceutical,
Inc. and the Registrant (7)
10.39* Warrant Agreement dated June 30, 1998, between Jeff Margolis and the
Registrant (7)
10.40* Warrant Agreement dated June 30, 1998, between Stephen Ross and the
Registrant (7)
10.41* Collaboration and License Agreement dated January 1, 1999, by and
between American Home Products Corporation acting through its
Wyeth-Ayerst Laboratories Division and the Registrant (8)
10.42* Employment Agreement dated January 1, 1999, between the Registrant and
Margaret Valeur-Jensen (8)
10.43* Employment Agreement dated February 9, 1998, between the Registrant
and Bruce Campbell (8)
10.44 Amended 1992 Incentive Stock Plan, as amended May 27, 1997, May 27,
1998 and May 21, 1999. (8)
10.45* Agreement by and among Dupont Pharmaceuticals Company, Janssen
Pharmaceutica, N.V. and Neurocrine Biosciences, Inc. dated September
28, 1999.(10)
10.46* Amendment Number One to the Agreement between Neurocrine Biosciences,
Inc. and Janssen Pharmaceutica, N.V. dated September 24, 1999. (10)
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP, Independent Auditors
24 Power of Attorney (see page 35)
27 Financial Data Schedule
- ----------
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-03172)
(2) Incorporated by reference to the Company's Report on Form
10-K for the fiscal year ended December 31, 1996
(3) Incorporated by reference to the Company's amended Quarterly
Report on Form 10-Q filed on August 15, 1997
(4) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q filed on August 14, 1997
(5) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q filed on November 14, 1997
(6) Incorporated by reference to the Company's Report on Form
8-K filed on March 13, 1998.
(7) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q filed on November 16, 1998.
(8) Incorporated by reference to the Company's Report on Form
10-K for the fiscal year ended December 31, 1998
(9) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q filed on August 11, 1999.
(10) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q filed on November 12, 1999.
(11) Incorporated by reference to the Company's Report on Form
S-3 filed on January 20, 2000.
* Confidential treatment has been granted with respect to certain
portions of the exhibit.
(d) Financial Statement Schedules See Item 14(a) (2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEUROCRINE BIOSCIENCES, INC.
A Delaware Corporation
By: /s/Gary A. Lyons
--------------------
Gary A. Lyons
President and Chief Executive Officer
Date: March 30, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gary A. Lyons and Paul Hawran, jointly
and severally his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendment to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Gary A. Lyons President, Chief Executive Officer March 29, 2000
- -------------------- and Director (Principal Executive Officer)
Gary A. Lyons
/s/ Paul W. Hawran Chief Financial Officer (Principal March 29, 2000
- -------------------- Financial and Accounting Officer)
Paul W. Hawran
/s/ Joseph A. Mollica Chairman of the Board of Directors March 29, 2000
- ---------------------
Joseph A. Mollica
/s/ Richard F. Pops Director March 29, 2000
- ---------------------
Richard F. Pops
/s/ Stephen A. Sherwin Director March 29, 2000
- ----------------------
Stephen A. Sherwin
/s/ Wylie W. Vale Director March 29, 2000
- ----------------------
Wylie W. Vale
NEUROCRINE BIOSCIENCES, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors ...................... F-2
Consolidated Balance Sheet ............................................. F-3
Consolidated Statement of Operations ................................... F-4
Consolidated Statement of Stockholders' Equity ......................... F-5
Consolidated Statement of Cash Flows ................................... F-6
Notes to the Consolidated Financial Statements ......................... F-7
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Neurocrine Biosciences, Inc.
We have audited the accompanying consolidated balance sheet of Neurocrine
Biosciences, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Neurocrine
Biosciences, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
San Diego, California
January 27, 2000
NEUROCRINE BIOSCIENCES, INC.
Consolidated Balance Sheet
(in thousands)
December 31,
--------------------
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 21,265 $ 11,708
Short-term investments, available-for-sale ........... 69,833 50,962
Receivables under collaborative agreements ........... 1,458 863
Receivables from related parties ..................... -- 544
Other current assets ................................. 2,257 1,556
--------- ---------
Total current assets .............................. 94,813 65,633
Property and equipment, net .......................... 11,181 10,899
Licensed technology and patent applications costs, net 615 967
Other assets ......................................... 2,613 3,030
--------- ---------
Total assets ...................................... $ 109,222 $ 80,529
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 2,447 $ 2,481
Accrued liabilities .................................. 5,069 2,077
Deferred revenues .................................... 155 169
Current portion of long-term debt .................... 149 149
Current portion of capital lease obligations ......... 825 693
--------- ---------
Total current liabilities ......................... 8,645 5,569
Long-term debt, net of current portion ............... 312 461
Capital lease obligations, net of current portion .... 1,827 1,786
Deferred rent ........................................ 1,005 257
Other liabilities .................................... 1,079 498
--------- ---------
Total liabilities ................................. 12,868 8,571
Commitments and contingencies (See Note 6) ............... -- --
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding ...... -- --
Common Stock, $0.001 par value; 100,000,000 shares
authorized; issued and outstanding shares were
21,608,011 in 1999 and 18,930,865 in 1998 ......... 22 19
Additional paid in capital ........................... 138,798 97,064
Deferred compensation ................................ (411) (187)
Stockholder notes .................................... (119) (119)
Accumulated other comprehensive (loss) income ........ (264) 31
Accumulated deficit .................................. (41,672) (24,850)
--------- ---------
Total stockholders' equity ........................ 96,354 71,958
--------- ---------
Total liabilities and stockholders' equity ........ $ 109,222 $ 80,529
========= =========
See accompanying notes.
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Operations
(in thousands)
Year-ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Revenues:
Sponsored research and development ........ $ 12,171 $ 8,751 $ 14,985
Sponsored research and development
from related party ......... ............ 491 3,610 --
Milestones and license fees ............... 3,000 2,500 10,250
Grant income and other revenues ........... 1,129 1,176 909
-------- -------- --------
Total revenues ......................... 16,791 16,037 26,144
Operating expenses:
Research and development .................. 29,169 21,803 18,758
General and administrative ................ 7,476 6,594 5,664
Write-off of acquired in-process research
and development and licenses ............ -- 4,910 --
-------- -------- --------
Total operating expenses ............... 36,645 33,307 24,422
Income (loss) from operations ................. (19,854) (17,270) 1,722
Other income and expenses:
Interest income ........................... 3,082 4,151 4,084
Interest expense .......................... (231) (151) (153)
Equity in NPI losses and
other adjustments, net ............... ... (885) (7,188) (1,130)
Other income .............................. 1,066 504 818
-------- -------- --------
Income (loss) before taxes .................... (16,822) (19,954) 5,341
Income taxes .................................. -- 1 214
-------- -------- --------
Net income (loss) ............................. $(16,822) $(19,955) $ 5,127
======== ======== ========
Earnings (loss) per common share:
Basic ..................................... $ (0.88) $ (1.10) $ 0.30
Diluted ................................... $ (0.88) $ (1.10) $ 0.28
Shares used in the calculation of earnings
(loss) per common share:
Basic ..................................... 19,072 18,141 16,930
Diluted ................................... 19,072 18,141 18,184
See accompanying notes.
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Stockholders' Equity
(in thousands)
Notes
Common Stock Additional Receivable
----------------- Paid In Unearned from
Shares Amount Capital Compensation Stockholders
------ ------ ------- ------------ ------------
BALANCE AT DECEMBER 31, 1996 ................. 16,777 $ 17 $ 83,234 $ (376) $ (128)
Net income ........................................ -- -- -- -- --
Unrealized loss on short-term investments ......... -- -- -- -- --
Comprehensive income .............................. -- -- -- -- --
Issuance of common stock for warrants ............. 182 -- 59 -- --
Issuance of common stock for option exercises ..... 106 -- 453 -- --
Issuance of common stock pursuant to the
Employee Stock Purchase Plan .................... 22 -- 175 -- --
Issuance of common stock in exchange for
NPI Preferred Stock ............................. 600 1 4,473 -- --
Payments received on stockholder notes ............ -- -- -- -- 8
Deferred compensation and related amortization, net -- -- 192 (63) --
------- ------ -------- -------- --------
BALANCE AT DECEMBER 31, 1997 ................. 17,687 18 88,586 (439) (120)
Net loss .......................................... -- -- -- -- --
Unrealized gain on short-term investments ......... -- -- -- -- --
Comprehensive loss ................................ -- -- -- -- --
Issuance of common stock for warrants ............. 60 -- 142 -- --
Issuance of common stock for option exercises ..... 81 -- 286 -- --
Issuance of common stock pursuant to the
Employee Stock Purchase Plan .................... 30 -- 205 -- --
Issuance of common stock in exchange for
NPI Preferred Stock ............................. 679 1 3,854 -- --
Issuance of common stock for NNL Acquisition ...... 392 -- 4,032 -- --
Issuance of common stock for milestone achievement 2 -- 17 -- --
Payments received on stockholder notes ............ -- -- -- -- 1
Amortization of deferred compensation, net ........ -- -- (58) 252 --
------- ------ -------- -------- --------
BALANCE AT DECEMBER 31, 1998 ................. 18,931 19 97,064 (187) (119)
Net loss .......................................... -- -- -- -- --
Unrealized gain on short-term investments ......... -- -- -- -- --
Comprehensive loss ................................ -- -- -- -- --
Issuance of common stock for option exercises ..... 307 -- 1,507 -- --
Issuance of common stock pursuant to the Employee
Stock Purchase Plan .............................. 42 -- 213 -- --
Issuance of common stock, net of offering costs ... 2,328 3 39,293 -- --
Amortization of deferred compensation, net ........ -- -- 721 (224) --
------- ------ -------- -------- --------
BALANCE AT DECEMBER 31, 1999 ................. 21,608 $ 22 $138,798 $ (411) $ (119)
======= ====== ======== ======== ========
See accompanying notes.
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Stockholders' Equity
(continued) (in thousands)
Accumulated
Other Total
Comprehensive Accumulated Stockholders'
Income (Loss) Deficit Equity
------------- --------- ----------
BALANCE AT DECEMBER 31, 1996 ................. $ 42 $ (10,022) $ 72,767
Net income ........................................ -- 5,127 5,127
Unrealized loss on short-term investments ......... (40) -- (40)
----------
Comprehensive income .............................. -- -- 5,087
Issuance of common stock for warrants ............. -- -- 59
Issuance of common stock for option exercises ..... -- -- 453
Issuance of common stock pursuant to the
Employee Stock Purchase Plan .................... -- -- 175
Issuance of common stock in exchange for
NPI Preferred Stock ............................. -- -- 4,474
Payments received on stockholder notes ............ -- -- 8
Deferred compensation and related amortization, net -- -- 129
--------- --------- ----------
BALANCE AT DECEMBER 31, 1997 ................. 2 (4,895) 83,152
Net loss .......................................... -- (19,955) (19,955)
Unrealized gain on short-term investments ......... 29 -- 29
----------
Comprehensive loss ................................ -- -- (19,926)
Issuance of common stock for warrants ............. -- -- 142
Issuance of common stock for option exercises ..... -- -- 286
Issuance of common stock pursuant to the
Employee Stock Purchase Plan .................... -- -- 205
Issuance of common stock in exchange for
NPI Preferred Stock ............................. -- -- 3,855
Issuance of common stock for NNL Acquisition ...... -- -- 4,032
Issuance of common stock for milestone achievement -- -- 17
Payments received on stockholder notes ............ -- -- 1
Amortization of deferred compensation, net ........ -- -- 194
--------- --------- ----------
BALANCE AT DECEMBER 31, 1998 ................. 31 (24,850) 71,958
Net loss .......................................... -- (16,822) (16,822)
Unrealized gain on short-term investments ......... (295) -- (295)
---------
Comprehensive loss ................................ -- -- (17,117)
Issuance of common stock for option exercises ..... -- -- 1,507
Issuance of common stock pursuant to the Employee
Stock Purchase Plan .............................. -- -- 213
Issuance of common stock, net of offering costs ... -- -- 39,296
Amortization of deferred compensation, net ........ -- -- 497
--------- --------- ----------
BALANCE AT DECEMBER 31, 1999 ................. $ (264) $ (41,672) $ 96,354
========= ========= ==========
See accompanying notes.
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Cash Flows
(in thousands)
Twelve Months Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net (loss) income ........................................ $ (16,822) $ (19,955) $ 5,127
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Acquisition of NNL for Common Stock ................ -- 4,200 --
Equity in NPI losses and other adjustments ......... 885 7,188 1,130
Depreciation and amortization ...................... 2,066 1,720 1,322
Loss on abandonment of assets ...................... 133 460 76
Gain on sale of equipment .......................... -- (15) --
Deferred revenues .................................. (14) (1,750) 1,000
Deferred rent ...................................... 748 (402) 384
Compensation expenses recognized for stock options . 497 194 129
Change in operating assets and liabilities,
net of acquired business:
Accounts receivable and other current assets ... (752) (2,898) 885
Other non-current assets ....................... (357) 291 (1,274)
Accounts payable and accrued liabilities ....... 3,360 271 2,213
--------- --------- ---------
Net cash flows (used in) provided by operating activities (10,256) (10,696) 10,992
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of short-term investments ...................... (87,728) (41,618) (113,080)
Sales/maturities of short-term investments ............... 68,562 50,006 112,315
Purchases of property and equipment, net ................. (2,061) (3,683) (6,440)
--------- --------- ---------
Net cash flows provided by (used in) investing activities (21,227) 4,705 (7,205)
CASH FLOW FROM FINANCING ACTIVITIES
Issuance of Common Stock ................................. 41,016 433 687
Proceeds received from long-term obligations ............. 981 2,500 747
Principal payments on long-term obligations .............. (957) (1,006) (783)
Payments received on notes receivable from stockholders .. -- 1 8
--------- --------- ---------
Net cash flows provided by financing activities .......... 41,040 1,928 659
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ..... 9,557 (4,063) 4,446
Cash and cash equivalents at beginning of the period ..... 11,708 15,771 11,325
--------- --------- ---------
Cash and cash equivalents at end of the period ........... $ 21,265 $ 11,708 $ 15,771
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Supplemental disclosures of cash flow information:
Interest paid $ 231 $ 150 $ 153
Taxes paid - 1 250
Schedule of noncash investing and financing activities:
Conversion of note receivable to investment in NPI - $ 1,401 -
Conversion of NPI Preferred Stock to investment in NPI - 3,855 4,474
See accompanying notes.
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES. Neurocrine Biosciences, Inc. (the "Company") was
incorporated in California on January 17, 1992 and was reincorporated in
Delaware in March 1996. The Company is a neuroscience-based company focused on
the discovery and development of novel therapeutics for neuropsychiatric,
neuroinflammatory and neurodegenerative diseases and disorders. The Company's
neuroscience, endocrine and immunology disciplines provide a unique biological
understanding of the molecular interaction between central nervous, immune and
endocrine systems for the development of therapeutic interventions for anxiety,
depression, insomnia, stroke, malignant brain tumors, multiple sclerosis,
obesity and diabetes.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Neurocrine Biosciences, Inc. (the "Company") and its wholly
owned subsidiary, Northwest NeuroLogic, Inc. ("NNL"). Significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
a maturity of three months or less when purchased, to be cash equivalents.
SHORT-TERM INVESTMENTS AVAILABLE-FOR-SALE. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Debt
and Equity Securities," short-term investments are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in comprehensive income. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in investment income. Realized gains and losses and declines in value
judged to be other-than-temporary, if any, on available-for-sale securities are
included in investment income. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities classified
as available-for-sale are included in interest income.
The Company invests its excess cash primarily in investment grade debt
instruments, marketable debt securities of U.S. government agencies, and
high-grade commercial paper. Management has established guidelines relative to
diversification and maturities that maintain safety and liquidity.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost.
Depreciation and amortization are provided over the estimated useful lives of
the assets, ranging from three to ten years, using the straight-line method.
LICENSED TECHNOLOGY AND PATENT APPLICATION COSTS. Licensed technology
consists of worldwide licenses to patents related to the Company's platform
technology which are capitalized at cost and amortized over periods of 7 to 11
years. These costs are regularly reviewed to determine that they include costs
for patent applications the Company is pursuing. Costs related to applications
that are not being actively pursued are evaluated under Accounting Principles
Board Statement 17 "Intangible Assets" and are adjusted to an appropriate
amortization period which generally results in immediate write-off. Assets
written-off during 1999 had a net book value of $133,000. Accumulated
amortization at December 31, 1999 and 1998 was $685,000 and $679,000,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS. In accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", if indicators of impairment exist, the Company assesses the
recoverability of the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through undiscounted future
operating cash flows. If impairment is indicated, the Company measures the
amount of such impairment by comparing the carrying value of the asset to the
present value of the expected future cash flows associated with the use of the
asset. While the Company's current and historical operating and cash flow losses
are indicators of impairment, the Company believes the future cash flows to be
received from the long-lived assets will exceed the assets carrying value, and
accordingly the Company has not recognized any impairment losses through
December 31, 1999.
INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION. The Company operates in a
single industry segment - the discovery and development of therapeutics for the
treatment of diseases and disorders of the central, nervous and immune systems.
The Company has no foreign operations.
RESEARCH AND DEVELOPMENT REVENUE AND EXPENSES. Revenues under collaborative
research agreements are recognized over the period specified in the related
agreement. Advance payments received in excess of amounts earned are classified
as deferred revenue and recognized as income in the period earned. Revenues from
government grants are recognized based on the performance requirements of the
grant or as the grant expenditures are incurred. Research and development costs
are expensed as incurred. Such costs include proprietary research and
development activities and expenses associated with collaborative research
agreements. Research and development expenses relating to collaborative
agreements and grants were approximately $7.2 million, $12.0 million and $9.4
million during 1999, 1998 and 1997, respectively.
STOCK-BASED COMPENSATION. As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations in accounting for stock-based employee
compensation. Deferred compensation is recorded for employee options only in the
event that the fair market value of the stock on the date of the option grant
exceeds the exercise price of the options. The deferred compensation is
amortized over the vesting period of the options.
Deferred charges for options granted to non-employees has been determined
in accordance with SFAS No. 123 and EITF 96-18 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. Deferred charges for options granted to
non-employees are periodically remeasured as the underlying options vest and are
included in deferred compensation in the financial statements.
EARNINGS PER SHARE. Basic and diluted earnings per share are calculated in
accordance with FASB Statement No. 128, "Earnings per Share". All earnings per
share amounts for all periods have been presented, and where appropriate, were
restated to conform to the requirements of Statement No. 128.
COMPREHENSIVE INCOME. Comprehensive income is calculated in accordance with
FASB Statement No. 130, "Comprehensive Income". The Statement requires the
disclosure of all components of comprehensive income, including net income and
changes in equity during a period from transactions and other events and
circumstances generated from non-owner sources. The Company's other
comprehensive income consisted of gains and losses on short-term investments and
is reported in the consolidated statement of stockholders' equity.
RECLASSIFICATIONS. Certain reclassifications have been made to prior year
amounts to conform to the presentation for the year ended December 31, 1999.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements,"("SAB 101"). Among other things,
SAB 101 discusses the SEC staff's view on accounting for non-refundable up-front
fees received in connection with collaboration agreements. The Company is
currently evaluating the impact of SAB 101 on the accounting for up-front
license fees received. Should the Company determine that a change in its
accounting policy is necessary, such a change will be made effective January 1,
2000 and would result in a charge to results of operations for the cumulative
effect of the change. This amount, if recognized, would be recorded as deferred
revenue and recognized as revenue in future periods. Prior financial statements
would not be restated.
In June 1998, the Financial Accounting Standards Board issued SFAS
133,"Accounting for Derivative Instruments and Hedging Activities". The Company
expects to adopt the new Statement effective January 1, 2001. This statement
requires the recognition of all derivative instruments as either assets or
liabilities in the statement of financial position and the measurement of those
instruments at fair value. The Company does not expect the adoption of this
statement to have a material impact on its results of operations or financial
position.
NOTE 2. SHORT-TERM INVESTMENTs
The following is a summary of short-term investments classified as
available-for-sale securities (in thousands):
--------- ----------- ----------- ---------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ----------- ---------
DECEMBER 31, 1999
US Government securities ....... $ 1,997 $ -- $ (24) $ 1,973
Corporate debt securities ...... 68,100 7 (247) 67,860
------- ------- ------- -------
Total securities ...... $70,097 $ 7 $ (271) $69,833
======= ======= ======= =======
DECEMBER 31, 1998
US Government securities ....... $ 6,000 $ 17 $ -- $ 6,017
Certificates of deposit ........ 260 -- -- 260
Commercial paper ............... 5,420 -- -- 5,420
Corporate debt securities ...... 39,141 61 (87) 39,115
Other .......................... 110 40 -- 150
------- ------- ------- -------
Total securities ...... $50,931 $ 118 $ (87) $50,962
======= ======= ======= =======
Gross realized gains and losses were not material for any of the reported
periods. The amortized cost and estimated fair value of debt securities by
contractual maturity at December 31, 1999, are shown below (in thousands).
Amortized Estimated
Cost Fair Value
------- -------
Due in one year or less .......................... $ 2,004 $ 2,000
Due after one year through four years ............ 68,093 67,833
------- -------
$70,097 $69,833
======= =======
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998, consist of the
following (in thousands):
1999 1998
-------- --------
Land ......................................... $ 5,299 $ 5,299
Furniture and fixtures ....................... 1,982 1,856
Equipment .................................... 9,046 7,356
Leasehold improvements ....................... 875 562
-------- --------
17,202 15,073
Less accumulated depreciation and amortization (6,021) (4,174)
-------- --------
Net property and equipment ................... $ 11,181 $ 10,899
======== ========
Furniture and equipment under capital leases were $6.7 million and $5.8
million at December 31, 1999 and 1998, respectively. Accumulated depreciation of
furniture and equipment under capital leases totaled $4.0 million and $3.1
million at December 31, 1999 and 1998, respectively. In 1999, the Company
entered into $981,000 of additional capital leases. Similar transactions in 1998
totaled $2.5 million.
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1999 and 1998 consist of the following
(in thousands):
1999 1998
------ ------
Accrued employee benefits ........... $1,331 $1,120
Accrued professional fees ........... 270 438
Accrued offering expenses ........... 1,222 --
Accrued development costs ........... 1,828 333
Taxes payable ........... ........... 27 15
Other accrued liabilities ........... 391 171
------ ------
$5,069 $2,077
====== ======
NOTE 5. LONG-TERM DEBT
During 1997, the Company partially financed the purchase of land under a 5
year note payable for approximately $747,000, which bears interest at a floating
rate of prime plus one quarter percent (8.75% and 8.00% at December 31, 1999 and
1998, respectively). The note is repayable in equal monthly installments
beginning February 1998.
At December 31, 1999, the balance of the note was $ 461,000. The repayment
schedule for the note is $149,000 for each year 2000 through 2002 and $13,000 in
the year 2003.
NOTE 6. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE OBLIGATIONS. The Company has financed certain equipment under
capital lease obligations, which expire on various dates through the year 2004
and bear interest at rates between 7.6% and 10.1%. The lease commitments are
repayable in monthly installments.
OPERATING LEASES. In May 1997, the Company purchased two adjacent parcels
of land in San Diego for $5.0 million. In August 1997, the Company sold one
parcel to Science Park Center LLC, a California limited liability company (the
"LLC"), of which the Company owns a minority interest, in exchange for a note
receivable in the amount of $3.5 million plus interest of 8.25%. However, for
accounting purposes, this transaction does not qualify as a sale under SFAS No.
98 and therefore, the entire amount of the note receivable is included in land.
The amount included in land at December 31, 1999 and 1998 was $3.8 million.
During 1998, the LLC constructed an expanded laboratory and office complex
which was leased by the Company under a 15 year operating lease, commencing
September 1998. The Company has the option to purchase the facility at any time
during the term of the lease at a predetermined price. The lease contains a 4%
per year escalation in base rent fees, effective with each anniversary. In
November 1998, the Company subleased a portion of this facility to an unrelated
third party through August 2000. The Company will hold the second parcel of land
until such time as additional facilities are required.
In November 1998, the lease obligation relating to the Company's former
operating facility was amended to reduce the amount of square footage leased and
to shorten the lease term to conclude in June 2000. The Company currently
subleases this space to an unrelated third party and is obligated to continue
this arrangement through June 2000.
Repayment schedules for the capital lease obligations and operating lease
commitments at December 31, 1999 are as follows (in thousands):
Capital Operating
Fiscal Year: Leases Leases
--------- ---------
2000 .......................................... $ 996 $ 2,731
2001 .......................................... 1,163 2,525
2002 .......................................... 573 2,626
2003 .......................................... 173 2,731
2004 .......................................... 66 2,841
Thereafter .................................... - 29,880
--------- ---------
Total minimum payments ...................... $ 2,971 $ 43,334
=========
Less: amounts representing interest .......... (319)
----------
Future minimum payments ....................... 2,652
Less: current portion ........................ (825)
----------
Future payments on capital lease obligations .. $ 1,827
==========
Rent expense was $2,730,000, $2,379,000 and $2,139,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. Sublease income was $1.2
million, $837,000 and $917,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
Future minimum sublease income to be received under non-cancelable
subleases at December 31, 1999 will be $657,000 for the year ending December 31,
2000.
LICENSING AND RESEARCH AGREEMENTS. The Company has entered into licensing
agreements with various universities and research organizations. Under the terms
of these agreements, the Company has received licenses to technology, or
technology claimed, in certain patents or patent applications. The Company is
required to pay royalties on future sales of products employing the technology
or falling under claims of a patent, and, certain agreements require minimum
royalty payments. Certain agreements also require the Company to make payments
upon the achievement of specified milestones.
NOTE 7. STOCKHOLDERS' EQUITY
COMMON STOCK ISSUANCES. From inception through 1996, the Company has issued
Common Stock in various private and public offerings, as well as to corporate
collaborators, at prices between $5.00 and $10.50 per share resulting in
aggregate net proceeds of approximately $72.1 million. In December 1999, the
Company sold 2.3 million shares of Common Stock in a private placement at $18.00
per share. The offering resulted in net proceeds of $39.3 million.
OPTIONS. The Company has authorized 5.6 million shares of its Common Stock
for issuance upon exercise of options or stock purchase rights granted under the
1992 Incentive Stock Option Plan, 1996 Director Option Plan and the 1997 NNL
Stock Option Plan (collectively "the Plan"). These plans provide for the grant
of stock options and stock purchase rights to officers, directors, and employees
of, and consultants and advisors to, the Company. Options under these plans have
terms of up to 10 years from the date of grant and may be designated as
incentive stock options or nonstatutory stock options under the Plan.
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
1999 1998 1997
------------------- ------------------- -------------------
Weighted Weighted Weighted
Options Average Options Average Options Average
(in Exercise (in Exercise (in Exercise
thousands) Price thousands) Price thousands) Price
------------------- ------------------- -------------------
Outstanding at
January 1, .... 2,793 $ 6.02 2,653 $ 5.84 1,739 $ 4.48
Granted ......... 1,142 $ 6.03 677 $ 6.26 1,072 $ 7.86
Exercised ....... (412) $ 4.79 (81) $ 3.64 (100) $ 4.10
Canceled ........ (365) $ 6.52 (456) $ 5.76 (58) $ 5.88
----- ------ ----- ------ ----- ------
Outstanding at
December 31, .. 3,158 $ 5.91 2,793 $ 6.02 2,653 $ 5.85
===== ====== ===== ====== ===== ======
A summary of options outstanding as of December 31, 1999 follows:
Options Outstanding Options Exercisable
- -------------- ----------------------------------- ----------------------------
Weighted Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise As of Exercise
Prices 12/31/99 Life Price 12/31/99 Price
- --------------- ---------------------------------- ----------------------------
$0.02 to $2.50 478 4.3 $ 2.29 425 $ 2.42
$4.03 to $4.25 459 5.6 $ 4.24 406 $ 4.25
$4.66 to $5.25 501 8.7 $ 4.99 119 $ 5.01
$5.27 to $6.50 410 8.8 $ 5.79 97 $ 5.97
$6.56 to $7.37 509 7.7 $ 7.16 271 $ 7.25
$7.50 to $8.25 361 7.2 $ 7.95 219 $ 8.00
$8.31 to $20.50 440 7.4 $ 9.66 251 $ 9.04
----- --- ------ ----- ------
3,158 7.1 $ 5.91 1,788 $ 5.54
The weighted average fair values of the options granted during 1999, 1998
and 1997 were $3.75, $5.59 and $5.01, respectively.
Pro forma information regarding net income (loss) is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model using the following weighted-average assumptions for 1999, 1998
and 1997, respectively: risk-free interest rates of 6.4%, 5.5% and 5.8%; a
dividend yield of 0.0% (for all years), volatility factors of the expected
market price of the Company's common stock of .74, .88 and .43; and a weighted
average expected life of the option of 5 years (for all years presented).
For purposes of pro forma disclosures, the estimated fair value of the
options granted is amortized to expense over the options' vesting period. The
pro forma effect on net losses for 1999 and 1998 and net income in 1997, is not
likely to be representative of the effects on reported income or loss in future
years because these amounts reflect less than full vesting for options granted
during these periods. The Company's pro forma information for the years ended
December 31, 1999, 1998 and 1997 follows (in thousands, except for per share
data):
1999 1998 1997
--------- --------- --------
Net income (loss) as reported $(16,822) $(19,955) $5,127
Earnings (loss) per share (diluted) $ (0.88) $ (1.10) $ 0.28
Pro forma net income (loss) $(18,303) $(20,758) $4,364
Pro forma earnings (loss) per share (diluted) $ (0.96) $ (1.14) $ 0.24
EMPLOYEE STOCK PURCHASE PLAN. The Company has reserved 125,000 shares of
Common Stock for issuance under the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). The Purchase Plan permits eligible employees to purchase
Common Stock through payroll deductions at a purchase price equal to 85% of the
lesser of the fair market value per share of Common Stock on the start date of
an offering period or on the date on which the shares are purchased. Through
December 31, 1999, 93,000 shares had been issued pursuant to the Purchase Plan.
WARRANTS. The Company has outstanding warrants to purchase 384,000 shares
of Common Stock at an exercise price of $10.50 per share. These warrants
generally expire in 2007. At December 31, 1999, all outstanding warrants were
exercisable.
The following shares of Common Stock are reserved for future issuance at
December 31, 1999 (in thousands):
Stock option plans 3,653
Employee stock purchase plan 32
Warrants 384
-----
Total 4,069
=====
Of the shares available for future issuance under the Plan, 3.2 million are
outstanding grants and 495,000 remain available for future grant.
NOTE 8. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND LICENSES
NORTHWEST NEUROLOGIC, INC. In May 1998, the Company acquired the assets
and liabilities of Northwest NeuroLogic, Inc. ("NNL"), in exchange for the
Company's Common Stock and stock options valued at $4.2 million. The acquisition
was accounted for as a purchase and, accordingly, the purchase price was
allocated to the assets acquired and the liabilities assumed based on the
estimated fair market values. Substantially all the purchase price was allocated
to the in-process research and development. The value allocated to the
technology was then expensed because it had not reached technological
feasibility and had no future alternative uses. Since the acquisition, the
operations of NNL have been included in the Company's consolidated statements of
operations.
The following are pro forma unaudited results of operations for the year
ended December 31, 1998 (in thousands, except per share data) had the purchase
of NNL been consummated as of January 1, 1998. This pro forma information is not
necessarily indicative of the actual results that would have been achieved nor
is it necessarily indicative of future results.
Revenues ............................. $16,325
Net loss ............................. (20,013)
Loss per share basic and diluted ..... $ (1.09)
OTHER. During 1998, the Company purchased licenses for technologies
relating to insomnia and brain cancer in the amount of $710,000. These projects
are in the early stages of development, have not reached technological
feasibility and have no known alternative uses. Consequently, the costs of these
licenses were expensed.
NOTE 9. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
TAISHO. In December 1999, Neurocrine signed an exclusive agreement with
Taisho Pharmaceutical Co. LTD ("Taisho") providing Taisho an option to obtain
European and Asian commercialization rights for Neurocrine's altered peptide
ligand (APL) for diabetes (NBI-6024). Neurocrine would retain all rights in the
rest of the world, including North America. The resulting collaboration could be
valued at up to $45 million, if a product is commercialized, consisting of:
licensing and option fees, payments for certain development and regulatory
milestones, and reimbursement of 50% of the worldwide development expenses. In
addition, Neurocrine would receive royalties on product sales in Europe and
Japan.
WYETH-AYERST. In March 1999, the Company entered into an agreement with
Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products
Corporation, on the research, development and commercialization of compounds
which modulate excitatory amino acid transporters (EAATs) for the treatment of
neurodegenerative and psychiatric diseases. EAATs are part of the family of
neurotransmitter transporters and play a key role in regulating the actions of
neurotransmitters and brain function.
The agreement, valued at up to $81 million if a product is commercialized,
includes: sharing proprietary technologies, funding for research, payments for
milestones reached, plus royalties on sales from products resulting from the
collaboration. Under the terms of the agreement, Neurocrine expects to receive
three to five years of funding for research and development as well as worldwide
royalties on commercial sales of products that result from the collaboration.
Wyeth-Ayerst will also provide Neurocrine with access to chemical libraries for
screening within the collaborative field. As of December 31, 1999, the Company
has received $3.0 million in sponsored research payments and $3.0 million for
the achievement of four milestones.
ELI LILLY. In October 1996, the Company entered into an agreement with Eli
Lilly and Company under which the Company expects to receive $22.0 million in
research payments of which $17.7 million have been received as of December 31,
1999. The Company is also entitled to milestone payments for certain development
and regulatory accomplishments. The Company will have the option to receive
co-promotion rights and share profits from commercial sales of select products,
which result from the collaboration in the U.S. or receive royalties on U.S.
product sales. The Company will receive royalties on product sales for the rest
of the world.
The collaborative research portion of the agreement was completed as
scheduled in 1999. The Company will continue to receive milestone payments and
royalties upon the successful continuation of the development portion of the
agreement, if any.
JANSSEN. In January 1995, the Company entered into a research and
development agreement (the "Janssen Agreement") with Janssen, under which
Janssen paid the Company $2.0 million in up-front license fees and $9.7 million
in sponsored research payments during the three-year term of the collaborative
research portion of the agreement. The research portion of the agreement was
completed in 1997.
Under the Janssen Agreement, the Company is entitled to receive up to $10.0
million in milestone payments for the indications of anxiety, depression and
substance abuse, and up to $9.0 million in additional milestone payments for
other indications. Milestone payments of $3.5 million had been received as of
December 31, 1998. There were no additional milestone payments received during
1999. The Company has granted Janssen an exclusive worldwide license to
manufacture and market products developed under the Janssen Agreement. The
Company is entitled to receive royalties on worldwide product sales and has
certain rights to co-promote such products in North America. Janssen is
responsible for funding all clinical development and marketing activities,
including reimbursement to Neurocrine for its promotional efforts, if any.
The collaborative research portion of the agreement was completed as
scheduled in 1997 with the selection of a clinical candidate and the
commencement of clinical trials in Europe. The Company will continue to receive
milestone payments and royalties upon the successful continuation of the
development portion of the agreement. Janssen has the right to terminate the
Agreement upon six months notice. However, in the event of termination, other
than termination by Janssen for cause or as a result of the acquisition of
Neurocrine, all product and technology rights become the exclusive property of
Neurocrine.
In September 1999, the Company signed an amendment to its 1995 agreement
with Janssen Pharmaceutica, N.V. ("Janssen"). The amendment provides for a new
sponsored research period designed to identify new corticotropin-releasing
factor ("CRF") receptor antagonists which will be subject to the terms of the
original agreement signed in 1995. The term of the amendment is from April 1999
through February 2001. Under the agreement, the Company will receive $5.0
million in sponsored research funding, up to $3.5 million in milestone
achievements, $500,000 for research already conducted under this certain
technology and reimbursement of all outside and third party costs associated
with the project. As of December 31, 1999, the Company has received $1.9 million
in sponsored research and the $500,000 payment for prior research.
NOVARTIS. In January 1996, the Company entered into an agreement with
Novartis under which Novartis paid the Company $5.0 million in up-front license
fees and was obligated to provide Neurocrine with $7.0 million in research and
development funding during the first two years of the agreement and up to $15.5
million in further research and development funding thereafter. As of December
31, 1999, the Company has received $18.8 million in sponsored research and
development payments and $9.1 million of milestone payments.
On July 7, 1999, Novartis exercised its right to terminate the Development
and Commercialization Agreement, effective January 7, 2000. As a result,
Neurocrine will reacquire the worldwide rights to its multiple sclerosis
compound, MSP771.
NOTE 10. RELATED PARTY TRANSACTIONS
NEUROSCIENCE PHARMA, INC. In March 1996, the Company along with a group of
Canadian institutional investors (the "Canadian Investors") established
Neuroscience Pharma Inc. ("NPI"). The Company's contribution was to license
certain technology and Canadian marketing rights to NPI. The Canadian Investors
contributed approximately $9.5 million in cash in exchange for the Preferred
Stock of NPI, which was convertible into the Company's Common Stock at the
option of the Canadian Investors, and warrants exercisable for 383,875 shares of
the Company's Common Stock at an exercise price of $10.50 per share. The
Canadian Investors are also eligible to receive additional warrants upon the
attainment of certain additional funding.
During 1997 and 1998, the Investors converted their Preferred Shares to the
Company's Common Stock. As a result, the Company recorded an investment in NPI
equal to the market value of Common Stock issued in exchange for the Preferred
Shares and has recognized its proportionate share of the NPI net losses in
accordance with the equity method of accounting. Equity in NPI losses totaled
$764,000, $3.4 million and $1.1 million in 1999, 1998 and 1997, respectively.
The Preferred Shares were redeemable for cash at the Company's option. The
redemption feature of the Preferred Shares limits their value to the balance of
cash and cash equivalents maintained by NPI. Consequently, the Company reduced
the value of its NPI investment by $647,000 during 1999 and $3.8 million during
1998. The balance of the Company's investment in NPI was $0 and $1.4 million at
December 31, 1999 and 1998, respectively.
During 1996, the Company entered into a sponsored research agreement with
NPI. The terms of the agreement called for NPI to fund additional research
efforts on technologies licensed to NPI by the Company. Associated with the
costs of research on those certain programs, the Company recognized revenues of
$491,000 and $3.6 million during 1999 and 1998 respectively.
During December 1999, the Company sold the its investment in NPI in
exchange for cash, receivables and potential royalties on worldwide sales
resulting from certain of NPI's future products. This transaction, as well as
those discussed above, is included in "Equity in NPI losses and other
adjustments, net" reported on the Consolidated Statement of Operations.
NOTE 11. EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share
and the effect on income and the weighted-average number of shares of dilutive
potential common stock (in thousands except for earning per share data):
Year Ended December 31,
--------------------------------
1999 1998 1997
--------- --------- --------
Numerator:
Net income (loss) ...................... $ (16,822) $ (19,955) $ 5,127
Effect of dilutive securities .......... -- -- --
--------- --------- -------
Numerator for earnings (loss) per share $ (16,822) $ (19,955) $ 5,127
========= ========= =======
Denominator:
Denominator for basic earnings
(loss) per share ...................... 19,072 18,141 16,930
Effect of dilutive securities:
Employee stock options ............... ** ** 909
Convertible preferred stock .......... ** ** 204
Warrants ............................. ** ** 141
------ ------- -------
Dilutive potential of common shares .. ** ** 1,254
------ ------- -------
Denominator for diluted earnings
(loss) per share . .................. 19,072 18,141 18,184
====== ====== ======
Basic earnings (loss) per share ....... $ (0.88) $ (1.10) $ 0.30
======= ======= =======
Diluted earnings (loss) per share ..... $ (0.88) $ (1.10) $ 0.28
======= ======= =======
- ----------
** Antidilutive
NOTE 12. INCOME TAXES
At December 31, 1999, the Company had federal and California income tax net
operating loss carryforwards of approximately $20.3 million and $5.4 million,
respectively. The federal and California tax loss carryforwards will begin to
expire in 2010 and 2003, respectively, unless previously utilized. The Company
also has federal and California research tax credit carryforwards of
approximately $3.5 million and $1.3 million, respectively, which will begin to
expire in 2007 and 2012, respectively, unless previously utilized. The Company
has federal Alternative Minimum Tax credit carryforwards of approximately
$257,000, which will carryforward indefinitely.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss and credit carryforwards may be limited because of
cumulative changes in ownership of more than 50% which occurred during 1992 and
1993. However, the Company does not believe such changes will have a material
impact upon the utilization of these carryforwards.
Significant components of the Company's deferred tax assets as of December
31, 1999 and 1998 are shown below. A valuation allowance of $13,504,000 and
$6,470,000 at December 31, 1999 and 1998, respectively, have been recognized to
offset the net deferred tax assets as realization of such assets is uncertain.
Amounts are shown in thousands as of December 31, of the respective years:
1999 1998
-------- --------
Deferred tax assets:
Net operating loss carryforwards ....... $ 7,400 $ 3,744
Tax credit carryforwards ............... 4,649 2,069
Capitalized research and development ... 935 453
Other, net 520 204
-------- --------
Total deferred tax assets ................ 13,504 6,470
Valuation allowance ...................... (13,504) (6,470)
-------- --------
Net deferred tax assets .................. $ - $ -
======== ========
The provision for income taxes on earnings subject to income taxes differs
from the statutory federal rate at December 31, 1999, 1998 and 1997, due to the
following:
1999 1998 1997
-------- -------- --------
Federal income taxes at 34% ................. $(5,719) $(6,785) $1,816
State income tax, net of federal benefit .... - 1 87
Tax effect on non-deductible expenses ....... 932 4,213 21
Increase in valuation allowance and other ... 4,787 2,572 (1,837)
Alternative minimum taxes ................... - - 127
-------- ------- --------
$ - $ 1 $ 214
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