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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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)
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Delaware 33-0525145
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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10555 Science Center Drive, San Diego, CA 92121
(Address of principal executive office) (Zip Code)
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Registrant's telephone number, including area code: (619) 658-7600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock of the issuer held by
non-affiliates of the issuer on March 15, 1999 was approximately $88,054,931,
based upon the closing price of such stock of $6.31 on March 15, 1999. As of
March 15, 1999, 18,960,581 shares of Common Stock of the registrant were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Parts I and 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 21, 1999 (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, 1998.
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Page 4
PART I
ITEM 1. BUSINESS
BACKGROUND
Neurocrine Biosciences, Inc. is a leading neuroscience 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, Alzheimer's disease, insomnia, stroke, glioblastoma, 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, for anxiety/depression.
Neurocrine and its partner, Novartis Pharmaceuticals, are conducting their
second Phase II clinical trial with Neurocrine's Altered Peptide Ligand (APL)
compound in patients with multiple sclerosis. Neurocrine is conducting a Phase
I/II trial with for its IL-4 Fusion Toxin for glioblastoma (malignant brain
tumors). The Company has also completed a Phase Ib clinical trial in insomnia
with a GABA receptor subtype agonist and recently announced that it commenced a
Phase I safety and dose escalating clinical study with an 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
Altered Peptide Ligand Multiple Sclerosis Phase II Novartis/Neurocrine
IL-4 Fusion Toxin Glioblastoma Phase I/II Neurocrine
GABA Receptor Subtype Agonist Insomnia Phase I/II Neurocrine
Altered Peptide Ligand Type I diabetes Phase I Neurocrine
CRF Receptor Antagonist Stroke Development Neurocrine
CRF / Urocortin Agonist Alzheimer's/Obesity Research Lilly/Neurocrine
Excitatory Amino Acid Transporters Stroke Research Wyeth-Ayerst/Neurocrine
Melanocortin Receptor Antagonist Obesity Research Neurocrine
Chemokine Antagonist Inflammatory Disorders Research Neurocrine
GNRh Endometriosis Research Neurocrine
Neurogenomics Neurodegenerative Research NPI/Neurocrine
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(1) "Research" indicates identification and evaluation of compounds in in
vitro and animal models.
"Development" indicates that lead compounds have been discovered that
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 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 the Company has received FDA approval to
evaluate one of the Company's products in humans to determine safety and
efficacy in an expanded patient population.
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's corporate
partner, Janssen, selected a CRF-1 receptor antagonist drug candidate for
preclinical testing in 1996 and commenced and completed Phase I clinical trials
on the compound in late 1998. Results in animal models of anxiety are not
necessary predictive of efficacy in human clinical trials and there can be no
assurance that these compounds will demonstrate clinical efficacy in humans. In
addition, no assurance can be given that Janssen will successfully initiate and
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 depression was
reported to affect 6% of the population or approximately 25 million individuals
in the United States in 1998. Current antidepressant therapies, including
Prozac, 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 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 and 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. Results from this trial are expected to be
available in second half of 1999. 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.
Altered Peptide Ligands
In North America, five percent 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 FDA. In addition, Avonex, a similar form of
beta-interferon, and Copaxone, a random 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 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,
the Company's 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 currently underway in North America and Europe and are scheduled
to complete by the fourth quarter of 1999 or the first quarter 2000. Results
obtained in animal models of MS are not necessarily predictive of results
obtained in man, and Phase I trials are not designed to predict efficacy. No
assurance, therefore, can be given that Novartis will successfully complete the
current Phase II clinical studies or that results of these 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 the
North America, afflicting approximately 890,000 patients in 1997. 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
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 APL are recognized by immune
cells response to insulin, suggesting that the APL may have the potential to
intervene in the disease process in humans. Neurocrine is currently conducting a
Phase I safety and dose escalating clinical program in diabetic patients in
Europe. The results of the Company's preclinical studies in animals and cells
derived from Type I diabetes patients are not necessarily predictive of the
results the Company will see treating Type I diabetes patients. There can be no
assurance that the APL will prove safe in Phase I studies or that the Company
will conduct additional clinical trials.
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 situations. The immunotoxin is
designed to carry a cellular toxin, such as Pseudomonas exotoxin, to a target
antigen, expressed on cancer cells. Targeted toxins have several theoretical
advantages over conventional chemotherapy in that they may be extremely 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 anti-cancer compound, referred to as IL-4 Fusion Toxin. NBI-3001, or
IL-4 Fusion Toxin is an immunotoxin which fuses interleukin-4 ("IL-4"), a
cytokine, to Pseudomonas exotoxin. This molecule was designed as a result of a
collaboration between the FDA and the National Cancer Institute. IL-4 receptors
Fusion Toxin is a chimeric protein in which a cytokine (blood cell growth
factor) known as interleukin 4 (IL-4) has been joined together with another
molecule, an exotoxin that can destroy cancer cells. The IL-4 portion of the
Fusion Toxin preferentially binds to human cancer cells, which express elevated
levels of high affinity receptors for IL-4 on their surface. The advantage of
targeting the IL-4 receptor is that expression of the receptor is absent or
undetectable in normal brain tissue.
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. NBI-3001 has completed a Phase I safety trial 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. A physician-IND clinical trial does not replace the
need for Company-sponsored clinical trials, but can provide a preliminary
indication as to whether further clinical trials are warranted. However, results
from the Physician IND sponsored clinical study may not be repeated in a larger
study. NBI-3001 is currently undergoing a Phase I/II trial targeting enrollment
of thirty (30) subjects with recurrent glioblastoma in which the primary
endpoints are safety, tumor regression, and progression free survival. The
Company intends to complete enrollment of this trial in 1999, and if results
warrant, commence an efficacy trial for NBI-3001 in early 2000. 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.
GABA Subtype Receptor Agonists
Insomnia
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 by the Company, a Phase I clinical trial was conducted
in forty-two (42) subjects. The study was designed to determine the safety and
tolerance of NBI-34060, and provide a preliminary evaluation of the
sedative-hypnotic potential in 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.
Based on results from this Phase I study, in the first quarter of 1999,
Neurocrine completed a Phase Ib clinical trial in thirty (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 adequate safety profile.
The Company currently intends to conduct a Phase II clinical program in 1999 to
evaluate the efficacy of NBI-34060 in subjects with chronic insomnia, and if
results warrant, initiate a pivotal Phase III trial 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 trials will be confirmed in the Phase II
trial or that the results of the Phase II trial will warrant further study.
CRF / 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. CRF-BP may provide a novel
target to selectively increase levels of CRF in diseases that are associated
with decreased levels of CRF, such as Alzheimer's disease and obesity. In
addition, agonists of the CRF-2 receptor may represent a therapeutic strategy to
elevate CRF and a related neuropeptide urocortin for the treatment of these
disorders.
Alzheimer's Disease
Alzheimer's disease is a neurodegenerative brain disorder that leads to
progressive memory loss and dementia. Alzheimer's disease generally follows a
predictable course of deterioration over eight years or more, with the earliest
symptom being impairment of short-term memory. Gradually, memory loss increases,
reasoning abilities deteriorate, and individuals become depressed, agitated,
irritable and restless. In the final stages of the disease, patients become
unable to care for themselves. According to the National Alzheimer's
Association, in 1994 over four million individuals in the United States suffered
from Alzheimer's disease. Alzheimer's disease is the fourth leading cause of
death for adults, responsible for over 100,000 deaths in 1994. Marketed
therapies currently available for the treatment of Alzheimer's disease are
severely limited. Tacrine and Aricept have been recently approved for this
indication, but, show limited memory improvement in Alzheimer's patients;
concerns regarding drug-induced elevations in liver enzymes and other side
effects have limited the widespread use of these products.
Neurocrine scientists have found that there are significant decreases in
CRF levels in the brain areas that are affected in Alzheimer's disease. In spite
of reduced CRF concentrations, CRF-BP levels are not decreased in areas of the
brain affected by Alzheimer's disease, thereby providing the Company with a
novel target for drug intervention. Consequently, Neurocrine is developing
CRF-BP antagonists to displace CRF from the binding protein and effectively
increase the amount of "free CRF" available to interact with the CRF receptors.
This strategy is expected to selectively raise the concentration of CRF in brain
areas involved in learning and memory processes. Because the therapeutic is
designed to restore normal levels of CRF only in these areas, the Company
believes that the drug will not induce the side effects associated with
administering CRF directly, such as anxiety. Current efforts are underway to
identify and optimize molecules through high-throughput screening of small
molecule libraries. However, no assurance can be given that the Company and its
corporate partner, Eli Lilly, will successfully identify suitable candidate
compounds for development in a timely manner, or at all.
Obesity
Obesity is the most common nutritional disorder in Western societies. As
many as three in ten adult Americans weigh at least 20% in excess of their ideal
body weight, and 35 million people in the United States are characterized as
clinically obese. Increased body weight is a significant public health problem
because it is associated with a number of serious diseases, including Type II
diabetes, hypertension, hyperlipidemia and several cancers. Although obesity has
been commonly considered to be a behavioral problem, there is now evidence that
body weight is physiologically regulated. The regulation of body weight is
complex and appears to consist of both centrally and peripherally acting
mechanisms.
Preliminary data indicates that CRF and a related neuropeptide, urocortin,
may act as central regulators of both appetite and metabolism. Neurocrine has
evaluated CRF-BP antagonists and CRF receptor agonists in various animal models
of obesity and have shown effects of reduced food intake and weight loss.
Neurocrine and its corporate partner Eli Lilly are screening and optimizing
small molecule compounds for evaluation in confirmatory preclinical studies.
However, no assurance can be given that the Company and its corporate partner
will successfully identify CRF and urocortin agonists suitable as anti-obesity
therapeutics in a timely manner, or at all. Further, even if the Company and
Lilly are successful in identifying drug candidates, the results obtained in
animals are not necessarily predictive of results obtained in humans, and no
assurance can be given that the Company will progress to clinical trials or
successfully complete clinical trials in a timely manner, if at all.
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 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.
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 our 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.
Gonadotrophin-Releasing Hormone (GnRH) Receptor
Gonadotrophin-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 and Zoladex,
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.
Neurogenomics
The brain and spinal cord are comprised of two major cell types - glial
cells and neurons. Glial cells are the most prevalent cell types in the central
nervous system, comprising over 75% of all brain cells. The gene products from
these cells are crucial for the survival and development of neurons. Neurons are
CNS cells that transmit and receive complex electrical and chemical messages
from other neurons to control all cognitive processes. In certain pathological
states, excessive glial activity results in the activation of cytosine and
related genes. The proteins encoded by these genes may be implicated in the
degenerative cascade leading to neurological disorders such as Alzheimer's
disease, stroke, multiple sclerosis, Parkinson's disease, epilepsy and AIDS
dementia. For example, in AIDS, the HIV virus does not attack neurons but does
infect glial cells which in turn release inflammatory cytokines and other
factors which are toxic to neurons. Similarly, in Alzheimer's disease,
accumulating evidence suggests complex interactions between neurons, glia and a
protein fragment known as beta amyloid leading to formation of senile plaques
and neurodegeneration. Currently, it is estimated that only a small fraction of
genes involved in neurodegeneration or regeneration has been identified. The
identification of novel CNS genes involved in the neurodegenerative process may
yield new therapeutic opportunities.
Neurodegenerative Diseases and Disorders
Neurodegenerative diseases and disorders involve damage to the cellular
structure of the brain either acutely, as in stroke or trauma, or chronically,
as in epilepsy and Alzheimer's disease. To date, only a limited number of
effective therapeutics exists to treat neurological disorders, resulting in
significant economic and social costs. In 1998, over 26 million people are
estimated in the United States to be affected by neurological disorders.
Activation of glial cells is a common feature of many neurodegenerative
diseases. The primary goal of Neurocrine's Neurogenomics program is to identify
and characterize novel genes that are induced in glial cells under conditions
that lead to neurodegeneration or regeneration. The Company is focusing on
stroke, multiple sclerosis, AIDS dementia, epilepsy, Parkinson's disease and
Alzheimer's disease. The unique conditions leading to neurodegeneration in each
of the disorders have been established in both animal and cellular models of the
disease. Neurocrine is actively isolating and analyzing genes associated with
neuronal cell death utilizing state of the art molecular biology, gene
sequencing and bioinformatics. In addition, activated genes that are
neuroprotective or allow for the regeneration of neurons may also be identified.
Novel neurodegenerative genes that are discovered may include proteins,
enzymes or receptors. Protein signaling molecules or the genes encoding such
molecules may be utilized as therapeutics, while enzymes and receptors may serve
as new targets for drug discovery. Neurocrine currently intends to place the
receptors and enzymes encoded by these genes in high-throughput screens in an
attempt to discover small molecule therapeutics to treat neurodegenerative
disorders. To date, the Company has identified novel genes of which a number are
undergoing biological evaluation in in vitro and animal models. The Company
currently intends to identify candidate genes as drugs or drug targets for one
or more neurological diseases. However, there can be no assurance that the
Company will successfully identify suitable gene candidates for development in a
timely manner, or at all.
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. More recently, the Company entered into a collaboration
with Wyeth-Ayerst Laboratories for the research; development and
commercialization of compounds with modulate excitatory amino acid transporters.
The Company has also formed NPI, a research and development subsidiary, to
finance its Neurosteroid clinical development program, which has been
discontinued and its Neurogenomics programs. In 1999 the Company entered into a
collaboration agreement with Wyeth-Ayerst to research, develop and commercialize
compounds which modulate excitatory amino acid transporters ("EAATs") for the
treatment of neurodegenerative and psychiatric diseases.
In addition, in 1998 Neurocrine entered into two alliances with other
companies to enhance its drug discovery and development capabilities. The first
alliance is with Medtronic Inc. to study the stability and compatibility of IL-4
Fusion Toxin in Medtronic's implantable drug pump and catheter system. The
second alliance is with Caliper Technologies. Neurocrine and Caliper are
collaborating to apply Caliper's microfluidics technology to the ultra-high
throughput screening of Neurocrine's proprietary targets.
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 IL-4 Fusion
Toxin program, insomnia and diabetes. 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 completed the acquisition of Northwest NeuroLogic, Inc. (NNL),
acquiring the intellectual property surrounding the Excitatory Amino Acid
Transporters (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 which has completed Phase I clinical
development 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 is acquiring 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 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.
On January 1, 1995, Neurocrine entered into a research and development
agreement with Janssen to collaborate in the discovery, development and
commercialization of CRF receptor antagonists focusing on the treatment of
anxiety, depression and substance abuse (the "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
connection with the Janssen Agreement, Johnson & Johnson Development Corporation
("JJDC") purchased $5 million of the Company's Common Stock. The collaborative
research portion of the Janssen Agreement was completed as scheduled in 1997.
In 1996 Janssen selected a clinical candidate and commenced clinical trials
in Europe. Under the Janssen Agreement, Neurocrine is entitled to receive up to
$10.0 million in milestone payments for the indications of anxiety, depression,
and substance abuse, and up to $9.0 million in milestone payments for other
indications, in each case upon achievement of certain development and regulatory
goals. As of December 31, 1998 the Company has received $3.5 million in
milestone payments from Janssen. 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 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 Agreement.
As a result, there can be no assurance that any product development milestone or
royalty payments will be made.
NOVARTIS
In January 1996, the Company entered into a binding letter agreement with
Ciba-Geigy (which subsequently became Novartis) to develop altered peptide
ligand therapeutics for the treatment of MS based upon the Company's drug
development candidates and expertise in immunology and protein chemistry. In
December 1996, the Company and Novartis entered into a definitive agreement (the
"Novartis Agreement") incorporating the terms and conditions set forth in the
letter agreement and certain other terms and conditions agreed to by the Company
and Novartis. Novartis paid the Company a $5.0 million non-refundable fee prior
to executing the Novartis Agreement. In connection with the Novartis Agreement,
Novartis purchased $10.0 million of the Company's Common Stock. Pursuant to the
Novartis Agreement, Novartis is obligated to provide the Company with $3.5
million in research and development funding, plus certain other program
expenses, each year for five years ending on December 31, 2000. In event that no
biological license application ("BLA") has been filed as a result of the
collaboration by December 31, 2000, then Novartis may be obligated to provide
the Company with an additional $2.5 million per year thereafter until a Product
License Application is filed, except in certain circumstances. As of December
31, 1998 the Company has received a total of $20.2 million in license fees and
research funding under the Novartis Agreement (including the $5.0 million
non-refundable fee). Neurocrine is also entitled to receive milestone payments
if certain research, development and regulatory milestones are achieved.
Milestone payments were $3.8 million and $2.3 million in 1997 and 1998,
respectively. Novartis has the right to terminate the Novartis Agreement on six
months' notice, which may be given at any time after December 30, 1997.
The Company has granted Novartis an exclusive license outside of the United
States and Canada to market altered peptide ligand products developed under the
Novartis Agreement for multiple sclerosis. Neurocrine is entitled to receive
royalties on product sales in these territories. The Novartis Agreement provides
that the Company and Novartis will collaborate in the marketing of products
developed under the Novartis Agreement in the United States and Canada.
Neurocrine is entitled to receive a share of the profits resulting from sales of
altered peptide ligand products in the United States and Canada subject to the
recoupment of a portion of Novartis's development costs. Neurocrine retains the
right to convert its profit share to the right to receive royalty payments at
its sole discretion in which case no repayment of development costs are due to
Novartis and Novartis will have exclusive marketing rights. Neurocrine is
obligated to repay a portion of the development costs of any potential product
developed pursuant to the collaboration unless the Company elects to convert to
the right to receive royalty payments. There can be no assurance that the
Company and Novartis will be successful in developing or commercializing any
potential products. As a result, there can be no assurance that any product
development milestone, royalty, or profit sharing payments will be made.
ELI LILLY AND CO.
On October 15, 1996, Neurocrine entered into a research and license
agreement (the "Lilly Agreement") with Lilly to collaborate in the discovery,
development and commercialization of CRF binding protein ligand inhibitors for
the treatment of central nervous system disorders including obesity and
dementias such as Alzheimer's disease and CRF-2 agonists for CNS mediated
diseases and disorders. Neurocrine has received $14.5 million in research
payments under the Lilly Agreement, of which $4.0 million was received in 1998.
Neurocrine expects to receive an additional $3.0 million in research payments
through October 31, 1999, as well as additional sponsored research payments over
the subsequent two-year period if certain milestones are met, and up to an
additional $49.0 million in milestone payments for the first two products for
dementia or obesity if certain development and regulatory milestones are
achieved. The Company has granted Lilly an exclusive worldwide license to
manufacture and market CRF binding protein ligand antagonists and CRF-2 agonist
products. Lilly is obligated to fund clinical development and marketing expenses
(except as set forth below) and is responsible for clinical development,
regulatory compliance, and manufacturing of products. Neurocrine is entitled to
royalties on product sales. At its option, Neurocrine is entitled to receive a
portion of the profits resulting from sales of products for the treatment of
dementia in the United States (subject to the Company's obligation to pay a
portion of the development costs for such product). Lilly has agreed to provide
the Company with access to a portion of its chemical compound library for
screening against targets outside of the field of the Lilly Agreement and other
Lilly program areas, subject to the Company's obligation to pay Lilly royalties
on sales of products developed based on compounds in such library and milestone
payments based upon certain development and regulatory milestones for such
products. There can be no assurance that the Company's research under the Lilly
Agreement will be successful in discovering any potential products or that Lilly
will be successful in developing, receiving regulatory approvals, or
commercializing any potential products that may be discovered. As a result there
can be no assurance that any product development milestone, royalty, or profit
sharing payments will be made.
WYETH-AYERST
Effective January 1, 1999, the Company entered into a Collaboration and
License 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
agreement, Wyeth-Ayerst will provide the Company with up to $13 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.
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.
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 redeemed the
Preferred Stock for an aggregate of 1,279,758 shares of Common Stock of the
Company. Pursuant to a Research and Development Agreement with a wholly owned
subsidiary of the Company, NPI committed to expend an aggregate amount of $9.5
million for clinical development of DHEA, a neurosteroid for Alzheimer's
Disease. The DHEA Neurosteroid Program was discontinued in March 1999 following
results from the Phase II/III trial. Despite suggestion of efficacy from a
previously completed 60 patient Phase II trial, the results of its Phase II/III
trial did not demonstrate a difference in efficacy between patients treated with
DHEA versus placebo. Based on these results, NPI has discontinued further
development of DHEA. NPI will continue its research activities in the area of
neurogenomics. Pursuant to such Research and Development Agreement, NPI is
entitled to receive royalties on sales of products developed in these programs
as well as exclusive Canadian marketing rights for such products in the event
that the Company has not terminated the technology license and the marketing
rights. 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.
RISK FACTORS
DEPENDENCE ON STRATEGIC ALLIANCES
The Company is dependent upon its corporate partners to provide adequate
funding for certain of its programs. Under these arrangements, the Company's
corporate partners are responsible for (i) selecting compounds for subsequent
development as drug candidates, (ii) conducting preclinical testing and clinical
trials and obtaining required regulatory approvals for such drug candidates,
and/or (iii) manufacturing and commercializing any resulting drugs. Failure of
these partners to select a compound discovered by the Company for subsequent
development into marketable products, gain the requisite regulatory approvals or
successfully commercialize products would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
strategy for development and commercialization of certain of its products is
dependent upon entering into additional arrangements with research
collaborators, corporate partners and others, and upon the subsequent success of
these third parties in performing their obligations. There can be no assurance
that the Company will be able to enter into additional strategic alliances on
terms favorable to the Company, or at all. Failure of the Company to enter into
additional strategic alliances would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company cannot control the amount and timing of resources that its
corporate partners devote to the Company's programs or potential products. If
any of the Company's corporate partners breach or terminate their agreements
with the Company or otherwise fail to conduct their collaborative activities in
a timely manner, the preclinical testing, clinical development or
commercialization of product candidates will be delayed, and the Company will be
required to devote additional resources to product development and
commercialization, or terminate certain development programs. The Company's
strategic alliances with Janssen, Novartis, Lilly, and Wyeth-Ayerst are subject
to termination by Janssen, Novartis, Lilly, or Wyeth-Ayerst, respectively. There
can be no assurance that Janssen, Novartis, Lilly, 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. Neurocrine's corporate partners may develop, either alone or with
others, products that compete with the development and marketing of the
Company's products. Competing products, either developed by the corporate
partners or to which the corporate partners have rights, may result in their
withdrawal of support with respect to all or a portion of the Company's
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that disputes will not arise in the future with respect to the
ownership of rights to any products or technology developed with corporate
partners. These and other possible disagreements between corporate partners and
the Company could lead to delays in the collaborative research, development or
commercialization of certain product candidates or could require or result in
litigation or arbitration, which would be time-consuming and expensive, and
would have a material adverse effect on the Company's business, financial
condition and results of operations.
MANUFACTURING
The Company has in the past utilized, and intends to continue to utilize,
third party manufacturing for the production of material for use in clinical
trials and for the potential commercialization of future products. The Company
has no experience in manufacturing products for commercial purposes and does not
have any manufacturing facilities. Consequently, the Company is solely dependent
on contract manufacturers for all production of products for development and
commercial purposes. In the event that the Company is unable to obtain or retain
third-party manufacturing, it will not be able to commercialize its products as
planned. The manufacture of the Company's products for clinical trials and
commercial purposes is subject to cGMP regulations promulgated by the FDA. No
assurance can be given that the Company's third-party manufacturers will comply
with cGMP regulations or other regulatory requirements now or in the future. The
Company's current dependence upon third parties for the manufacture of its
products may adversely affect its profit margin, if any, on the sale of future
products and the Company's ability to develop and deliver products on a timely
and competitive basis.
MARKETING, SALES, AND PHARMACEUTICAL PRICING ISSUES
Neurocrine has retained certain marketing or co-promotion rights in North
America to its products under development, and plans to establish its own North
American marketing and sales organization. The Company currently has no
experience in marketing or selling pharmaceutical products and does not have a
marketing and sales staff. In order to achieve commercial success for any
product candidate approved by the FDA, Neurocrine must either develop a
marketing and sales force or enter into arrangements with third parties to
market and sell its products. There can be no assurance that Neurocrine will
successfully develop such experience or that it will be able to enter into
marketing and sales agreements with others on acceptable terms, if at all. If
the Company develops its own marketing and sales capabilities, it will compete
with other companies that currently have experienced and well funded marketing
and sales operations. To the extent that the Company enters into co-promotion or
other marketing and sales arrangements with other companies, any revenues to be
received by Neurocrine will be dependent on the efforts of others, and there can
be no assurance that such efforts will be successful.
The Company's business may be materially adversely affected by the
continuing efforts of government and third party payers to contain or reduce the
costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar government control in such jurisdictions. In addition, an
increasing emphasis on managed care in the United States has put, and will
continue to put, pressure on pharmaceutical pricing. Such initiatives and
proposals, if adopted, could decrease the price that the Company receives for
any products it may develop and sell in the future, and thereby have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, to the extent that such proposals or initiatives have a
material adverse effect on other pharmaceutical companies that corporate
partners or prospective corporate partners for certain of the Company's
potential products, the Company's ability to commercialize its potential
products may be materially adversely affected.
The Company's ability to commercialize pharmaceutical products may depend
in part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health insurers and other third-party payers. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third-party payers are increasingly challenging the prices charged
for medical products and services. There can be no assurance that any
third-party insurance coverage will be available to patients for any products
developed by the Company. Government and other third-party payors are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new therapeutic products, and by refusing, in
some cases, to provide coverage for uses of approved products for disease
indications for which the FDA has not granted marketing approval. If adequate
coverage and reimbursement levels are not provided by government and third party
payors for the Company's products, the market acceptance of these products would
be materially adversely affected.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid and
intense technological change. The Company faces, and will continue to face,
competition in the development and marketing of its product candidates from
academic institutions, government agencies, research institutions and
biotechnology and pharmaceutical companies. Competition may arise from other
drug development technologies, methods of preventing or reducing the incidence
of disease, including vaccines, and new small molecule or other classes of
therapeutic agents. There can be no assurance that developments by others will
not render the Company's product candidates or technologies obsolete or
noncompetitive.
Betaseron and Avonex, similar forms of beta-interferon marketed by Berlex
BioSciences and Biogen, Inc., respectively, and Copaxone a peptide polymer
marketed by Teva, have been approved for the marketing in the United States and
certain other countries for the treatment of relapsing remitting multiple
sclerosis. Tacrine, marketed by Warner-Lambert Co., and Aricept, marketed by
Pfizer Inc, have been approved for the treatment of Alzheimer's dementia. Sales
of these drugs may reduce the available market for any product developed by the
Company for these indications. The Company is developing products for the
treatment of anxiety disorders, which will compete with well-established
products in the benzodiazepine class, including Valium, marketed by Hoffman-La
Roche, Inc., and depression, which will compete with well-established products
in the anti-depressant class, including Prozac, marketed by Eli Lilly & Co.
Certain technologies under development by other pharmaceutical companies could
result in treatments for these and other diseases and disorders being pursued by
the Company. For example, a number of companies are conducting research on
molecules to block CRF to treat anxiety and depression. Other biotechnology and
pharmaceutical companies are developing compounds to treat obesity. In the event
that one or more of these products and/or programs are successful, the market
for the Company's products may be reduced or eliminated.
In addition, if Neurocrine receives regulatory approvals for its products,
manufacturing efficiency and marketing capabilities are likely to be significant
competitive factors. At the present time, Neurocrine has no commercial
manufacturing capability, sales force or marketing experience. In addition, many
of the Company's competitors and potential competitors have substantially
greater capital resources, research and development resources, manufacturing and
marketing experience and production facilities than does Neurocrine. Many of
these competitors also have significantly greater experience than does
Neurocrine in undertaking preclinical testing and clinical trials of new
pharmaceutical products and obtaining FDA and other regulatory approvals.
PATENTS AND PROPRIETARY RIGHTS
The Company files patent applications both in the United States and in
foreign countries, as it deems appropriate, for protection of its proprietary
technology and products. As of December 31, 1998, 4 patents have been issued to
the Company; and the Company has received licenses to 5 issued patents. The
Company owns or has exclusive rights to a total of approximately 122 patent
applications pursuant to license agreements with academic and research
institutions, including the Beckman Research Institute of the City of Hope, the
Salk Institute for Biological Studies, and Leland Stanford Junior University.
The Company intends to file additional United States and foreign applications
and license additional technologies from third parties in the future as
appropriate. However, there can be no assurances that licenses to third party
technologies that may be required by or advantageous to the Company will be
obtained on commercially reasonable terms or at all.
The Company's success will depend on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the United States and internationally.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the pharmaceutical industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, the Company intends to seek
patent protection for its proprietary technology and compounds. There can be no
assurance as to the success or timeliness in obtaining any such patents, that
the breadth of claims obtained, if any, will provide adequate protection of the
Company's proprietary technology or compounds, or that the Company will be able
to adequately enforce any such claims to protect its proprietary technology and
compounds. Since patent applications in the United States are confidential until
the patents issue, and publication of discoveries in the scientific or patent
literature tend to lag behind actual discoveries by several months, the Company
cannot be certain that it was the first creator of inventions covered by pending
patent applications or that it was the first to file patent applications for
such inventions. Litigation, which could result in substantial cost to the
Company, 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 not consist of novel compounds 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 competitors and potential competitors of the Company. 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 products may give rise
to claims that such products infringe the patent rights of others. At least one
patent containing claims covering compositions of matter consisting of certain
altered peptide ligand therapeutics for use in modulating the immune response
has issued in Europe, and the Company believes that this patent has been
licensed to a competitor of the Company. There can be no assurance that a patent
containing corresponding claims will not issue in the United States. Although
the Company is engaged in an opposition proceeding with respect to the European
patent, there can be no guarantee that the Company will be successful in this
opposition. Further, there can be no assurance that the claims of the European
patent or any corresponding claims of any future United States patents or other
foreign patents which may issue will not be infringed by the manufacture, use or
sale of any potential altered peptide ligand therapeutics developed by the
Company or Novartis. Although the Company has been granted claims to a European
patent covering altered peptide ligand therapeutics, there can be no assurance
that the Company or Novartis would prevail in any legal action seeking damages
or injunctive relief for infringement of any such claims or any patent that
might issue under such applications or that any license required under any such
patent would be made available or, if available, would be available on
acceptable terms. Failure to obtain a required license could prevent the Company
and Novartis from commercializing any altered peptide ligand products that they
may develop.
The Company is aware of an issued U.S. patent directed toward an excitatory
amino acid transporter included within the subject matter of its corporate
collaboration with Wyeth-Ayerst. Although the Company believes that it will be
found to have superior rights to this transporter through an anticipated
interference proceeding, there can be no assurance that the Company will be
successful in such an interference.
In 1998 a patent application filed by a third party outside of the United
States pursuant to the Patent Cooperation Treaty was published claiming priority
from a United States patent application and came to the attention of the Company
and Janssen, the Company's corporate partner in the field of
corticotropin-releasing factor antagonists. This application claims a genus of
chemical compounds that includes the lead product candidate currently under
development by Janssen. This application appears to predate the filing by the
Company and Janssen with respect to such compound. The Company and Janssen are
engaged in discussions with the third party with regard to a licensing
arrangement. There can be no assurance that such discussions will be successful
or that such a license will be available on commercially reasonable terms. If
the third party's patent application was determined to predate the filing by the
Company and Janssen and were to issue in its current form, Janssen may be unable
to commercialize the current lead compound in the countries which the third
party patent issues and may elect to select a new lead clinical candidate. While
the Company and Janssen have filed patent applications directed to chemical
compounds not covered by the third party's application, selection of a new lead
clinical candidate may delay the Company's realization of milestone and royalty
income under its agreement with Janssen. As noted above, the patent positions of
pharmaceutical and biotechnology companies, including the Company, involve
complex legal and factual issues. It is not certain that, with respect to the
United States, the third party's date of invention will pre-date that of the
Company, that outside of the United States the third party's patent application
will be determined to predate filing by the Company and Janssen or that the
third party application will issue as a patent. In addition, if the third
party's patent does eventually issue, it is not certain that the form in which
it issues will present an impediment to Janssen's CRF antagonist development and
commercialization program or lead to delays in the Company's realization of
milestone and royalty income derived therefrom. The Company's independent CRF
antagonist program is not impacted and will continue without regard to this
application.
No assurance can be given that any licenses required under any patents or
proprietary rights of third parties would be made available on terms acceptable
to the Company, or at all. If the Company does not obtain such licenses, it
could encounter delays in product introductions while it attempts to design
around such patents, or could find that the development, manufacture or sale of
products requiring such licenses could be foreclosed. Litigation may be
necessary to defend against or assert such claims of infringement to enforce
patents issued to the Company to protect trade secrets or know-how owned by the
Company, or to determine the scope and validity of the proprietary rights of
others. In addition, interference proceedings declared by the United States
Patent and Trademark Office may be necessary to determine the priority of
inventions with respect to patent applications of the Company or its licensors.
Litigation or interference proceedings could result in substantial costs to and
diversion of effort by, and may have a material adverse impact on, the Company.
In addition, there can be no assurance that these efforts by the Company would
be successful.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that 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 would
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known or be independently discovered by competitors.
As is commonplace in the biotechnology industry, the Company employs
individuals who were previously employed at other biotechnology or
pharmaceutical companies, including competitors or potential competitors of the
Company. To the extent such Company employees are involved in research areas at
the Company which are similar to those areas in which they were involved at
their former employer, the Company may be subject to claims that such employees
and/or the Company have inadvertently or otherwise used or disclosed the alleged
trade secrets or other proprietary information of the former employers.
Litigation may be necessary to defend against such claims, which could result in
substantial costs and be a distraction to management, and which may have a
material adverse effect on the Company, even if the Company was successful in
defending such claims.
GOVERNMENT REGULATION
Regulation by government authorities in the United States and foreign
countries is a significant factor in the development, manufacture and marketing
of the Company's proposed products and in its ongoing research and product
development activities. All of the Company's products will require regulatory
approval by government agencies prior to commercialization. In particular, human
therapeutic products are subject to rigorous preclinical testing and clinical
trials and other approval procedures of the FDA and similar regulatory
authorities in foreign countries. Various federal and state statutes and
regulations also govern or influence testing, manufacturing, safety, labeling,
storage and record-keeping related to such products and their marketing. The
process of obtaining these approvals and the subsequent substantial compliance
with appropriate federal and state statutes and regulations require the
expenditure of substantial time and financial resources. Any failure by the
Company or its collaborators or licensees to obtain, or any delay in obtaining
or maintaining, regulatory approval could adversely affect the marketing of any
products developed by the Company, its ability to receive product or royalty
revenues and its liquidity and capital resources.
Preclinical testing is generally conducted in laboratory animals to
evaluate the potential safety and the efficacy of a product. The results of
these studies are submitted to the FDA as a part of an IND, which must be
approved before clinical trials in humans can begin. Typically, clinical
evaluation involves a time consuming and costly three-phase process. In Phase I,
clinical trials are conducted with a small number of subjects to determine the
early safety profile, the pattern of drug distribution and metabolism. In Phase
II, clinical trials are conducted with groups of patients afflicted with a
specific disease in order to determine preliminary efficacy, optimal dosages and
expanded evidence of safety. In Phase III, large-scale, multi-center,
comparative trials are conducted with patients afflicted with a target disease
in order to provide enough data to demonstrate with substantial evidence the
efficacy and safety required by the FDA. The FDA closely monitors 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 an NDA or BLA for approval to commence commercial sales. In
responding to an NDA or BLA, the FDA may grant marketing approval, request
additional information or deny the application if the FDA determines that the
application does not satisfy its regulatory approval criteria. There can be no
assurance that approvals will be granted on a timely basis (or at all). If
approved, there can be no assurance that such approval will include acceptable
labeling to adequately commercialize the product. Similar regulatory procedures
must also be complied with in countries outside the United States.
To date, the Company or its collaborators have submitted five IND or
equivalent applications in the United States, Canada and/or Europe with regard
to its product candidates and has commenced clinical trials. Even if Canadian or
European regulatory authorities approve the product, the Company will be
required to undertake additional clinical testing to obtain FDA regulatory
approval in the United States. No assurance can be given that the Company will
be able to obtain FDA or other governmental regulatory approval for any
products.
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, for anxiety/depression.
Neurocrine and its partner, Novartis Pharmaceuticals, are conducting their
second Phase II clinical trial with Neurocrine's APL compound in patients with
multiple sclerosis. Neurocrine is conducting a Phase I/II trial with an IL-4
Fusion Toxin for glioblastoma (malignant brain tumors). The Company has also
completed a Phase Ib clinical trial for insomnia and recently announced that it
commenced a Phase I safety and dose escalating clinical study for and APL
compound for Type I diabetics.
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 conducted by the Company or its corporate
partners will demonstrate sufficient safety and efficacy to obtain the requisite
regulatory approvals or will result in marketable products or marketable
indications. In addition, late stage clinical trials are often conducted with
patients having the most advanced stages of disease. During the course of
treatment, these patients can die or suffer other adverse medical effects for
reasons that may not be related to the pharmaceutical agent being tested but
which can nevertheless adversely affect clinical trial results. A number of
companies in the biotechnology and pharmaceutical industries have suffered
significant setbacks in advanced clinical trials, even after promising results
in earlier trials. If the Company's drug candidates are not shown to be safe and
effective in clinical trials, the resulting delays in developing other compounds
and conducting related preclinical testing and clinical trials, as well as the
potential need for additional financing, would have a material adverse effect on
the Company's business, financial condition and results of operations.
The rate of completion of clinical trials conducted by the Company or its
corporate partners may be delayed by many factors, including slower than
expected patient recruitment or unforeseen safety issues. Any delays in, or
termination of, the Company's clinical trials would have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that Neurocrine or its corporate partners will be
permitted by regulatory authorities to undertake clinical trials for its
products or, if such trials are conducted, that any of the Company's product
candidates will prove to be safe and efficacious or will receive regulatory
approvals.
The Company is required to conduct its research activities in compliance
with good laboratory practice regulations enforced by FDA. The Company is also
subject to various Federal, state and local laws, regulations and
recommendations relating to safe working conditions, laboratory manufacturing
practices, and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with the Company's research. The extent of government regulation
that might result from future legislation or administrative action cannot be
predicted accurately.
SCIENTIFIC ADVISORY BOARD
Neurocrine has assembled a Scientific Advisory Board that currently
consists of 16 individuals. Members of the Scientific Advisory Board are leaders
in the fields of neurobiology, immunology, endocrinology, psychiatry and
medicinal chemistry. Scientific Advisory Board members meet 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.
Iain Campbell, Ph.D., is an Associate Member of the Department of
Neuropharmacology at The Scripps Research Institute. Dr. Campbell is an expert
in cytosine activation in autoimmune diseases and neuronal degeneration.
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.
George P. Chrousos, M.D., Sc.D., is Chief of the Pediatric Endocrinology
Section at the National Institute of Child Health and Human Development. He has
investigated the role of stress hormones in pathological conditions such as
Cushing's disease, anxiety-related disorders and rheumatoid arthritis.
Caleb E. Finch, Ph.D., is the Arco and William F. Kieschnick Professor of
Neurobiology of Aging at the University of Southern California. He is an
internationally recognized expert in the field of molecular gerontology and the
genomic control of mammalian development and aging. His recent work has focused
on the role of cytokines in neuronal protection and aging.
Stephen M. Hedrick, Ph.D., is Professor and Chairman of Cell Biology at the
University of California, San Diego. Dr. Hedrick is an expert in T cell
immunology and co-discovered the first T cell receptor genes and identified the
regions responsible for antigen binding. He is an editor for the Journal of
Immunology.
Florian Holsboer, M.D., Ph.D., is Director at the Max Planck Institute fur
Psychiatrie. Dr. Holsboer is an international expert on the role of
glucocorticoids and neuropeptides, particularly CRF, in neuropsychiatric
disorders. He coordinates the efforts of several hundred scientists and
clinicians at the Max Planck Institute, a major European neuropsychiatric
institute.
George F. Koob, Ph.D., is a Member of the Department of Neuropharmacology
at The Scripps Research Institute and an Adjunct Professor in the Departments of
Psychology and Psychiatry at the University of California, San Diego. Dr. Koob
is an internationally recognized behavioral pharmacology expert on the role of
peptides in the central nervous system, the neurochemical basis of addiction and
in the development of preclinical behavioral procedures for the screening of
anxiolytic and antidepressant drugs and memory enhancers.
Phillip J. Lowry, Ph.D., is Professor and Head of the Department of
Biochemistry and Physiology at the University of Reading in Great Britain. Dr.
Lowry is an internationally recognized biochemical endocrinologist whose work
has focused on the purification and characterization of some of the key hormonal
mediators of the endocrine response to stress. Dr. Lowry is a member of the
European Neuroscience Steering Committee, the European Neuroendocrine
Association and the Committee of British Endocrinology
Bruce S. McEwen, Ph.D., is Professor and Head of the Harold and Margaret
Milliken Hatch Laboratory of Neuroendocrinology at The Rockefeller University.
Dr. McEwen has identified and studied the function of intracellular receptors
for neuroactive steroid hormones in the brain and immune system, in relation to
stress and sex differences. Dr. McEwen is also President of the Society for
Neuroscience.
Charles B. Nemeroff, M.D., Ph.D., is Chairman and Professor of the
Department of Psychiatry and Behavioral Sciences at Emory University School of
Medicine. Dr. Nemeroff is an internationally recognized expert on the effects of
neuropeptides on behavior and their relevance in clinically important conditions
such as depression, anxiety and schizophrenia, and has published over 400
articles on this subject.
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, 1998, the Company had 149 employees, consisting of 135
full-time and 14 part-time employees. Of the full-time employees, 46 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 80% 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.
1998 1997
------------------------- -------------------------
High Low High Low
------------------------- -------------------------
1st Quarter ........$ 10.13 $ 7.56 $ 13.25 $ 8.63
2nd Quarter ........ 9.06 7.38 10.50 7.00
3rd Quarter ........ 8.13 4.00 10.75 7.88
4th Quarter ........ 8.00 4.13 11.88 7.50
As of March 15, 1999, there were approximately 211 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.
Year Ended December 31,
-----------------------------------------------------------
1998(1) 1997 1996 1995 1994
-----------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenues
Sponsored research and development ........... $ 8,751 $ 14,985 $ 9,092 $ 3,000 $ --
Sponsored research and development from
related party ............................ 3,610 -- -- -- --
Milestones and license fees .................. 2,500 10,250 9,000 2,750 --
Grant income and other revenues .............. 1,176 909 1,124 356 162
---------------------------------------------------------
Total revenues ............................... 16,037 26,144 19,216 6,106 162
Operating expenses
Research and development ..................... 21,803 18,758 12,569 7,740 6,231
General and administrative ................... 6,594 5,664 3,697 2,728 2,223
Write-off of acquired in-process research
and development and licenses ............. 4,910 -- -- -- --
--------------------------------------------------------
Total operating expenses ..................... 33,307 24,422 16,266 10,468 8,454
Income (loss) from operations ...................... (17,270) 1,722 2,950 (4,362) (8,292)
Interest income, net ......................... 4,000 3,931 2,598 839 627
Other income (expense) ....................... 504 818 574 177 (41)
Equity in NPI net losses and other adjustments (7,188) (1,130) -- -- --
--------------------------------------------------------
Net income (loss) before income taxes .............. (19,954) 5,341 6,122 (3,346) (7,706)
Income taxes ................................. 1 214 248 -- --
--------------------------------------------------------
Net income (loss) .................................. $(19,955) $ 5,127 $ 5,874 $ (3,346) $ (7,706)
========================================================
Earnings per shares
Basic ........................................ $ (1.10) $ 0.30 $ 0.39 $ (0.29) $ (0.70)
Diluted ...................................... $ (1.10) $ 0.28 $ 0.36 $ (0.29) $ (0.70)
Shares used in calculation of earnings per share
Basic ........................................ 18,141 16,930 14,971 11,684 10,933
Diluted ...................................... 18,141 18,184 16,127 11,684 10,933
BALANCE SHEET DATA
Cash, cash equivalents and short-term investments(2) 62,670 75,092 69,920 18,696 18,228
Total assets ....................................... 80,529 91,903 77,957 24,012 22,344
Long-term debt and capital lease obligations ....... 2,247 722 847 1,631 1,733
Accumulated deficit ................................ (24,850) (4,895) (10,022) (15,895) (12,549)
Total stockholders' equity ......................... 71,958 83,152 72,767 19,225 18,743
- ----------------------------------------------------------------------------------------------------------------
(1) Includes results of operations and financial position of Northwest
NeuroLogic, Inc. from May 28, 1998, the date of acquisition (See Note 2 of
the Notes to the Consolidated Financial Statements).
(2) Excludes funds held by NPI, which is available to fund certain of the
Company's research and development activities.
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. The
Company's revenues are expected to come from its strategic alliances. Neurocrine
has incurred a cumulative deficit of approximately $25 million as of December
31, 1998 and expects to incur additional operating losses in the future, which
are potentially greater than losses in prior years.
Results of Operations
The Company's revenue from collaborative research and development
agreements was $16.0 million for the year ended December 31, 1998 compared with
$26.1 million in 1997, and $19.2 million in 1996. The decline in 1998 revenues
compared to 1997 revenues resulted primarily from non-recurring 1997 revenues
related to the completion of the sponsored research portion of the Janssen
collaboration, a one-time research support payment received under the Eli Lilly
collaboration, sponsored development payments received under the Novartis
collaboration and the timing of milestone achievements received under all three
collaborations. Revenues in 1998 included $3.6 million of sponsored development
received from the Company's Canadian affiliate, NPI. The increase in 1997
revenues compared to 1996 revenues resulted primarily to increased sponsored
research, license fees and milestone revenues recognized under the Janssen,
Novartis and Eli Lilly collaborations.
Research and development expenses increased to $21.8 million during 1998
compared with $18.8 million in 1997 and $12.6 million in 1996. These increases
reflect higher costs associated with the addition of scientific personnel and
costs to advance compounds into preclinical and clinical trials. The Company
expects to incur significant increases in future periods as compounds are
advanced through the clinical development process.
General and administrative expenses increased to $6.6 million during 1998
compared with $5.7 million in 1997 and $3.7 million in 1996. These increases
resulted primarily from additional administrative personnel, business
development and professional service expenses to support the expanded clinical
development efforts. The Company anticipates slight increases in general and
administrative expenses over the next few years as the Company's clinical
efforts continue to expand.
During 1998, the Company wrote-off acquired in-process research and
development costs of $4.9 million. In May 1998, the Company acquired the assets,
liabilities and the in-process research and development programs of Northwest
NeuroLogic, Inc. ("NNL") in exchange for Company's Common Stock and stock
options valued at $4.2 million. The acquired in-process research and development
consisted of Melanocortin ("MCR"), a brain receptor technology relating to
obesity and Excitatory Amino Acid Transporters ("EAATs"), a technology relating
to neurodegeneration and stroke. In June 1998, the Company purchased licenses
for the use of technology in programs relating to insomnia ("NBI-34060") from
DOV Pharmaceuticals and brain cancer ("IL-4 Fusion Toxin") from the National
Institute of Health for $710,000. The acquired in-process research and
development projects and the licensed technologies are in the early stages of
development, have not reached technological feasibility and have no known
alternative uses.
The nature and efforts required to develop the acquired in-process research
and development into commercially viable products include completion of the
development stages of a compound, pre-clinical development, clinical trial
testing, FDA approval and commercialization. Due to the nature of the
pharmaceutical development process, the Company anticipates incurring
substantial costs to develop the compounds into products. However, there is no
certainty that any of these development efforts will result in commercially
viable products. During the upcoming fiscal year, the Company anticipates
research and development expenditures of $2.8 million for EAATs, $1.7 million
for MCR, $6.1 million for IL-4 Fusion Toxin and $5.0 million for NBI-34060.
The value of the acquired in-process research and development was
determined by estimating the projected net cash flows related to such products,
including costs to complete the development, and future revenues to be earned
upon commercialization of the products. These cash flows were discounted back to
their net present value using a discount factor of 35%. The resulting projected
net cash flows from such projects were based on management's estimates of
revenues and operating profits related to such projects. Management also
reviewed the probability of product success, which were estimated using certain
probability factors for each stage of development.
Interest income increased to $4.2 million during 1998 compared with $4.1
million for 1997 and $2.9 million in 1996. The increase over 1997 primarily
resulted from higher effective interest yields on the Company's investment
portfolio during 1998. The increase over 1996 primarily resulted from higher
effective interest yields in addition to higher average cash balances throughout
the year. Management anticipates lower interest income in future periods as
clinical efforts increase operating requirements and cash available for
investment declines.
Equity in NPI losses recorded in 1998 were $3.4 million compared with $1.1
million in 1997. In addition to the equity in NPI losses during 1998, the
Company recorded a write-down in the value of its investment in NPI, totaling
$3.8 million.
Net loss for 1998 was $20.0 million or $1.10 per share compared to net
income of $5.1 million or $0.30 per share for 1997 and $5.9 million or $0.39 per
share in 1996. Management expects to incur substantial operating losses in
future periods 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, 1998, the Company had cash, cash equivalents and
short-term investments of $62.7 million. The Company invests its excess cash
primarily in investment grade debt instruments, marketable debt securities of
U.S. government agencies and high-grade commercial paper. Management has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. The primary market risk associated with such investments
is vulnerability to changes in short-term and long-term U.S. prime interest
rates. For further information regarding the Company's investments, see Notes 1
and 3 of the Notes to the Consolidated Financial Statements.
Net cash used by operating activities during 1998 was $10.7 million
compared with net cash provided of $11.0 million in 1997 and $6.7 million in
1996. The increase in cash used in operations during 1998 compared with 1997,
resulted primarily from increased sponsored research and milestone revenues
received under the Company's collaborations during 1997 and an increase in 1998
operating expenses as the Company expands its clinical development activities.
The increase in cash provided during 1997 compared with 1996, resulted primarily
from increased sponsored research and milestone revenues received under the
Company's collaborations during 1997.
Net cash provided by investing activities during 1998 was $4.7 million
compared with net cash used of $7.2 million and $48.6 million in 1997 and 1996,
respectively. The cash provided by investing activities during 1998 resulted
primarily from sales of short-term investments. The cash used in investing
activities during 1997 and 1996 resulted from the purchase of short-term
investments with proceeds from the Company's prior financings and the sale of
Common Stock to corporate collaborators.
Net cash provided by financing activities during 1998 was $1.9 million
compared with $659,000 and $46.8 million during 1997 and 1996, respectively.
Cash provided during 1998 resulted from proceeds received under 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. Cash provided during 1996 resulted from proceeds received from the
Company's initial public offering and sale of the Company's Common Stock to
corporate collaborators in May 1996.
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.
In February 1995, the Company entered into a three year collaborative
research and development agreement with Janssen for the development of CRF
receptor antagonists for the treatment of anxiety, depression and substance
abuse. Janssen paid the Company $3.7 million and $3.0 million for sponsored
research during 1997 and 1996, respectively. Milestone payments totaled
$250,000, $1.5 million and $1.0 million during 1998, 1997 and 1996,
respectively. The collaborative research portion of the agreement was completed
as scheduled in 1997 with the selection of a clinical candidate and the
commencement of clinical trials in Europe. The Company may continue to receive
milestone payments and royalties upon the successful continuation of the
development portion of the agreement.
In January 1996, the Company entered into an agreement with Novartis to
develop altered peptide ligands for the treatment of multiple sclerosis.
Novartis paid the Company for license fees and research funding totaling $4.5
million, $7.2 million and $8.5 during 1998, 1997 and 1996, respectively.
Milestone payments were $2.3 million, $3.8 million and $3.0 million during 1998,
1997 and 1996, respectively.
In March 1996, the Company participated in the formation of a research and
development company, Neuroscience Pharma, Inc. ("NPI"), with a group of Canadian
investors. At the same time, 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. During 1998,
the Company recognized $3.6 million in revenues associated with costs of
research on the Neurogenomics and DHEA programs.
In May 1997, the Company purchased two adjacent parcels of land in San
Diego for approximately $5.0 million in cash. One parcel was sold to Science
Park Center, LLC. ("LLC"), of which the Company owns a minority interest, in
exchange for a note receivable of $3.5 million plus interest. 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, 1998 and 1997 was $3.8 million and
$3.5 million, respectively. During 1998, the LLC constructed an expanded
laboratory and office complex on the property and leased the facility to the
Company under a 15 year operating lease. The Company has the option to purchase
the facility at any time during the lease at a predetermined price. The Company
will hold the remaining parcel until such time as the Company's growth requires
additional expansion.
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 2000. However, no assurance can be given that such capital
resources and payments will be sufficient to conduct its research and
development programs as planned. The amount and timing of expenditures will vary
depending upon a number of factors, including progress of the Company's research
and development programs.
INTEREST RATE RISK
The Company is exposed to changes in interest rates primarily from its
investments in certain available-for-sale securities and secondarily from its
long-term debt. Under its current policies, the Company does not use interest
rate derivative instruments to manage exposure to interest rate changes.
The Company's investments are primarily in fixed income, investment-grade
securities and are not restricted. The investment policy emphasizes return on
principal and liquidity and is focused on fixed returns, which limit volatility
and risk of principal. At December 31, 1998, the Company had available-for-sale
securities of $51.0 million. Interest risk exposure on long-term debt relates to
the Company's note payable which bears of floating interest rate of prime plus
one quarter percent (8.00% at December 31, 1998). At December 31, 1998, the note
balance was approximately $610,000, payable in equal monthly installments
through January 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
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will not be
required to modify or replace significant portions of hardware and software so
that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications and replacement of existing
hardware and software, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. To date the
Company has fully completed its assessment of all systems that could be
significantly affected by the Year 2000. The completed assessment indicated that
most of the Company's significant information technology systems are Year 2000
compliant. That assessment did, however, indicated that software and hardware
(embedded chips) used in some scientific equipment were at risk. Affected
systems include several robotics systems used for high through-put screening.
The Company is currently assessing cost comparisons on whether to remediate or
replace this equipment and expects to have the equipment corrected and re-tested
by May 1, 1999. The Company has gathered information about the Year 2000
compliance status of its significant suppliers and contractors and continues to
monitor their compliance.
For its information technology exposures, to date the Company is 99%
complete on the remediation phase and expects to complete software reprogramming
and replacement no later than April 15, 1999. To date, the Company has completed
100% of its testing and has implemented 90% of its remediated systems for its
scientific equipment. The remediation phase for all significant systems is
expected to be complete by May 1, 1999, with all remediated systems fully tested
by June 1, 1999.
The Company has queried its important suppliers and contractors that do not
share information systems with the Company (external agents). To date, the
Company is not aware of any external agent Year 2000 issue that would materially
impact the company's results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that external agents will be Year
2000 ready. The inability of external agents to complete their Year 2000
resolution process in a timely fashion could materially impact the Company. The
effect of non-compliance by external agents is not determinable.
The Company will utilize both internal and external resources to reprogram,
or replace, test and implement the software and scientific equipment for Year
2000 modifications. The total cost of the Year 2000 project is estimated at
approximately $175,000 and is being funded through operating cash flows and
capital equipment financing. To date, the Company has incurred approximately
$100,000 related to all phases of the Year 2000 project. Of the total remaining
project costs, approximately $40,000 is attributable to the purchase of new
software, $25,000 for new scientific equipment, which will be capitalized, and
$10,000 for the repair of hardware and software.
The Company plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including continued availability of certain resources, and
other factors. Estimates on the status of completion and the expected completion
dates are based on costs incurred to date compared to total expected costs.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
The Company has not completed a formal contingency plan for non-compliance,
but it is developing a plan based on the information obtained from third parties
and an on-going evaluation of the Company's own systems. The Company anticipates
having a contingency plan in place by mid-1999, which will include development
of backup procedures, identification of alternate suppliers and possible
increases in supplies inventory levels. The Company has not identified its most
reasonably likely worst case scenario with respect to possible losses in
connection with Year 2000 related problems. The Company plans on completing this
analysis in mid-1999.
The information above contains forward-looking statements including,
without limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, and adequate resources that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that forward-looking statements about
the Year 2000 should be read in conjunction with the Company's disclosures under
the heading: "Caution on forward-looking statements".
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.
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.
Continued profitability is not expected as the Company's operating expenses
are anticipated to rise significantly in future periods as products are advanced
through the various development and clinical stages. Neurocrine expects to incur
additional operating expenses over the next several years as its research,
development, preclinical testing and clinical trial activities increase. To the
extent that the Company is unable to obtain third party funding for such
expenses, the Company expects that increased expenses will result in increased
losses from operations. There can be no assurance that the Company's products
under development will be successfully developed or that its products, if
successfully developed, will generate revenues sufficient to enable the Company
to earn a profit.
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, on page 26 of
this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See the list of the Company's Financial Statements filed with this Form
10-K under Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Information required by this item will be contained in the Company's Notice
of 1999 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, 1998. 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 1999 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, 1998. 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 1999 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, 1998. 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 1999 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, 1998. 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, 1998 and 1997
Consolidated Statement of Operations for the years ended
December 31, 1998, 1997 and 1996 Consolidated Statement of
Stockholders' Equity for the years ended December 31, 1998, 1997
and 1996 Consolidated Statement of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 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, 1998.
(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* Registration Rights Agreement dated May 28, 1998, between certain investors and the Registrant (7)
2.3 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 Lock-Up Agreement (1)
4.2 Form of Common Stock Certificate (1)
4.3 Form of warrant issued in existing warrant holders (1)
4.4 Form of Series A warrant issued in connection with the execution by the Company of the Unit Purchase
Agreement (see below) (1)
4.5 New Registration Rights Agreement dated March 29, 1996 among the Company and the investors signatory
thereto (1)
4.6 Letter of Intent between Northwest NeuroLogic, Inc. and the Company dated February 27, 1998 (2)
10.1 Purchase and Sale Agreement and Escrow Instructions between MS Vickers II, LLC and the Company dated
February 13, 1997 (3)
10.2 1992 Incentive Stock Plan, as amended
10.3 1996 Employee Stock Purchase Plan (1)
10.4 1996 Director Stock Option Plan and form of stock option agreement (1)
10.5 Form of Director and Officer Indemnification Agreement (1)
10.6 Employment Agreement dated March 1, 1997, between the Registrant and Gary A. Lyons, as amended (4)
10.7 Employment Agreement dated March 1, 1997, between the Registrant and Errol B. De Souza, 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 Neuroscience 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 (5)
10.26* Letter and Purchase Order dated June 7, 1996, by and between Ciba-Geigy and the Registrant (5)
10.27 Third Lease Amendment dated June 6, 1996, by and between Talcott Realty I Limited Partnership and the
Registrant (5)
10.28* Research and License Agreement dated October 15, 1996, between the Registrant and Eli Lilly and
Company (5)
10.29* Lease between Science Park Center LLC and the Company (6)
10.30* Option Agreement between Science Park Center LLC (Optionor) and the Company (Optionee) (6)
10.31* Construction Loan Agreement (6)
10.32 Secured Promissory Note (6)
10.33* Operating Agreement for Science Park Center LLC (6)
10.34 Information and Registration Rights Agreement dated September 15, 1992, as amended to date (1)
10.35 Form of incentive stock option agreement and nonstatutory stock option agreement for use in connection
with 1992 Incentive Stock Plan (1)
10.36* Patent License Agreement dated May 7, 1998, between the US Public Health Service and the Registrant (7)
10.37* Patent License Agreement dated April 28, 1998, between and among Ira Pastan, David Fitzgerald and the
Registrant (7)
10.38* Sub-License and Development Agreement dated June 30, 1998, by and between DOV Pharmaceutical, Inc. and
the Registrant (7)
10.39* Warrant Agreement dated June 30, 1998, between DOV Pharmaceutical, Inc. and the Registrant (7)
10.40* Warrant Agreement dated June 30, 1998, between Jeff Margolis and the Registrant (7)
10.41* Warrant Agreement dated June 30, 1998, between Stephen Ross and the Registrant (7)
10.42+ Collaboration and License Agreement dated January 1, 999, by and between American Home Products
Corporation acting through its Wyeth-Ayerst Laboratories Division and the Registrant
10.43+ Employment Agreement dated January 1, 1999, between the Registrant and Margaret Valeur-Jensen
10.44+ Employment Agreement dated February 9, 1998, between the Registrant and Bruce Campbell
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP, Independent Auditors
24 Power of Attorney (see page 33)
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 8-K filed
on March 13, 1998.
(3) Incorporated by reference to the Company's amended
Quarterly Report on Form 10-Q filed on August 15, 1997
(4) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed on August 14, 1997
(5) Incorporated by reference to the Company's Report on Form 10-K for the fiscal year ended December 31, 1996
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on November 14, 1997
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on November 16, 1998.
* Confidential treatment has been granted with respect to certain portions of the exhibit.
+ Confidential treatment has been requested with respect to certain portions of the exhibit.
(d) Financial Statement Schedules
See Item 14(a) (2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEUROCRINE BIOSCIENCES, INC.
A Delaware Corporation
By: /s/ Gary A. Lyons
Gary A. Lyons
President and Chief Executive Officer
Date: March 31, 1999
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 and March 31, 1999
- ----------------------- Director (Principal Executive Officer)
Gary A. Lyons
/s/ Paul W. Hawran Chief Financial Officer March 31, 1999
- ----------------------- (Principal Financial and Accounting Officer)
Paul W. Hawran
/s/ Joseph A. Mollica Chairman of the Board of Directors March 31, 1999
- -----------------------
Joseph A. Mollica.
/s/ Richard F. Pops Director March 31, 1999
- -----------------------
Richard F. Pops
/s/ Harry F. Hixson, Jr. Director March 31, 1999
- -----------------------
Harry F. Hixson, Jr.
/s/ Wylie W. Vale Director March 31, 1999
- -----------------------
Wylie W. Vale
NEUROCRINE BIOSCIENCES, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors ........................ 35
Consolidated Balance Sheet ................................................ 36
Consolidated Statement of Operations ...................................... 37
Consolidated Statement of Stockholders' Equity ............................ 38
Consolidated Statement of Cash Flows ...................................... 39
Notes to the Consolidated Financial Statements ............................ 40
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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Neurocrine
Biosciences, Inc. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
January 26, 1999,
except for Note 13, as to which the date is
March 2, 1999
NEUROCRINE BIOSCIENCES, INC.
Consolidated Balance Sheet
(in thousands)
December 31,
--------------------
1998 1997
--------- --------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 11,708 $ 15,771
Short-term investments, available-for-sale .......... 50,962 59,321
Receivables under collaborative agreements .......... 863 194
Receivables from related parties .................... 544 156
Other current assets ................................ 1,556 936
-------- --------
Total current assets ............................. 65,633 76,378
Property and equipment, net ......................... 10,899 8,846
Licensed technology and patent applications costs, net 967 1,185
Investment in Neuroscience Pharma, Inc. ............. 1,411 3,343
Other assets ........................................ 1,619 2,151
======== ========
Total assets ..................................... $ 80,529 $ 91,903
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 2,481 $ 1,822
Accrued liabilities .................................. 2,077 2,402
Deferred revenues .................................... 169 1,919
Current portion of long-term debt .................... 149 149
Current portion of capital lease obligations ......... 693 724
-------- --------
Total current liabilities ......................... 5,569 7,016
Long-term debt, net of current portion ............... 461 597
Capital lease obligations, net of current portion .... 1,786 125
Deferred rent ........................................ 257 659
Other liabilities .................................... 498 354
-------- --------
Total liabilities ................................. 8,571 8,751
Commitments and contingencies
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
18,930,865 in 1998 and 17,686,802 in 1997 ......... 19 18
Additional paid in capital ........................... 97,064 88,586
Deferred compensation ................................ (187) (439)
Stockholder notes .................................... (119) (120)
Accumulated other comprehensive income ............... 31 2
Accumulated deficit .................................. (24,850) (4,895)
-------- --------
Total stockholders' equity ........................ 71,958 83,152
-------- --------
Total liabilities and stockholders' equity ........ $ 80,529 $ 91,903
======== ========
See accompanying notes.
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Operations
(in thousands)
Year-ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Revenues:
Sponsored research and development ............................ $ 8,751 $ 14,985 $ 9,092
Sponsored research and development from related party ......... 3,610 -- --
Milestones and license fees ................................... 2,500 10,250 9,000
Grant income and other revenues ............................... 1,176 909 1,124
-------- -------- --------
Total revenues ............................................. 16,037 26,144 19,216
Operating expenses:
Research and development ...................................... 21,803 18,758 12,569
General and administrative .................................... 6,594 5,664 3,697
Write-off of acquired in-process research and
development and licenses ...................................... 4,910 -- --
-------- -------- --------
Total operating expenses ................................... 33,307 24,422 16,266
Income (loss) from operations ..................................... (17,270) 1,722 2,950
Other income and expenses:
Interest income ............................................... 4,151 4,084 2,870
Interest expense .............................................. (151) (153) (272)
Equity in NPI losses and other adjustments .................... (7,188) (1,130) --
Other income .................................................. 504 818 574
-------- -------- --------
Income (loss) before taxes ........................................ (19,954) 5,341 6,122
Income taxes ...................................................... 1 214 248
-------- -------- --------
Net income (loss) ................................................. $(19,955) $ 5,127 $ 5,874
======== ======== ========
Earnings (loss) per common share:
Basic ......................................................... $ (1.10) $ 0.30 $ 0.39
Diluted ....................................................... $ (1.10) $ 0.28 $ 0.36
Shares used in the calculation of earnings (loss) per common share:
Basic ......................................................... 18,141 16,930 14,971
Diluted ....................................................... 18,141 18,184 16,127
See accompanying notes.
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Stockholders' Equity
(in thousands)
Notes Accumulated
Common Stock Additional Unearned Receivable Other Accumu- Total
-------------- Paid In Compen- from Comprehensive lated Stockholders
Shares Amount Capital sation Stockholders Income (Loss) Deficit Equity
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 .............. 11,723 $12 $ 35,586 $(342) $(138) $ 3 $(15,896) $ 19,225
Net income ..................................... -- -- -- -- -- -- 5,874 5,874
Unrealized gain on short-term investments ...... -- -- -- -- -- 39 -- 39
--------
Comprehensive income ........................... -- -- -- -- -- -- -- 5,913
Issuance of common stock for cash .............. 5,054 5 47,535 -- -- -- -- 47,540
Payments received on stockholder notes ......... -- -- -- -- 10 -- -- 10
Deferred compensation and related
amortization, net -- -- 113 (34) -- -- -- 79
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 .............. 16,777 17 83,234 (376) (128) 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 .......... 182 -- 59 -- -- -- -- 59
Issuance of common stock for option exercises .. 106 -- 453 -- -- -- -- 453
Issuance of common stock pursuant to the
Employee Stock Purchase Plan ................. 22 -- 175 -- -- -- -- 175
Issuance of common stock in exchange for
NPI Preferred Stock .......................... 600 1 4,473 -- -- -- -- 4,474
Payments received on stockholder notes ......... -- -- -- -- 8 -- -- 8
Deferred compensation and related
amortization, net ............................ -- -- 192 (63) -- -- -- 129
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 .............. 17,687 18 88,586 (439) (120) 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 .......... 60 -- 142 -- -- -- -- 142
Issuance of common stock for option exercises .. 81 -- 286 -- -- -- -- 286
Issuance of common stock pursuant to the
Employee Stock Purchase Plan ................. 30 -- 205 -- -- -- -- 205
Issuance of common stock in exchange for
NPI Preferred Stock .......................... 679 1 3,854 -- -- -- -- 3,855
Issuance of common stock for NNL Acquisition ... 392 -- 4,032 -- -- -- -- 4,032
Issuance of common stock for milestone achievement 2 -- 17 -- -- -- -- 17
Payments received on stockholder notes ......... -- -- -- -- 1 -- -- 1
Amortization of deferred compensation, net ..... -- -- (58) 252 -- -- -- 194
-------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 .............. 18,931 $19 $ 97,064 $(187) $(119) $ 31 $(24,850) $ 71,958
===============================================================================
See accompanying notes.
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Cash Flows
(in thousands)
Twelve Months Ended December 31,
---------------------------------
1998 1997 1996
-------- --------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net (loss) income ............................................. $(19,955) $ 5,127 $ 5,874
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Acquisition of Northwest NeuroLogic for Common Stock .... 4,200 -- --
Equity in NPI losses and other adjustments .............. 7,188 1,130 --
Depreciation and amortization ........................... 1,720 1,322 981
Loss on abandonment of assets ........................... 460 76 25
Gain on sale of equipment ............................... (15) -- --
Deferred revenues ....................................... (1,750) 1,000 419
Deferred rent ........................................... (402) 384 61
Compensation expenses recognized for stock options ...... 194 129 79
Change in operating assets and liabilities,
net of acquired business:
Accounts receivable and other current assets ........ (2,898) 885 (936)
Other non-current assets ............................ 291 (1,274) (486)
Accounts payable and accrued liabilities ............ 271 2,213 665
-------- --------- --------
Net cash flows (used in) provided by operating activities ..... (10,696) 10,992 6,682
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of short-term investments ........................... (41,618) (113,080) (85,171)
Sales/maturities of short-term investments .................... 50,006 112,315 38,918
Proceeds from sale of equipment ............................... 72 -- --
Purchases of property and equipment ........................... (3,755) (6,440) (2,304)
-------- --------- --------
Net cash flows provided by (used in) investing activities ..... 4,705 (7,205) (48,557)
CASH FLOW FROM FINANCING ACTIVITIES
Issuance of Common Stock ...................................... 433 687 47,540
Proceeds received from long-term obligations .................. 2,500 747 --
Principal payments on long-term obligations ................... (1,006) (783) (742)
Payments received on notes receivable from stockholders ....... 1 8 10
-------- --------- --------
Net cash flows provided by financing activities ............... 1,928 659 46,808
-------- --------- --------
Net decrease in cash and cash equivalents ..................... (4,063) 4,446 4,933
Cash and cash equivalents at beginning of the period .......... 15,771 11,325 6,392
-------- --------- --------
Cash and cash equivalents at end of the period ................ $ 11,708 $ 15,771 $ 11,325
======== ========= ========
SUPPLEMENTAL DISCLOSURES
Supplemental disclosures of cash flow information:
Interest paid ........................................... $ 150 $ 153 $ 272
Taxes paid .............................................. 1 250 40
Schedule of noncash investing and financing activities in 1998:
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 (Continued)
December 31, 1998
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 engaged in the discovery and development
of therapeutics for the treatment of diseases and disorders of the central
nervous and immune systems which includes anxiety, depression, Alzheimer's
disease, obesity, stroke and multiple sclerosis.
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 a separate component of
stockholders' equity. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses
and declines in value judged to be other-than-temporary, if any, on
available-for-sale securities are included in investment income. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
interest income.
The Company invests its excess cash primarily in investment grade debt
instruments, marketable debt securities of U.S. government agencies, and
high-grade commercial paper. Management has established guidelines relative to
diversification and maturities that maintain safety and liquidity.
PROPERTY AND EQUIPMENT: 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 exclusive, worldwide, perpetual licenses to patents related to the
Company's platform technology which are capitalized at cost and amortized over
periods of 7 to 11 years. 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. Accumulated amortization at December 31, 1998 and 1997 was $679,000
and $461,000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company routinely assesses the
recoverability of 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 will measure 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.
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. 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 $12.0 million, $9.4 million and $8.3
million during 1998, 1997 and 1996, respectively.
STOCK-BASED COMPENSATION: The Company accounts for stock option grants to
employees in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
because the Company believes the alternative fair value accounting provided for
under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use
of option valuation models that were not developed for use in valuing employee
stock options. Deferred compensation is recorded only in the event that the fair
market value of the stock on the date of the option grant exceeds the exercise
price of the options. Such deferred compensation is amortized over the vesting
period of the options. Compensation expense recognized during the years ended
December 31, 1998, 1997 and 1996 was $194,000, $129,000 and $79,000,
respectively.
EARNINGS PER SHARE: Basic and diluted earnings per share is 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, 1998.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the FASB
issued Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Company expects to adopt the new Statement effective January 1,
2000. The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. The Company does not anticipate that the adoption
of the Statement will have a significant effect on its results of operations or
financial position.
2. 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"), a neurodegenerative research
and development company, in exchange for 392,608 shares of Company's Common
Stock and 105,414 of stock options valued at $4.2 million. The operations of NNL
are included in the consolidated statement of operations from the date of
acquisition.
The acquisition was accounted for as a purchase and, accordingly, the
purchase price has been allocated to the assets acquired and the liabilities
assumed based on the estimated fair market value at the date of the acquisition.
The amount allocated to in-process research and development was charged to
expense because the technology has not reached technological feasibility and has
no future alternative uses. The purchase price was allocated as follows (in
thousands):
Current assets .............................. $ 180
Furniture and equipment ..................... 49
Liabilities assumed ......................... (207)
In-process research and development ......... 4,200
-------
Total purchase price ........................ $ 4,222
=======
The acquired in-process research and development consisted of Melanocortin
("MCR"), a brain receptor technology relating obesity and Excitatory Amino Acid
Transporters ("EAATs"), a technology relating to neurodegeneration and stroke.
Both in-process research and development are in early developmental stages.
The nature and efforts required to develop the acquired in-process research
and development into commercially viable products include completion of the
development stages of a compound, pre-clinical development, clinical trial
testing, FDA approval and commercialization. Due to the nature of the
pharmaceutical development process, the Company anticipates substantial further
research and clinical expenditures to develop the products. There is, however,
no certainty that either of these programs will result in viable products.
The following are the pro forma unaudited results of operations for the
years ended December 31, 1998 and 1997, had the purchase of NNL been consummated
as of January 1, of the respective years:
1998 1997
------------------------------------
(in thousands, except per share data)
Revenues .................. $ 16,325 $ 26,783
Net income (loss) ......... (20,013) 975
Earnings (loss) per share:
Basic ..................... $ (1.09) $ 0.06
Diluted ................... (1.09) 0.05
This pro forma information is not necessarily indicative of the actual
results that would have been achieved had NNL been acquired on January 1, 1997,
nor is it necessarily indicative of future results.
OTHER: During 1998, the Company purchased licenses for technologies
relating to insomnia in the amount of $440,000 and brain cancer in the amount of
$270,000. 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.
3. 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, 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
======== ======== ======== ========
December 31, 1997
US Government securities $ 11,975 $ 54 $ -- $ 12,029
Certificates of deposit . 247 -- -- 247
Commercial paper ........ 9,850 -- -- 9,850
Corporate debt securities 37,143 4 (60) 37,087
Other ................... 104 4 -- 108
----------------------------------------------------
Total securities $ 59,319 $ 62 $ (60) $ 59,321
======== ======== ======== ========
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, 1998, are shown below (in thousands).
Amortized Estimated
Cost Fair Value
------- --------
Due in one year or less ..................... $22,883 $23,002
Due after one year through five years ....... 28,048 27,960
------ ------
$50,931 $50,962
======= =======
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997, consist of the
following (in thousands):
1998 1997
------- ------
Land .......................................... $5,299 $4,985
Furniture and fixtures ........................ 1,856 1,204
Equipment ..................................... 7,356 4,956
Leasehold improvements ........................ 562 717
------ -------
15,073 11,862
Less accumulated depreciation and amortization (4,174) (3,016)
-------- -------
Net property and equipment .................... $ 10,899 $ 8,846
======== ========
Furniture and equipment under capital leases were $5.8 million and $3.3
million at December 31, 1998 and 1997, respectively. Accumulated depreciation of
furniture and equipment under capital leases totaled $3.1 million and $2.2
million at December 31, 1998 and 1997, respectively. The Company received
proceeds of $2.5 million for equipment that it sold and subsequently leased back
under capital lease obligations in 1998. No similar transactions were conducted
in 1997.
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1998 and 1997 consist of the following
(in thousands):
1998 1997
------- -------
Accrued employee benefits ......... $ 1,120 $ 1,162
Accrued professional fees ......... 438 470
Accrued development costs ......... 333 300
Taxes payable ..................... 15 195
Other accrued liabilities ......... 171 275
------- -------
$2,077 $2,402
======= =======
6. 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 (8.00% at December 31, 1998). The note is
repayable in equal monthly installments beginning February 1998.
At December 31, 1998, the repayment schedule for the note was $149,000 for
each year 1999 through 2002 and $13,000 in the year 2003.
7. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE OBLIGATIONS: The Company has financed certain equipment under
capital lease obligations which expire on various dates through the year 2002
and bear interest at rates between 7.6% and 11.6%. 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, 1998 and 1997 was $3.8 million and
$3.5 million, respectively.
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 for a term of 20 months. The Company will hold the second parcel of
land until such a 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, 1998 are as follows (in thousands):
Capital Operating
Fiscal Year: Leases Leases
-------- --------
1999 ........................................ $863 $2,924
2000 ........................................ 733 2,731
2001 ........................................ 900 2,525
2002 ........................................ 350 2,626
2003 ........................................ -- 2,731
Thereafter .................................. -- 32,721
-------- --------
Total minimum payments ...................... 2,846 $46,258
========
Less: amounts representing interest ........ (367)
--------
Future minimum payments ..................... 2,479
Less: current portion ...................... (693)
--------
Future payments on capital lease obligations . $1,786
========
Rent expense was $2,379,000, $2,139,000, and $1,298,00 for the years ended
December 31, 1998, 1997 and 1996, respectively. Sublease income was $837,000,
$917,000 and $598,000, for the years ended December 31, 1998, 1997 and 1996,
respectively.
Future minimum sublease income to be received under non-cancelable
subleases at December 31, 1998 will be $985,000 and $506,000 for the years
ending December 31, 1999 and 2000, respectively.
Licensing and Research Agreements: The Company has entered into licensing
agreements with various universities and research organizations. Under the terms
of these agreements, the Company has received licenses to technology, or
technology claimed, in certain patents or patent applications. The Company is
required to pay royalties on future sales of products employing the technology
or falling under claims of a patent, and, certain agreements require minimum
royalty payments. Certain agreements also require the Company to make payments
upon the achievement of specified milestones.
8. 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.
Options: The Company has authorized 5,005,414 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:
1998 1997 1996
-------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(in thousands) Price (in thousands) Price (in thousands) Price
--------------------------- -------------------------- --------------------------
Outstanding at January 1, ..... 2,653 $5.84 1,739 $4.48 1,415 $3.61
Granted ....................... 677 $6.26 1,072 $7.86 378 $7.92
Exercised ..................... (81) $3.64 (100) $4.10 (11) $3.60
Canceled ...................... (456) $5.76 (58) $5.88 (43) $4.41
---------------------------- -------------------------- ------------------------
Outstanding at December 31, ... 2,793 $6.02 2,653 $5.85 1,739 $4.48
============================ ========================== ========================
A summary of options outstanding as of December 31, 1998 follows:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------ --------------------------------------
Weighted
Average
Outstanding Remaining Weighted Exercisable Weighted
Range of as of Contractual Average As of Average
Exercise Prices 12/31/98 Life Exercise Price 12/31/98 Exercise Price
- -------------------------------------------------------------------------------------------------------------
$0.02 to $2.50 492 5.4 years $2.24 427 $2.40
$4.25 553 6.2 years $4.25 474 $4.25
$5.00 to $7.01 486 8.6 years $6.36 104 $5.64
$7.38 to $7.86 678 8.5 years $7.62 228 $7.58
$8.00 to $10.25 584 8.2 years $8.73 294 $8.73
-------------------------------------------------------------------------------------------
2,793 7.5 years $6.02 1,527 $5.19
The weighted average fair values of the options granted during 1998, 1997
and 1996 were $5.59, $5.01 and $5.79, 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 1998, 1997
and 1996, respectively: risk-free interest rates of 5.5%, 5.8% and 6.1%; a
dividend yield of 0.0% (for all years), volatility factors of the expected
market price of the Company's common stock of .88, .43 and .41; 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 income loss for 1998 and net income in 1997 and 1996, 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, 1998, 1997 and 1996 follows (in thousands, except for per
share data):
1998 1997 1996
---------------------------------
Pro forma net income (loss) ................. $(20,758) $4,364 $5,375
Pro forma income (loss) per share (diluted) . $(1.14) $0.24 $0.33
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, 1998, 51,082 shares had been issued pursuant to the Purchase Plan.
WARRANTS: The Company has outstanding warrants to purchase 388,185 shares
of Common Stock at exercise prices of $5.00 and $10.50 per share. The warrants
generally expire between 1998 and 2007. At December 31, 1998, all outstanding
warrants were exercisable.
The following shares of Common Stock are reserved for future issuance at
December 31, 1998:
Stock option plans ..................... 3,465,465
Employee stock purchase plan ........... 73,918
Warrants ............................... 388,185
----------
Total .................................. 3,927,568
==========
Of the shares available for future issuance under the Plan, 2,792,987 are
outstanding grants and 672,478 remain available for future grant.
9. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
JANSSEN: In January 1995, the Company entered into a research and
development agreement (the "Janssen Agreement") with Janssen, under which
Janssen paid the Company $2.0 million in up-front license 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 have been received through
December 31, 1998. 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.
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 is obligated to provide Neurocrine with $7.0 million in research and
development funding during the first two years of the agreement and up to $15.5
million in further research and development funding thereafter. As of December
31, 1998, the Company has received $15.2 million in sponsored research and
development payments. In addition, the Company is also entitled to receive
milestone payments for certain development and regulatory achievements. The
Company has received $9.1 million of milestone payments through December 31,
1998 of which $2.3 million was received in 1998.
In return, Novartis received manufacturing and marketing rights outside of
North America and will receive a percentage of profits on sales in North
America. The Company will receive royalties for all sales outside North America
and a percentage of profits on sales in North America, which the Company may at
its option convert to a right to receive royalties on product sales. Neurocrine
is obligated to repay a portion of the development costs for potential products
developed in such collaboration unless the Company elects to convert to the
right to receive royalty payments. Novartis has the right to terminate the
agreement upon six months notice.
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 $14.5 million have been received as of December 31,
1998. 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.
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 Preferred Stock
of NPI, which could be converted into 1,279,758 shares of the Company's Common
Stock at the option of the investors. Upon conversion of the Preferred Shares,
ownership of the shares transfer to the Company and is redeemable for
approximately $9.5 million in cash at the option of the Company.
NPI has committed to use these funds for research and clinical development
of certain of the Company's programs in exchange for royalties on sales of
products developed, as well as, exclusive Canadian marketing rights for such
products in certain situations. The Company has the right to terminate this
agreement upon the conversion of the Preferred Shares. In connection with their
investment in NPI, the Canadian Investors also received warrants exercisable for
383,875 shares of the Company's Common Stock at an exercise price of $10.50 per
share and are also eligible to receive additional warrants in the future upon
attainment of certain additional funding.
During December 1997 and October 1998, the Canadian Investors converted
their Preferred Shares to Neurocrine 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 NPI net losses in accordance with the equity method of accounting.
The Preferred Shares are redeemable for approximately $9.5 million in 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 $3.8
million during 1998. Equity in NPI losses was $3.4 million and $1.1 million in
1998 and 1997, respectively. The balance of the Company's investment in NPI was
$1.4 million and $3.3 million at December 31, 1998 and 1997, 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. During 1998, the Company
recognized $3.6 million in revenues associated with costs of research on the
Neurogenomics and DHEA programs.
11. INCOME TAXES
At December 31, 1998, the Company had federal and California income tax net
operating loss carryforwards of approximately $9.3 million and $8.3 million,
respectively. The federal and California tax loss carryforwards will begin to
expire in 2009 and 2003, respectively, unless previously utilized. The Company
also has federal and California research tax credit carryforwards of
approximately $1.6 million and $271,000, 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 change will have a material
impact upon the utilization of these carryforwards.
Significant components of the Company's deferred tax assets as of December
31, 1998 and 1997 are shown below. A valuation allowance of $6,470,000 and
$3,474,000 at December 31, 1998 and 1997, 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:
1998 1997
-------- --------
Deferred tax assets:
Net operating loss carryforwards ....... $ 3,744 $ 993
Tax credit carryforwards ............... 2,069 1,176
Capitalized research and development ... 453 525
Other, net ............................. 204 780
-------- --------
Total deferred tax assets .............. 6,470 3,474
Valuation allowance .................... (6,470) (3,474)
-------- --------
Net deferred tax assets ................ $ -- $ --
======== ========
The provision for income taxes on earnings subject to income taxes differs
from the statutory federal rate at December 31, 1998, 1997 and 1996, due to the
following:
1998 1997 1996
-------- -------- --------
Federal income taxes at 34% ............. $(6,785) $ 1,816 $2,081
State income tax, net of federal benefit 1 87 --
Tax effect on non-deductible expenses ... 4,213 21 17
Increase in valuation allowance and other 2,572 (1,837) (2,098)
Alternative minimum taxes ............... -- 127 248
-------- -------- --------
$ 1 $ 214 $ 248
======== ========= ========
The provision for taxes based on income at December 31, 1998, 1997 and 1996
consist of the following:
1998 1997 1996
------ ------ ------
Current:
Federal ..... $ -- $127 $248
State ....... 1 87 --
Deferred:
Federal ..... -- -- --
State ....... -- -- --
------ ------ ------
Total ....... $ 1 $214 $248
====== ====== ======
12. 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,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
Numerator:
Net income (loss) ................................. $(19,955) $5,127 $5,874
Effect of dilutive securities ..................... -- -- --
--------- --------- ---------
Numerator for earnings (loss) per share ........... $(19,955) $5,127 $5,874
========= ========= =========
Denominator:
Denominator for basic earnings (loss) per share ... 18,141 16,930 14,971
Effect of dilutive securities:
Employee stock options ........................ Antidilutive 909 796
Convertible preferred stock ................... Antidilutive 204 183
Warrants ...................................... Antidilutive 141 177
------------ --------- ---------
Dilutive potential of common shares ............... - 1,254 1,156
--------- --------- ---------
Denominator for diluted earnings (loss) per share . 18,141 18,184 16,127
========= ========= =========
Basic earnings (loss) per share ................... $ (1.10) $ 0.30 $ 0.39
Diluted earnings (loss) per share ................. $ (1.10) $ 0.28 $ 0.36
13. SUBSEQUENT EVENT
On March 2, 1999, the Company entered into a collaboration 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. The agreement, valued up to $78
million, provided that marketable products for these disorders result from the
collaboration, includes sharing proprietary technologies between the two
companies; funding for research and milestone achievements and potential
royalties on world-wide sales of products resulting from the collaboration. The
Company expects to receive three to five years of funding for research and
development activities, in addition to access to Wyeth's chemical libraries for
screening within the collaborative field.