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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 1-12584
SHEFFIELD PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 13-3808303
(State of Incorporation) (IRS Employee Identification Number)
425 SOUTH WOODSMILL ROAD 63017 (314) 579-9899
ST. LOUIS, MISSOURI (Zip Code) (Registrant's telephone,
(Address of principal executive offices) including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
Common Stock. $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 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. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers 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 at March 20, 2000 of the voting stock of
the registrant held by non-affiliates (based upon the closing price of $6.00 per
share of such stock on the American Stock Exchange on such date) was
approximately $136,000,000. Solely for the purposes of this calculation, shares
held by directors and officers and beneficial owners of 10% or more of the
Company's Common Stock of the registrant have been excluded. Such exclusion
should not be deemed a determination or an admission by the registrant that such
individuals are, in fact, affiliates of the registrant.
Indicate the number of shares outstanding of each of the
registrant's classes of common equity, as of the latest practicable date: At
March 20, 2000, there were outstanding 27,872,802 shares of the registrant's
Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Annual Report to Stockholders for the year
ended December 31, 1999 are incorporated by reference in Items 6, 7 and 8 of
this Annual Report on Form 10-K and attached as Exhibit 13 hereto.
Certain portions of the Registrant's definitive proxy statement to be filed not
later than April 5, 2000 pursuant to Regulation 14A are incorporated by
reference in Items 10 through 13 of Part III of this Annual Report on Form 10-K.
2
PART I
Item 1. Business
The Company
Sheffield Pharmaceuticals, Inc. (formerly Sheffield Medical
Technologies Inc.) ("Sheffield" or the "Company") was incorporated under
Canadian law in October 1986. In May 1992, the Company became domesticated as a
Wyoming Corporation pursuant to a "continuance" procedure under Wyoming law. In
January 1995, the Company's shareholders approved the proposal to reincorporate
the Company in Delaware, which was effected on June 13, 1995. The Company is a
specialty pharmaceutical company focused on development and commercialization of
later stage, lower risk pharmaceutical products that utilize the Company's
unique proprietary pulmonary delivery technologies. The Company is in the
development stage and, as such, has been principally engaged in the development
of its pulmonary delivery systems. The Company and its development partners
currently has nine products in various stages of development.
In 1997, the Company acquired the Metered Solution Inhaler ("MSI"),
a portable nebulizer-based pulmonary delivery system, through a worldwide
exclusive license and supply arrangement with Siemens AG ("Siemens"). During the
second half of 1998, the Company acquired the rights to an additional pulmonary
delivery technology, the Aerosol Drug Delivery System ("ADDS") from a subsidiary
of Aeroquip-Vickers, Inc. ("Aeroquip-Vickers"). The ADDS technology is a new
generation propellant-based pulmonary delivery system. Additionally, during
1998, Sheffield licensed from Elan Corporation, plc, the Ultrasonic Pulmonary
Drug Absorption System ("UPDAS(TM)"), a novel disposable unit dose nebulizer
system, and Elan's Absorption Enhancing Technology ("Enhancing Technology"), a
therapeutic agent to increase the systemic absorption of drugs. In October 1999,
the Company licensed Elan's Nanocrystal(TM) dispersion technology to be used in
developing certain steroid products.
Business Strategy
The Company's business strategy is to seek out opportunities to
acquire and develop commercially attractive pharmaceutical products, primarily
in the area of pulmonary drug delivery. The Company recognizes that no single
technology in the area of pulmonary drug delivery will meet the needs of
patients and providers of the wide variety of compounds (both for respiratory
disease and systemic disease therapy) that may benefit therapeutically and
commercially from pulmonary delivery. As a result, it remains the Company's goal
to acquire or in-license a portfolio of pulmonary delivery technologies to meet
the broadest based market opportunity. The Company intends to selectively enter
into joint ventures or other forms of strategic alliances to defray or reduce
significant development and manufacturing costs associated with these
opportunities that otherwise might be borne by the Company while retaining
certain commercial rights.
The Company will continue to be opportunistic in the acquisition
and/or in-licensing of technologies or products that meet the Company's
strategic objectives. Such opportunities include: (1) technologies or products
that meet the needs of healthcare communities that are not currently served, (2)
technologies or products that can effectively be developed when viewed in light
of the commercial opportunity and competitive environment within the U.S.
market, (3) technologies or products that will be of substantive interest to
other companies with regard to co-development and co-marketing with limited
incremental investment by the Company, and (4) products and technologies with
the potential for marketing to a specialty group or limited physician audience.
The Company plans to pay special attention to platform technologies that can be
developed into multiple applications in varying therapeutic categories.
Strategic Alliances
The Company believes a less costly, more predictable path to
commercial development of therapeutics can be achieved through the creative use
of collaborations and alliances, combined with state-of-the-art technology and
experienced management. The Company is applying this strategy to the development
of both respiratory and systemic pharmaceutical products to be delivered through
the Company's proprietary pulmonary delivery systems. Using these pulmonary
delivery systems as platforms, the Company has established strategic alliances
for developing its initial products with Elan, Siemens and Zambon Group SpA
("Zambon").
3
In a collaboration with Zambon, the Company is developing a range of
pharmaceutical products delivered by the MSI to treat respiratory diseases.
Under its agreement with Zambon, MSI commercial rights for respiratory products
have been sublicensed to Zambon in return for an equity investment in the
Company (approximately 10%). The Company has maintained co-marketing rights for
the U.S. The Company's ability to co-market MSI respiratory products in the U.S.
requires no additional payment by the Company. Zambon has committed to fund the
development costs for respiratory compounds delivered by the MSI as well as
making certain milestone payments and royalties on net sales resulting from
these MSI products to the Company. Initial products for respiratory disease
therapy include albuterol, ipratropium, cromolyn and inhaled steroids.
As part of a strategic alliance with Elan, a world leader in
pharmaceutical delivery technology, the Company is developing therapies for
systemic (non-respiratory) diseases to be delivered to the lungs using both the
ADDS and MSI. In 1998, the systemic applications of the MSI and ADDS were
licensed to Systemic Pulmonary Delivery, Ltd. ("SPD"), a wholly owned subsidiary
of the Company. In addition, two Elan technologies, UPDAS(TM) and the Enhancing
Technology, have also been licensed to SPD. The Company has retained exclusive
rights outside of the strategic alliance to respiratory disease applications
utilizing the ADDS technology and the two Elan technologies. Two systemic
compounds for pulmonary delivery are currently under development. For the
treatment of breakthrough pain, the Company is developing morphine delivered
through the MSI. Ergotamine, a therapy for the treatment of migraine headaches,
is currently being developed for use in the ADDS.
In addition to the above alliance with Elan, in 1999, the
Company and Elan formed a joint venture, Respiratory Steroid Delivery, Ltd.
("RSD"), to develop certain inhaled steroid products to treat certain
respiratory diseases using Elan's NanoCrystal(TM) dispersion technology. The
inhaled steroid products to be developed include a propellant-based steroid
formulation for delivery though the ADDS, a solution-based unit-dose-packaged
steroid formulation for delivery using a conventional tabletop nebulizer, and a
solution-based steroid formulation for delivery using the MSI system, subject to
further agreement with Zambon.
Outside of these alliances, the Company owns the worldwide rights to
respiratory disease applications of all of its technologies, subject only to the
MSI respiratory rights sublicensed to Zambon.
In addition to the above, the Company has several agreements in
place for the manufacture of its delivery systems. Siemens, a multi-national
engineering and electronics conglomerate, serves as the manufacturer of the MSI.
Siemens also provides ongoing technical support in the design and testing of
pharmaceutical products in the MSI. The interchangeable drug-containing
cartridges in the MSI are being assembled and filled by Cheasapeake Biological
Laboratories of Baltimore, Maryland. During 1999, the Company signed an
agreement with an aerosol manufacturer, Medeva Pharmaceuticals MA, Inc., for the
manufacture and supply of certain products to be delivered by the ADDS.
The Company is also currently in discussions with a number of
pharmaceutical and biotechnology companies about potential collaborations for
developing specific compounds (both respiratory and systemic) in the ADDS.
Unlike the MSI, ADDS is a technology that lends itself to individual product
applications in the respiratory market. While the ADDS technology may be
applicable to a wide range of respiratory products, the Company believes that a
full line of products delivered by ADDS is not necessary for commercial success.
The reverse is true with the MSI, since one of the MSI's primary competitive
advantages is the delivery of a range of drugs in interchangeable cartridges
used with the parent nebulizer device.
Pulmonary Delivery Market Environment
The Company competes in the pulmonary delivery market. The principal
use of pulmonary delivery has been in the treatment of respiratory diseases such
as asthma, chronic obstructive pulmonary disease ("COPD") and cystic fibrosis.
In 1998, industry sources estimate there were approximately 35.5 million asthma
patients and 49.5 million COPD patients in the world. These sources indicate
that the number of newly diagnosed patients is growing at a rate in excess of
10% annually due to an increase in worldwide air pollution levels and the
overall aging of the population. By the year 2005, the Company expects that
there will be more than 19 million asthma patients in the United States alone.
In addition, the competitive marketplace has been significantly
affected by the worldwide phase out of clorofluorocarbons ("CFCs") pursuant to
the Montreal Protocol. CFCs are the propellants traditionally used in metered
dose inhalers ("MDIs"), which are the most common form of pulmonary delivery.
Companies in the respiratory market have initiated significant programs to
redevelop existing products using alternative propellants, dry powders or
nebulizers.
4
There is considerable interest in applying pulmonary delivery
technology to systemic therapies that would benefit from the relatively easy
administration to the circulatory system through the lungs. Work on pulmonary
delivery of insulin by other pulmonary delivery companies has received
significant public notice. There is a range of therapies that could provide a
significant market opportunity if available in a pulmonarily delivered form.
There is also significant advantage in aerosol therapy for respiratory disease.
Pulmonary administration delivers the medication directly onto the lung's
epithelial surfaces. In many cases, this means that drugs can be effective in
very low doses -- eliminating the side effects usually associated with systemic
administration.
Today, three types of devices are widely used in pulmonary drug
administration: metered dose inhalers, dry powder inhalers, and nebulizers.
Metered Dose Inhalers. Currently, MDIs are the most commonly used
pulmonary delivery system. It is estimated that in the United States
80% of pulmonary drug delivery is via MDI, with the majority of this
use coming from adults with asthma and COPD.
The main components of an MDI include a canister containing the drug
mixed with propellant and surfactant, a mouthpiece that acts as the
delivery conduit and the actuator seat for the release of the drug.
The initial velocity of particles as they leave an inhaler is very
high -- approximately 60 mph -- resulting in wasted drug if the
patient is not able to coordinate his/her breath with the delivery
of aerosol into the mouth. A number of studies have demonstrated
that as many as 60% of patients cannot accurately time their
inspiration with the actuation of their inhaler which results in
under medication and lack of compliance. Typically, only 20% of
delivered drug actually reaches the lungs.
The primary advantages of an MDI include its small size,
portability, fast usage time, and its availability for use with most
respiratory drugs. Disadvantages of an MDI include patient
coordination issues and efficient dose delivery. Additionally,
because the use of CFCs traditionally used in MDIs are being phased
out by international agreement (Montreal Protocol), alternative
propellants and formulations are being developed. Over time, all
current MDI users will be required to move to a non-CFC MDI or other
alternative delivery systems. The majority of U.S. patients favor
aerosol MDIs although a sizable percentage may not coordinate them
properly.
Dry Powder Inhalers. Dry powder inhalers ("DPIs") were introduced in
the 1960s as single-dose inhalers. In these devices, the drug is
loaded as a unit dose that is mechanically released as a powder for
inhalation prior to each use. To date, these relatively cumbersome
systems have been the primary form of DPI available in the United
States, and account for approximately 1% of the total aerosol
delivery market.
The inconvenience of the single dose DPI has been overcome outside
of the U.S. with the development and introduction of multi-dose DPIs
that can deliver up to 200 doses of medication. However, like the
single dose systems, they are inspiratory flow rate dependent; that
is, the amount of drug delivered to the lung depends on the
patient's ability to inhale.
Two of the most significant advantages of DPIs include (1) no
hand-breath coordination is required as with MDIs; and (2) they
contain no CFCs. However, most require a high inspiratory flow rate,
which can be problematic in younger patients or patients with
compromised lung function. In addition, they often present
difficulties for those with manual disabilities (e.g., arthritis) or
limited vision and, depending upon the powder load delivered, they
may induce acute bronchospasm in sensitive individuals.
Additionally, multi-dose powder inhalers are subject to moisture
sensitivity either from the environment or patient breath and have
had difficulty meeting U.S. regulatory standards for dose-to-dose
variation.
Nebulizers. The third widely used aerosol delivery system is the
nebulizer. Jet nebulizers, which are the most commonly used
nebulizer, work on a stream of compressed air or oxygen that is
forced through a narrow tube lying just above the surface of the
liquid to be nebulized. It takes approximately 10 to 15 minutes to
nebulize this amount of liquid. Studies suggest keeping the duration
of nebulization below 10 minutes, as longer durations are associated
with poor compliance. During nebulization only about 10% of the drug
is delivered to the lungs; about 80% gets trapped in the reservoir,
tubing and mask; the rest is exhaled.
Nebulizers can be used for a wide range of patients, but are
especially useful for those older and younger patients who cannot
manage other inhaler devices. Nebulizers also play a key role in
emergency room and intensive care treatment for patients with acute
bronchospasm. Another feature exclusive to nebulizers is that a
mixture of drugs can be administered in one sitting. However,
currently approved nebulizers are bulky table-top units that are
time consuming, have a high initial cost (often in excess of the
amount reimbursable by managed care) and can be noisy during
operation.
5
Metered Solution Inhaler
The MSI pulmonary drug delivery system has been developed to provide
the therapeutic benefit of nebulization with the convenience of pressurized MDIs
in one system. The MSI was developed to meet specific needs within the
respiratory market, particularly for pediatric and geriatric patients suffering
from asthma and COPD.
Description of the MSI
The MSI is comprised of two main components: (1) a reusable,
pocket-size inhaler unit developed and manufactured for the Company by Siemens;
and (2) interchangeable drug cartridges containing multiple doses of drug in
solution assembled and filled by Chesapeake Biological Laboratories. The
cartridges are an integral part of the total system. The cartridge plus each
drug formulation will be the subject of a separate drug device combination New
Drug Application ("NDA").
The basic technology of the system involves the rapid nebulization
of therapeutic agents using ultrasonic waves. This produces a concentrated cloud
of medication delivered through the mouthpiece over a two to three second period
for inhalation. The key components of the technology are housed in the inhaler
unit. They are the rechargeable battery-operated motor, ultrasonic horn and drug
cartridge. The pocketsize MSI allows for administration of a range of drugs in a
single, simple-to-use, environmentally friendly delivery system. Each cartridge
contains, depending on formulation, approximately a one to two month supply of
the drug.
To use the MSI system, a patient simply selects the appropriate
color-coded drug cartridge and places it into the chamber of the inhaler unit.
Pressing the "on" button activates a small electrical motor that transports a
precise dose of drug from the cartridge chamber to the ultrasonic horn --
transforming the solution into an aerosolized cloud. The patient's inspiratory
breath carries this cloud of medication directly to the lungs where it is
needed. The dose delivered by the MSI is very accurate and consistent because:
(1) the MSI is designed to be inspiratory flow rate independent; that is,
delivery of the drug does not depend upon the patient's ability to inhale
forcefully, and (2) the MSI does not require a high level of coordination
between inspiration and actuation of the device. The patient's natural breath
carries the medication directly to the lungs, minimizing the amount of drug
deposited in the mouth and throat.
MSI Advantages
The Company believes that the MSI provides significant advantages
over other drug delivery systems. It is particularly suited for younger and
older asthma patients, as well as for older COPD patients who have difficulty
using MDIs and currently have to depend on larger, more time-consuming tabletop
nebulizers for delivery of their medications. These potential advantages
include:
Accuracy. The superior engineering and patient-friendly design of
the MSI is intended to provide minimal dose-to-dose variability.
Patients can therefore expect to receive the right therapeutic dose
consistently. Testing of the MSI system has shown that dose-to-dose
variability with the MSI is significantly better than the current
FDA requirement.
Enhanced Patient Compliance. The pocketsize, portable MSI unit is
designed to combine the therapeutic benefits of nebulization with
the convenience of pressurized metered dose inhalers. The drug dose
is precisely measured and delivered in seconds, as compared to 10 to
15 minutes or more for the typical nebulizer. The device is easy to
operate, requiring minimal coordination between actuation and
inhalation for proper drug delivery. These benefits are expected to
improve patient compliance with the proper administration of their
respiratory medication. Another expected factor in enhanced patient
compliance is the broad range of drugs that can be accommodated by
the MSI, allowing patients on multiple medications to rely on one
simple delivery system.
Inspiratory Flow Rate Independence. Unlike most of the DPIs
currently available (or in development), the MSI is designed to
achieve a consistent and significant level of drug deposition over a
broad range of inspiratory flow rates. This is especially important
in younger patients or patients with compromised lung function
(e.g., during an asthma attack) who have a difficult time breathing
normally.
Versatility. Many asthma and COPD patients are taking multiple
inhalation medications. The MSI accommodates interchangeable drug
cartridges to allow for the administration of a broad range of
frequently used respiratory drugs in a single, simple-to-use
delivery system. The system includes an early warning mechanism that
signals when the batteries need recharging or when the dosator is
not functioning properly and a dose counter indicating when a new
inhaler unit is required. These user-friendly features result in a
simplified dosing procedure for both patients and their caregivers.
6
Pulmonary Targeting. The particle size of the inhaled medication
affects the effectiveness of drug delivery to the lung. Generally, a
drug is "respirable" if the particle size is between two and five
microns. Larger particles tend to deposit in the inhaler or in the
patient's mouth and throat. Smaller particles tend to be exhaled.
Within the respirable range, the MSI is designed to deliver
particles specifically targeted for certain portions of the lungs;
for example, the central lung for local treatment or the deep lung
for enhanced absorption into the blood stream for systemic
therapies.
Environmentally Friendly. CFCs, the most commonly used propellant
for MDI aerosols, are believed to adversely affect the Earth's ozone
layer. They are subject to worldwide regulations aimed at
eliminating their production and use within the decade under the
Montreal Protocol. The MSI does not use CFCs or any other type of
ozone depleting propellant.
Economical. The Company believes that the MSI offers significant
value to the patient because it is designed to allow a single device
to be used with a complete family of respiratory medications
available in cost-effective interchangeable cartridges. The inhaler
unit itself is expected to have a life of two to three years. The
initial cost of the inhaler unit is expected to be within the cost
range that managed care providers will reimburse patients. The
Company anticipates the combined cost to the patient of the device
plus the drug filled cartridges will be comparable to the average
cost per dose of the standard metered dose inhaler.
MSI Product Pipeline in Development
Through development alliances with strategic partners, Zambon and
Elan, the Company is implementing a broad development strategy for the MSI. The
Company and Zambon are developing a range of widely used respiratory drugs for
delivery in the MSI. Potential candidates for respiratory disease therapy
include albuterol, ipratropium, cromolyn, inhaled bronchial steroids and
combination products, each of which is described below. Most patients who
experience respiratory disease commonly use multiple medications to treat their
conditions
Among the drugs being developed for respiratory applications in the MSI system
are:
Albuterol. Albuterol is a beta agonist used as rescue therapy
for patients with asthma and COPD. It is the largest selling
respiratory compound with U.S. sales of over $500 million in all
dosage forms. It is available in a metered dose inhaler and
nebulizer solution as well as solid and liquid dosage forms.
Status: The Company initiated a Phase I/II pediatric clinical
trial in September 1999 comparing the safety and efficacy of
albuterol to the market-leading metered dose inhaler. Sheffield
initiated a Phase II clinical trial in December 1999 which will
compare the MSI to a conventional albuterol metered dose inhaler.
Findings from Phase I/II studies demonstrated that the MSI, when
compared to a commercially available metered dose inhaler, delivered
comparable amounts of albuterol to the whole lung, significantly
reduced oropharyngeal deposition, and achieved equivalent
single-dose therapeutic efficacy and tolerability.
Ipratropium. Ipratropium is a bronchodilator used primarily to
treat COPD patients. It is useful because of its anticholinergic
properties, which reduce pulmonary congestion. It is available in a
metered dose inhaler, nebulizer solution and a combination product
with albuterol.
Status: The Company initiated a Phase I/II clinical trial in
Europe in January 2000 assessing the safety and efficacy compared to
a commercially available ipratropium product delivered by a metered
dose inhaler and placebo in patients with COPD. An Investigational
New Drug Application ("IND") is being prepared for filing with the
Food and Drug Administration ("FDA").
Cromolyn. Cromolyn is a non-steroidal, anti-inflammatory drug
used to reduce the underlying bronchial inflammation associated with
asthma. It is extremely safe and it is most commonly used to treat
pediatric patients. It is available in a metered dose inhaler and
nebulizer solution.
Status: An IND is being prepared for filing with the FDA.
Inhaled Bronchial Steroids. Inhaled bronchial steroids are
anti-inflammatory agents. They address the underlying inflammation
in the lungs of asthma and COPD patients. They are available in a
metered dose inhaler. Steroids are the fastest growing category in
the respiratory market, growing at 20% per year.
Status: Formulation work is currently underway.
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Other Respiratory Therapies. In addition to the drugs listed
above, the Company and Zambon are assessing the market potential for
certain other respiratory therapies. These therapies are expected to
include a combination of an anti-inflammatory and beta agonist, and
an anticholinergic and beta agonist, as well as antibiotics, cystic
fibrosis treatments and a range of early stage biotech compounds
that target respiratory disease.
Systemic Applications: Through its development alliance with Elan,
the Company is currently developing certain drugs for systemic treatment by
pulmonary delivery through the MSI. The first of these drugs, morphine, is for
the treatment of severe pain. The pain management market includes patients with
cancer, post-operative, migraine headache and chronic persistent pain. Narcotic
analgesics for treatment of these severe forms of pain are estimated to exceed
$1.0 billion in worldwide sales in the year 2000. The Company has identified a
market opportunity for a rapid-acting, non-invasive treatment for breakthrough
pain.
Status: In July 1999, the Company completed a gamma
scintigraphy/pharmacokinetic trial comparing morphine delivered via the MSI to
subcutaneous injection. The MSI demonstrated good pulmonary deposition and very
rapid absorption, more rapid peak blood levels vs. subcutaneous injection and
low oral and throat deposition. The Company is currently in discussions with a
number of companies for the outlicensing and development of this product.
Aerosol Drug Delivery System
The ADDS, a new generation MDI, was developed to correct major
deficiencies associated with existing MDI technology. MDIs have provided
convenient, safe, self-administered treatment for over 30 years and decrease the
cost of therapy because they can be used by the patient at home with minimal
medical supervision. However, proper use of current MDIs requires training and
precise execution of the delivery technique. For these reasons, many patients do
not use their MDIs in the prescribed manner to coordinate actuation and
inhalation. Incorrect technique has been shown to result in little or no
benefits from MDI use in half of all adult patients and in a greater proportion
of children. Moreover, because of these coordination issues, most children under
age five cannot use a standard MDI.
Even with correct technique, current MDIs deliver less than 20% of
the drug to the lungs of the patient. The remaining 80% of the drug is wasted
upon deposition on the back of the mouth, or by completely missing the airway.
This results from: (1) the high linear velocity (two to seven meters/second) of
the aerosol jet as it discharges; (2) incomplete evaporation of the propellant
leading to large size droplets that deposit in the mouth and larynx rather than
reaching the lung; and (3) inadequate mixing resulting in a non-uniform
distribution of drug particles in the inspiratory flow stream. Drug deposited in
the mouth and throat can be swallowed and absorbed systemically or, in the case
of inhaled steroids, may create a local concentration of the drug that causes
immunosuppression response and the development of fungal infections. In
addition, swallowing beta agonist bronchodilators causes relaxation of the
smooth muscles of the gastrointestinal tract that decreases activity of the
stomach.
From a therapeutic view, the most serious problem with MDIs is
inconsistency of delivery. With existing MDIs the actual dose can vary from 0%
to 300% of the intended dose. Patients may not receive sufficient drug to
achieve a therapeutic effect, or they may overdose with undesirable side
effects. These conditions can lead to the need for emergency treatment.
A major advantage for the ADDS technology is that it uses the same
aerosol canisters and valves as are currently used in existing MDIs. As a
result, existing aerosol facilities will be able to produce canisters with
formulations optimized for use in ADDS. The only additional step required is to
place the aerosol canister in the "device" prior to final packaging. This
results in a cost effective product and provides numerous benefits to patients.
The device along with the canister are disposable when the canister is empty.
The ADDS technology features two improvements over existing MDIs and
dry powder inhalers. Fluid dynamics modeling and in-vitro trials indicate that
up to 50% of drug emitted by the ADDS reaches the lungs with oral deposition
reduced to less than 10%. Because of this increase in efficiency, ADDS should
require less drug per actuation than existing devices to achieve the same
therapeutic effect. This will result in more unit doses per drug canister than a
conventional MDI, with less potential for adverse reactions.
ADDS also features a unique proprietary triggering mechanism that
actuates at the correct time during inhalation. It is designed to automatically
adjust to the patient's breathing pattern to accommodate differences in age and
disease state. This synchronous trigger is designed to reduce patient
coordination problems and enhance patient compliance.
8
Description of ADDS
The ADDS technology utilizes a standard aerosol MDI canister,
encased in a compact device that provides an aerosol flow-control chamber and a
synchronized triggering mechanism. Manipulation of the discharged drug-
containing aerosol cloud is key to optimization of the efficiency and
consistency for MDIs. The unique features of ADDS are:
Aerosol Flow-Control Chamber. The ADDS design uses fluid dynamics
to: (1) reduce the velocity of the drug relative to the inspiratory
breath velocity (less than one meter/second); (2) increase residence
time of the aerosol droplets before exiting the device to allow near
complete evaporation of the propellant; (3) increase droplet
dispersion and mixing, thus increasing evaporation and improving
vapor fraction at every point along the flow path; (4) reduce the
diameter of the drug particles at the exit plane of the device; (5)
decrease inertia of droplets to reduce impaction; and (6) optimize
timing of dose discharge with inspiratory breath for maximum drug
deposition in lungs.
Synchronizing Trigger Mechanism. The aerosol flow-control chamber
allows the patient to inhale through the device at a normal
breathing rate, instead of a forced breath. The inspiratory breath
establishes flow fields within the device that mix and uniformly
disperse the drug in the breath. In the mouthpiece, nearly all the
propellant is evaporated leaving only drug particles to be inspired,
allowing a dramatic increase in the amount of drug delivered to the
lungs. Only small amounts of drug deposit in the mouth and throat. A
triggering and timing mechanism that is synchronized with the
patient's inspiratory breath control the discharge of the metering
valve. ADDS can accommodate different flowrates, so any patient can
activate the triggering device. Similarly, the timing mechanism will
automatically adjust to the flow generated by the patient, delaying
or hastening discharge in proportion to the total volume passing
through the flow control chamber. This feature accommodates
differences in inspiratory flow characteristic of pulmonary disease
states in children, adults and the infirm.
ADDS Advantages
The Company believes that the ADDS technology possesses many
potential competitive advantages over other inhalation systems in both local
respiratory and systemic applications. It is applicable to all age categories,
eliminating the most troublesome problems of aerosol metered dose delivery.
Increased efficiency allows for potential application to proteins and peptides
formerly discarded as candidates for aerosol delivery.
The performance characteristics of the ADDS are expected to
translate into multiple benefits, including:
Improved Drug Delivery Efficiency. The majority of the drug emitted
by the ADDS is delivered to the lungs while less than 10% is lost
through deposition in the mouth and throat. The improved delivery
efficiency enhances efficacy, reduces side effects and provides
greater consistency of dose administration.
Greater Patient Compliance. The ADDS eliminates technique dependence
for simple, consistent dose-to-dose delivery, resulting in improved
compliance with prescribed therapy.
Broader Patient Base. The ADDS can be prescribed for a broader
patient base since it is designed to be self-administered by
children and the elderly as well as adult patients.
Pharmacoeconomic Benefit. The ADDS has increased delivery efficiency
with less waste, so patients can receive more unit doses per
standard canister. This allows for a lower drug cost per day in
addition to reducing prescription and payor costs because fewer
pharmacy visits are required.
ADDS Product Pipeline in Development
ADDS Systemic Therapies. The development of systemic drugs using
ADDS is being conducted as part of the Company's alliance with Elan. The first
product to be developed in the ADDS is ergotamine. Ergotamine, an alpha
adrenergic blocking agent, is a therapy to stop or prevent vascular headaches
such as migraines. Migraine headaches affect 16-18 million Americans. Annual
sales for the migraine therapy market are in excess of $2.3 billion with many
patients unable to get satisfactory relief from currently available therapies.
In fact, it is estimated that absenteeism and medical expenses resulting from
migraine total $50 billion annually. Current oral drug therapies for the
treatment of migraine headaches have slow onset of action, resulting in a
medical need that may be better satisfied through pulmonary delivery.
Status: In December 1999, the Company completed a gamma
scintigraphy/pharmacokinetic trial comparing the ADDS to a conventional MDI. The
trial showed successful delivery of the drug to all regions of lung with
significantly reduced mouth and throat deposition, and rapid drug absorption.
The Company is currently in discussions with a number of companies for the
outlicensing and development of this product.
9
ADDS Respiratory Therapies. The ADDS has broad applicability across
respiratory disease therapies since it utilizes basic MDI delivery methods that
are the most popular forms of respiratory delivery. The ADDS technology's
ability to vastly minimize oral deposition makes it especially applicable to
steroids and steroid combinations with which fungal overgrowth side effects are
common. In addition, U.S. patients and physicians have indicated that they
prefer metered dose aerosol delivery. The ADDS technology is positioned to take
advantage of this built-in market preference for MDIs with its potential for
superior performance, reduced adverse reactions and cost-effectiveness. Inhaled
steroids are the fastest growing segment of the respiratory market and the
largest in Europe. The features of the ADDS directly minimize the aspects of
inhaled steroids that remain a concern to patients and physicians. The market
for inhaled steroids on a worldwide basis is approximately $2.0 billion.
As with MSI, there remains opportunities for developing ADDS for a
range of therapies either directly by the Company or in collaboration with
strategic partners. Unlike the MSI, it is potentially advantageous for the
Company to partner on a product-by-product basis, concentrating on prime
partners to launch the system commercially and to aid in subsequent development
with products developed specifically for exclusive commercialization by the
Company.
Inhaled Steroid Products
In October 1999, the Company and Elan formed a new joint venture to
develop three inhaled steroid products to treat certain respiratory diseases
that will utilize Elan's Nanocrystal(TM) dispersion technology and Sheffield's
pulmonary delivery systems. Because of the difficulties in formulating steroids
for delivery through a solution-based inhalation system, no steroid products are
currently available in the United States for delivery through a nebulizer.
Elan's Nanocrystal(TM) technology will allow for such a formulation. The
estimated worldwide market for inhaled steroids is $2 billion annually and
growing at 20% per year. The three products being developed are 1) a
propellant-based steroid formulation for inhalation in the ADDS; 2) a unit-dose
packaged steroid formulation for inhalation delivery in a standard commercial
tabletop device; and 3) a steroid formulation for inhalation delivery using the
MSI, subject to further agreement with Zambon. Formulation work is currently
underway in all three of these inhaled steroid products.
Ultrasonic Pulmonary Drug Absorption System
The UPDAS(TM) is a novel ultrasonic pulmonary delivery system
designed by Elan as a disposable unit dose nebulizer system. UPDAS was designed
primarily for the delivery of proteins, peptides and other large molecules to
the lungs for absorption into the bloodstream. Elan's preliminary research with
UPDAS demonstrated unique atomization that may prevent denaturing of bioactive
molecules and particle size distribution that meets the targets for local and
systemic delivery. The Company intends to initiate in-vitro validation testing
of UPDAS to confirm Elan's preliminary results and to develop data to support
patent filings. A plan for additional development of UPDAS will be prepared
based upon the results of this confirmational testing.
Absorption Enhancing Technology
As part of the same transaction in which the Company acquired UPDAS,
the Company also acquired a worldwide exclusive license to Elan's Absorption
Enhancing Technology ("Enhancing Technology"). While not a delivery system
itself, the Enhancing Technology is a therapeutic agent identified by Elan to
increase the systemic absorption of drugs delivered to the lungs. The Enhancing
Technology will be utilized in conjunction with the Company's other pulmonary
delivery systems. The Company intends to complete the in-vitro testing necessary
to substantiate the unique absorption properties of the Enhancing Technology
that have been identified by Elan. After this work is completed and analyzed,
the Company plans to determine the appropriate patent strategy to take and to
begin development of the Enhancing Technology for use in the Company's delivery
systems.
Early Stage Research Projects
As part of the Company's focus on later stage pharmaceutical
opportunities, the Company is seeking to out-license its portfolio of early
stage medical research projects to companies that are committed to early stage
biotechnology opportunities. The Company has determined that its early stage
technologies do not fit the Company's pulmonary drug delivery strategy.
Consequently, the Company plans to out-license these technologies while
maintaining an interest in the technologies' promise without incurring the
development costs associated with early stage research and development.
Because the Company is no longer funding these projects, it may be
at risk of losing its rights to certain of these technologies. There can be no
assurance that the Company will be able to sell or license its rights to any of
its remaining early stage research projects or realize any milestone payments or
other revenue from those early stage research projects that have been previously
divested.
10
Anti-Proliferative Technologies
The Company holds rights to certain compounds and their uses for the
treatment of conditions characterized by unregulated cell proliferation or cell
growth and sickle cell anemia. The Company's intellectual property portfolio
consists of clotrimazole ("CLT"), its metabolites and a number of proprietary
new chemical entities co-owned by the Company termed the Trifens(TM). Such
compounds have demonstrated promise in therapeutic applications for treating a
number of conditions characterized by unregulated cell proliferation, such as
cancer (including multiple drug resistance cases) and certain proliferative
dermatological conditions, as well as sickle cell anemia and secretory diarrhea.
The Company entered into a license arrangement with Lorus
Therapeutics, Inc. (formerly Imutec Pharma Inc.) in November 1997. The
arrangement licenses rights to a series of compounds for the treatment of
cancer, Kaposi's sarcoma and actinic keratosis to a newly formed company, NuChem
Pharmaceuticals, Inc. ("NuChem") for which Lorus Therapeutics will provide
funding and management of the development program. The Company holds a 20%
equity interest in NuChem.
Work on the lead compounds by NuChem has progressed in the
pre-clinical phase. In 1999, NuChem announced that the U.S. National Cancer
Institute has agreed to undertake additional in vitro screening after initial
evaluation of the compounds. The initial IND for the lead compounds is planned
to be filed in early 2000.
The Company is actively seeking to partner or license the use of
clotrimazole and the Trifens in the fields of sickle cell anemia and
gastrointestinal disorders.
RBC-CD4 Electroinsertion Technology
The Company is the worldwide licensee of certain technology (the
"RBC-CD4 Electroinsertion Technology") relating to the electroinsertion of
full-length CD4 protein into red blood cells for use as a potential therapeutic
in the treatment of HIV that leads to AIDS. The Company has signed an option
agreement with a private investment group that had a prior interest in the
RBC-CD4 Electroinsertion Technology to sell the Company's rights to this
HIV/AIDS technology. As consideration for the option, the third party will fund
an additional study related to the RBC-CD4 Electroinsertion Technology. If this
option is exercised, the Company will retain a one-third interest in all future
commercial and sublicensing results.
Liposome-CD4 Technology
The Company is the worldwide licensee of certain technology (the
"Liposome-CD4 Technology") relating to the incorporation of CD4 antigens into
liposome bilayers and their use as a potential therapeutic agent in the
treatment of HIV/AIDS. The Company entered into a sublicense agreement in July
1996 with SEQUUS Pharmaceuticals, Inc. for the continued development and
commercialization of the Liposome-CD4 Technology.
HIV/AIDS Vaccine
The Company holds an exclusive worldwide license to a potential
HIV/AIDS vaccine and diagnostic test under development at the French Institute
of Health and Medical Research. The Company is seeking a partner for this
technology.
UGIF Technology - Prostate Cancer
The Company holds an exclusive worldwide license to a growth
regulatory factor, termed Urogenital Sinus Derived Growth Inhibitory Factor
("UGIF"), which could serve as a potential prostate cancer therapy.
Identification of UGIF as a growth inhibitory factor for certain prostate cells
was based upon laboratory studies conducted at Baylor Medical College. The
Company is seeking a partner for this technology.
Government Regulation
The Company's research and development activities and, ultimately,
the production and marketing of its licensed products, are subject to
comprehensive regulation by numerous governmental authorities in the United
States and other countries. Among the applicable regulations in the United
States, pharmaceutical products are subject to the Federal Food, Drug & Cosmetic
Act, the Public Health Services Act, other federal statutes and regulations, and
certain state and local regulations. These regulations and statutes govern the
development, testing, formulation, manufacture, labeling, storage, record
keeping, quality control, advertising, promotion, sale, distribution and
approval of such pharmaceutical products. Failure to comply with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production, refusal by the government to approve marketing
of the product and criminal prosecution.
11
A new drug may not be legally marketed for commercial use in the
United States without FDA approval. In addition, upon approval, a drug may only
be marketed for the indications, in the formulations and at the dosage levels
approved by the FDA. The FDA also has the authority to withdraw approval of
drugs in accordance with applicable laws and regulations. Analogous foreign
regulators impose similar approval requirements relating to commercial marketing
of a drug in their respective countries and may impose similar restrictions and
limitations after approval.
In order to obtain FDA approval of a new product, the Company and
its strategic partners must submit proof of safety, efficacy, purity and
stability, and the Company must demonstrate validation of its manufacturing
process. The testing and application process is expensive and time consuming,
often taking several years to complete. There is no assurance that the FDA will
act favorably or quickly in reviewing such applications. With respect to
patented products, processes or technologies, delays imposed or caused by the
governmental approval process may materially reduce the period during which the
Company will have the exclusive right to exploit them. Such delays could also
affect the commercial advantages derived from proprietary processes. As part of
the approval process, the FDA reviews the Drug Master File (the "DMF") for a
description of product chemistry and characteristics, detailed operational
procedures for product production, quality control, process and methods
validation, and quality assurance. As process development continues to mature,
updates and modifications of the DMF are submitted.
The FDA approval process for a pharmaceutical product includes
review of (i) chemistry and formulations, (ii) preclinical laboratory and animal
studies, (iii) initial IND clinical studies to define safety and dose
parameters, (iv) well-controlled IND clinical trials to demonstrate product
efficacy and safety, followed by submission and FDA approval of a New Drug
Application (the "NDA"). Preclinical studies involve laboratory evaluation of
the product and animal studies to assess activity and safety of the product.
Products must be formulated in accordance with United States Good Manufacturing
Procedures ("GMP") requirements and preclinical tests must be conducted by
laboratories that comply with FDA regulations governing the testing of drugs in
animals. The results of the preclinical tests are submitted to the FDA as part
of the IND application and are reviewed by the FDA prior to granting the sponsor
permission to conduct clinical studies in human subjects. Unless the FDA objects
to an IND application, the application will become effective 30 days following
its receipt by the FDA. There can be no certainty that submission of an IND will
result in FDA authorization to commence clinical studies.
Human clinical trials are typically conducted in three sequential
phases with some amount of overlap allowed. Phase I trials normally consist of
testing the product in a small number of normal volunteers for establishing
safety and pharmacokinetics using single and multiple dosing regiments. In Phase
II, the continued safety and initial efficacy of the product are evaluated in a
limited patient population, and appropriate dosage amounts and treatment
intervals are determined. Phase III trials typically involve more definitive
testing of the appropriate dose for safety and clinical efficacy in an expanded
patient population at multiple clinical testing centers. A clinical plan, or
"protocol," accompanied by the approval of the institution participating in the
trials, must be submitted to the FDA prior to commencement of each clinical
trial phase. Each clinical study must be conducted under the auspices of an
Institutional Review Board (the "IRB") at the institution performing the
clinical study. The IRB is charged with protecting the safety of patients in
trials and may require changes in a protocol, and there can be no assurance that
an IRB will permit any given study to be initiated or completed. In addition,
the FDA may order the temporary or permanent discontinuation of clinical trials
at any time. The Company must rely on independent investigators and institutions
to conduct these clinical studies.
All the results of the preclinical and clinical studies on a
pharmaceutical product are submitted to the FDA in the form of an NDA for
approval to commence commercial distribution. The information contained in the
DMF is also incorporated into the NDA. Submission of an NDA does not assure FDA
approval for marketing. The application review process often requires 12 months
to complete. However, the process may take substantially longer if the FDA has
questions or concerns about a product or studies regarding the product. In
general, the FDA requires two adequate and controlled clinical studies
demonstrating efficacy with sufficient levels of statistical assurance. However,
additional support may be required. The FDA also may request additional
information relating to safety or efficacy, such as long-term toxicity studies.
In responding to an NDA, the FDA may grant marketing approval, require
additional testing and/or information, or deny the application. Accordingly,
there can be no assurance about any specific time frame for approval, if any, of
products by the FDA or foreign regulatory agencies. Continued compliance with
all FDA requirements and conditions relative to an approved application,
including product specifications, manufacturing process, labeling and
promotional material, and record keeping and reporting requirements, is
necessary throughout the life of the product. In addition, failure to comply
with FDA requirements, the occurrence of unanticipated adverse effects during
commercial marketing or the result of future studies, could lead to the need for
product recall or other FDA-initiated actions that could delay further marketing
until the products or processes are brought into compliance.
12
The facilities of each pharmaceutical manufacturer must be
registered with and approved by the FDA as compliant with GMP. Continued
registration requires compliance with standards for GMP. In complying with GMP,
manufacturers must continue to expend time, money and effort in production,
record keeping and quality control to ensure technical compliance. In addition,
manufacturers must comply with the United States Department of Health and Human
Services and similar state and local regulatory authorities if they handle
controlled substances, and they must be registered with the United States
Environmental Protection Agency and similar state and local regulatory
authorities if they generate toxic or dangerous waste streams. Other regulatory
agencies such as the Occupational Safety and Health Administration also monitor
a manufacturing facility for compliance. Each of these organizations conducts
periodic establishment inspections to confirm continued compliance with its
regulations. Failure to comply with any of these regulations could mean fines,
interruption of production and even criminal prosecution.
For foreign markets, a pharmaceutical company is subject to
regulatory requirements, review procedures and product approvals which,
generally, may be as extensive, if not more extensive, as those in the United
States. Although the technical descriptions of the clinical trials are
different, the trials themselves are often substantially the same as those in
the United States. Approval of a product by regulatory authorities of foreign
countries must be obtained prior to commencing commercial product marketing in
those countries, regardless of whether FDA approval has been obtained. The time
and cost required to obtain market approvals in foreign countries may be longer
or shorter than required for FDA approval and may be subject to delay. There can
be no assurance that regulatory authorities of foreign countries will grant
approval. The Company has no experience in manufacturing or marketing in foreign
countries nor in matters such as currency regulations, import-export controls or
other trade laws.
Patents and Trademarks
MSI System Patents and Trademark
Under its agreement with Siemens AG for the technology underlying
the MSI system, the Company is responsible for jointly financing and prosecuting
the U.S. patent applications for the benefit of the owners and licensors of this
technology. To date, three U.S. patents have issued, one U.S. patent application
is pending, two U.S. provisional applications and five foreign patent
applications are pending. They provide protection through 2017 for the MSI
device, the dosator cartridges and their combinations.
Aerosol Drug Delivery System Patents
As of the December 31, 1999, two U.S. patents have issued, one
notice of allowance has been received, and two U.S. and four foreign
applications are pending. The issued and allowed patents cover the ADDS flow
control and triggering mechanism through 2018.
Early Stage Research Technology Patents
Under its license agreements for its early stage research projects,
the Company has been responsible for financing and prosecuting patent
applications for the benefit of the owners and licensors of these technologies.
While the Company holds, or has held, several U.S. and foreign patents and
patent applications for these early stage technologies, the Company expects to
assign these patents and applications to future acquirors, if any, of these
technologies. Because the Company does not intend to continue to pay for future
patent fees on these early stage technologies, in the event that no acquirors
are found for these technologies, the Company expects that it will allow some or
all of these patents and patent applications to lapse or the rights may be
returned to the licensors.
Competition
The Company competes with approximately 25 other companies involved
in developing and selling respiratory products for the U.S. market. Most of
these companies possess financial and marketing resources and developmental
capabilities substantially greater than the Company. Some of the products in
development by other companies may be demonstrated to be superior to the
Company's current or future products. Furthermore, the pharmaceutical industry
is characterized by rapid technological change and competitors may complete
development and reach the market place prior to the Company. The Company
believes that competition in the respiratory category will be based upon several
factors, including product efficacy, safety, reliability, availability, and
price, among others.
13
Subsidiaries
On January 10, 1996, Ion Pharmaceuticals, Inc. ("Ion"), was formed
as a wholly owned subsidiary of the Company. At that time, Ion acquired the
Company's rights to certain early stage biomedical technologies.
On April 17, 1997, CP Pharmaceuticals, Inc. ("CP") was formed for
the purpose of acquiring Camelot Pharmacal, LLC ("Camelot"), a privately held
pharmaceutical development company. The Company acquired Camelot on April 25,
1997.
As part of its strategic alliance with Elan, on June 30, 1998, the
Company formed SPD as a wholly owned subsidiary. At that time, SPD acquired the
Company's rights to the systemic applications of the MSI and the ADDS. In
addition, SPD acquired Elan's rights to the UPDAS(TM) and the Enhancing
Technology. SPD is responsible for the development of systemic applications in
both the MSI and ADDS.
In addition to the above alliance with Elan, on October 18, 1999,
the Company and Elan formed a new joint venture, RSD, to develop certain
respiratory steroid products. The Company and Elan made equity investments in
RSD representing an initial 80.1% and 19.9%, respectively, ownership in the
joint venture. The joint venture is responsible for the development of the
inhaled steroid products.
Employees
As of March 20, 2000, the Company employed 15 persons, five of whom
are executive officers.
Certain Risk Factors that May Affect Future Results, Financial Condition and
Market Price of Securities
Significant Liquidity Restraints; Need for Additional Financing; Uncertainty of
Obtaining Additional Funding
The Company's cash available for funding its operations as of
December 31, 1999 was $3.9 million. As of such date, the Company had trade
payables of $0.8 million and current research obligations of $0.4 million. In
addition, committed and/or anticipated funding of research and development after
December 31, 1999 is estimated at approximately $4.1 million, of which $4.0
million has been committed to be funded by Elan through the issuance of the
Company's Series E Cumulative Convertible Preferred Stock. The Company needs to
raise substantial additional capital to fund its operations. The Company intends
to seek such additional funding through collaborative or partnering
arrangements, the extension of existing arrangements, or through public or
private equity or debt financings. There can be no assurance that additional
financing will be available on acceptable terms or at all. If additional funds
are raised by issuing equity securities, further dilution to shareholders may
result. If adequate funds are not available, the Company may be required to
delay, reduce the scope of, or eliminate one or more of its research or
development programs or obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates or products that the Company would
otherwise seek to develop or commercialize. If adequate funds are not available
from operations or additional sources of funding, the Company's business will
suffer a material adverse effect.
The Company's operations to date have consumed substantial amounts
of cash. The negative cash flow from operations is expected to continue in the
foreseeable future. The development of the Company's technologies and proposed
products will require a commitment of substantial funds to conduct costly and
time-consuming research, preclinical and clinical testing, and to bring any such
products to market. The Company's future capital requirements will depend on
many factors, including continued progress in out-licensing the early stage
technologies and developing the Company's pulmonary delivery technologies, the
ability of the Company to establish and maintain collaborative arrangements with
others and to comply with the terms thereof, receipt of payments due from
partners under research and development agreements, progress with preclinical
and clinical trials, the time and costs involved in obtaining regulatory
approvals, the cost involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, the need to acquire licenses to new technology and the
status of competitive products. The inability of the Company to raise additional
funds at the pace dictated by these and other factors, either from operations or
additional sources of funding, will result in a material adverse effect on the
Company's business.
14
No Commercialization of Products to Date
The Company has not yet begun to generate revenues from the sale of
products. The Company's products will require significant additional
development, clinical testing and investment prior to commercialization. The
Company does not expect regulatory approval for commercial sales of any of its
products in the immediate future. There can be no assurance that such products
will be successfully developed, proven to be safe and efficacious in clinical
trials, able to meet applicable regulatory standards, able to obtain required
regulatory approvals, or produced in commercial quantities at reasonable costs
or be successfully commercialized and marketed.
Royalty Payment Obligations
The owners and licensors of the technology rights acquired by the
Company are entitled to receive a certain percentage of all royalties and
payments in lieu of royalties received by the Company from commercialization, if
any, of products in respect of which the Company holds licenses. Accordingly, in
addition to its substantial investment in product development, the Company will
be required to make substantial payments to others in connection with revenues
derived from commercialization of products, if any, developed under licenses the
Company holds. Consequently, the Company will not receive the full amount of any
revenues that may be derived from commercialization of products to fund ongoing
operations.
Potential Loss of Rights Upon Default
Under the terms of existing agreements, the Company is obligated to
make certain payments to its licensors. In the event that the Company defaults
on the payment of an installment under the terms of an existing licensing
agreement, its rights thereunder could be forfeited. As a consequence, the
Company could lose all rights under a license agreement to the related licensed
technology, notwithstanding the total investment made through the date of the
default. There can be no assurance that unforeseen obligations or contingencies
will not deplete the Company's financial resources and, accordingly, sufficient
resources may not be available to fulfill the Company's commitments.
Rapid Technological Change; Competition
The medical field is subject to rapid technological change and
innovation. Pharmaceutical and biomedical research and product development are
rapidly evolving fields in which developments are expected to continue at a
rapid pace. Reports of progress and potential breakthroughs are occurring with
increasing frequency. There can be no assurance that the Company will have a
competitive advantage in its fields of technology or in any of the other fields
in which the Company may concentrate its efforts.
The Company's success will depend upon its ability to develop and
maintain a competitive position in the research, development and
commercialization of products and technologies in its areas of focus.
Competition from pharmaceutical, chemical, biomedical and medical companies,
universities, research and other institutions is intense and is expected to
increase. All, or substantially all, of these competitors have substantially
greater research and development capabilities, experience, and manufacturing,
marketing, financial and managerial resources. Further, acquisitions of
competing companies by large pharmaceutical or other companies could enhance
such competitors' financial, marketing and other capabilities. There can be no
assurance that developments by others will not render the Company's products or
technologies obsolete or not commercially viable or that the Company will be
able to keep pace with technological developments.
Government Regulation
The Company's ongoing research and development projects are subject
to rigorous FDA approval procedures. The preclinical and clinical testing
requirements to demonstrate safety and efficacy in each clinical indication (the
specific condition intended to be treated) and regulatory approval processes of
the FDA can take a number of years and will require the expenditure of
substantial resources by the Company. Delays in obtaining FDA approval would
adversely affect the marketing of products to which the Company has rights and
the Company's ability to receive product revenues or royalties. Moreover, even
if FDA approval is obtained, a marketed product, its manufacturer and its
manufacturing facilities are subject to continual review and periodic
inspections by the FDA, and a later discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on such
product or manufacturer. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.
Additional government regulation may be established which could prevent or delay
regulatory approval of the Company's products. Sales of pharmaceutical products
outside the United States are subject to foreign regulatory requirements that
vary widely from country to country. Even if FDA approval has been obtained,
approval of a product by comparable regulatory authorities of foreign countries
must be obtained prior to the commencement of marketing the product in those
countries. The time
15
required to obtain such approval may be longer or shorter than that required for
FDA approval. The Company has no experience in manufacturing or marketing in
foreign countries nor in matters such as currency regulations, import-export
controls or other trade laws. To date, the Company has not received final
regulatory approval from the FDA or any other comparable foreign regulatory
authority in respect of any product or technology.
Risks Incident to Patent Applications and Rights
The Company's success will depend in part on its ability to obtain
patent protection for its technologies, products and processes and to maintain
trade secret protection and operate without infringing the proprietary rights of
others. The degree of patent protection to be afforded to pharmaceutical,
biomedical or medical inventions is an uncertain area of the law. There can be
no assurance that the Company will develop or receive sublicenses or other
rights related to proprietary technology that are patentable, that any patents
pending will issue, or that any issued patents will provide the Company with any
competitive advantages or will not be challenged by third parties. Furthermore,
there can be no assurance that others will not independently duplicate or
develop similar products or technologies to those developed by or licensed to
the Company. If the Company is required to defend against charges of patent
infringement or to protect its own proprietary rights against third parties,
substantial costs will be incurred and the Company could lose rights to certain
products and technologies.
Reliance on Third Parties; No Marketing or Manufacturing Capabilities
The Company does not currently have its own sales force or an
agreement with another pharmaceutical company to market the Company's products
that are in development. When appropriate, the Company may build or otherwise
acquire the necessary marketing capabilities to promote its products. There can
be no assurance that the Company will have the resources available to build or
otherwise acquire its own marketing capabilities, or that agreements with other
pharmaceutical companies can be reached to market the Company's products on
terms acceptable to the Company.
In addition, the Company does not intend to manufacture its own
products. While the Company has already entered into two manufacturing and
supply agreements related to the MSI system and one related to the ADDS, there
can be no assurance that these manufacturing and supply agreements will be
adequate or that the Company will be able to enter into future manufacturing and
supply agreements on terms acceptable to the Company.
Dependence Upon Obtaining Healthcare Reimbursement
The Company's ability to commercialize human therapeutic and
diagnostic products may indirectly depend in part on the extent to which costs
for such products and technologies are reimbursed by private health insurance or
government health programs. The uncertainty regarding reimbursement may be
especially significant in the case of newly approved products. There can be no
assurance that reimbursement price levels will be sufficient to provide a return
to the Company on its investment in new products and technologies.
Adequacy of Product Liability Insurance
The use of the Company's proposed products and processes during
testing, and after approval, may entail inherent risks of adverse effects that
could expose the Company to product liability claims and associated adverse
publicity. Although the Company currently maintains general liability insurance,
there can be no assurance that the coverage limits of the Company's insurance
policies will be adequate. The Company currently maintains clinical trial
product liability insurance of $2.0 million per event for certain clinical
trials and intends to obtain insurance for future clinical trials of products
under development. There can be no assurance, however, that the Company will be
able to obtain or maintain insurance for any future clinical trials. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms, or at all. A successful claim brought against the
Company in excess of the Company's insurance coverage would have a material
adverse effect upon the Company and its financial condition. The Company intends
to require its licensees to obtain adequate product liability insurance.
However, there can be no assurance that licensees will be able to maintain or
obtain adequate product liability insurance on acceptable terms or that such
insurance will provide adequate coverage against all potential claims.
16
Potentially Limited Trading Market; Possible Volatility of Stock Price.
The Common Stock is listed for trading on American Stock Exchange
(the "AMEX") under the symbol "SHM". The Company does not presently satisfy the
listing guidelines of the AMEX, including the AMEX guideline that a listed
company that has sustained losses from operations and/or net losses in three of
its four most recent fiscal years have stockholders' equity of at least
$4,000,000. The Company has sustained net losses for its four most recent fiscal
years and, at December 31, 1999, had stockholders' equity of $0.7 million. The
failure to meet the AMEX listing guidelines may result in the Common Stock no
longer being eligible for listing on the AMEX and trading, if any, of the Common
Stock would thereafter be conducted in the over-the-counter market. If the
Company's Common Stock were to be delisted from the AMEX, it may be more
difficult for investors to dispose of, or to obtain accurate quotations as to
the market value of the Common Stock.
In the event of the delisting of the Company's Common Stock from the
AMEX, the regulations of the Securities and Exchange Commission ("Commission")
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), require additional disclosure relating to the market for penny stocks.
Commission regulations generally define a penny stock to be an equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. A disclosure schedule explaining the penny stock market and the
risks associated therewith is required to be delivered to a purchaser and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, the broker-dealer must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If the Company's securities become subject to the
regulations applicable to penny stocks (i.e., by AMEX delisting), the market
liquidity for the Company's securities could be severely affected. In such an
event, the regulations on penny stocks could limit the ability of broker-dealers
to sell the Company's securities and thus the ability of purchasers of the
Company's securities to sell their securities in the secondary market. In the
absence of an active trading market, holders of the Common Stock may experience
substantial difficulty in selling their securities.
Volatility of Market Price of Securities
The market price of securities of firms in the
biotechnology/pharmaceutical industries have tended to be volatile.
Announcements of technological innovations by the Company or its competitors,
developments concerning proprietary rights and concerns about safety and other
factors may have a material effect on the Company's business or financial
condition. The market price of the Common Stock may be significantly affected by
announcements of developments in the medical field generally or the Company's
research areas specifically. The stock market has experienced volatility in
market prices of companies similar to the Company that has often been unrelated
to the operating results of such companies. This volatility may have a material
adverse effect on the market price of the Common Stock.
Authorization of Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance
of "blank check" preferred stock with such designations, rights and preferences
as may be determined from time to time by the Board of Directors, without
shareholder approval. In the event of issuance, such preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company and preventing shareholders from
receiving a premium for their shares in connection with a change of control. The
Company issued Series A and Series B Cumulative Convertible Redeemable Preferred
Stock in connection with private placements in February 1997 and April 1998,
respectively. All of the Series A Preferred Stock was converted into common
stock during 1998. On July 31, 1998, all of the Series B Preferred Stock was
redeemed for cash. The Company also issued shares of its Series C Cumulative
Convertible Preferred Stock ( Series C Preferred Stock") in connection with the
consummation of an agreement with Elan in June 1998. In October 1999, in
conjunction with a licensing agreement with Elan, the Company issued shares of
its Series D Cumulative Convertible Exchangeable Preferred Stock ("Series D
Preferred Stock") and Series F Cumulative Convertible Preferred Stock ("Series F
Preferred Stock"). In addition, the Company also has a commitment from Elan to
purchase shares of its Series E Cumulative Convertible Non-Exchangeable
Preferred Stock (Series E Preferred Stock") at the Company's option (subject to
satisfaction of certain conditions). Except for the previously mentioned
purchase commitment for Series E Preferred Stock, and additional shares of
Series C, D and E Preferred Stock that may be payable as dividends to Elan, as
holder of the outstanding Series C, D and E Preferred Stock, the Company has no
present intention to issue any additional shares of its preferred stock;
however, there can be no assurance that the Company will not issue additional
shares of its preferred stock in the future.
17
Outstanding Options, Warrants and Convertible Securities; Dilution
As of December 31, 1999, the Company had reserved approximately
7,783,000 shares of its Common Stock for issuance upon exercise of outstanding
options and warrants convertible into shares of its Common Stock, including
shares of Common Stock issuable upon the exercise of options and warrants held
by officers and directors of the Company. In addition, as of December 31, 1999,
the Company had $2,000,000 principal amount of a Convertible Promissory Note,
12,780 shares of its Series C Preferred Stock, 12,015 shares of Series D
Preferred Stock, and 5,000 shares of Series F Preferred Stock outstanding. Each
of the convertible securities provide for conversion into shares of Common Stock
of the Company at a discount to the market price at December 31, 1999. The
Series C, D and F Preferred Stock are convertible into 9,063,830 shares,
2,472,222 shares, and 1,470,588 shares, respectively, of Common Stock. The
Convertible Promissory Note is convertible into 1,142,857 shares of Common
Stock. The exercise of options and outstanding warrants, the conversion of such
other securities and sales of Common Stock issuable thereunder could have a
significant dilutive effect on the market price of shares of the Company's
Common Stock and could materially impair the Company's ability to raise capital
through the future sale of its equity securities.
Item 2. Properties
The Company's principal executive offices are located at 425 South
Woodsmill Road, St. Louis, Missouri 63017. These premises consist of
approximately 4,521 square feet subject to a lease that expires September 14,
2002. The monthly rent for these premises is $9,419. The Company also maintains
a research facility in Ann Arbor, Michigan, and leases a small office in
Rochester, New York. The Company maintains no other laboratory, research or
other facilities, but primarily conducts research and development in outside
laboratories under contracts with universities or research facilities. The
Company believes that its existing office arrangements will be adequate to meet
its reasonably foreseeable future needs.
Item 3. Legal Proceedings
There are no material legal proceedings against the Company or any of its
subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
None.
18
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters
The following table sets forth the high and low sale prices of the
Company's Common Stock on the American Stock Exchange (the "AMEX") for the
periods indicated.
1999: High Low
---- ---
Fourth Quarter............... $ 5.250 $ 2.438
Third Quarter................ 2.938 2.000
Second Quarter............... 3.063 2.188
First Quarter................ 3.500 2.000
1998:
Fourth Quarter............... $ 2.500 $ .938
Third Quarter................ 2.500 1.063
Second Quarter............... 2.313 .625
First Quarter................ 1.438 .625
The closing sale price for the Company's Common Stock on the AMEX on
March 20, 2000 was $6.00 per share. At March 20, 2000, there were approximately
434 holders of record of the Company's Common Stock.
The Company has never paid dividends on its Common Stock and does
not intend to pay cash dividends on its Common Stock in the foreseeable future.
The terms of the Company's Series C, D and E Preferred Stock generally prohibit
the payment of cash dividends and other distributions on the Company's Common
Stock unless full cumulative stock dividends on shares of such Series C, D and E
Preferred Stock have been paid or declared in full. During 1999, the Company
issued stock dividends totaling 866 shares of Series C Preferred Stock and cash
dividends for fractional shares of $2,277. No dividends were paid or declared
during 1999 on the Company's Series D and E Preferred Stock.
The following unregistered securities were issued by the Company
during the quarter ended December 31, 1999:
Number of Shares
Sold/Issued/ Offering/
Date of Description of Subject to Options or Exercise Price
Sale/Issuance Securities Issued Warrants per share ($) Purchaser or Class
- ------------- ----------------- -------- ------------- ------------------
October 1999 Common stock 150,000 $6.00 Licensor/Investor
warrants pursuant to financing
arrangement
December 1999 Common stock 14,400 $3.6875 Employees pursuant to
options Employee Stock Option
Plan
The issuance of these securities are claimed to be exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, as
transactions by an issuer not involving a public offering. There were no
underwriting discounts or commissions paid in connection with the issuance of
any of these securities.
19
Item 6. Selected Financial Data
The information required by this Item is incorporated by reference to the
Company's Annual Report to Stockholders for the year ended December 31, 1999,
pertinent portions of which are attached hereto as Exhibit 13.
Item 7. Management's Discussion and Analysis or Plan of Operation
The information required by this Item is incorporated by reference to the
Company's Annual Report to Stockholders for the year ended December 31, 1999,
pertinent portions of which are attached hereto as Exhibit 13.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company has no material market risk exposure.
Item 8. Financial Statements and Supplementary Data
Quarterly financial data for 1999 and 1998 is summarized below:
Three Months Ended
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
1999:
Total revenues $ 26,000 $ 101,412 $ 147,526 $ 124,440
Operating loss (1,154,642) (1,468,668) (1,418,452) (16,257,730)
Net loss (1,162,656) (1,487,010) (1,454,942) (13,280,180)
Basic and diluted net loss per share (.04) (.05) (.05) (.49)
1998:
Total revenues $ -- $ 350,000 $ -- $ --
Operating loss (2,221,531) (13,219,472) (1,999,198) (929,170)
Net loss (2,263,048) (13,303,121) (2,142,410) (851,882)
Basic and diluted net loss per share (.17) (.67) (.08) (.03)
The remaining information required by this Item is incorporated by reference to
the Company's Annual Report to Stockholders for the year ended December 31,
1999, pertinent portions of which are attached hereto as Exhibit 13.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 5, 2000,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 5, 2000,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 5, 2000,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.
20
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 5, 2000,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.
21
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The following Financial Statements are included:
Report of Independent Auditors
Consolidated Balance Sheets as of
December 31, 1999 and 1998
Consolidated Statements of Operations for
the years ended December 31, 1999, 1998 and
1997 and for the period October 17, 1986
(inception) to December, 31 1999
Consolidated Statements of Stockholders'
Equity (net capital deficiency) for the
period from October 17, 1986 (inception)
to December 31, 1999
Consolidated Statements of Cash Flows for
the years ended December 31, 1999, 1998
and 1997 and for the period from October
17, 1986 (inception) to December 31,
1999
Notes to Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules are omitted because they are
not applicable, or not required, or because the required information is included
in the financial statements or notes thereto.
(a)(3) Exhibits:
NO. REFERENCE
3.1 Certificate of Incorporation of the Company, as amended (10)
3.2 By-Laws of the Company (4)
4.1 Form of Common Stock Certificate (2)
4.2 Certificate of Designation defining the powers, (7)
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series A
Cumulative Convertible Redeemable Preferred Stock
4.3 Certificate of Designations defining the powers, (11)
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series B
Cumulative Convertible Redeemable Preferred Stock
4.4 Certificate of Designations defining the powers, (10)
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series C
Cumulative Convertible Redeemable Preferred Stock
4.5 Certificate of Designations defining the powers, (16)
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series D
Cumulative Convertible Exchangeable Preferred Stock.
22
NO. REFERENCE
4.6 Certificate of Designations defining the powers, (16)
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series E
Convertible Non-Exchangeable Preferred Stock.
4.7 Certificate of Designations defining the powers, (16)
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series F
Convertible Non-Exchangeable Preferred Stock.
10.6 Employment Agreement dated as of June 6, 1996 between the (3)
Company and Thomas M. Fitzgerald
10.6.5 Employment Agreement dated as of November 16, 1998 (15)
between the Company and Scott Hoffmann
10.6.6 Employment Agreement dated as of November 17, 1997 (14)
between the Company and Judy Roeske-Bullock
10.7 Agreement of Sublease dated as of November 17, 1995 (2)
between the Company and Brumbaugh Graves Donohue &
Raymond relating to 30 Rockefeller Plaza, Suite 4515, New
York, New York
10.8 1993 Stock Option Plan, as amended (15)
10.9 1993 Restricted Stock Plan, as amended (2)
10.10 1996 Directors Stock Option Plan (7)
10.11 Agreement and Plan of Merger among the Company, Camelot (6)
Pharmacal, L.L.C., David A. Byron, Loren G. Peterson and
Carl Siekmann dated April 25, 1997
10.12 Employment Agreement dated as of April 25, 1997 between (6)
the Company and David A. Byron
10.13 Employment Agreement dated as of April 25, 1997 between (6)
the Company and Loren G. Peterson
10.14 Employment Agreement dated as of April 25, 1997 between (6)
the Company and Carl Siekmann
10.15 Form of the Company's 6% Convertible Subordinated (8)
Debentures due September 22, 2000.
10.16 Lease dated August 18, 1997 between Corporate Center, (5)
L.L.C. and the Company relating to the lease of office
space in St. Louis, Missouri.
10.17 Assignment and License Agreement dated as of December 3, (9)
1997 between 1266417 Ontario Limited and Ion
Pharmaceuticals, Inc. (portions of this exhibit were
omitted and were filed separately with the Securities
Exchange Commission pursuant to the Company's application
requesting confidential treatment in accordance with Rule
24b-2 as promulgated under the Securities Exchange Act of
1934, as amended).
23
NO. REFERENCE
10.18 Sub-License Agreement dated as of December 3, 1997 (9)
between 1266417 Ontario Limited and Ion Pharmaceuticals,
Inc. (portions of this exhibit were omitted and were
filed separately with the Securities Exchange Commission
pursuant to the Company's application requesting
confidential treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of 1934, as
amended).
10.19 Form of Sublicense and Development Agreement between (12)
Sheffield Pharmaceuticals, Inc. and Inpharzam
International, S.A. (portions of this exhibit were
omitted and were filed separately with the Securities and
Exchange Commission pursuant to the Company's application
requesting confidential treatment in accordance with Rule
24b-2 as promulgated under the Securities Exchange Act of
1934, as amended).
10.20 Securities Purchase Agreement, dated as of June 30, 1998, (13)
by and between Sheffield pharmaceuticals, Inc. and Elan
International Services, Ltd., which includes the
Certificate of Designations of Series C Convertible
Preferred Stock as Exhibit B. The Company agreed to
furnish the disclosure schedules as well as Exhibits A
and C, which were omitted from this filing, to the
Commission upon request (portions of this exhibit were
omitted and were filed separately with the Securities and
Exchange Commission pursuant to the Company's application
requesting confidential treatment in accordance with Rule
24b-2 as promulgated under the Securities Exchange Act of
1934, as amended).
10.21 Systemic Pulmonary Delivery, Ltd. Joint Development and (13)
Operating Agreement dated as of June 30, 1998 among
Systemic Pulmonary Delivery, Ltd., Sheffield
Pharmaceuticals, Inc. and Elan International Services,
Ltd. (portions of this exhibit were omitted and were
filed separately with the Securities and Exchange
Commission pursuant to the Company's application
requesting confidential treatment in accordance with Rule
24b-2 as promulgated under the Securities Exchange Act of
1934, as amended).
10.22 License and Development Agreement dated June 30, 1998 (13)
between Sheffield Pharmaceuticals, Inc. and Systemic
Pulmonary Delivery, Ltd. and Elan Corporation plc.
(portions of this exhibit were omitted and were filed
separately with the Securities and Exchange Commission
pursuant to the Company's application requesting
confidential treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of 1934, as
amended).
10.23 License and Development Agreement dated June 30, 1998 (13)
between Systemic Pulmonary Delivery, Ltd. and Sheffield
Pharmaceuticals, Inc. and Elan Corporation, plc.
(portions of this exhibit were omitted and were filed
separately with the Securities and Exchange Commission
pursuant to the Company's application requesting Rule
24b-2 as promulgated under the Securities Exchange Act of
1934, as amended).
24
NO. REFERENCE
10.24 License and Development Agreement dated June 30, 1998 (13)
between Elan Corporation, plc and Systemic Pulmonary
Delivery, Ltd. and Sheffield Pharmaceuticals, Inc.
(portions of this exhibit were omitted and were filed
separately with the Securities and Exchange Commission
pursuant to the Company's application requesting
confidential treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of 1934, as
amended).
10.25 Securities Purchase Agreement, dated as of October 18, (16)
1999, by and between the Company and Elan (portions of
this exhibit were omitted and were filed separately with
the Securities and Exchange Commission pursuant to the
Company's application requesting confidential treatment
in accordance with Rule 24b-2 as promulgated under the
Securities Exchange Act of 1934, as amended).
10.26 Subscription, Joint Development and Operating Agreement (16)
dated as of October 18, 1999 by and among Elan Pharma
International Limited, Elan, the Company and Newco.
(portions of this exhibit were omitted and were filed
separately with the Securities and Exchange Commission
pursuant to the Company's application requesting
confidential treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of 1934, as
amended).
10.27 License Agreement, dated as of October 19, 1999, by and (16)
between the Company and Newco (portions of this exhibit
were omitted and were filed separately with the
Securities and Exchange Commission pursuant to the
Company's application requesting confidential treatment
in accordance with Rule 24b-2 as promulgated under the
Securities Exchange Act of 1934, as amended).
10.28 License Agreement, dated as of October 19, 1999, by and (16)
between Elan Pharma International Limited and Newco
(portions of this exhibit were omitted and were filed
separately with the Securities and Exchange Commission
pursuant to the Company's application requesting
confidential treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of 1934, as
amended).
10.29 Registration Rights Agreement dated as of October 18, (16)
1999 by and between Elan and the Company.
13 Portions of the Company's Annual Report to Stockholders (1)
for the year ended December 31, 1999 relating to Items 6,
7 and 8.
21 Subsidiaries of Registrant (1)
23.1 Consent of Ernst & Young LLP (1)
27 Financial Data Schedule (1)
- -----------------------
(1) Filed herewith.
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for its fiscal year ended December 31, 1995 filed with the Securities and
Exchange Commission.
25
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996 filed with the Securities and Exchange
Commission.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 filed with the Securities and Exchange
Commission.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 filed with the Securities and
Exchange Commission.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997 filed with the Securities and
Exchange Commission.
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996 filed with the Securities and
Exchange Commission.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-3 (File No. 333-38327) filed with the Securities and Exchange Commission
on October 21, 1997.
(9) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 17, 1997.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 filed with the Securities and Exchange
Commission.
(11) Incorporated by reference to Exhibit 3 of the Company's Current Report on
Form 8-K, dated April 17, 1998, filed with the Securities and Exchange
Commission.
(12) Incorporated by reference to Exhibit 2 of the Company's Current Report on
Form 8-K, dated June 22, 1998, filed with the Securities and Exchange
Commission.
(13) Incorporated by reference to exhibits to the Company's Current Report on
Form 8-K, dated July 16, 1998, filed with the Securities and Exchange
Commission.
(14) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 filed with the Securities and Exchange
Commission.
(15) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 filed with the Securities and Exchange
Commission.
(16) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on November 2, 1999.
(b) Reports on Form 8-K
(1) Current Report on Form 8-K filed with Securities and Exchange
Commission on October 22, 1999.
(2) Current Report on Form 8-K with the Securities and Exchange
Commission on November 2, 1999.
26
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.
SHEFFIELD PHARMACEUTICALS, INC.
Dated: March 27, 2000 /S/ Loren G. Peterson
---------------------------------------
Loren G. Peterson
President and Chief Executive Officer
POWER OF ATTORNEY
Sheffield Pharmaceuticals, Inc. and each of the undersigned do
hereby appoint Loren G. Peterson and Thomas Fitzgerald and each of them
severally, its or his or her true and lawful attorney to execute on behalf of
Sheffield Pharmaceuticals, Inc. and the undersigned any and all amendments to
this Annual Report and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission;
each of such attorneys shall have the power to act hereunder with or without the
other.
In accordance with the Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ Thomas M. Fitzgerald Chairman and Director March 27, 2000
- -------------------------------
Thomas M. Fitzgerald
/S/ Loren G. Peterson Director, President and March 27, 2000
- ------------------------------- Chief Executive Officer
Loren G. Peterson
/S/ John M. Bailey Director March 27, 2000
- -------------------------------
John M. Bailey
/S/ Digby W. Barrios Director March 27, 2000
- -------------------------------
Digby W. Barrios
/S/ Todd C. Davis Director March 27, 2000
- -------------------------------
Todd C. Davis
/S/ Scott A. Hoffmann Vice President, Chief March 27, 2000
- ------------------------------- Financial Officer,
Scott A. Hoffmann Treasurer and Secretary
(Chief Financial and Chief
Accounting Officer)
Sheffield Pharmaceuticals, Inc. Exhibit 13
(a development stage enterprise)
SELECTED FINANCIAL INFORMATION
(In dollars, except per share information)
Year Ended December 31
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Contract research revenue $ 399,378 $ -- $ -- $ -- $ --
Sublicense revenue -- 350,000 500,000 510,000 --
------------ ------------ ------------ ------------ ------------
Total revenues 399,378 350,000 500,000 510,000 --
Operating costs and expenses:
Acquired research and development
in-process technology 15,000,000 13,325,000 1,650,000 -- --
Research and development 3,421,734 2,351,301 3,729,193 3,841,818 4,424,154
General and administrative 2,277,136 3,043,070 4,627,567 3,831,204 2,979,437
------------ ------------ ------------ ------------ ------------
Total operating costs and expenses 20,698,870 18,719,371 10,006,760 7,673,022 7,403,591
------------ ------------ ------------ ------------ ------------
Loss from operations (20,299,492) (18,369,371) (9,506,760) (7,163,022) (7,403,591)
Interest income 91,941 60,273 56,914 163,664 80,610
Interest expense (162,237) (251,363) (39,292) (9,531) (64,736)
Minority interest in loss of subsidiary 2,985,000 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss $(17,384,788) $(18,560,461) $ (9,489,138) $ (7,008,889) $ (7,387,717)
============ ============ ============ ============ ============
Basic and diluted net loss per share $ (.64) $ (.85) $ (.80) $ (.65) $ (.90)
Basic and diluted weighted average common
shares outstanding 27,236,715 21,931,040 11,976,090 10,806,799 8,185,457
CONSOLIDATED BALANCE SHEET DATA:
Working capital (net deficiency) $ 3,344,174 $ 1,456,833 $ (837,564) $ 1,433,773 $ 1,585,675
Total assets 5,048,655 2,862,521 689,937 2,773,884 2,221,050
Long-term debt & redeemable preferred stock 2,000,000 1,000,000 4,019,263 27,206 --
Accumulated deficit (73,409,828) (55,156,763) (36,157,290) (26,588,652) (19,579,763)
Stockholders' equity (net capital deficiency) 671,073 655,205 (4,716,751) 1,695,837 1,792,363
- ------------
No cash dividends have been paid on Common Stock for any of the periods
presented.
Loss per share is based upon the weighted average number of common and certain
common equivalent shares outstanding.
See consolidated financial statements and accompanying footnotes.
1
Sheffield Pharmaceuticals, Inc.
(a development stage enterprise)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. All forward-looking
statements involve risks and uncertainty, including without limitation, risks
set forth in Part I of the Company's Form 10-K for the year ended December 31,
1999.
The discussion and analysis below should be read in conjunction with
the Financial Statements of the Company and the related Notes to Financial
Statements included on pages 7 - 18 in this Annual Report.
Overview
Sheffield Pharmaceuticals, Inc. ("Sheffield" or the "Company") is a
specialty pharmaceutical company focused on development and commercialization of
later stage, lower risk pharmaceutical products that utilize the Company's
unique proprietary pulmonary delivery technologies. Through its alliances with
Elan Corporation, plc ("Elan"), Zambon Group SpA ("Zambon"), and Siemens AG
("Siemens"), Sheffield is currently developing nine respiratory and
non-respiratory therapies to be delivered through its proprietary Metered
Solution Inhaler ("MSI") and Aerosol Drug Delivery System ("ADDS") to address
unmet market needs.
The consolidated financial statements include the accounts of
Sheffield and its wholly owned subsidiaries, Systemic Pulmonary Delivery, Ltd.
("SPD"), Ion Pharmaceuticals, Inc., and CP Pharmaceuticals, Inc., and its 80.1%
owned subsidiary Respiratory Steroid Delivery, Ltd. ("RSD").
The Company is in the development stage and to date has been
principally engaged in research, development and licensing efforts. The Company
has generated minimal operating revenue and will require additional capital
which the Company intends to obtain through out-licensing as well as through
equity and debt offerings to continue to operate its business. Even if the
Company is able to successfully develop new products, there can be no assurance
that the Company will generate sufficient revenues from the sale or licensing of
such products to be profitable.
In October 1999, Elan International Services, Ltd. ("Elan
International"), an affiliate of Elan, and the Company formed a new joint
venture, RSD, to develop certain respiratory steroid products. Under the terms
of the agreement, the Company issued to Elan International 12,015 shares of
Series D Cumulative Convertible Exchangeable Preferred Stock ("Series D
Preferred Stock"), for $12.015 million. In turn, the Company made an equity
investment of $12.015 million representing an initial 80.1% ownership in RSD.
RSD paid $15.0 million to license certain pulmonary NanoCrystal(TM) technology
from Elan Pharmaceutical Technologies, a division of Elan. Elan International
has also committed to purchase, on a drawdown basis, up to an additional $4.0
million of the Company's Series E Cumulative Convertible Preferred Stock
("Series E Preferred Stock"). The Series E Preferred Stock will be utilized by
the Company to fund its portion of RSD's operating and development costs. In
addition to the above, the Company issued to Elan International 5,000 shares of
Series F Convertible Non-Exchangeable Preferred Stock ("Series F Preferred
Stock"), for $5.0 million. The proceeds of the Series F Preferred Stock will be
utilized by Sheffield for its own operating purposes.
In June 1998, the Company and Elan International formed a joint
venture, SPD, to develop certain systemic applications for use in the Company's
pulmonary technologies. The Company issued 5.6 million shares of Common Stock
and 11,500 shares of Series C Cumulative Convertible Preferred Stock ("Series C
Preferred Stock") for $17.5 million. In turn, the Company made an equity
investment of $17.5 million in SPD, representing a 100% ownership interest.
Under the terms of the agreement, SPD acquired the Ultrasonic Pulmonary Drug
Absorption System and the Absorption Enhancing Technology from Elan for $12.5
million. SPD is responsible for the development of these technologies. Elan
agreed to make available to the Company an additional $2.0 million in funding in
the form of a convertible note, at the option of the Company. In July 1998, SPD
acquired from Aeroquip Corporation, the ADDS, a new generation metered dose
inhaler for $825,000. SPD holds the rights to all systemic disease applications
of the ADDS technology. Sheffield retained the rights to develop respiratory
disease applications of the ADDS.
2
In June 1998, the Company entered into an agreement with Zambon for
a sublicense to the Company's proprietary MSI drug delivery system. Zambon
received an exclusive world-wide marketing and development sublicense for
respiratory products to be delivered by the MSI including four drugs previously
under development by Sheffield. Sheffield retained certain co-promotion rights
in the U.S. for respiratory drugs as well as the worldwide marketing and
development rights for all applications of the MSI delivery system outside the
respiratory therapeutic area. As part of this transaction, Zambon agreed to fund
all remaining development costs relating to these respiratory products, paid the
Company an up-front fee of $2.15 million in the form of an equity investment of
2.6 million shares of Common Stock, and will pay the Company milestone payments
upon marketing approval for each of the four products and royalties upon
commercialization. In addition, Zambon has committed to provide Sheffield with
an interest-free line of credit upon the achievement of certain technical
milestones.
Results of Operations
Revenue
Contract research revenue was $399,378 for the year ended December
31, 1999. There were no contract research revenues in 1998 and 1997. The 1999
contract research revenues primarily represent revenue earned from a
collaborative research agreement with Zambon relating to the development of
respiratory applications of the MSI. Costs of contract research revenue
approximate such revenue and are included in research and development expenses
on the consolidated statement of operations. Future contract research revenues
and expenses are anticipated to fluctuate depending, in part, upon the success
of current clinical studies, and obtaining additional collaborative agreements.
Sublicense revenue of $350,000 for the year ended December 31, 1998
relates to a sublicense agreement entered into during 1997 with Lorus
Therapeutics, Inc. (formerly Imutec Pharma Inc.) ("Lorus"). The agreement
licensed rights to a series of compounds for the treatment of cancer, Kaposi's
sarcoma and actinic keratosis to a newly formed company, NuChem Pharmaceuticals,
Inc. ("NuChem") for which Lorus will provide funding and management of the
development program. The Company received $500,000 in cash upon signing the
agreement in 1997 and received 583,188 shares of Lorus stock with a value of
$350,000 in 1998. At December 31, 1999 the Company's investment in Lorus had a
market value of $519,387. There were no such sublicense revenues in 1999.
Acquisition of Research & Development In-Process Technology
Acquisition of research and development in-process technology for
the years ended December 31, 1999, 1998 and 1997 was $15.0 million, $13.3
million, and $1.7 million, respectively. In 1999, the Company licensed certain
pulmonary NanoCrystal(TM) technology from Elan for $15.0 million. This entire
payment was expensed as the license agreement restricts the Company's use of the
NanoCrystal(TM) technology to certain respiratory steroid products that are
currently research and development projects. In 1998, the Company acquired the
ADDS from Aeroquip Corporation for $825,000 and certain pulmonary delivery
technologies from Elan for $12.5 million. The 1997 amount is attributable to the
acquisition of Camelot Pharmacal, LLC, a specialty pharmaceutical company. The
1998 and 1997 acquisitions were expensed in the year acquired since the
technologies had not demonstrated technological feasibility and had no
alternative future uses.
Research and Development
Research and development expenses were $3.4 million for the year
ended December 31, 1999 compared to $2.4 million and $3.7 million for the years
ended December 31, 1998 and 1997, respectively. The increase of $1.0 million
from 1998 to 1999 is due to modifications being made to the MSI to enhance its
commercial appeal prior to the start of Phase III MSI-albuterol clinical trials,
and with work associated with the development of a therapy for breakthrough pain
delivered through the MSI, as well as a migraine therapy delivered through the
ADDS. These increases were partially offset by the shifting of responsibility
for development expenses of the respiratory applications of the MSI to the
Company's partner, Zambon. The decrease of $1.3 million from 1997 to 1998
reflects both the Company's shifting of responsibility for development expenses
of the respiratory applications of the MSI to Zambon and continued winding down
of its early stage research projects. This decrease was partially offset by
development costs associated with the ADDS technology acquired in July 1998.
3
General and Administrative Expenses
General and administrative expenses were $2.3 million for the year
ended December 31, 1999 compared to $3.0 million and $4.6 million for the years
ended December 31, 1998 and 1997, respectively. The decrease of $0.7 million
from 1998 to 1999 was primarily attributable to indirect costs associated with
completing both the 1998 Zambon and Elan agreements. In addition, the decrease
between years resulted from 1998 costs associated with both the retention of the
Company's former investor relations firm and settlement of a dispute with the
innovator of one of the Company's early stage research projects. The decrease
from 1997 to 1998 of $1.6 million was due to lower compensation expense
reflecting fewer employees during 1998 and the extension of certain option and
warrant agreements in 1997. The 1998 decrease also reflects lower consulting
costs resulting from indirect expenses associated with two financings completed
in 1997, and a loss realized on the sale of securities during 1997.
Interest
Interest income was $91,941 for the year ended December 31, 1999 as
compared to $60,273 and $56,914 for the years ended December 31, 1998 and 1997,
respectively. The $31,668 increase in interest income in 1999 from 1998 was
primarily due to larger balances of cash available for investment.
Interest expense was $162,237 for the year ended December 31, 1999
as compared to $251,363 and $39,292 for the years ended December 31, 1998 and
1997, respectively. The decrease of $89,126 in 1999 as compared to 1998
primarily reflects the 1998 conversion of the Company's Series A Cumulative
Convertible Preferred Stock and 6% Convertible Subordinated Debentures into
Common Stock, partially offset by higher outstanding balances of a convertible
promissory note with Elan. The increase of $212,071 in 1998 as compared to 1997
was primarily due to interest paid on the Company's Series B Cumulative
Convertible Redeemable Preferred Stock ("Series B Preferred Stock") and a
convertible promissory note issued to Elan, both of which were originally issued
in 1998.
Minority Interest in Subsidiary
Minority interest in loss of subsidiary was $2.985 million for the
year ended December 31, 1999. RSD, a consolidated and 80.1% owned subsidiary of
the Company, incurred a loss of $15.0 million in 1999 resulting from the license
of certain pulmonary NanoCrystal(TM) technology from Elan. The minority interest
in loss of subsidiary represents Elan's portion, or 19.9%, of RSD's 1999 losses.
Elan's investment in RSD, shown as minority interest in subsidiary on the
consolidated balance sheets, was $0 at December 31, 1999.
Liquidity and Capital Resources
At December 31, 1999, the Company had $3.9 million in cash and cash
equivalents compared to $2.5 million at December 31, 1998. The increase of $1.4
million reflects $16.7 million in net proceeds from the issuance of the
Company's Series D and Series F Preferred Stock and proceeds from the issuance
of a convertible promissory note to Elan of $1.0 million. These increases were
partially offset by $16.1 million of cash disbursements used primarily to fund
operating activities, including a $15.0 million license fee paid to Elan as part
of the 1999 inhaled steroid development agreement, partially offset by the
receipt of a $1.0 million interest-free advance against future milestone
payments from Zambon.
In October 1999, as part of a licensing agreement with Elan, the
Company received gross proceeds of $17.0 million related to the issuance to Elan
of 12,015 shares of Series D Preferred Stock and 5,000 shares of Series F
Preferred Stock. In turn, the Company made an equity investment of $12.015
million in a joint venture, RSD, representing an initial 80.1% ownership. The
remaining proceeds from the above-mentioned preferred stock issuance will be
utilized for general operating purposes. As part of the agreement, Elan has also
committed to purchase, on a drawdown basis, up to an additional $4.0 million of
the Company's Series E Preferred Stock. The proceeds from the Series E Preferred
Stock will be utilized by the Company to fund its portion of RSD's operating and
development costs.
In May 1999, in conjunction with the completion of its Phase I/II
MSI-albuterol trial, Zambon provided the Company with a $1.0 million
interest-free advance against future milestone payments. Upon the attainment of
certain future milestones, the Company will recognize this advance as revenue.
If the Company does not achieve these future milestones, the advance must be
repaid in quarterly installments of $250,000 commencing January 1, 2002. The
proceeds from this advance are not restricted as to their use by the Company.
Upon the achievement of certain other technical milestones, Zambon will provide
an additional $1.0 million advance under the terms of the agreement.
4
On April 15, 1998, the Company issued 1,250 shares of its Series B
Preferred Stock in a private placement for an aggregate purchase price of $1.25
million. The proceeds were used to make a payment to Siemens pursuant to the MSI
license agreement. During 1998, the Company entered into a sublicense agreement
with Zambon that provided the Company $2.15 million in gross proceeds from the
sale of 2.6 million shares of Common Stock. The Company also entered into an
agreement with Elan that provided the Company approximately $17.5 million of
gross proceeds from the sale of 4.6 million shares of Common Stock and 11,500
shares of the Company's Series C Preferred Stock. The proceeds from the Elan
transaction were used to purchase certain pulmonary device delivery technologies
from Elan for $12.5 million, the ADDS for $825,000 from Aeroquip Corporation,
and to redeem $1.25 million principal amount of Series B Preferred Stock. The
remaining proceeds from the Elan transaction were used for research and
development, working capital and general corporate purposes. Also, as part of
the 1998 Elan agreement, Elan agreed to make available to the Company a
convertible promissory note that provides the Company the right to borrow up to
$2.0 million, subject to satisfying certain conditions. No more than $0.5
million may be drawn under the note in any calendar quarter and at least
one-half of the proceeds must be used to fund SPD's development activities. As
of December 31, 1999, $2.0 million was outstanding under this note.
Since its inception, the Company has financed its operations
primarily through the sale of securities and convertible debentures, from which
it raised an aggregate of approximately $70.7 million through December 31, 1999,
of which approximately $30.0 million has been spent to acquire certain
in-process research and development technologies, and $24.7 million has been
incurred to fund certain ongoing technology research projects. The Company
expects to incur additional costs in the future, including costs relating to its
ongoing research and development activities, and preclinical and clinical
testing of its product candidates. The Company may also bear considerable costs
in connection with filing, prosecuting, defending and/or enforcing its patent
and other intellectual property claims. Therefore, the Company will need
substantial additional capital before it will recognize significant cash flow
from operations, which is contingent on the successful commercialization of the
Company's technologies. There can be no assurance that any of the technologies
to which the Company currently has or may acquire rights can or will be
commercialized or that any revenues generated from such commercialization will
be sufficient to fund existing and future research and development activities.
Because the Company does not expect to generate significant cash
flows from operations for at least the next few years, the Company believes it
will require additional funds to meet future costs. The Company will attempt to
meet its capital requirements with existing cash balances and through additional
public or private offerings of its securities, debt financing, and collaboration
and licensing arrangements with other companies. There can be no assurance that
the Company will be able to obtain such additional funds or enter into such
collaborative and licensing arrangements on terms favorable to the Company, if
at all. The Company's development programs may be curtailed if future financings
are not completed.
While the Company does not believe that inflation has had a material
impact on its results of operations, there can be no assurance that inflation in
the future will not impact financial markets which, in turn, may adversely
affect the Company's valuation of its securities and, consequently, its ability
to raise additional capital, either through equity or debt instruments, or any
off-balance sheet refinancing arrangements, such as collaboration and licensing
agreements with other companies.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. Such
systems that are not Year 2000 compliant may not have been able to properly
interpret dates beyond the Year 1999, which may have led to business disruptions
in the U.S. and internationally. The potential costs and uncertainties
associated with the Year 2000 issue depended on a number of factors, including
software, hardware and the nature of the industry in which a company operates.
Additionally, companies had to coordinate with other entities with which they
electronically interact, such as customers, creditors and borrowers.
During 1998, the Company conducted an assessment of its computer
systems to identify systems that could be affected by the Year 2000 issue. All
identified systems that could have potentially been affected by the turnover to
the Year 2000 were tested. During the second quarter of 1999, all noncompliant
internal software and hardware were replaced or upgraded to reach compliance. To
date, the Company has experienced no adverse effect on its internal software and
hardware by the Year 2000 turnover.
5
The Company relies on several universities and independent
laboratories (collectively, "CROs") for conducting a significant portion of the
research and development of its technologies and products. In addition, the
Company relies on its strategic alliance partners to perform certain
manufacturing, research and development activities related to its products in
development. To date, the Company has experienced no adverse effect from
computer failures of any of its CROs on which the Company relies. However, there
can be no assurance that if these CROs and/or strategic alliance partners (or
their significant vendors) were to experience future computer failures related
to the Year 2000 turnover, these failures would not have a material adverse
effect on the Company's business, including the possibility of material delays
in the progress of clinical trials, product development and future receipt of
product sales and related royalties.
Given the lack of legacy systems at the Company, the limited number
of issues that have arisen to date, and the level of development activity, the
Company has not developed a formal contingency plan for its worse case scenario.
While the Company does not anticipate that its worst case scenario will occur,
in the event that any of its major CROs or strategic alliance partners suffer
material Year 2000 disruptions that negatively impact the Company, the Company
will evaluate the materiality of the disruptions at that time. Following the
completion of any necessary evaluation, the Company will determine whether to
delay the related clinical trials or other research and development while
corrective efforts are being implemented. Depending on the anticipated period of
time it will take to complete such efforts, the Company may consider replacing
the applicable CRO with another Year 2000 compliant provider.
The total cost to the Company of these Year 2000 compliance
activities was approximately $20,000. The Company does not expect to incur any
future significant costs related to these activities.
6
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Balance Sheets
Assets December 31,
1999 1998
---- ----
Current assets:
Cash and cash equivalents (Note 1) $ 3,874,437 $ 2,456,290
Marketable equity security (Notes 1 and 8) 519,387 127,774
Prepaid expenses and other current assets 145,237 39,035
------------ ------------
Total current assets 4,539,061 2,623,099
------------ ------------
Property and equipment (Note 1):
Laboratory equipment 407,624 317,032
Office equipment 178,797 175,062
Leasehold improvements 15,000 1,323
------------ ------------
Total at cost 601,421 493,417
Less accumulated depreciation and amortization (311,752) (253,995)
------------ ------------
Property and equipment, net 289,669 239,422
------------ ------------
Patent costs (Note 1) 204,283 --
Other assets 15,642 --
------------ ------------
Total assets $ 5,048,655 $ 2,862,521
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 773,206 $ 615,138
Sponsored research payable 421,681 449,805
Note payable - related party (Note 9) -- 101,323
------------ ------------
Total current liabilities 1,194,887 1,166,266
Convertible promissory note (Note 7) 2,000,000 1,000,000
Unearned revenue (Note 3) 1,000,000 --
Other long-term liabilities 182,695 41,050
Commitments and contingencies -- --
------------ ------------
Total liabilities 4,377,582 2,207,316
Minority interest in subsidiary (Note 1) -- --
Stockholders' equity (Notes 5 & 6):
Preferred stock, $.01 par value, authorized 3,000,0000 shares:
Series C cumulative convertible preferred stock, authorized 23,000
shares; 12,780 and 11,914 shares issued and outstanding at
December 31, 1999 and 1998, respectively 128 119
Series D cumulative convertible exchangeable preferred stock,
authorized 21,000 shares; 12,015 and no shares issued and
outstanding at December 31, 1999 and 1998, respectively 120 --
Series F convertible non-exchangeable preferred stock, 5,000 shares
authorized; 5,000 and no shares issued and outstanding at
December 31, 1999 and 1998, respectively 50 --
Common stock, $.01 par value, authorized 60,000,000 and 50,000,000 shares
at December 31, 1999 and 1998, respectively; issued and
outstanding, 27,308,846 and 27,058,419 shares at
December 31, 1999 and 1998, respectively 273,088 270,584
Notes receivable in connection with sale of stock -- (10,000)
Additional paid-in capital 73,638,128 55,773,491
Other comprehensive income (loss) 169,387 (222,226)
Deficit accumulated during development stage (73,409,828) (55,156,763)
------------ ------------
Total stockholders' equity 671,073 655,205
------------ ------------
Total liabilities and stockholders' equity $ 5,048,655 $ 2,862,521
============ ============
See notes to consolidated financial statements.
7
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997 and for the Period
from October 17, 1986 (inception) to December 31, 1999
October 17,
1986
(inception) to
Years ended December 31, December 31,
1999 1998 1997 1999
---- ---- ---- ----
Revenues:
Contract research revenue (Note 1) $ 399,378 $ -- $ -- $ 399,378
Sublicense revenue (Note 8) -- 350,000 500,000 1,360,000
------------ ------------ ------------ ------------
Total revenues 399,378 350,000 500,000 1,759,378
Expenses:
Acquisition of research and development in-process
technology (Notes 2 & 8) 15,000,000 13,325,000 1,650,000 29,975,000
Research and development 3,421,734 2,351,301 3,729,193 25,025,424
General and administrative 2,277,136 3,043,070 4,627,567 21,842,465
------------ ------------ ------------ ------------
Total expenses 20,698,870 18,719,371 10,006,760 76,842,889
------------ ------------ ------------ ------------
Loss from operations (20,299,492) (18,369,371) (9,506,760) (75,083,511)
Interest income 91,941 60,273 56,914 606,041
Interest expense (162,237) (251,363) (39,292) (573,355)
Minority interest in loss of subsidiary (Note 1) 2,985,000 -- -- 2,985,000
------------ ------------ ------------ ------------
Loss before extraordinary item (17,384,788) (18,560,461) (9,489,138) (72,065,825)
Extraordinary item -- -- -- 42,787
------------ ------------ ------------ ------------
Net loss $(17,384,788) $(18,560,461) $ (9,489,138) $(72,023,038)
============ ============ ============ ============
Accretion of mandatorily redeemable preferred stock -- (23,900) (79,500) (103,400)
------------ ------------ ------------ ------------
Net loss - attributable to common shares $(17,384,788) $(18,584,361) $ (9,568,638) $(72,126,438)
============ ============ ============ ============
Basic and diluted weighted average common shares
outstanding (Note 1) 27,236,715 21,931,040 11,976,090 7,917,966
Basic and diluted net loss per share of common stock (Note 1):
Loss before extraordinary item $ (.64) $ (.85) $ (.80) $ (9.10)
Extraordinary item -- -- -- .01
------------ ------------ ------------ ------------
Net loss per share $ (.64) $ (.85) $ (.80) $ (9.09)
============ ============ ============ ============
See notes to consolidated financial statements.
8
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)
For the Period from October 17, 1986 (Inception) to December 31, 1999
Notes receivable in Other
connection Additional comprehen
Preferred Common with sale of paid-in -sive income
stock Stock stock capital (loss)
--------- ------ ------------ ------- ------------
Balance at October 17, 1986 $ -- $ -- $ -- $ -- $ --
Common stock issued -- 11,334,252 -- 17,024,469 --
Reincorporation in Delaware at $.01 par value -- (11,220,369) -- 11,220,369 --
Common stock subscribed -- -- (110,000) -- --
Common stock options issued -- -- -- 75,000 --
Comprehensive income (loss):
Unrealized loss on marketable securities -- -- -- -- (39,232)
Net loss -- -- -- -- --
Comprehensive income (loss) -- -- -- -- --
---------- ------------ --------- ----------- ---------
Balance at December 31, 1996 -- 113,883 (110,000) 28,319,838 (39,232)
Issuance of common stock in connection with
acquisition of Camelot Pharmacal, LLC -- 6,000 -- 1,644,000 --
Common stock issued -- 6,612 37,400 1,041,750 --
Common stock options and warrants issued -- -- -- 165,868 --
Common stock options extended -- -- -- 215,188 --
Accretion of issuance costs for Series A preferred stock -- -- -- -- --
Comprehensive income (loss):
Unrealized gain on marketable securities -- -- -- -- 39,232
Net loss -- -- -- -- --
Comprehensive income (loss) -- -- -- -- --
---------- ------------ --------- ----------- ---------
Balance at December 31, 1997 -- 126,495 (72,600) 31,386,644 --
Common stock issued -- 144,089 62,600 12,472,966 --
Series C preferred stock issued 115 -- -- 11,499,885 --
Series C preferred stock dividends 4 -- -- 413,996 --
Accretion of issuance costs for Series A preferred stock -- -- -- -- --
Comprehensive income (loss):
Unrealized loss on marketable securities -- -- -- -- (222,226)
Net loss -- -- -- -- --
Comprehensive income (loss) -- -- -- -- --
---------- ------------ --------- ----------- ---------
Balance at December 31, 1998 119 270,584 (10,000) 55,773,491 (222,226)
Common stock issued -- 2,504 10,000 89,059 --
Series C preferred stock dividends 9 -- -- 865,991 --
Series D preferred stock issued 120 -- -- 12,014,880 --
Series F preferred stock issued 50 -- -- 4,691,255 --
Common stock warrants issued -- -- -- 203,452 --
Comprehensive income (loss):
Unrealized gain on marketable securities -- -- -- -- 391,613
Net loss -- -- -- -- --
Comprehensive income (loss) -- -- -- -- --
============ ========= =========== =========
Balance at December 31, 1999 $ 298 $ 273,088 $ -- $73,638,128 $ 169,387
========== ============ ========= =========== =========
Deficit Total
accumulated stockholders'
during equity (net
development capital
stage deficiency)
----------- --------------
Balance at October 17, 1986 $ -- $ --
Common stock issued -- 28,358,721
Reincorporation in Delaware at $.01 par value -- --
Common stock subscribed -- (110,000)
Common stock options issued -- 75,000
Comprehensive income (loss):
Unrealized loss on marketable securities -- --
Net loss (26,588,652) --
Comprehensive income (loss) -- (26,627,884)
------------ ------------
Balance at December 31, 1996 (26,588,652) 1,695,837
Issuance of common stock in connection with
acquisition of Camelot Pharmacal, LLC -- 1,650,000
Common stock issued -- 1,085,762
Common stock options and warrants issued -- 165,868
Common stock options extended -- 215,188
Accretion of issuance costs for Series A preferred stock (79,500) (79,500)
Comprehensive income (loss):
Unrealized gain on marketable securities -- --
Net loss (9,489,138) --
Comprehensive income (loss) -- (9,449,906)
------------ ------------
Balance at December 31, 1997 (36,157,290) (4,716,751)
Common stock issued -- 12,679,655
Series C preferred stock issued -- 11,500,000
Series C preferred stock dividends (415,112) (1,112)
Accretion of issuance costs for Series A preferred stock (23,900) (23,900)
Comprehensive income (loss):
Unrealized loss on marketable securities -- --
Net loss (18,560,461) --
Comprehensive income (loss) -- (18,782,687)
------------ ------------
Balance at December 31, 1998 (55,156,763) 655,205
Common stock issued -- 101,563
Series C preferred stock dividends (868,277) (2,277)
Series D preferred stock issued -- 12,015,000
Series F preferred stock issued -- 4,691,305
Common stock warrants issued -- 203,452
Comprehensive income (loss):
Unrealized gain on marketable securities -- --
Net loss (17,384,788) --
Comprehensive income (loss) -- (16,993,175)
============ ============
Balance at December 31, 1999 $(73,409,828) $ 671,073
============ ============
See notes to consolidated financial statements.
9
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997 and
for the Period from October 17, 1986 (Inception) to December 31, 1999
October 17, 1986
(inception) to
Years ended December 31, December 31,
1999 1998 1997 1999
---- ---- ---- ----
Cash flows from operating activities:
Net loss $(17,384,788) $(18,560,461) $(9,489,138) $(72,023,038)
Adjustments to reconcile net loss to net cash used by
development stage activities:
Issuance of common stock, stock options/warrants for
services 203,452 359,913 381,056 2,485,425
Depreciation and amortization 86,341 68,794 84,584 479,560
Non-cash acquisition of research and development
in-process technology -- -- 1,650,000 1,650,000
(Increase) decrease in prepaid expenses & other current
assets (106,202) 8,343 (3,403) (204,278)
(Increase) decrease in other assets (219,925) 25,738 14,278 (160,884)
Increase (decrease) in accounts payable and accrued liabilities 154,418 (279,264) 440,817 185,866
(Decrease) increase in sponsored research payable (28,124) (20,963) (109,389) 998,751
Increase in unearned revenue 1,000,000 -- -- 1,000,000
Other 151,396 (285,826) 353,790 562,990
---------------------------------------------------------
Net cash used by development stage activities (16,143,432) (18,683,726) (6,677,405) (65,025,608)
---------------------------------------------------------
Cash flows from investing activities:
Acquisition of laboratory and office equipment, and leasehold
improvements (136,588) (131,772) (53,543) (585,712)
Other 10,000 132,200 160,798 117,998
------------ ----------- ---------- ------------
Net cash (used) provided by investing activities (126,588) 428 107,255 (467,714)
------------ ----------- ---------- ------------
Cash flows from financing activities:
Payments on debt and capital leases (709,701) (54,020) (50,925) (836,174)
Net proceeds from issuance of:
Debt 1,600,000 1,150,000 1,750,000 5,050,000
Common stock -- 8,150,000 -- 21,418,035
Preferred stock 16,706,305 12,750,000 3,284,812 32,741,117
Proceeds from exercise of warrants/stock options 91,563 -- -- 11,493,721
Other -- (1,250,000) -- (500,024)
------------ ----------- ---------- ------------
Net cash provided by financing activities 17,688,167 20,745,980 4,983,887 69,366,675
------------ ----------- ---------- ------------
Net increase (decrease) in cash and cash equivalents 1,418,147 2,062,682 (1,586,263) 3,873,353
Cash and cash equivalents at beginning of period 2,456,290 393,608 1,979,871 1,084
------------ ----------- ---------- ------------
Cash and cash equivalents at end of period $ 3,874,437 $ 2,456,290 $ 393,608 $ 3,874,437
============ =========== ========== ============
Noncash investing and financing activities:
Common stock, stock options and warrants issued for services $ 203,452 $ 359,913 $ 381,056 $ 2,485,425
Common stock redeemed in payment of notes receivable -- 10,400 -- 10,400
Acquisition of research and development in-process technology -- -- 1,650,000 1,655,216
Common stock issued for intellectual property rights -- -- -- 866,250
Common stock issued to retire debt -- -- -- 600,000
Common stock issued to redeem convertible securities -- 4,019,263 1,334,105 5,353,368
Securities acquired under sublicense agreement -- 350,000 -- 850,000
Equipment acquired under capital lease -- 49,231 -- 121,684
Notes payable converted to common stock -- -- -- 749,976
Stock dividends 868,277 596,195 182,352 1,646,824
Supplemental disclosure of cash information: Interest paid $ 8,919 $ 186,519 $ 10,417 $ 276,320
See notes to consolidated financial statements.
10
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Sheffield Pharmaceuticals, Inc. (formerly Sheffield
Medical Technologies Inc.) ("Sheffield" or the "Company") was incorporated under
Canadian law in October 1986. In May 1992, the Company became domesticated as a
Wyoming Corporation pursuant to a "continuance" procedure under Wyoming law. In
January 1995, the Company's stockholders approved the proposal to reincorporate
the Company in Delaware, which was effected on June 13, 1995. The Company is
focused on the development and commercialization of later stage, lower risk
pharmaceutical products that utilize the Company's unique proprietary pulmonary
delivery technologies.
The Company is in the development stage and to date has been principally engaged
in research, development and licensing efforts. The Company has generated
minimal operating revenue, sustained significant net operating losses, and
requires additional capital that the Company intends to obtain through
out-licensing as well as through equity and debt offerings to continue to
operate its business. Even if the Company is able to successfully develop new
products, there can be no assurance that the Company will generate sufficient
revenues from the sale or licensing of such products to be profitable.
Principles of Consolidation - The consolidated financial statements include the
accounts of Sheffield and its wholly owned subsidiaries, Systemic Pulmonary
Delivery, Ltd. ("SPD"), Ion Pharmaceuticals, Inc., and CP Pharmaceuticals, Inc.,
and its 80.1% owned subsidiary, Respiratory Steroid Delivery, Ltd. ("RSD"). All
significant intercompany transactions have been eliminated. Investments in
affiliated companies that are 50% owned or less, and where the Company does not
exercise control, are accounted for using the equity method.
Use of Estimates - The preparation of the 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 accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents - The Company considers all highly liquid instruments with
original maturities of three months or less to be cash equivalents. Cash and
cash equivalents include demand deposits held in banks, interest bearing money
market funds, and corporate commercial paper with A1 or P1 short-term ratings.
Marketable Securities - Marketable securities consist of investments that can be
readily purchased or sold using established markets. The Company's securities,
which are classified as available-for-sale, are carried at market with
unrealized gains and losses reported as a separate component of other
comprehensive income within stockholders' equity.
Property and Equipment - Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over three or five year periods for
leasehold improvements and office equipment, and five years for laboratory
equipment. Assets under capital leases, consisting of office equipment, are
amortized over the lesser of the useful life or the applicable lease terms.
Patent Costs - Costs associated with obtaining patents, principally legal costs
and filing fees, are capitalized and being amortized on a straight-line basis
over the remaining lives of the respective patents. The Company periodically
evaluates the carrying amount of these assets based on current licensing and
future commercialization efforts, and if warranted, impairment would be
recognized.
Contract Research Revenue - Contract revenue from collaborative research
agreements is recorded when earned and as the related costs are incurred.
Payments received which are related to future performance are deferred and
recognized as revenue in the period in which they are earned.
Research and Development Costs - Research and development costs ("R & D costs")
are expensed as incurred, except for fixed assets to which the Company has
title, which are capitalized and depreciated over their estimated useful lives.
Income Taxes - The Company utilizes the liability method to account for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Fair Value of Financial Instruments - The carrying amounts of cash and cash
equivalents, accounts payable, sponsored research payable and notes payable
approximates fair value.
11
Basic Net Loss per Share of Common Stock - Basic net loss per share is
calculated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. Basic net loss per share is based upon the
weighted average common stock outstanding during each year. Potentially dilutive
securities such as stock options, warrants, convertible debt and preferred
stock, have not been included in any years presented as their effect is
antidilutive.
Stock-Based Compensation - SFAS No. 123, Accounting for Stock-Based
Compensation, defines a fair value method of accounting for stock options and
similar equity instruments. As permitted by SFAS 123, the Company continues to
account for such transactions under Accounting Principal Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and has disclosed in a note
to the financial statements pro forma net loss and earnings per share as if the
Company had applied the fair value method of accounting for its stock-based
awards. Under APB 25, no expense is generally recognized at the time of option
grant because the exercise price of the Company's employee stock option equals
or exceeds the fair market value of the underlying common stock on the date of
grant.
Comprehensive Income (Loss) - Effective January 1, 1998, the Company adopted
SFAS No. 130, Reporting Comprehensive Income, which establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements and applies to all enterprises.
Other comprehensive income or loss shown in the consolidated statements of
stockholders' equity at December 31, 1999, 1998 and 1997 is solely comprised of
unrealized gains or losses on marketable securities. The unrealized gain on
marketable securities during 1997 includes reclassification adjustments of
$324,915 for losses realized in income from the sale of the securities.
Segment Information - Effective January 1, 1998, the Company adopted SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information, which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
operates in one reportable segment as defined by SFAS No. 131.
2. ACQUISITION
In April 1997, the Company, through its wholly owned subsidiary, CP
Pharmaceuticals, Inc., completed its acquisition of Camelot Pharmacal, LLC
("Camelot"), a Missouri limited liability company, focusing on the development
of specialty pharmaceuticals. The purchase price consisted of 600,000 shares of
the Company's Common Stock (valued at $2.75 per share) and the assumption of
certain liabilities in excess of tangible assets acquired of $8,262 (see Note
5). The transaction was treated as a purchase for accounting purposes, and
accordingly, the assets and liabilities assumed have been recorded at their
estimated fair market values at the date of acquisition. Since technological
feasibility of the in-process research and development costs have not yet been
established and the technology had no alternative future use at the acquisition
date, the in-process research and development costs of $1,650,000 were
immediately written-off and included in the results of operations as a
non-recurring charge for the year ended December 31, 1997. Camelot had no
revenue and minimal operating losses for the period ended April 24, 1997 and
therefore pro forma disclosure has not been included.
3. UNEARNED REVENUE
In May 1999, in conjunction with the completion of the Phase I/II
Metered Solution Inhaler ("MSI") albuterol trial, Zambon Group SpA ("Zambon")
provided the Company with a $1.0 million interest-free advance against future
milestone payments. Upon the attainment of certain future milestones, the
Company will recognize this advance as revenue. If the Company does not achieve
these future milestones, the advance must be repaid in quarterly installments of
$250,000 commencing on January 1, 2002. The proceeds from this advance are not
restricted as to their use by the Company (see Note 8).
4. LEASES
The Company leases its office space and certain equipment under
noncancelable operating and capital leases that expire at various dates through
2003. At December 31, 1999, assets held under capital leases consisting of
office equipment were $31,090, net of accumulated amortization of $18,141.
Future minimum lease payments under capital and operating leases at December 31,
1999 are as follows:
12
Capital Operating
Leases Leases
------ ------
2000 ...................................................... $ 9,375 $ 182,411
2001 ...................................................... 9,375 135,313
2002 ...................................................... 9,375 80,412
2003 ...................................................... 774 1,024
-------------------------------
Total minimum lease payments .............................. 28,899 $ 399,160
=========
Less amount representing interest ......................... (5,692)
---------
Present value of net
minimum lease payments
23,207
Less current maturities of capital
lease obligations
(6,435)
=========
Capital lease obligations ................................. $ 16,772
=========
Rent expense relating to operating leases for the years ended
December 31, 1999, 1998 and 1997 was $174,332, $143,126, and $190,584,
respectively.
5. STOCKHOLDERS' EQUITY
Preferred Stock
In February 1997, 35,700 shares of Series A Cumulative Convertible
Preferred Stock ("Series A Preferred Stock") were issued pursuant to a private
placement. Holders of Series A Preferred Stock had the right, exercisable
commencing May 29, 1997 and ending February 28, 1999, to convert shares of
Series A Preferred Stock into shares of Common Stock. The number of shares of
Common Stock issuable upon conversion of Series A Preferred Stock was determined
by reference to the lesser of (i) $3.31875 and (ii) 85% of the "current market
price" per share of Common Stock, where "current market price" means, with
certain exceptions, the average of the closing bid prices of Common Stock for
the 10 consecutive trading days ending the last trading day before the
applicable conversion date. Each share of Series A Preferred Stock earned a
cumulative dividend payable in shares of Common Stock at a rate per share equal
to 7.0% of the original $100 purchase price per share of the Series A Preferred
Stock payable at the time of conversion. As of December 31, 1997, 25,000 shares
of Series A Preferred Stock were outstanding. Between August 26, 1997 and
December 31, 1997, 10,700 shares of Series A Preferred Stock, plus related
accrued dividends, were converted into 44,769 shares of Common Stock. In 1998,
the remaining balance of the Company's outstanding Series A Preferred Stock,
plus related dividends payable, were converted to Common Stock, resulting in the
issuance of 4,075,797 shares of Common Stock.
In April 1998, the Company issued 1,250 shares of its Series B
Cumulative Convertible Redeemable Preferred Stock ("Series B Preferred Stock")
in a private placement for an aggregate purchase price of $1,250,000. In
addition, the holder of Series B Preferred Stock was issued warrants to acquire
300,000 shares of Common Stock at any time up until and including April 15, 2001
for a price of $1.00 per share. Each share of Series B Preferred Stock earned a
cumulative dividend payable at a rate per share equal to 6.0% per annum. On July
31, 1998, the Company redeemed all of the Series B Preferred Stock and accrued
dividends for cash.
In June 1998, the Company issued 4,571,428 shares of Common Stock
and 11,500 shares of Series C Cumulative Convertible Preferred Stock ("Series C
Preferred Stock"), convertible into shares of Common Stock of the Company or of
its wholly owned subsidiary, SPD, for $17.5 million pursuant to a definitive
agreement with an affiliate of Elan Corporation, plc ("Elan"), Elan
International Services, Ltd. ("Elan International"). The Series C Preferred
Stock earns cumulative dividends payable in shares of Series C Preferred Stock
at an annual rate of 7.0% on the stated value of each outstanding share of
Series C Preferred Stock on the dividend date. Elan International also received
a warrant to purchase 990,000 shares of Common Stock of the Company exercisable
from December 31, 1998 through January 30, 2005 at an exercise price of $2.00
per share. Under the terms of the agreement, the Company, through SPD, acquired
certain pulmonary delivery technologies for the sum of $12.5 million in cash
(see Note 8). All of the outstanding Common Stock of SPD is pledged to Elan
during the term of the agreement. Subject to certain conditions and the making
of certain payments to the Company, Elan International has the option to acquire
all or a portion of the outstanding stock of SPD. The net book value of SPD is
$0.2 million as of December 31, 1999. The Company issued stock dividends
totaling 866 and 414 shares of Series C Preferred Stock and cash dividends for
fractional shares of $2,278 and $1,112 for the years ended December 31, 1999 and
1998, respectively.
13
In October 1999, pursuant to a definitive agreement, the Company and
Elan International formed a new joint venture to develop certain respiratory
steroid products. Under the terms of the agreement, the Company issued to Elan
International 12,015 shares of Series D Cumulative Convertible Exchangeable
Preferred Stock ("Series D Preferred Stock"), convertible into shares of Common
Stock of the Company at $4.86 per Common Share or exchangeable for an additional
30.1% ownership interest in the new joint venture, for $12.015 million. The
Series D Preferred Stock earns cumulative dividends payable in shares of Series
D Preferred Stock at an annual rate of 7.0% on the stated value of each
outstanding share of Series D Preferred Stock on the dividend date. Elan
International has also committed to purchase, on a drawdown basis, up to an
additional $4.0 million of the Company's Series E Cumulative Convertible
Preferred Stock ("Series E Preferred Stock"), convertible into shares of Common
Stock of the Company at $3.89 per Common Share. The Series E Preferred Stock
will be utilized by the Company to fund its portion of the joint venture's
operating and development costs. The Series E Preferred Stock earns cumulative
dividends payable in shares of Series E Preferred Stock at an annual rate of
9.0% on the stated value of each outstanding share of Series E Preferred Stock
on the dividend date. In addition to the above, the Company issued to Elan
International 5,000 shares of Series F Convertible Non-Exchangeable Preferred
Stock ("Series F Preferred Stock"), convertible into shares of Common Stock of
the Company at $3.40 per Common Share, for $5.0 million. The proceeds of the
Series F Preferred Stock will be utilized by Sheffield for its own operating
purposes. The holders of the Series F Preferred Stock may be entitled to receive
dividends on a pari passu basis with the holders of Common Stock. As part of the
transaction, Elan International also received a warrant to purchase 150,000
shares of Common Stock of the Company at an exercise price of $6.00 per share
(see Note 8).
Common Stock
In April 1997, Camelot merged with and into CP Pharmaceuticals,
Inc., a newly formed wholly owned subsidiary of the Company. The principals of
Camelot at the time of the merger were Loren G. Peterson, Carl F. Siekmann and
David A. Byron. Pursuant to the related agreement and plan of merger, Messrs.
Peterson, Siekmann and Byron each received 200,000 shares of Common Stock.
Following the consummation of the merger, each of Messrs. Peterson, Siekmann and
Byron entered into employment agreements with Sheffield and received stock
options providing each individual the right to purchase up to 400,000 shares of
Common Stock (see Note 2).
During 1998, the Company entered into an agreement with Zambon for a
sublicense to the Company's proprietary MSI drug delivery system (see Note 8).
Pursuant to an option agreement dated April 15, 1998, the Company issued 800,000
shares of Common Stock for $650,000 in cash. On June 15, 1998, the Company
entered into the definitive agreement, resulting in the issuance of an
additional 1,846,153 shares of Common Stock for $1.5 million.
In June 1999, the stockholders of Sheffield approved an amendment to
the Company's Certificate of Incorporation to increase the number of shares of
Common Stock that the Company is authorized to issue from 50 million shares to
60 million shares.
Convertible Subordinated Debentures
In September 1997, the Company consummated a private placement of
$1.75 million principal amount of its 6.0% Convertible Subordinated Debentures
("Debentures") due September 22, 2000. In addition, the Company granted the
holder of the Debenture warrants to purchase 140,000 shares of the Company's
Common Stock at $2.80 per share. A value of $115,500 was assigned to these
warrants. The Debentures are convertible at the option of the holder from
December 22, 1997 until maturity, subject to certain limitations, into a number
of shares of Common Stock equal to (i) the principal amount of the Debenture
being so converted divided by (ii) 75% of the market price of the Common Stock
as of the date of conversion. For purposes of any conversion of Debentures,
"market price" generally means the average of the closing prices of the Common
Stock for the five trading day period proceeding the applicable conversion date.
The Debentures also earn interest at a rate of 6.0% per annum that is payable by
the Company, at the option of the holder and subject to certain conditions, in
shares of its Common Stock at a conversion rate generally equal to the average
of the closing prices of the Common Stock for the ten trading days preceding the
applicable interest payment date. During 1998, the Debentures were converted to
Common Stock resulting in the issuance of 2,925,941 shares of Common Stock.
14
6. STOCK OPTIONS AND WARRANTS
Stock Option Plan - The 1993 Stock Option Plan (the "Option Plan") was adopted
by the Board of Directors in August 1992 and approved by the stockholders at the
annual meeting in December 1993. An amendment to the Option Plan increasing the
number of shares of Common Stock available for issuance thereunder from 3
million shares to 4 million shares received stockholder approval on July 15,
1998. The Option Plan permits the grant to employees and officers of the Company
of both incentive stock options and non-statutory stock options. The Option Plan
is administered by the Board of Directors or a committee of the Board, which
determines the persons to whom options will be granted and the terms thereof,
including the exercise price, the number of shares subject to each option, and
the exercisability of each option. The exercise price of all options for Common
Stock granted under the Option Plan must be at least equal to the fair market
value on the date of grant in the case of incentive stock options, and 85% of
the fair market value on the date of grant in the case of non-statutory stock
options. Options generally expire five to ten years from the date of grant and
vest either over time or upon the Company's Common Stock attaining a set market
price for a certain number of trading days. As of December 31, 1999, options
available for grant under the Option Plan are 1,528,600.
Restricted Stock Plan - The 1993 Restricted Stock Plan (the "Restricted Plan")
was adopted by the Board of Directors in August 1992 and approved by the
stockholders at the annual meeting in December 1993. The Restricted Plan
authorized the grant of a maximum of 150,000 shares of Common Stock to key
employees, consultants, researchers and members of the Company's Scientific
Advisory Board. The Restricted Plan is administered by the Board of Directors or
a committee of the Board, which determines the person to whom shares will be
granted and the terms of such share grants. As of December 31, 1999, no shares
have been granted under the Restricted Plan.
Directors Stock Option Plan - The 1996 Directors Stock Option Plan (the
"Directors Plan") was adopted by the Board of Directors and approved by the
stockholders on June 20, 1996. Under the Directors Plan, the maximum aggregate
number of shares which may be optioned and sold is 500,000 shares of Common
Stock. The Directors Plan initially granted each eligible director 15,000 stock
options. To the extent that shares remain available, any new directors shall
receive the grant of an option to purchase 25,000 shares. To the extent that
shares remain available under the Directors Plan, on January 1 of each year
commencing January 1, 1997, each eligible director shall be granted an option to
purchase 15,000 shares. The exercise price of all options granted under the
Directors Plan shall be the fair market value at the date of the grant. Options
generally expire five years from the date of grant. As of December 31, 1999,
there are 260,000 options available for grant under the Directors Plan.
SFAS No. 123 requires pro forma information regarding net income and
earnings per share as if the Company has accounted for its stock options granted
subsequent to December 31, 1994, under the fair value method of SFAS No. 123.
The fair value of these stock options is estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1999, 1998, and 1997, risk-free interest rate ranging from 4.39%
to 6.23%; expected volatility ranging from 0.526 and 0.694; expected option life
of one to ten years from vesting and an expected dividend yield of 0.0%.
For purposes of pro forma disclosures, the estimated fair value of
the stock options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
1999 1998 1997
---- ---- ----
Pro forma net loss............................ $17,807,124 $18,983,921 $9,500,810
Pro forma basic net loss per share of
common stock.................................. $.65 $.87 $.79
15
Transactions involving stock options and warrants are summarized as follows:
Year Ended December 31,
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Common Stock Exercise Common Stock Exercise Common Stock Exercise
Options/Warrants Price Options/Warrants Price Options/Warrants Price
---------------- ----- ---------------- ----- ---------------- -----
Outstanding, January 1 ............ 7,910,836 $ 2.55 4,781,290 $ 3.65 3,033,755 $ 4.49
Granted ......... 555,040 2.97 3,162,910 1.81 3,683,039 3.92
Expired ......... 315,422 3.92 283,504 4.48 327,500 3.18
Exercised ....... 367,500 1.07 -- -- -- --
Canceled ........ -- -- 180,500 5.64 1,608,004 4.11
Revalued(1) ..... -- -- 430,640 -- -- --
--------- -------- --------- -------- --------- --------
Outstanding, December 31 .......... 7,782,954 $ 2.59 7,910,836 $ 2.55 4,781,290 $ 3.65
========= ======== ========= ======== ========= ========
Exercisable at end of year ........ 6,358,554 $ 2.51 5,028,336 $ 2.71 2,900,290 $ 3.88
========= ======== ========= ======== ========= ========
(1) Certain warrants issued by the Company during 1995 contain
antidilutive provisions. These warrants total 615,325, and have exercise prices
ranging from $4.00 to $5.00 per share. Pursuant to the antidilutive provisions
of the warrants, the common shares to be purchased under the warrants were
increased to 1,045,965 and the related exercise prices were adjusted to a range
of $2.44 to $2.81 per share.
During the period January 1, 1997 through December 31, 1999, the exercise prices
and weighted average fair value of options and warrants granted by the Company
were as follows:
Number of Options/ Weighted Average
Year Warrants Exercise Price Fair Value
---- -------- -------------- ----------
1997 3,683,039 $1.50 - 6.00 . $ 4.05
1998 3,162,910 $1.00 - 3.69 . $ 0.99
1999 555,040 $0.82 - 6.00 . $ 1.34
At December 31, 1999, outstanding warrants to purchase the Company's Common
Stock are summarized as follows:
Range of Outstanding Warrants Weighted Average Remaining
Exercise Prices at December 31, 1999 Contractual Life (Years) Weighted Average Exercise Price
--------------- -------------------- ------------------------ -------------------------------
$0.73 - $2.00 1,737,410 3.98 $1.69
$2.25 - $3.00 1,520,605 .86 $2.58
$3.25 - $6.50 621,539 3.24 $4.16
---------
3,879,554 2.64 $2.43
At December 31, 1999, outstanding options to purchase the Company's
Common Stock are summarized as follows:
Range of Outstanding Options Weighted Average Remaining
Exercise Prices at December 31, 1999 Contractual Life (Years) Weighted Average Exercise Price
--------------- -------------------- --------------------------- -------------------------------
$1.24 - $2.75 2,867,000 5.63 $2.34
$3.00 - $4.00 686,400 3.68 $3.51
$4.06 - $6.25 350,000 1.81 $4.59
---------
3,903,400 4.94 $2.75
=========
7. CONVERTIBLE PROMISSORY NOTE
As part of the 1998 agreement with Elan, Elan agreed to make
available to the Company a Convertible Promissory Note ("Note") that provides
the Company the right to borrow up to $2.0 million, subject to satisfying
certain conditions. No more than $500,000 may be drawn under the Note in any
calendar quarter and at least one-half of the proceeds must be used to fund
SPD's development activities. The principal outstanding under the Note bears
interest at the prime rate plus 1% and, if not previously converted, matures on
June 30, 2005. Prior to repayment, Elan has the right to convert all principal
and accrued interest into shares of the Company's Common Stock at a conversion
price of $1.75 per share. As of December 31, 1999, the outstanding principal
balance of the Note was $2.0 million.
16
8. RESEARCH AND DEVELOPMENT AGREEMENTS
Pulmonary Delivery Technologies
In March 1997, the Company entered into exclusive supply and license
agreements for the worldwide rights to the MSI system with Siemens AG
("Siemens"). The agreements call for Siemens to be the exclusive supplier of the
MSI drug delivery system. The Company paid licensing fees of $1.1 million in
both April 1997 and 1998, to Siemens pursuant to these agreements.
On June 15, 1998, the Company entered into an agreement with Zambon
for a sublicense to the Company's MSI system. Under this transaction, Zambon
received an exclusive world-wide marketing and development sublicense for
respiratory products to be delivered by the MSI system including four drugs that
had been under development by the Company. The Company maintained certain
co-promotion rights in the U.S. for respiratory drugs as well as the worldwide
marketing and development rights for all applications of the MSI delivery system
outside the respiratory products. The Company was paid an up-front fee in the
form of an equity investment and will receive milestone payments upon marketing
approval for each of the four products and royalties upon commercialization (see
Note 3).
On June 30, 1998, the Company issued certain equity securities
pursuant to an agreement with Elan (see Note 5). Under the terms of the
agreement, the Company, through its wholly owned subsidiary, SPD, acquired
certain pulmonary delivery technologies from Elan for $12.5 million in cash. On
July 15, 1998, SPD acquired from Aeroquip-Vickers, Inc. a new generation metered
dose inhaler system called the Aerosol Drug Delivery System ("ADDS") for
$825,000. The payments for these technologies were expensed during 1998 as
acquired R&D in-process technology since the technologies acquired had not
demonstrated technological feasibility and had no alternative future uses. SPD
holds the rights to all systemic disease applications of the ADDS technology
while Sheffield retains the rights to develop the respiratory disease
applications of ADDS. The Company is responsible for the development of these
technologies. Pursuant to its agreement with Elan, at December 31, 1999, the
Company was committed to fund $98,000 of additional costs related to SPD's
systemic development program.
On October 18, 1999, the Company issued certain equity securities
pursuant to an agreement with Elan (see Note 5). Under the terms of the
agreement, the Company, through its majority owned subsidiary, RSD, licensed
certain pulmonary NanoCrystal(TM) technology from Elan for $15.0 million in
cash. This payment was expensed as acquired R&D in-process technology as the
license agreement restricts the Company's use of the NanoCrystal technology to
certain respiratory steroid products that are currently research and
development. The subsidiary is responsible for the development of certain
respiratory steroid products. Pursuant to its agreement with Elan, at December
31, 1999, the Company was committed to fund $4.0 million to the subsidiary for
the development of these products.
Early Stage Technologies
The Company also is party to a number of license and research
agreements, primarily with universities, hospitals, and research facilities,
relating to early stage medical research projects that focus on the development
of new compounds for the treatment of cancer, acquired immune deficiency
syndrome and other diseases. As part of the Company's focus on later stage
opportunities, the Company is seeking to out-license these projects. There can
be no assurance that the Company will receive license fees or other payments
related to these technologies. The Company believes these early stage technology
license and research agreements will have no material impact on the financial
position of the Company. For the year ended December 31, 1999, the Company
funded approximately $2,000 related to these projects.
On November 20, 1997, the Company entered into a sublicense
agreement with Lorus Therapeutics, Inc. (formerly Imutec Pharma Inc.) ("Lorus").
The agreement licenses rights to a series of clotrimazole-related compounds for
the treatment of cancer, Kaposi's sarcoma and actinic keratosis to a newly
formed company, NuChem Pharmaceuticals, Inc. ("NuChem"). In exchange, Lorus
agreed to manage and fund the remaining development program. The Company
received $500,000 in cash upon signing the agreement, which was recognized as
revenue during the year ended December 31, 1997, and received 583,188 shares of
Lorus stock valued at $350,000 which was recognized as revenue during the year
ended December 31, 1998. In addition, the Company is entitled to receive
additional payments upon the completion of certain milestones in the development
of these compounds and retains a 20 percent ownership interest in NuChem.
17
9. RELATED PARTY TRANSACTIONS
During 1998, three executive officers provided funds for use by the
Company comprised of short-term notes having a 7.0% annual interest rate, unpaid
salaries and unreimbursed expenses. The largest amount outstanding to the
executive officers during 1998 was $241,740. All amounts under the short-term
notes were repaid in 1998.
During 1998, certain stockholders provided funds for use by the
Company comprised of short-term notes totaling $150,000, bearing interest at the
rate of 7.0% per annum. On September 8, 1998, the Company repaid principal of
$50,000 plus accrued interest. The remaining balance of the short-term notes and
accrued interest was repaid on May 12, 1999.
10. INCOME TAXES
At December 31, 1999, the Company had available net operating loss
carryforwards for regular federal income tax purposes of approximately $39.4
million, of which $27.5 million will expire between 2007 and 2012, and $11.9
million will expire between 2018 and 2019, if not utilized. Utilization of the
Company's net operating loss carryforwards may be subject to an annual
limitation as a result of the "changes in ownership" provisions of the Internal
Revenue Code Section 382. Future changes in ownership may limit net operating
loss carryforwards generated in the year of change.
Deferred income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred tax asset at December 31, 1999 and
1998, which are considered noncurrent, are as follows:
Deferred Tax Assets 1999 1998
---- ----
Net operating loss carryforwards ................. $ 14,957,000 $ 12,600,000
Costs capitalized for tax purposes ............... 22,027,000 14,391,000
Deferred tax asset valuation allowance ........... (36,984,000) (26,991,000)
------------ ------------
Net deferred tax asset ........................... $ -- $ --
============ ============
The Company has recorded a valuation allowance for the entire
deferred tax asset due to the uncertainty of its realization. The net change in
the total valuation allowance for the year ended December 31, 1999 was an
increase of $9,993,000. As a result of differences between book and tax
requirements for writing off intangible assets acquired, such as in-process R &
D technology, the Company has capitalized the in-process R & D technology for
tax purposes. The deferred tax asset will be amortized into taxable income over
a useful life of 15 years.
18
Report of Independent Auditors
The Board of Directors and Stockholders
Sheffield Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Sheffield
Pharmaceuticals, Inc. and subsidiaries (a development stage enterprise) as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999 and for the period October 17, 1986
(inception) through December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sheffield
Pharmaceuticals, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 and the period from October
17, 1986 (inception) through December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 1, 2000