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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Fiscal Year Ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period from to
Commission File 000-26929
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ADOLOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1429198
(State of other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
620 Pennsylvania Drive, Exton, 19341
Pennsylvania (Zip Code)
(Address of principal executive
offices)
(484) 595-1500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
(Title of class) (Name of each exchange on which
Common Stock, $0.0001 par value registered)
NASDAQ National Market
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of 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 approximate aggregate market value of Common Stock held by non-
affiliates of the Company was $333,966,835 as of March 25, 2002. (For purposes
of determining this amount only, the Company has defined affiliates as
including (a) the executive officers named in Part I of this 10-K report, (b)
all directors of the Company and (c) each stockholder that has informed the
Company by March 25, 2002 that it is the beneficial owner of 10% or more of
the outstanding common stock of the Company.)
The number of shares of the Company's Common Stock outstanding as of March
25, 2002 was 31,181,735 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission in
connection with the Company's Annual Meeting of Stockholders for the fiscal
year ended December 31, 2001 are incorporated by reference into Part III of
this Report.
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ADOLOR CORPORATION
FORM 10-K
December 31, 2001
TABLE OF CONTENTS
Item Page No.
---- --------
PART I
1. Business...................................................... 2
2. Properties.................................................... 23
3. Legal Proceedings............................................. 23
4. Submission of Matters to a Vote of Security Holders........... 23
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 24
6. Selected Financial Data....................................... 24
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 26
7A. Quantitative and Qualitative Disclosures About Market Risk.... 32
8. Financial Statements and Supplementary Data................... 32
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 32
PART III
10. Directors and Executive Officers of the Registrant............ 33
11. Executive Compensation........................................ 33
12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 33
13. Certain Relationships and Related Transactions................ 33
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................... 34
15. Signatures.................................................... 35
16. Exhibit Index................................................. 36
17. Index to Consolidated Financial Statements.................... F-1
i
This Annual Report on Form 10-K includes 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. We have based these forward-
looking statements on our current expectations and projections about future
events. These forward-looking statements include statements about the
following:
. our product development efforts and the implications of their
preliminary results;
. the commercialization of our products, including the development of a
sales and marketing force;
. our intentions regarding the establishment of collaborations;
. anticipated operating losses and capital expenditures;
. anticipated regulatory filing dates and clinical trial initiation dates
for our product candidates;
. the status of regulatory approval for our product candidates; and
. our intention to rely on third parties for manufacturing.
In some cases, you can identify forward-looking statements by terminology
such as "may", "will", "should", "could", "would", "expect", "plan",
"anticipate", "believe", "estimate", "continue", or the negative of such terms
or other similar expressions. Factors that might cause or contribute to
discrepancies include, but are not limited to, those discussed elsewhere in
this Report and the risks discussed in our other Securities and Exchange
Commission filings, including our Registration Statement on Form S-1 declared
effective on November 13, 2000 by the Securities and Exchange Commission, or
Commission, (File No. 333-96333) and our Registration Statement on Form S-3
declared effective on December 7, 2001 by the Commission (File No. 333-64298).
Market data and forecasts used in this Report, including, for example,
estimates of the size and growth rates of the pain management market, have
been obtained from independent industry sources. We have not independently
verified the data obtained from these sources and we cannot assure you of the
accuracy or completeness of the data. Forecasts and other forward-looking
information obtained from these sources are subject to the same qualifications
and the additional uncertainties accompanying any estimates of future market
size.
The following discussion should be read in conjunction with our audited
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Report.
1
PART I
ITEM 1. BUSINESS
Our Company
We are a therapeutic-based biopharmaceutical company. We discover, develop
and plan to commercialize proprietary pharmaceutical products for the
treatment of pain and the side effects that are caused by current pain
treatments. We have a portfolio of small molecule product candidates that are
in various stages of development ranging from preclinical studies to Phase I
through Phase III clinical trials. Our lead product candidate, alvimopan,
which is also known as ADL 8-2698, is designed to selectively block the
effects of narcotic analgesics on the gastrointestinal tract. In Phase II
clinical trials, alvimopan reduced postoperative bowel dysfunction, or ileus,
thereby speeding the recovery of normal bowel function following abdominal
surgery. In separate Phase II clinical trials, alvimopan has been shown to
prevent or reverse symptoms of opioid bowel dysfunction, including
constipation, bloating and cramping, in patients receiving chronic narcotic
analgesics. Our analgesic product candidates are designed to treat moderate-
to-severe pain and itch. We are planning to develop an analgesic product
candidate that is a combination of alvimopan and a narcotic that is intended
to reduce the most prevalent and severe side effects of morphine and other
narcotic analgesics, such as constipation, nausea and vomiting. Since most of
our product candidates target peripheral opioid receptors (those outside of
the central nervous system), they should not exhibit the dose-limiting central
nervous system side effects of existing narcotic analgesics. We believe our
product candidates and drug discovery and development expertise have potential
applicability to a broad range of pain and itch conditions. For the twelve
month period ended December 31, 2001, combined prescription sales in the pain
management market were $14.0 billion in the United States, a 19% increase
compared to the same period in 2000, and are estimated to be in excess of $22
billion worldwide.
Currently marketed analgesics have well-defined adverse side effects that
limit their ability to meet the needs of physicians and their patients.
Moreover, an increased emphasis on treating pain has highlighted the need for
improved products. We believe our product candidates address significant unmet
needs in the pain management market. In addition, we believe we may create new
pain management markets with some of our product candidates because their
mechanisms of action may provide significant pain relief or relief of narcotic
analgesic side effects for patients for whom existing analgesics or other
symptom management products have limited effectiveness.
Our drug discovery capabilities and pipeline of product candidates
originate through a combination of internal research and development
activities, in-licensed technologies and in-licensed product candidates. Our
initial drug discovery and development activities focus on three aspects of
pain management:
. reversal or prevention of gastrointestinal effects of narcotic
analgesics administered during or following surgical procedures or for
the treatment of pain;
. novel mu and kappa opioid receptor based analgesics that act on
peripheral opioid receptors and not in the central nervous system; and
. narcotic analgesic products with significantly reduced side effects.
Our lead compound, alvimopan, is being studied in three pivotal Phase III
clinical trials for the management of postoperative ileus that frequently
follows abdominal surgery. We have completed three Phase II clinical trials
with alvimopan for the management of postoperative ileus. Alvimopan is also
being studied in one pivotal Phase III clinical trial for the prevention or
reversal of the severe constipating effects associated with opioid bowel
dysfunction. We completed multiple Phase I and Phase II clinical trials that
indicate that alvimopan may be effective in this application. Based on our
initial clinical results, we have conducted an exploratory Phase I clinical
trial for alvimopan co-administered with morphine, with a goal of producing a
combination narcotic analgesic product that treats moderate-to-severe pain
without inducing nausea or other adverse gastrointestinal effects associated
with current narcotic analgesic therapies.
2
We have additional compounds in clinical development that target peripheral
opioid analgesia receptors. Our peripheral analgesic compound, ADL 10-0101, is
being studied in clinical trials for the treatment of visceral pain. Following
positive results in two proof-of-concept clinical trials in ADL 10-0101, we
commenced three additional proof-of-concept clinical trials in visceral pain.
These recently completed trials did not demonstrate adequate pain relief in
patients. We plan to establish a maximum tolerated dose for ADL 10-0101
through additional Phase I studies and subsequently we will determine further
development plans.
We have completed Phase II clinical trials with a prototype eye drop
formulation of ADL 2-1294 for the treatment of pain from corneal abrasion or
ophthalmic surgery. Santen Pharmaceutical Co., Ltd. is developing topical ADL
2-1294 under a worldwide license from us (excluding South Korea and North
Korea) for the treatment of ophthalmic pain. We have also completed two Phase
I clinical trials with prototype topical dermal formulations of ADL 2-1294
where it demonstrated positive results in the treatment of dermal burn pain.
We received notification in December, 2001, that the Consumer Healthcare
Division of GlaxoSmithKline, plc, our former development partner for the
commercialization of the dermal product candidate, ADL 2-1294, was unable to
obtain a significant difference between the drug and placebo groups in a Phase
II proof-of-concept clinical study in dermal itch. As a consequence, the
rights to dermal ADL 2-1294 products have reverted to us. We may seek another
partner for ADL 2-1294 for dermal pain and itch indications.
Finally, we recently initiated Phase I safety studies with a third product
candidate, ADL 10-0116, an orally-active peripheral analgesic which is
designed for use in inflammatory pain conditions.
We plan to build a sales and marketing organization to sell our products to
hospitals, surgeons, oncologists and pain management specialists. We intend to
enter into strategic marketing or co-promotion agreements with, and grant
additional licenses to, pharmaceutical companies to gain access to broader
market segments, including general practitioners and international markets.
Overview Of Pain Management Industry
Over 100 million patients experience acute or chronic pain annually in the
United States caused by headache, muscle strains and sprains, arthritis,
trauma, cancer, surgery and back injuries, among others. Because pain impairs
one's ability to carry out a productive life, pain in general and chronic pain
in particular are serious health and economic problems.
There has been an increasing focus on pain management in the healthcare
industry. Published guidelines of the World Health Organization and the United
States Agency for Health Care Policy and Research encourage the use of
stronger analgesic therapy for treating cancer pain. In 1991, the American
Board of Medical Specialties designated the treatment of pain as a recognized
specialty for physicians. The number of physicians receiving specialty
training in pain management increased from 446 in 1993, the first year in
which certifications were granted, to a total of over 3,900 in 2001. In
addition, since 1999, all United States hospitals and health care facilities
have been required to assess the adequacy of pain treatment for each patient
on a daily basis to achieve accreditation by the Joint Commission on
Accreditation of Healthcare Organizations.
Types of Pain. Pain is commonly classified into three broad categories
based upon its presumed cause and sensory characteristics: somatic pain,
visceral pain and neuropathic pain. Somatic pain can be produced by injuries
to skin, muscle, bones or joints and is typically characterized as a sharp
pain that is localized to an area of injury. Visceral pain can be produced by
distention, injury or inflammation of internal organs and is typically
characterized by diffuse, poorly localized, dull and vague pain. Neuropathic
pain can be produced by injuries or inflammation of nerves and is typically
characterized by diffuse, burning pain. Patients may simultaneously experience
more than one type of pain.
Pain Management Market. Prescription pain management sales for the twelve
months ended December 31, 2001 were $14.0 billion in the United States. Growth
in the pain management market has been significant in recent years and is
expected to continue. The prescription pain management market grew 19%
compared to the same period in 2000. This growth rate appears to be primarily
attributable to COX-2 inhibitors for mild-to-moderate pain and narcotic
analgesics to treat moderate-to-severe pain.
3
Sales of prescription pain management products in the United States are
shown in the following table:
U.S. Sales
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(For the twelve
months ended
December 31)
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Market Segment 1999 2000 2001
-------------- ---- ----- -----
(In Billions)
Moderate-to-severe pain (Narcotic analgesics)............. $3.3 $ 4.0 $ 4.9
==== ===== =====
Mild-to-moderate pain (NSAIDs, COX-2 inhibitors,
Acetaminophen)........................................... $4.2 $ 5.7 $ 6.7
==== ===== =====
Topical pain, itch and special purpose analgesics
(Corticosteroids, antihistamines)........................ $2.0 $ 2.1 $ 2.4
==== ===== =====
Total U.S. Pain Management Market....................... $9.4 $11.8 $14.0
==== ===== =====
The pain management market for drugs used to treat patients with moderate-
to-severe and mild-to-moderate pain is growing due to the following factors:
. increasing recognition of the need for effective pain management and its
therapeutic benefits;
. rapid market acceptance of new products with novel mechanisms of action;
. markets that permit cost-effective selling and marketing; and
. growth in the aged population with an associated increased incidence of
pain.
Current Therapies to Counteract Pain. Narcotic analgesics such as morphine
are considered to be the most effective analgesics and are widely used to
treat patients with moderate-to-severe pain. These narcotic analgesics produce
pain relief by stimulating opioid receptors in the central nervous system,
which consists of the brain and spinal cord. Advances in narcotic analgesics
during the past 20 years have primarily been in improved methods for the
delivery of existing narcotic analgesics rather than the discovery of new
drugs. Patients who suffer severe pain may simultaneously receive more than
one formulation of narcotic analgesics and may receive other classes of
analgesic medications.
Non-narcotic analgesics, including acetaminophen and non-steroidal anti-
inflammatory drugs, or NSAIDs, such as ibuprofen, are widely used to treat
mild-to-moderate pain. NSAIDs are thought to produce analgesia by inhibiting
activity of cyclooxygenase enzymes (COX-l and COX-2), thereby reducing
inflammation at the site of injury or disease. Some NSAIDs require a
prescription and others are available as over-the-counter medications. Recent
advances in NSAID analgesia have focused primarily on reducing adverse
gastrointestinal (GI) side effects.
Deficiencies of Current Therapies to Counteract Pain. Although morphine and
other narcotic analgesics are considered to be the most effective analgesics,
many patients who use them do not obtain complete pain relief, and they are
ineffective for other patients. Narcotic analgesics also produce a wide range
of adverse side effects that may include opioid bowel dysfunction, sedation,
nausea, vomiting, decreased respiratory function, addiction and death. In
addition, due to their potential for abuse, narcotic analgesics are strictly
regulated by the United States Drug Enforcement Agency, or DEA, under the
Controlled Substances Act, which imposes strict registration, record-keeping
and reporting requirements, security controls and restrictions on narcotic
analgesic prescriptions.
Although NSAIDs are generally effective for mild or moderate pain, many
patients are unable to tolerate NSAIDs because of GI side effects. Traditional
NSAIDs can produce significant adverse effects on the stomach and GI tract,
including GI ulcers and bleeding. In addition, prolonged use can cause liver
and kidney failure. COX-2 inhibitors appear to produce fewer GI ulcers than
NSAIDs but may be less effective for acute pain. For most patients with
moderate-to-severe pain, NSAIDs and COX-2 inhibitors do not produce complete
pain relief.
4
Background On Postoperative Ileus
Postoperative ileus is a form of temporary bowel dysfunction that regularly
follows abdominal surgery and certain other surgeries. Postoperative ileus is
characterized by abdominal distention, lack of bowel sounds and lack of
passage of flatus and stool. Other symptoms include nausea, vomiting, bloating
and stomach cramps. These symptoms may prevent drinking or eating, prolong
recovery from surgery, and extend the average length of stay in hospitals.
Clinical trials indicate that the use of narcotic analgesics to treat
postoperative pain delays recovery of normal bowel function. Since virtually
all patients receive morphine or other narcotic analgesics for pain relief
after major surgery, current postoperative pain treatment may actually slow
recovery of normal bowel function, delay time until patients can drink or eat,
delay hospital discharge and therefore increase the cost of medical care.
Currently there are no United States Food and Drug Administration ("FDA")
approved treatments for postoperative ileus. Nearly all of the patients having
open abdominal surgery will experience postoperative ileus, but other surgical
procedures also produce postoperative ileus. Based on our estimates, more than
5 million surgeries of all types result in some degree of postoperative ileus
in the U.S. We believe that a portion of these patients will comprise the
addressable market for an alvimopan postoperative ileus product.
Background On Opioid Analgesia
Pain Transmission Signals. When tissues such as the skin, muscles and
joints become inflamed or are injured, pain receptors in those tissues are
activated, and electrical pain signals are transmitted from the injured
tissues through nerve fibers into the spinal cord. Within the spinal cord, the
electrical pain signals are received by a second set of nerve fibers that
continue the transmission of the signal up the spinal cord and into the brain.
Within the brain, additional nerve fibers transmit the electrical signals to
the "pain centers" of the brain where these signals are perceived as pain.
Pain receptors are also present in internal, or visceral, organs such as the
intestines, uterus, cervix and bladder. These pain receptors also send pain
signals when the organs are inflamed or distended.
Opioid Receptors Block Pain Transmission Signals. Opioid receptors located
on the surface of nerves that transmit pain signals, block transmission of
pain when activated by drugs specific for those receptors. There are three
types of opioid receptors, mu, kappa and delta, each of which produces
analgesia. All marketed narcotic analgesic drugs interact with mu opioid
receptors in the brain and spinal cord. When these central nervous system
opioid receptors are activated with narcotic analgesics such as morphine, the
perception of pain is reduced. However, activating these opioid receptors in
the brain with morphine-like narcotic analgesics often results in serious side
effects such as sedation, decreased respiratory function and addiction.
Because of the potential to cause addiction, drugs that are able to activate
mu opioid receptors in the brain (morphine-like narcotic analgesics) are
regulated, or scheduled, under the Controlled Substances Act.
Compounds that activate kappa opioid receptors in the brain also produce
analgesia and sedation but are far less likely than morphine to decrease
respiratory function. Studies in animals and humans suggest that opioid drugs
that activate the kappa receptors are unlikely to cause addiction. However,
prototype kappa opioid compounds that were designed to work in the brain have
produced adverse central nervous system side effects, including visual and
auditory disturbances, unpleasant mood changes and hallucinations. These side
effects have prevented the development of centrally-acting kappa analgesics
that act on receptors in the central nervous system.
Our Approach To Pain Management
Peripheral Opioid Analgesia. Scientists have shown that mu and kappa opioid
receptors are present on nerve endings in the skin, joints, eyes and visceral
organs. Activation of these opioid receptors, which are outside
5
of the central nervous system, with mu or kappa opioid analgesics reduces pain
related to injury or inflammation by decreasing pain signal transmission from
the peripheral nerves into the spinal cord. Proof-of-concept studies in
animals and humans have shown that small doses of morphine, applied locally to
inflamed tissues such as skin, joints and eyes are effective in reducing pain.
These findings demonstrate the effectiveness of stimulating peripheral mu
opioid receptors to produce pain relief. These findings have created the
opportunity for us to develop an entirely new class of analgesics that
selectively stimulate opioid receptors in inflamed tissues but do not
stimulate opioid receptors in the central nervous system thereby avoiding
central nervous system side effects. These pain medications are called
peripheral analgesics. Our peripheral analgesics demonstrated positive results
in preclinical studies of pain and itch, and our peripheral kappa opioid
analgesics demonstrated positive results in blocking the visceral pain
originating from internal organs such as the bowel and cervix. In our
preclinical studies, our peripheral analgesics have delivered near complete
pain relief without detectable side effects at therapeutic doses. Because our
peripheral analgesics are designed to have limited ability to cross the blood-
brain barrier at therapeutic doses, they are not expected to cause addiction
or other adverse central nervous system side effects. These peripheral
analgesics should not cause sedation, decreased respiratory function or
addiction at therapeutic doses. As a result, we expect that these analgesics
will not be subject to United States Drug Enforcement Agency regulation under
the Controlled Substances Act.
Peripheral Opioid Receptors in the GI Tract. Just as there are opioid
receptors on peripheral nerves that regulate the transmission of pain signals
into the spinal cord, there are also opioid receptors in the GI tract that
regulate bowel functions such as motility and water absorption. Stimulation of
these bowel mu opioid receptors by morphine or other narcotic analgesics
causes constipation associated with opioid bowel dysfunction. Scientists have
shown that blocking these receptors with opioid receptor antagonist drugs
during administration of morphine or other narcotic analgesics prevents or
reverses the effects of opioid bowel dysfunction. However, currently marketed
opioid receptor antagonist drugs also cross the blood-brain barrier and enter
the brain where they can block the primary pain relieving effects of narcotic
analgesics such as morphine. These findings have created the opportunity to
develop a new class of narcotic antagonists which, when taken with narcotic
analgesics, block the side effects of the narcotic analgesics on the GI tract
but do not block the desired analgesic activity of narcotic drugs because the
antagonists do not cross the blood-brain barrier.
Development of Peripherally-Restricted Products. We use our biological,
chemical and analytical technology expertise to create proprietary peripheral
analgesics and narcotic antagonists.
Within our analgesia program, we use computer-assisted chemical design
technology and medicinal chemistry to synthesize compounds that have limited
ability to pass through the blood-brain barrier into the central nervous
system. We then use cloned human mu, kappa and delta opioid receptors to
select the compounds that are effective at very low concentrations and that
are highly specific for one receptor type (usually kappa) over other receptor
types. We conduct preclinical studies to confirm the analgesic activity of the
compounds and to confirm that the compounds have limited ability to pass
through the blood-brain barrier to give central nervous system side effects.
We have demonstrated in a number of preclinical trials of inflammatory and
visceral pain that our peripherally restricted kappa analgesics can produce
the same or better pain relief as narcotic analgesics, such as morphine,
without causing central nervous system side effects. In addition, we have
demonstrated that our peripheral kappa analgesics are active in preclinical
trials of itch. Similarly, we have shown in preclinical and clinical trials
that our narcotic antagonists, including our lead compound, alvimopan, block
the adverse side effects of narcotic analgesics on the GI tract without
blocking analgesia.
Itch sensations are carried by the same nerves that carry pain signals to
the brain, and we have found that many of our peripherally-restricted
analgesics can reduce the perception of itch in preclinical trials. These
compounds may be effective as topical, injectable or oral medications for
relieving itch in a wide variety of diseases including eczema and allergic
dermatitis.
Peripherally-active analgesics may not relieve all types of pain.
Therefore, the development of centrally-active analgesics with reduced side
effects is one of our longer-term goals. We believe that centrally-acting
compounds have the ability to treat nerve damage pain and some cancer pain.
6
Our Strategy
Our goal is to become a leading discoverer, developer and marketer of
proprietary pain management pharmaceuticals. We plan to pursue this objective
by implementing the following strategies:
Pioneering the Use of Peripheral Opioid Receptors in Pain Management. We
focus on clinical conditions that can be treated by either stimulating or
blocking peripheral opioid receptors. These conditions include opioid bowel
dysfunction, inflammatory pain, itch and visceral pain. We have biological and
chemical expertise to support drug discovery. Our technology includes our
expertise in opioid receptors in analgesic pathways, cloned human opioid,
orphan and chimeric receptors and the chemical synthesis of compounds that do
not readily cross the blood-brain barrier. We are using our knowledge about
opioid receptors to develop alvimopan, ADL 2-1294, ADL 10-0101, ADL 10-0116
and ADL 1-0398, all of which are peripherally restricted opioid receptor
compounds, for a variety of these clinical indications.
Pursuing Clinical Indications that Allow Rapid Demonstration of
Efficacy. We try to expedite drug development by targeting pain management
indications in which animal pharmacology experiments are predictive of
efficacy in humans, established and reproducible clinical end points are
available and relatively short and less expensive clinical trials are possible
and appropriate. For instance, in our peripheral kappa opioid analgesic
program for inflammatory pain, we have chosen to examine clinical indications
such as visceral pain rather than arthritis pain because it can be tested in
much shorter and less expensive clinical trials. We intend to study arthritis
and other chronic pain indications at a later time.
Implementing a Commercial Strategy that will Combine Marketing and Product
Development Alliances with our own Product Development and Sales
Organization. We plan to maintain commercial rights in the United States for a
number of our product candidates. We intend to market certain of our product
candidates to the hospital market, including surgeons, oncologists and pain
management specialists. In addition, we have established and will continue
selectively to establish collaborations with pharmaceutical companies and
leading academic institutions to enhance our research, development and
commercialization activities. We have licensed topical ADL 2-1294 to Santen
Pharmaceutical Co., Ltd., for treatment of ophthalmic pain. We believe our
biological and chemical expertise to support drug discovery will continue to
generate opportunities for collaborative arrangements.
Managing Risk by Creating a Portfolio of Product Candidates. We have a
portfolio of product candidates in clinical development, each of which is
being developed for multiple indications. We conduct multiple parallel
clinical trials and examine multiple clinical indications on our product
candidates. For example, alvimopan is being evaluated in parallel clinical
trials for the management of opioid bowel dysfunction and the management of
postoperative ileus.
Developing Non-DEA Regulated Products. We develop product candidates that
do not (unless used in combination with narcotic analgesics) contain regulated
controlled substances. We believe this lack of regulation by the United States
Drug Enforcement Agency, or DEA, will give our products a competitive
advantage in the out-patient care market where non-addictive products are
favored. We believe our peripheral kappa analgesics will not be regulated by
the DEA.
7
Products in Research and Development
Our product candidates according to clinical indication have advanced to
the stage of development as set forth below. Their current development status
is described in the discussion following the chart.
Product Candidate (Mode of
Delivery) Clinical Indication Development Stage
- -------------------------- ------------------- -----------------
Reversal of Narcotic
Analgesic-Induced
GI Side Effects
GI Tract-Restricted mu
Antagonists
Alvimopan (oral).......... Postoperative ileus Phase III
Alvimopan (oral).......... Opioid bowel dysfunction Phase III
Alvimopan (oral).......... Acute opioid bowel dysfunction Phase II
Treatment of Pain or Itch
Peripherally Restricted
kappa Opioid Analgesics
ADL 10-0101 (injectable).. Visceral pain Phase II
ADL 10-0101 (injectable).. Dermal itch Phase I
ADL 10-0101 (oral)........ Inflammatory/visceral pain and itch Research
ADL 10-0116 (oral)........ Inflammatory/visceral pain and itch Phase I
Peripherally Restricted
mu Opioid Analgesics
ADL 2-1294 (topical)...... Ophthalmic pain Phase II
ADL 2-1294 (topical)...... Dermal pain Phase I
ADL 2-1294 (topical)...... Dermal itch Phase II
ADL 2-1294 (injectable)... Joint pain Preclinical
Centrally-Active Oral
Analgesics
Alvimopan combination with
narcotic opioid
analgesic................ GI side effect-free narcotic analgesic Phase I
Centrally-active kappa
analgesic................ Inflammatory/cancer/neuropathic pain Research
NARCOTIC ANTAGONISTS
ALVIMOPAN
Alvimopan is a peripherally-acting mu opioid receptor antagonist. Alvimopan
is designed to block the adverse side effects of narcotic analgesics on the GI
tract without blocking their beneficial analgesic effects. We are developing
alvimopan to manage or prevent postoperative ileus and opioid bowel
dysfunction. More than 500 patients have received alvimopan in nine Phase II
and nine Phase I opioid bowel dysfunction, postoperative ileus and safety
clinical studies completed to date.
Postoperative ileus
Postoperative ileus is a form of temporary bowel dysfunction that regularly
follows abdominal surgery and certain other surgeries for hospitalized
patients. By reducing the duration of postoperative ileus, we believe that
alvimopan will speed recovery of bowel function, improve the nutritional and
physical status for patients and reduce costs for hospitals and insurance
companies by preventing or speeding recovery from ileus, which may result in
earlier discharge of patients from hospitals.
8
Development Stage. We started our first Phase III clinical trial of
alvimopan in March 2001 using both a 6 mg and 12 mg twice daily dose. In
January 2002, we initiated two additional Phase III clinical trials and a
fourth clinical trial designed for the assessment of safety. Each of these
trials involves 450 to 500 patients age 18 years or older at approximately 30
centers in the United States or Canada. All of the patients are scheduled to
undergo major abdominal surgery, which carries with it a significant risk of
the occurrence of postoperative ileus. Our trials are designed to evaluate the
ability of alvimopan to speed recovery from postoperative ileus measured by an
earlier return of both upper GI function (time to tolerate solid food) and
lower GI function (time to first flatus or first bowel movement). These trials
use the same clinical endpoints and follow the design of our Phase II studies.
The key differences will be the number of patients enrolled, the number of
study sites, and the choice of two doses of alvimopan which individually or
together showed positive results in our Phase II clinical trial program.
We completed three Phase II clinical trials with alvimopan for the
management of postoperative ileus. As planned, the results from the three
Phase II clinical trials were combined to analyze the overall dose response to
confirm the doses for the Phase III pivotal trials. Based on the results from
296 patients, a clear dose response was obtained. Each of the twice daily 3
mg, 6 mg and 12 mg doses resulted in statistically significant improvement in
the primary clinical efficacy endpoint, the time for the recovery of GI
function.
Our first Phase II clinical trial compared 1 mg or 6 mg doses of alvimopan
vs. placebo in 78 patients undergoing partial colectomy or simple or radical
hysterectomy surgical procedures. These data showed a dose-dependent effect
and that patients receiving the higher dose of alvimopan experienced shorter
time to the first flatus (P<0.04), time to first bowel movement (P<0.02), time
to eating a solid diet (P=0.0001), and time to discharge from the hospital
(P=0.0001). The time to first flatus was reduced by 15 hours; all other
measures were reduced by 24 hours or more. No patients experienced serious
adverse events in this trial that were judged by the clinical investigator to
be related to the activity of alvimopan. The 26 patients treated with the
higher dose of alvimopan actually experienced fewer overall adverse effects
than the 26 patients in the placebo-treated group. We believe that alvimopan
blocked the adverse gastrointestinal effects of morphine or other narcotic
analgesics that were used for postoperative pain relief. In particular, none
of the 26 patients receiving the higher dose of alvimopan experienced
postoperative vomiting compared to 23% in the placebo control group (P<0.03).
Twenty-seven percent of the patients receiving the higher dose of alvimopan
experienced clinically relevant postoperative nausea compared to 63% of the
placebo control group (P=0.003). Alvimopan did not reduce the beneficial
analgesic effects of systemic narcotic analgesics used in this trial. These
results suggest that alvimopan may speed recovery of normal bowel function
after surgery. The results of this clinical trial were reported in the
September 27, 2001, issue of the New England Journal of Medicine (A. Taguchi
et al., N Engl J Med 345: 935-940, 2001).
Our second Phase II clinical trial was a multi-center, double-blind and
placebo-controlled trial in 65 patients undergoing abdominal surgery who were
randomized to receive placebo or 12 mg of alvimopan twice per day. The median
times for the recovery of GI function and time to discharge from the hospital,
the key endpoints of the trial, were improved by 14 and 4 hours, respectively,
(P=0.06). Confirming previous results, alvimopan did not reduce the beneficial
analgesic effects of systematic opioid narcotics administered to patients. One
alvimopan treated patient experienced protracted nausea which was possibly
related to the study medication.
The third Phase II trial was a multi-center, double-blind, and placebo-
controlled trial in 153 patients who were randomized to receive placebo, 3 mg,
6 mg or 12 mg of alvimopan twice per day. No serious adverse events were
attributed to alvimopan and patients experienced no loss of analgesia. The
median time for the recovery of GI function, a primary clinical endpoint,
improved by 9 hours in the 12 mg dose group. Statistical analysis showed that
this study was underpowered for a multi-center clinical study and it did not
reach statistical significance. The time to discharge from the hospital, a
secondary endpoint, improved by nearly 20 hours in the 12 mg dose group.
We pooled the results of 286 evaluable patients from our three Phase II
clinical trials. The 6 mg and 12 mg doses produced faster recovery of GI
function than placebo by 9 and 16 hours, respectively, P<0.01.
9
Opioid bowel dysfunction
Coordinated rhythmic contractions of the intestines move the intestinal
contents forward as a part of the normal digestive process. When morphine,
codeine, oxycodone, hydrocodone or similar narcotic analgesics enter the
gastrointestinal tract, they activate opioid receptors and disrupt the normal
rhythmic movements. This disruption may cause uncoordinated non-propulsive
intestinal contractions or cramps. The dose of morphine required to disrupt
bowel function is lower than the dose of morphine required to produce pain
relief. Morphine can produce symptoms of opioid bowel dysfunction that include
hard and dry stools, straining with bowel movements and inability to
completely evacuate the bowels. Patients may also experience abdominal
cramping or spasms with bloating and abdominal distention. The discomfort
associated with opioid bowel dysfunction can be so severe as to cause patients
to limit dosing of the narcotic analgesic and therefore reduce the degree of
pain relief.
When taken orally, alvimopan selectively blocks the intestinal opioid
receptors, restoring normal bowel function. Morphine and other narcotic
analgesics are still absorbed normally into the blood stream and produce their
desired analgesic effects in the brain.
Laxative and stool lubricant medications are used in an attempt to treat
opioid bowel dysfunction in patients receiving chronic narcotic analgesic
therapy, but they are only fully effective in a limited patient population.
Based on our market research, physicians report that 70 percent of their
patients receiving daily opioid narcotics for moderate-to-severe pain are
dissatisfied or only somewhat satisfied with currently available therapies for
the management of opioid bowel dysfunction.
Development Stage. In June 2001, we announced that with the positive
results of a fifth Phase II clinical trial, we successfully completed the
Phase II program for alvimopan for the management of opioid-induced bowel
dysfunction. The data from this Phase II trial supported previous Phase II
trials showing that the compound reduced the opioid-induced bowel dysfunction
in patients taking opioid narcotics. In July 2001, we began enrollment in a
multicenter, double-blind and placebo controlled Phase III clinical trial
which is expected to enroll approximately 162 patients at 15 to 22 centers in
the United States. In February 2002, we began enrollment in an open-label, 21
day, Phase II, dose ranging clinical trial on cancer pain patients, which is
expected to enroll approximately 20 patients at 2-3 centers in the United
States.
In our most recently completed double-blind, placebo-controlled trial with
chronic opioid-induced constipation, 20 patients were randomly assigned to
receive a placebo, 0.5 mg or 1 mg of alvimopan for 21 consecutive days. The
duration of treatment in this trial was substantially longer than previous
Phase II trials. Both groups taking 0.5 mg and 1 mg of alvimopan had improved
frequency and quality of bowel movement in a dose response fashion versus the
placebo group and this drug effect was sustained throughout the duration of
the 21 day trial. No serious adverse events were observed, and the adverse
events profile was essentially unchanged from previous trials. In this trial,
the side effects were not significantly different between placebo and
alvimopan groups with the exception of a somewhat higher incidence of diarrhea
in the high dose group early in the trial period.
Four previously completed Phase II opioid bowel dysfunction trials were
designed to identify the active dose of alvimopan for reversing opioid bowel
dysfunction in patients receiving chronic opioid narcotics for pain control.
Alvimopan reversed opioid bowel dysfunction on 80% to 100% of the patients who
were given therapeutically active doses of alvimopan. All patients who
received alvimopan responded on at least one day that they received alvimopan.
At therapeutic doses, side effects were generally absent or mild and consisted
of those expected to occur during acute reversal of opioid bowel dysfunction
such as abdominal cramping, gas and nausea. After receiving a dose 12 times
higher than the minimally effective dose, one patient developed severe
abdominal cramps, diarrhea, nausea and vomiting. This case represents the only
serious adverse event in clinical trials completed to date that was judged by
the clinical investigator to be probably related to the activity of alvimopan.
Acute opioid bowel dysfunction
We believe that alvimopan may also have an important use in maintaining
normal gastrointestinal function in hospitalized patients receiving narcotic
analgesics for the relief of pain or in patients following discharge from the
hospital who continue on short-term narcotics for the relief of pain. Just as
patients receiving chronic narcotic
10
analgesics experience constipation, cramping, bloating, and other symptoms of
opioid bowel dysfunction, patients receiving short-term narcotic analgesic
therapy experience similar symptoms which may cause them to reduce their dose
or discontinue their narcotic analgesics. Patients taking narcotic analgesics
on a short-term basis are also more susceptible to experience opioid-induced
nausea and vomiting. We believe that alvimopan may be useful in reducing these
adverse effects and in maintaining normal gastrointestinal function in
patients receiving narcotic analgesics for pain relief.
Development Stage. As part of our postoperative ileus development program,
we are conducting a double-blind, placebo-controlled, multi-center, clinical
trial in approximately 500 patients undergoing simple hysterectomy where those
patients will receive initial doses of alvimopan in the hospital and will
continue taking alvimopan at home for a maximum of seven days of continuous
treatment. This is our first clinical trial where postsurgical patients will
continue receiving doses of alvimopan after hospital discharge. As such, this
same study will also allow us to assess the potential for conducting
additional clinical trials for acute opioid bowel dysfunction. If successful,
we intend to develop alvimopan for this indication and to submit a
supplemental New Drug Application (sNDA) to the FDA following the approval, if
any, of our NDA for the management of postoperative ileus indication.
PERIPHERALLY RESTRICTED KAPPA OPIOID ANALGESICS
We use advanced chemical design technology to create proprietary topical,
injectable and oral peripheral kappa opioid receptor-specific compounds that
are designed to have limited ability to cross the blood-brain barrier at
therapeutic doses. These compounds are intended to produce more pain relief
than acetaminophen or NSAIDs and equivalent pain relief to narcotic analgesics
in inflammatory pain. We intend to develop oral product candidates to address
broader markets in chronic inflammatory pain, such as the market for
prescription arthritis pain products, that accounted for approximately $6.1
billion in United States prescription sales in the twelve months ended
December 31, 2001. We believe that these peripheral kappa opioid analgesics
may be the first opioid analgesics to address the pain of chronic inflammatory
disease without producing adverse psychological effects associated with
previously studied centrally acting kappa opioid analgesics, including visual
and auditory disturbances, unpleasant mood changes and hallucinations.
Preclinical studies show that our peripheral kappa opioid analgesics are
particularly effective against visceral pain. Because of these preclinical
results, we began clinical trials for the treatment of visceral pain in
humans.
ADL 10-0101
ADL 10-0101 is our first peripheral kappa opioid analgesic product
candidate. Preclinical trials suggest that ADL 10-0101 may be effective in
treatment of inflammatory pain, itch and visceral pain. Because ADL 10-0101
was designed to have limited ability to cross the blood-brain barrier and
enter the brain, we expect ADL 10-0101 to avoid central nervous system side
effects at therapeutic doses.
Visceral pain
Visceral pain can be caused by inflammation or distention of abdominal
organs as a result of surgical or diagnostic procedures or from acute or
chronic disease. Preclinical data indicated that our peripheral kappa opioid
analgesics were more effective than morphine and other narcotic analgesics for
blocking pain in visceral organs. Data from the United States Centers for
Disease Control and Prevention, or CDC, indicate that there are over 12
million annual visits to doctors offices for acute abdominal pain and 5.4
million GI endoscopy diagnostic procedures, a portion of which we believe will
comprise our potential patient population for an injectable ADL 10-0101
product candidate.
Development Stage. We completed a Phase I clinical trial of ADL 10-0101 in
volunteers in the third quarter of 1999. In this study, the dose was increased
until the expected dose-limiting adverse side effect was observed, namely,
visual and auditory disturbances and unpleasant mood changes. In 2001, we
completed a proof-of-concept Phase II clinical trial in six patients, using
doses below those which caused adverse side effects in volunteers, to evaluate
ADL 10-0101 in the treatment of moderate-to-severe visceral pain of chronic
11
pancreatitis. In this trial, mean pain scores for patients receiving ADL 10-
0101 were reduced by 38% and 64% at 30 minutes to four hours, respectively,
after initiation of a 30 minute infusion of ADL 10-0101. The patients
receiving placebo had reduction of 14% and 0%, respectively, at these same
time periods. None of the patients reported central nervous system side
effects.
Three Phase II studies were initiated in 2001 to evaluate the ability of ADL
10-0101 to reduce acute or chronic visceral pain. All three studies utilized
the same dose of ADL 10-0101 that was used in our first chronic pancreatitis
pain study.
The first study was in patients with chronic pain of pancreatitis. Fourteen
patients were enrolled in the study, including five who received placebo and
nine who received a single intravenous dose of ADL 10-0101 in a double-blind
and placebo-controlled trial. Preliminary results indicate that ADL 10-0101
did not meet the primary endpoint of reduction in pain scores versus placebo.
There was considerable variability in the pain scores within both the active
and the placebo treatment groups. This study was different from the first
chronic pancreatitis study in that the patients began the study with less
pain, not all patients were being treated with opioid narcotics on a chronic
basis, and patients were not trained to evaluate their pain scores versus an
experimental pain stimulus prior to the beginning of the study. Three patients
reported mild, but not dose-limiting, central nervous system side effects that
were characterized by the investigator as possibly related to the ADL 10-0101.
The second study was in three patients undergoing hysteroscopy. Patients
were administered a single intravenous dose of ADL 10-0101 to evaluate the
ability of ADL 10-0101 to reduce visceral pain caused by uterine distention.
The primary endpoint in this study was adequacy of pain relief such that the
patients would not require other medications for pain relief. All three
patients required administration of additional analgesic and anesthetic agents
to complete the procedure. Therefore, the primary clinical endpoint was not
achieved. No adverse side effects were reported.
The third study was a double-blind and placebo-controlled study in twenty
patients undergoing routine colonoscopy to evaluate the ability of ADL 10-0101
to reduce pain resulting from distention of the colon. Ten patients received
an infusion of ADL 10-0101 and ten patients received a placebo infusion. The
primary endpoint was the number of patients receiving ADL 10-0101 who required
the administration of no additional analgesic medication to complete the
procedure. There were no clinically meaningful differences between the two
groups in the study. No adverse side effects were reported.
The four Phase II studies to date have used a single infusion of ADL 10-
0101 and no patients reported dose-limiting adverse events. We plan to
initiate additional Phase I studies to define the maximum tolerable dose of
ADL 10-0101. Following these studies, we then plan to conduct additional Phase
II clinical studies with higher doses of ADL 10-0101 to evaluate its ability
to reduce pain caused by inflammation or distention of visceral organs.
Inflammatory pain
Inflammatory pain may be caused by burns, abrasions or surgical procedures.
Minor inflammatory pain is currently treated with over-the-counter medications
containing emollients or local anesthetics. Emollients are soothing but have
little or no analgesic activity; local anesthetics have a relatively short
duration of action and may be irritating to the skin. Moderate-to-severe
inflammatory pain is frequently treated with NSAIDs or narcotic analgesics. We
believe that ADL 10-0101 may produce greater analgesia with fewer side effects
than existing medications for inflammatory pain. Data from the CDC indicate
that there are over 44 million annual cases of inflammatory pain, a portion of
which we believe will comprise our potential patient population for an
injectable ADL 10-0101 product.
Development Stage. We completed a pilot Phase I clinical trial, using doses
below those that cause adverse side effects in volunteers, to assess safety
and preliminary activity of ADL 10-0101 for relieving experimentally induced
thermal burn pain. This study did not show a beneficial effect of ADL 10-0101.
We may do further tests in a different inflammatory pain model or with higher
doses after we complete the additional Phase I dose escalation safety studies.
12
Dermal itch
Dermal itch results from eczema, allergic dermatitis, or exposure to harsh
chemicals or plants. Minor dermal itch is currently treated with over-the-
counter medications containing emollients, local anesthetics, antihistamines,
or corticosteroids. Local anesthetics may be irritating to the skin and
corticosteroids cause skin thinning and other adverse effects with chronic
use. Moderate-to-severe itch is frequently treated with prescription
corticosteroids or with oral antihistamines, both of which may cause serious
side effects when used acutely or chronically, including sedation and adverse
effects on the immune system and on the regulation of normal body hormones. We
believe that ADL 10-0101 for dermal itch may produce greater relief with fewer
side effects than existing medications. Data from the CDC indicate that there
are over 14 million annual cases of chronic dermal itch, a portion of which we
believe will comprise our potential patient population for a dermal anti-itch
product.
Development Stage. Preclinical trials indicate that ADL 10-0101 may be
active in treating itch. Based on these results, we completed a proof-of-
concept Phase I clinical trial, using doses below those that cause adverse
side effects in volunteers, to assess safety and preliminary activity of ADL
10-0101 for relieving experimentally induced poison ivy itch. In this trial,
53% of patients receiving an injection of ADL 10-0101 under the area of skin
exposed to poison ivy reported "no itch" at five minutes after treatment
compared to 13% of the placebo subjects at the same time period. None of the
subjects reported central nervous system side effects. No additional
development efforts are currently scheduled for this product candidate. We
will continue to evaluate the further development of this product candidate
and we may conduct future clinical studies in subjects with dermal itch or
pruritus and we may consider developing a topical product. We may also
consider outlicensing topical-dermal ADL 10-0101 products to another
pharmaceutical company.
Future preclinical and clinical research
Based on preclinical studies which show that ADL 10-0101 has oral analgesic
activity in animal pain and itch models, we may develop an oral formulation of
ADL 10-0101 for future clinical studies.
ADL 10-0116
ADL 10-0116 is an orally active peripherally restricted kappa opioid
analgesic compound. In preclinical inflammatory pain trials, ADL 10-0116
demonstrated a longer duration of action than ADL 10-0101 and was active when
administered orally. As an orally-active compound, ADL 10-0116 may expand the
market that can be achieved with ADL 10-0101 by treating acute and chronic
pain conditions in clinical indications where an injectable product would not
be used.
Moderate-to-severe pain often requires the use of narcotic analgesics.
Preclinical data indicated that our peripheral kappa opioid analgesics are as
effective as narcotic analgesics for inflammatory pain and more effective than
narcotic analgesics for blocking visceral pain due to colorectal, uterine, and
cervical distention. Data from the CDC indicate that there are over 44 million
patients who have chronic inflammatory musculoskeletal pain and 12 million
cases of acute abdominal pain, a portion of which we believe will comprise our
potential patient population for an oral peripheral kappa opioid analgesic
product.
Development Stage. We initiated a Phase I safety study with orally
administered ADL 10-0116 in the fourth quarter of 2001. This study is ongoing.
The results of this study will be used to select dosing levels for future
multiple dose Phase I safety studies and for Phase II clinical efficacy
trials.
Preclinical kappa analgesic compound
ADL 1-0398 is another orally active peripheral kappa opioid analgesic
similar to ADL 10-0116. The compound is active in multiple types of
inflammatory pain in preclinical trials. In addition, ADL 1-0398 has greater
peripheral restriction than other peripheral kappa opioid analgesics.
13
Development Stage. This product candidate has advanced to preclinical
research. No additional development efforts on this product candidate are
currently scheduled. We will continue to evaluate the further development of
this product candidate.
PERIPHERALLY RESTRICTED MU OPIOID ANALGESICS
ADL 2-1294
The active ingredient in all of our formulations of ADL 2-1294 is
loperamide, the same active ingredient in the over-the-counter anti-diarrheal
product, Imodium(R) A-D. The compound patent for loperamide has expired, but
we have secured method-of-use and formulation patents for pain and itch
indications. Loperamide, like morphine, is a potent mu opioid receptor
stimulant. Unlike morphine, loperamide does not readily cross the blood-brain
barrier to enter the central nervous system. The compound is also very poorly
absorbed from the intestinal tract following oral administration. As a result,
the compound does not cause sedation or depress respiratory function, is not
considered to be addictive and is the only mu opioid agonist that is not
scheduled as a controlled substance. When applied locally to sites of
inflammation or irritation, ADL 2-1294 has been shown to be as active as
morphine in preclinical models of inflammatory pain and is active in
preclinical trials for the relief of itch. Pain from burns and other dermal
injuries was selected as the initial clinical target for topical formulations
of ADL 2-1294. We have also evaluated ophthalmic and injectable formulations
for the treatment of pain. Santen Pharmaceutical Co., Ltd., of Japan, licensed
the worldwide rights, except in South Korea and North Korea, to develop and
market ADL 2-1294 ophthalmic formulations for ophthalmic pain. Kwang Dong
Pharmaceutical Co., Ltd. licensed the right to develop and market dermal
formulations of ADL 2-1294 in South Korea and North Korea for dermal pain.
We received notification in December, 2001, that the Consumer Healthcare
Division of GlaxoSmithKline, our former development partner for the
commercialization of the dermal product candidate, was unable to obtain a
significant difference between the ADL 2-1294 and placebo groups in a Phase II
proof-of-concept clinical study in dermal itch of eczema. As a consequence,
the rights to all dermal ADL 2-1294 products outside of Korea have reverted to
Adolor. We may seek another partner to develop dermal ADL 2-1294 for pain or
itch indications.
Ophthalmic pain
Eye drops containing corticosteroids or an anti-inflammatory NSAID are
often used following corneal surgery or corneal abrasion but may inhibit wound
healing and cause other adverse side effects. Our collaborators have
demonstrated the efficacy of eye drops containing morphine for pain control
following ophthalmic surgery. ADL 2-1294 activates the same receptors as
morphine and has the competitive advantage that it is not a controlled
substance and therefore will not have prescription restrictions imposed by the
DEA. We believe that eye drops containing ADL 2-1294 will be more effective
and produce fewer adverse side effects than current therapy. Data from the CDC
indicate that there are 5.7 million annual cases of surgery on eyes or injury
to the cornea, a portion of which we believe will comprise our potential
patient population for an ophthalmic peripheral mu analgesic product.
Development Stage. Our Phase II study demonstrated that ADL 2-1294 reduced
the severity of pain following corneal abrasions and surgeries to a greater
extent than placebo. ADL 2-1294 resulted in a 58% reduction of pain, and this
effect was statistically significant (P=0.05). In addition, a Phase II pilot
study suggested that topical administration of ADL 2-1294 was as effective as
topical morphine in reducing corneal pain. Some patients experienced transient
stinging associated with administration of eye drops containing ADL 2-1294. We
believe that the efficacy of ADL 2-1294 can be improved by optimizing its
formulation.
Based in part on preliminary data generated in our Phase I and Phase II
trials, Santen Pharmaceutical Co., Ltd., licensed the rights in April, 2000,
to develop and market ADL 2-1294 formulations for ophthalmic pain on a
worldwide basis except in North and South Korea. Santen is currently
conducting preclinical safety studies on proprietary opthalmic formulations.
14
Dermal pain
Dermal pain may be caused by trauma, burns, abrasions or surgical
procedures. Minor dermal pain is currently treated with over-the-counter
medications containing emollients or local anesthetics. Moderate-to-severe
dermal pain is frequently treated with NSAIDs or narcotic analgesics. We
believe that a topical formulation of ADL 2-1294 for dermal pain may produce
greater analgesia with fewer adverse events than existing medications. Data
from the CDC indicate that there are 14.5 million annual cases of dermal pain
requiring emergency room treatment, a portion of which we believe will
comprise our potential patient population for a topical ADL 2-1294 dermal
analgesic product.
Development Stage. In our Phase I clinical trials, topically applied ADL 2-
1294 demonstrated statistically significant analgesic efficacy in burn pain
(P<0.05) without dermal or systemic adverse events. We initiated a Phase II
study evaluating efficacy in treating pain associated with skin graft surgery
but stopped the study because of slow enrollment.
Following the termination of our licensing agreement with the Consumer
Healthcare Division of GlaxoSmithKline, we may seek another partner for the
development of ADL 2-1294 for dermal pain.
Dermal itch
Dermal itch results from eczema, allergic dermatitis, or exposure to harsh
chemicals or plants. Minor dermal itch is currently treated with over-the-
counter medications containing emollients, local anesthetics, antihistamines,
or corticosteroids. Local anesthetics may be irritating to the skin and
corticosteroids cause skin thinning and other adverse effects with chronic
use. Moderate-to-severe itch is frequently treated with prescription
corticosteroids or with oral antihistamines, both of which may cause serious
side effects when used acutely or chronically, including sedation and adverse
effects on the immune system and on the regulation of normal body hormones.
Development Stage. Following the termination of our licensing agreement
with the Consumer Healthcare Division of GlaxoSmithKline, we may seek another
partner for the development of ADL 2-1294 for this indication.
Joint pain
Joint pain after arthroscopic surgery limits mobility and recovery.
Injection of morphine into a joint can reduce pain and speed recovery from
arthroscopic surgery. ADL 2-1294 demonstrated analgesic activity in
preclinical studies of joint pain. We have incorporated ADL 2-1294 into two
prototypic formulations suitable for delivery to joints following surgical
procedures. These formulations may also provide benefits after injection into
painful inflamed joints as an alternative to cortisone therapy. In addition,
preclinical safety studies found no dose-limiting adverse advents that would
prevent advancement into clinical development. Market research indicates that,
in the United States, there are 1.1 million outpatient arthroscopic knee
surgical procedures and 2.7 million patients who receive local injections of
corticosteroids for joint pain, a portion of which we believe will comprise
our potential patient population for a long-acting analgesic injectable
product.
Development stage. We have conducted preliminary preclinical formulation
and safety studies in animals. No additional development efforts on this
product candidate are currently scheduled. We will continue to evaluate the
further development of this product candidate or we may outlicense this
project to another pharmaceutical company.
CENTRALLY-ACTIVE ORAL ANALGESICS
We expect centrally-acting narcotic analgesics to be more useful than
peripheral opioid analgesics in a number of non-inflammatory painful
conditions such as nerve damage or neuropathic pain as well as certain types
of cancer pain. However, morphine and other narcotic analgesics have dose-
limiting side effects that limit their effectiveness. One of our longer-term
goals is to use our technology to create centrally-acting opioid analgesics
with significantly fewer side effects or greater efficacy to more effectively
treat non-inflammatory indications that would be particularly responsive to
opioid analgesics.
15
Alvimopan Combination With Narcotic Opioid Analgesic;
Nausea or vomiting occurs in up to 33% of patients who receive oral
narcotic analgesics and in up to 80% of patients who receive injectable
narcotic analgesics following surgery or trauma. This is due in part to direct
effects of narcotic analgesics on the GI tract. Data from one of our Phase I
clinical trials suggested that alvimopan may reduce the severity of nausea
caused by morphine. In addition, data from one of our Phase II postoperative
ileus trial showed that the higher dose of alvimopan produced more than a 50%
reduction in moderate-to-severe postoperative nausea compared to placebo-
treated patients (P=0.003) and that it completely eliminated postoperative
vomiting (P=0.026) in patients receiving intravenous narcotic analgesics for
postoperative pain control. We believe that a single oral dosage form
combining both alvimopan and a short acting oral narcotic analgesic, in fixed
doses, has the potential to produce a new narcotic analgesic combination
product that produces less nausea and vomiting than currently available
narcotic analgesics.
Development Stage. We conducted a Phase I clinical trial to evaluate the
ability of alvimopan to block morphine-induced nausea, but the amount of
nausea experienced by both placebo and alvimopan treated subjects in this
trial was much lower than expected and insufficient to make any conclusions
about the effectiveness of alvimopan. We plan to continue research and
development of this combination product in the future.
Centrally-active kappa agonist analgesic
We believe that it may be possible to avoid the serious central nervous
system adverse events that were reported with kappa opioid product candidates
that were being developed by other companies by using compounds that stimulate
kappa opioid receptors in the brain in the same manner that a naturally
occurring substance (a peptide) does. To find small synthetic organic
molecules that are not peptides but have the same effect as the natural
peptides, we have designed and constructed artificial kappa opioid receptors
to use as discovery tools. These artificial receptors allow us to identify
kappa compounds that interact with different parts of the kappa receptor and,
we hope, have kappa analgesic activity without adverse central nervous system
side effects.
Other preclinical research programs
In December 2001, we were awarded three Small Business Innovation Research
(SBIR) grants from the National Institutes of Health to fund research into
novel compounds for pain relief.
The first SBIR award was a Phase II grant for approximately $1.28 million
for research on "Novel Antagonists of the ORL-1 Receptor." This grant will
support research on novel small molecule antagonists of the ORL-1 receptor and
to determine the ability of the compounds to relieve inflammatory and
neuropathic pain. Compounds that demonstrate specific interactions with the
ORL-1 receptor have the potential to treat chronic pain without the side
effects observed in patients treated with traditional opioid narcotics. In
addition, these compounds may prove useful in the clinical management of
various forms of neuropathic pain, for which there is currently no widely
effective therapy to meet this unmet medical need.
The second SBIR award was a Phase I grant of $106,026 for research on
"Discovery of Kappa Opioid Analgesics Using Chimeric Receptors." This grant
will support research focusing on the use of an artificial receptor designed
to identify small molecule drug candidates that activate kappa opioid
receptors in the same manner as a naturally occurring peptide in the human
brain. Interaction of such small molecules with kappa opioid receptors in the
brain has the potential to yield a new class of potent pain relievers that
circumvent central nervous system side effects, which previously prevented the
development of centrally acting kappa agonists.
The third SBIR award was a Phase I grant of $157,110 for research on
"Development of Novel Cannabinoid Receptor Agonists as Analgesics." This grant
will fund research focusing on the discovery and development of novel small
molecule activators of cannabinoid receptors expressed on peripheral nerves.
Recent studies have shown that molecules that activate these receptors may be
useful in treating visceral and inflammatory pain without the abuse potential
associated with the use of marijuana.
16
Commercialization Strategy
We have developed a commercialization strategy that combines strategic
alliances with major pharmaceutical partners to access markets outside the
United States with a combination of co-promotion agreements with major
pharmaceutical companies and our marketing and sales activities inside the
United States. We pursue strategic relationships that are intended to offer us
independence and flexibility in the development and commercialization of our
products. We have chosen to license technology to major pharmaceutical
companies that have broad marketing capabilities in therapeutic areas outside
of our focus and to companies in geographic areas where we do not expect to
have direct sales capabilities.
Our marketing staff is conducting extensive market research and organizing
and participating in advisory panels and thought leader consultant meetings
relating to our alvimopan product candidates. Our scientific staff is
organizing and facilitating scientific presentations at appropriate forums
relating to postoperative ileus and opioid induced bowel dysfunction. Our
alvimopan marketing plans for the management of postoperative ileus include a
focus on medical education with targeted surgeons and hospital staff.
We currently do not have a sales staff or a distribution capability. We are
currently negotiating with pharmaceutical companies with a global presence to
help us develop, market, sell and distribute alvimopan products in
anticipation of marketing authorization approval by the relevant regulatory
authorities.
Our success in commercializing alvimopan and our other product candidates
will be dependent in part, upon our ability to enter into collaborative
marketing, sales and distribution arrangements with third parties. There can
be no assurance that we will be successful in developing a sales force,
entering into collaborative arrangements, penetrating the markets for any
proposed products or achieving market acceptance of our products. There can be
no assurance that any such marketing arrangements will be available on terms
acceptable to us, if at all, that such third parties would perform adequately
their obligations as expected, or that any revenue would be derived by us from
such arrangements.
Our Strategic Relationships
GlaxoSmithKline Affiliate
In July 1999, we licensed worldwide rights (excluding South Korea and North
Korea) to the development and commercialization of our product candidate ADL
2-1294 to SB Pharmaco Puerto Rico Inc., an affiliate of GlaxoSmithKline, for
the topical indications of dermal pain and itch. In December 2001, we were
notified by SB Pharmaco Puerto Rico Inc. of the termination of this license
agreement. As a result of the termination, all rights to ADL 2-1294 have been
returned to us. Under the license agreement, we received a total of $1,000,000
in license fees.
Santen Pharmaceutical Co., Ltd.
On April 25, 2000, we entered into a license agreement with Santen
Pharmaceutical Co., Inc. granting Santen an exclusive royalty bearing license
to develop and sell products in the field of ophthalmic pain in all countries
other than South and North Korea. Santen will pay us royalties on annual net
sales of the products. A $500,000 payment was paid to us upon execution of the
agreement. In October 2001, we received a $250,000 payment for progress made
by Santen under this agreement.
We retain the exclusive right to market and sell products, if any,
developed under the license agreement in the United States to hospitals for
emergency room physicians, and we retain a co-exclusive right with Santen to
market and sell products, if any, in the United States to hospitals other than
for emergency room physicians.
17
Under the license agreement, we will receive up to an aggregate $5.5
million from milestone payments upon the satisfaction of certain clinical and
regulatory milestones. In addition, we will receive royalties based on product
sales, if any, and may receive up to an aggregate $2.5 million in sales
bonuses if Santen reaches certain sales targets.
Santen can terminate the agreement for any reason upon 60 days' written
notice. If Santen terminates the license agreement, all of the rights granted
to Santen will terminate and revert to us. In addition, we have the right to
use Santen technology under terms negotiated in good faith.
Eli Lilly and Company
In June 1998, we entered into a license agreement with Roberts Laboratories
Inc. under which we licensed the compound that is the basis of our alvimopan
product candidates. Roberts subsequently merged with Shire Pharmaceuticals,
plc. Roberts had licensed the compound from Eli Lilly and Company in November
1996. The license agreement affords us an exclusive worldwide license to make,
use, sell or import the compound.
Under the license agreement, we paid a $300,000 up-front license fee to
Roberts, and Roberts is entitled to receive milestone payments upon the
satisfaction of certain clinical and regulatory milestones. In addition, we
are required to pay Eli Lilly a milestone payment on behalf of Roberts. Both
Roberts and Eli Lilly will receive royalties based on product sales, if any.
We will be responsible for all development costs. In 1999, we paid $300,000 to
Roberts to exercise certain licensing rights as defined in the agreement. We
may pay up to $1.9 million in additional future milestone payments under these
agreements.
Eli Lilly consented to the assignment by Roberts to us of Roberts' rights
and obligations of Roberts' license agreement with Eli Lilly.
The license agreement with Lilly expires upon the later of either the life
of the last to expire of Lilly's patents encompassing the licensed compound or
fifteen years from November 5, 1996. Upon expiration of the agreement, we will
have a fully paid up license.
Other Relationships
In November 1997, we entered into a license agreement with Kwang Dong
Pharmaceutical Co., Ltd. relating to the development and commercialization in
South Korea and North Korea of our product candidate ADL 2-1294 for the
indication of topical dermal pain. In addition, in November 1997, we entered
into a stock purchase agreement with Kwang Dong pursuant to which Kwang Dong
purchased for $1.2 million, 960,000 shares of our series D convertible
preferred stock. The license agreement with Kwang Dong provides for, among
other things, our transfer to Kwang Dong of technology and data developed by
us relating to the topical formulation of ADL 2-1294. We devoted significant
internal efforts and expenditures to the development of a formulation for this
indication. To date, we have not transferred sufficient technology under the
license agreement to allow commercialization of ADL 2-1294 in South and North
Korea. As a result, we do not anticipate material revenues under the license
agreement in the foreseeable future.
We have licensed technology from academic institutions and entities
including the University of California at Los Angeles, the University of
California at San Diego, the University of Minnesota, Oregon Health Sciences
University and Arch Development Corporation.
We licensed from the University of California at Los Angeles the exclusive
right to use cloned delta opioid receptors to discover new drug candidates.
The term of the license agreement is tied to the lifetime of the valid and
existing patents licensed under the agreement and is currently expected to
expire in 2016.
We licensed from the University of California at San Diego the right to
develop and commercialize ADL 2-1294, loperamide, as a peripheral opioid
analgesic for pain. The term of the license agreement is tied to the lifetime
of the valid and existing patents licensed under the agreement and is
currently expected to expire in 2015.
18
We licensed from the University of Minnesota the right to develop and
commercialize peripheral kappa opioid analgesics discovered at the University
of Minnesota. The term of the license agreement is tied to the lifetime of the
valid and existing patents licensed under the agreement and is currently
expected to expire in 2017. In November 2001, we terminated this agreement.
We licensed from Oregon Health Sciences University the right to use the
human orphanin FQ opioid receptor ligand in our research program. The license
expires in 2015.
We licensed from Arch Development Corporation the exclusive right to use
cloned mammalian kappa receptors to discover new drug candidates. The term of
the license agreement is tied to the lifetime of the valid and existing
patents licensed under the agreement and is currently expected to expire in
2017.
We licensed from the National Institutes of Health the right to use the
cloned human mu receptor on a nonexclusive basis for discovering new drug
candidates. The license expires in 2011.
In September 2001, the National Institutes of Health awarded us three Small
Business Innovation Research (SBIR) grants to fund research into novel
compounds for pain relief. The three grants will result in payments to us of
approximately $1.54 million upon completion.
Competition
Our success will depend, in part, upon our ability to achieve market share
successfully at the expense of existing and established products in the
relevant target markets. We believe that our ability to compete successfully
is based on our technical expertise in peripheral opioid analgesia and our
ability to maintain advanced scientific technologies, to develop a
differentiated product pipeline, to obtain successful regulatory approval for
novel pain management pharmaceuticals, and to sustain patent protection for
our portfolio.
Many companies currently sell either generic or proprietary narcotic
analgesic formulations. In addition, a number of technologies are being
developed to increase narcotic analgesic potency as well as to provide
alternatives to narcotic analgesic therapy for pain management. Several of
these technologies are in clinical trials or are awaiting approval from the
FDA. Several potential competitors are developing new products for the
treatment of opioid bowel dysfunction.
Merck KGA is developing asimadoline (Phase II) as a peripherally selective
kappa opioid analgesic for the treatment of pain associated with irritable
bowel syndrome.
Progenics Pharmaceutical, Inc., is developing methylnaltrexone, a
peripheral mu opioid receptor antagonist, under an exclusive license from the
University of Chicago. Progenics recently announced that they have initiated a
Phase II study evaluating subcutaneous doses of methylnaltrexone in cancer
patients for the treatment of opioid-induced constipation and that they plan
to initiate clinical trials in both opioid-induced constipation and
postoperative bowel dysfunction in 2002.
There may be additional competitive products about which we are not aware.
Intellectual Property
We seek United States and international patent protection for major
components of our technology. We also rely on trade secret protection for
certain of our confidential and proprietary information, and we use license
agreements both to access external technologies and assets and to convey
certain intellectual property rights to others. Our commercial success will be
dependent in part on our ability to obtain commercially valuable patent claims
and to protect our intellectual property portfolio.
19
As of December 31, 2001, we owned or had rights, whether by geography, by
field or otherwise, to approximately 120 issued patents, of which 39 are
issued in the United States and 81 are issued in foreign countries, and we own
23 United States patent applications and numerous foreign patent applications
relating to technologies used in our business.
We have or have licensed patents and patent applications related to (i) ADL
2-1294, (ii) peripheral kappa analgesics, (iii) alvimopan and (iv) opioid
receptors and ligands. The patents related to ADL 2-1294 expire between 2015
and 2018. The patents related to kappa receptor analgesics expire between 2016
and 2019. The patents related to alvimopan expire between 2011 and 2013. The
patents related to opioid receptors and ligands expire between 2015 and 2018.
These expiration dates are all based on the presumption that the applicable
maintenance fees are paid and the patents are not held to be invalid.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including ours, are generally uncertain and involve complex legal
and factual questions. Our business could be hurt by any of the following:
.the pending patent applications to which we have rights may not result in
issued patents;
. the claims of any patents which are issued may not provide meaningful
protection;
. we may not be successful in developing additional proprietary
technologies that are patentable;
. patents licensed or issued to us or our customers may not provide a
basis for commercially viable products or provide us with any
competitive advantages and may be challenged by third parties; and
. others may have patents that relate to our technology or business.
In addition, patent law relating to the scope of claims in the technology
field in which we operate is still evolving. The degree of future protection
for some of our rights, therefore, is uncertain. Furthermore, others may
independently develop similar or alternative technologies, duplicate any of
our technologies, and if patents are licensed or issued to us, design around
the patented technologies licensed to or developed by us. In addition, we
could incur substantial costs in litigation if we have to defend ourselves in
patent suits brought by third parties or if we initiate such suits.
Enactment of legislation implementing the General Agreement on Tariffs and
Trade has resulted in certain changes to United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of 17
years from the date of issuance. The new term of United States patents will
commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years,
a 20-year term from the effective date of filing may result in a substantially
shortened period of patent protection which may harm our patent position. If
this change results in a shorter period of patent coverage, our business could
be harmed to the extent that the duration and level of the royalties we are
entitled to receive from our partners are based on the existence of a valid
patent covering the product subject to the royalty obligation.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade secret
protection and confidentiality agreements to protect our interests. We believe
that several elements of our drug discovery system involve proprietary know-
how, technology or data that are not covered by patents or patent
applications. We have taken security measures to protect our proprietary know-
how and technologies and confidential data and continue to explore further
methods of protection. While we require all employees, consultants and
potential business partners to enter into confidentiality agreements, we
cannot be certain that proprietary information will not be disclosed, that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets, or
that we can meaningfully protect our trade secrets. In the case of
arrangements with our potential business partners that require the sharing of
data, our policy is to make available to our potential business partners only
such data as is relevant to our agreements with such customers, under
controlled circumstances, and only during the contractual term of those
agreements, and subject to a duty of confidentiality on the part of our
customer. However, such measures may not adequately protect our data. Any
material leak of confidential data into the public domain or to third parties
may cause our business, financial condition and results of operations to be
harmed.
20
We are a party to various license agreements that give us rights to use
technologies and biological materials in our research and development
processes. We may not be able to maintain such rights on commercially
reasonable terms, if at all. Failure by us to maintain such rights could harm
our business.
Manufacturing
We currently do not have commercial or clinical trial manufacturing
capabilities and do not intend to develop such capabilities for any product
candidate in the near future. We plan to rely on third parties for the
manufacture, packaging and distribution of alvimopan and our other product
candidates.
In August 2000, we entered into a development, scale up and supply
agreement with Torcan Chemical Ltd. for supply of alvimopan for use in
preclinical trials, clinical trials, stability batches for our alvimopan NDA
submission and validation batches for use in alvimopan product intended for
commercial distribution. In March 2001, we entered into a development, scale
up and supply agreement with Girindus AG as a second manufacturer of
alvimopan. The agreement with Girindus AG was amended in November 2001 to
provide for the supply of alvimopan for use in our preclinical and clinical
trials.
Alvimopan finished capsules are manufactured and supplied to us by
Pharmaceutics International Inc. under an agreement entered into in January
2001. Pursuant to this agreement Pharmaceutics International has also
developed an alvimopan liquid-filled soft gelatin capsule.
We require that all third party contract manufacturers and processors
produce alvimopan active pharmaceutical ingredients and finished products in
accordance with the FDA's current Good Manufacturing Practices and all other
applicable laws and regulations. We maintain confidentiality agreements with
potential and existing manufacturers to protect our proprietary rights related
to alvimopan and our other product candidates. We believe that the terms of
each of our agreements with suppliers of active pharmaceutical ingredient and
finished product candidates are comparable to the terms of similar agreements
for similar products entered into by third parties.
We contract with third party manufacturers for the preparation of compounds
other than alvimopan for preclinical research. We intend to rely on third
party manufacturers and packagers to produce larger quantities of active
pharmaceutical ingredients for clinical development and to manufacture final
drug products for both clinical development and commercial sale.
Earlier stage new chemical entities are synthesized in our laboratories,
and scaleup quantities and good manufacturing practices materials for
preclinical toxicology evaluations are conducted by qualified third parties in
strict compliance with cGMPs.
There can be no assurance that our third party manufacturers and suppliers
will be successful in the development, scale up and supply of alvimopam and
our other product candidates. Any failures in this area could have a material
adverse effect on our current and anticipated operations.
Government Regulation
In the United States, pharmaceutical products intended for therapeutic or
diagnostic use in humans are subject to rigorous FDA regulation. The process
of completing clinical trials and obtaining FDA approvals for a new drug is
likely to take a number of years and require the expenditure of substantial
resources. There can be no assurance that any product will receive FDA
approval on a timely basis, if at all.
The drug approval process:
The usual steps required before a new pharmaceutical product for use in
humans may be marketed in the United States include:
. preclinical studies,
21
. submission to the FDA of an Investigational New Drug application (IND),
which must become effective before human clinical trials commence,
. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product,
. submission to the FDA of a New Drug Application (NDA), and
. FDA approval of the NDA prior to any commercial sale or shipment of the
product.
Preclinical studies include laboratory evaluation of product chemistry and
formulation, as well as preclinical studies, to assess the potential safety
and efficacy of the product. The results of the preclinical studies are
submitted to the FDA as a part of an IND and are reviewed by the FDA prior to
the commencement of human clinical trials. Unless the FDA objects to, or
otherwise responds to, an IND submission, the IND becomes effective 30 days
following its receipt by the FDA.
Human clinical trials are typically conducted in three sequential phases
that may overlap:
. Phase I: The drug is initially introduced into healthy human subjects or
patients and tested for safety, dosage tolerance, absorption,
metabolism, distribution and excretion. In addition, it is sometimes
possible to assess efficacy in Phase I trials for analgesia.
. Phase II: This phase involves studies in a limited patient population to
identify possible adverse effects and safety risks, to determine the
efficacy of the product for specific targeted diseases and to determine
dosage tolerance and optimal dosage.
. Phase II/III: Data from Phase II clinical trials can be considered to
fulfill Phase III criteria in certain situations. This can occur when a
dose tested in a Phase II study is proven to be the optimal dose and
this dose is also statistically more effective than placebo.
Classification of the data as Phase III can only be determined after the
study is complete and the data are analyzed.
. Phase III: When Phase II evaluations demonstrate that a dosage range of
the product is effective and has an acceptable safety profile, Phase III
trials are undertaken to further evaluate dosage, clinical efficacy and
to further test for safety in an expanded patient population at
geographically dispersed clinical study sites.
Scientists use statistical techniques to compare responses produced by
drugs versus placebos in clinical trials of drug effectiveness. Statistical
analyses estimate the probability that a positive effect is actually produced
by the drug. This probability is expressed as a "P-value" which refers to the
likelihood that a drug response occurred just "by chance." When a P-value is
reported as P<0.05, the probability that the drug produced its effect "by
chance" is less than 5% and the probability that the drug produced a
reproducible positive effect is greater than 95%. When a P-value is reported
as P<0.01, the probability that the drug produced the positive effect is
greater than 99%. These values are reported in several instances above to
indicate how certain we are that we have obtained beneficial responses in our
clinical drug trials. P-values greater than 0.05 and equal to or less than
0.10 are generally not considered statistically significant by themselves but
may indicate a strong trend in data that provide support for further clinical
research.
Efficacy studies for analgesics
Analgesic efficacy can initially be assessed in Phase I clinical trials.
Human experimental pain models represent an important link between preclinical
research and clinical trials in patients. We use validated human experimental
pain models, such as the burn pain model, to evaluate efficacy of our products
during some of our Phase I clinical trials. Historical results from
preclinical and earlier clinical trials may not be predictive of the results
of later trials.
For analgesic drugs, Phase II efficacy studies have sometimes served as
pivotal studies. Phase III studies for these products normally focus greater
attention on safety in larger patient populations rather than on efficacy.
There can be no assurance that Phase I, Phase II, or Phase III testing will be
completed successfully within any specified time period, if at all, with
respect to any of our products subject to such testing. Furthermore, the FDA
may suspend clinical trials at any time if there is concern that the
participants are being exposed to an unacceptable health risk.
22
The results of pharmaceutical development, preclinical studies, and
clinical trials are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the product. The FDA may require
additional testing or information before approving the NDA. The FDA may deny
an NDA approval if safety, efficacy, or other regulatory requirements are not
satisfied. Moreover, if regulatory approval of the product is granted, such
approval may require post-marketing testing and surveillance to monitor the
safety of the product or may entail limitations on the indicated uses for
which the product may be marketed. Finally, product approval may be withdrawn
if compliance with regulatory standards is not maintained or if problems occur
following initial marketing.
Other regulatory requirements
The FDA mandates that drugs be manufactured in conformity with cGMP
regulations. If approval is granted, requirements for labeling, advertising,
record keeping and adverse experience reporting will apply. Failure to comply
with these requirements could result, among other things, in suspension of
regulatory approval, recalls, injunctions or civil or criminal sanctions. We
may also be subject to regulations under other federal, state, and local laws,
including the Occupational Safety and Health Act, the Environmental Protection
Act, the Clean Air Act, national restrictions on technology transfer, and
import, export, and customs regulations. In addition, any of our products that
contains one of our product candidates in combination with narcotic analgesics
will be subject to DEA regulations relating to manufacturing, storage,
distribution and physician prescribing procedures. There can be no assurance
that any portion of the regulatory framework under which we currently operate
will not change and that such change will not have a material adverse effect
on our current and anticipated operations.
Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign countries
must be obtained prior to the commencement of clinical trials and subsequent
sales and marketing efforts in those countries. The approval procedure varies
in complexity from country to country, and the time required may be longer or
shorter than that required for FDA approval.
The Controlled Substances Act imposes various registration, record-keeping
and reporting requirements, procurement and manufacturing quotas, labeling and
packaging requirements, security controls and a restriction on prescription
refills on certain pharmaceutical products. A principal factor in determining
the particular requirements, if any, applicable to a product is its actual or
potential abuse profile. A pharmaceutical product may be "scheduled" as a
Schedule I, II, III, IV or V substance, with Schedule I substances considered
to present the highest risk of substance abuse and Schedule V substances the
lowest.
Employees
As of December 31, 2001, we had 122 full-time employees and three part-time
employees, including 24 employees with Ph.D. or M.D. degrees. One hundred and
one of our employees are engaged in research and development activities. Most
of our senior management and professional employees have had prior experience
in pharmaceutical or biotechnology companies. None of our employees are
covered by collective bargaining agreements. We believe that our relations
with our employees are good.
ITEM 2. PROPERTIES
We currently occupy two suites with a combined 24,340 square feet of leased
office and laboratory space in Malvern, Pennsylvania. The leases expire in May
2003 and October 2004. We also occupy approximately 20,000 square feet of
additional office space in Exton, Pennsylvania, which accommodates our product
development and administrative staff. The lease expires in October 2002. We
believe that suitable space will be available, when needed, on commercially
reasonable terms for any expansion requirements.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 2001.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our common stock is traded on The Nasdaq National Market under the
symbol "ADLR". The initial public offering of our stock occurred on November
13, 2000 at an initial price of $15.00 per share. The price range per share
reflected in the table below is the highest and lowest sale price for our
stock as reported by The Nasdaq National Market during each quarter our common
stock has been publicly traded.
High Low
------- -------
2000
November 13 through December 31,............................... $24.625 $14.875
2001
First Quarter.................................................. $22.625 $13.938
Second Quarter................................................. 29.32 13.36
Third Quarter.................................................. 23.75 9.85
Fourth Quarter................................................. 19.10 14.30
As of March 25, 2002, the last reported sale price for our common stock on
the Nasdaq National Market was $12.04 per share.
(b) Holders. As of March 25, 2002, there were approximately 206 holders of
record of our common stock.
(c) Dividends. We have never declared or paid cash dividends on our capital
stock, and we do not intend to pay cash dividends in the foreseeable future.
We plan to retain any earnings for use in the operation of our business and to
fund future growth.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Report. The consolidated statements of operations
data except as otherwise indicated below for the three years ended December
31, 2001, and as of December 31, 2000 and 2001, are derived from our audited
financial statements which are included elsewhere in this Report. The
consolidated statements of operations data for the years ended December 31,
1997 and 1998 and the consolidated balance sheet data as of December 31, 1997,
1998 and 1999 are derived from audited financial statements not included in
this Report. Historical results are not necessarily indicative of the results
to be expected in the future and should be read in conjunction with the
consolidated financial statements and notes thereto that are incorporated by
reference into this Report.
Please see Note 2 to our consolidated financial statements for an
explanation of the method used to calculate the net loss allocable to common
stockholders, net loss per share and the number of shares used in the
computation of per share amounts.
24
Years Ended December 31,
-----------------------------------------------
1997 1998 1999 2000 2001
------- -------- -------- -------- --------
(In thousands, except per share data)
Consolidated Statements of
Operations
Grant and license revenues.... $ -- $ 150 $ 11 $ 44 $ 1,387
Operating expenses incurred
during the development stage:
Research and development...... 3,700 7,074 7,398 15,884 36,005
General and administrative.... 1,585 2,277 3,698 7,626 15,229
------- -------- -------- -------- --------
Total operating expenses...... 5,285 9,351 11,096 23,510 51,234
------- -------- -------- -------- --------
Net interest income
(expense).................... 486 385 404 2,228 7,440
------- -------- -------- -------- --------
Net loss...................... (4,799) (8,816) (10,681) (21,238) (42,407)
Beneficial conversion feature
on mandatorily redeemable
convertible preferred stock.. -- -- -- 48,906 --
Undeclared dividends
attributable to mandatorily
redeemable convertible
preferred.................... 1,408 1,704 2,430 4,103 --
------- -------- -------- -------- --------
Net loss allocable to common
stockholders................. $(6,207) $(10,520) $(13,111) $(74,247) $(42,407)
======= ======== ======== ======== ========
Basic and diluted net loss per
share allocable to common
stockholders................. $ (6.80) $ (10.59) $ (12.55) $ (13.99) $ (1.42)
Shares used in computing basic
and diluted net loss per
share allocable to common
stockholders................. 912 993 1,045 5,307 29,801
As of December 31,
-----------------------------------------------
1997 1998 1999 2000 2001
------- -------- -------- -------- --------
(In thousands)
Consolidated Balance sheet
data
Cash, cash equivalents and
short-term investments....... $10,710 $ 12,046 $ 5,264 $131,630 $156,444
Working capital............... 9,670 10,024 3,069 128,671 149,708
Total assets.................. 11,508 12,773 6,258 135,610 164,182
Total long-term debt ......... 174 66 -- 215 --
Mandatorily redeemable
convertible preferred stock.. 21,375 30,475 33,000 -- --
Deficit accumulated during the
development stage............ (11,507) (20,322) (31,004) (52,242) (94,649)
Total stockholders' equity
(deficit).................... (11,264) (19,913) (29,590) 129,040 152,781
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the notes to those statements included elsewhere in this
Report. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated by forward-looking information due to factors discussed under
"Item 1. Business" elsewhere in this Report.
Overview
We have devoted substantially all of our resources since we began our
operations in November 1994 to the discovery and development of proprietary
pharmaceutical products for the treatment of pain and the side effects that
are caused by current pain treatments. We are a development stage
pharmaceutical company and have not generated any revenues from product sales.
We have not been profitable and, since our inception, we have incurred a
cumulative net loss of approximately $94.6 million through December 31, 2001.
These losses have resulted principally from costs incurred in research and
development activities and general and administrative expenses. We have five
product candidates in Phase I through Phase III clinical trials.
Our revenues in the near term are expected to consist primarily of
milestone payments on certain of our product candidates licensed to others for
development. These payments are dependent on continued successful development
and achievement of certain clinical and regulatory milestones by licensees and
will not, in any event, be material relative to our operating expenses. In the
event that our development efforts or those of our licensees result in
regulatory approval and successful commercialization of our product
candidates, we will generate revenues from sales of our products and from the
receipt of royalties on sales of licensed products. Product revenues will
depend on our ability to receive regulatory approvals for, and successfully
market, our product candidates. We may also finance our future operations with
a combination of equity offering, payments for strategic research and
marketing arrangement.
We expect to incur additional operating losses for at least the next
several years. Research, development and clinical trial costs relating to
product candidates will continue to increase. Manufacturing, marketing and
sales costs will increase as we prepare for the commercialization of alvimopan
which, assuming regulatory approval, we expect to occur in 2003.
We intend to expand our marketing activities in 2002 and 2003 in
preparation for the establishment of a marketing and sales force for our
product candidates in the United States. We may also rely on collaborations
with pharmaceutical companies in the United States to market and sell certain
of our product candidates. In international markets, we intend to rely on
collaborations with pharmaceutical companies to market and sell our product
candidates rather than establish our own sales force.
The Company believes that its current financial resources and sources of
liquidity are adequate to fund operations through the third quarter of 2003
based on a level of research and development and administrative activities
necessary to achieve its short-term objectives.
During 2001, the staff of the SEC released a cautionary advice regarding
critical accounting policies and practices. The release defines critical
policies and practices as items that are both most important to the portrayal
of a company's financial condition and results, and require management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effects of matters that are inherently uncertain. Due
to the nature of our operations and our current stage of development, we do
not believe that we currently face the complex or subjective judgments
inferred by the staff in the advice. As we progress in our development and
move closer to product approval and commercial operation, we may face such
issues which require increased levels of management estimation and complex
judgment. Our practice of applying APB
26
Opinion No. 25 to account for our stock option plan rather than SFAS No. 123
could be considered to fall within the realm of this cautionary advice. Had we
applied SFAS No. 123 our net loss allocable to common stockholders for the
years ended December 31, 1999, 2000, 2001 would have been increased by
approximately $239,253, $289,133, and $842,817, respectively (See footnote 8
to the consolidated financial statements).
We enter into contracts with third party vendors to perform clinical trials
and the manufacture of drug candidates. The Company recognizes these expenses
based on the percentage of completion method to match the period in which they
are incurred. These contracts can be terminated by either party.
Milestone Payments, Royalties and License Fees
We paid Roberts Laboratories Inc., which merged with Shire Pharmaceuticals,
plc, a total of $600,000 through December 31, 2001 for the exclusive worldwide
license to alvimopan. Our license agreement with Roberts requires us to make
payments to Roberts if and when two milestones are achieved. Roberts licensed
the rights to alvimopan from Eli Lilly, and Eli Lilly consented to the
assignment by Roberts to us of Roberts' rights and obligations. Under the
agreement with Eli Lilly, we will make a milestone payment to Eli Lilly if and
when we receive FDA approval to sell alvimopan. We will be required to pay
royalties to Eli Lilly and Roberts on any sales of alvimopan.
Under agreements with other institutions, we will reimburse those
institutions for certain patent expenses incurred. In the aggregate these
payments are not material.
Results of Operations
Years Ended December 31, 2001 and 2000
Grant and License Revenues. Our grant and license revenues were
approximately $1.39 million and $43,860 for the years ended December 31, 2001
and 2000 respectively. Revenues recognized for the year ended December 31,
2001 consisted of a milestone payment of $500,000 from an affiliate of
GlaxoSmithKline, $24,123 which is a portion of a deferred $500,000 license fee
from the same affiliate, $438,596 which was the remaining balance of the
deferred license fee received from the same affiliate in July 1999 as a non-
refundable up-front payment upon signing the agreement, which was recorded as
revenue upon termination of all continuing involvement, a milestone payment of
$250,000 from Santen Pharmaceutical Co., Ltd. $26,316 which is a portion of
the $500,000 license fee received from Santen Pharmaceutical Co., Ltd., on
signing an agreement in April 2000, and $80,071 from a portion of the Small
Business Innovation Research (SBIR) grants awarded by the National Institutes
of Health (NIH) in September 2001. Revenue recognized for the year ended
December 31, 2000 consisted of $26,316 which is a portion of the $500,000
license fee received from an affiliate of GlaxoSmithKline on signing an
agreement in July 1999, and $17,544 which is a portion of the deferred
$500,000 license fee received from Santen Pharmaceutical Co., Ltd. on signing
an agreement in April 2000. The revenues from Santen Pharmaceutical Co., Ltd.
are being recognized on a straight line basis over the remaining life of the
patents that were licensed in that collaboration.
Research and Development Expenses. Our research and development expenses
consisted primarily of salaries and other personnel-related expenses, costs of
clinical trials, costs to manufacture drug candidates, stock-based
compensation, allocated and direct facility expenses and other research
expenses. Research and development expenses increased to approximately $36.0
million for the year ended December 31, 2001 from $15.9 million for the year
ended December 31, 2000. This increase is primarily due to the increased costs
associated with developing our product candidates and additional product
candidates being researched as well as higher personnel costs resulting from
increased staffing levels. For the twelve months ended December 31, 2001, the
costs of conducting Phase I and Phase II clinical trials, the expansion in the
Phase III clinical trials and the costs of manufacturing the clinical trial
materials for alvimopan increased by approximately $10.7 million compared to
the same period in 2000. Laboratory costs increased by approximately $1.4
million compared to the same period in 2000. In addition, we paid license fees
of approximately $0.3 million to Arch Development
27
Corporation and the National Institutes of Health in 2001. Database services
increased by approximately $0.6 million in the twelve months ended December
31, 2001 compared to the same period in 2000. Personnel costs increased by
approximately $4.3 million compared to the same period in 2000. Amortization
of deferred stock-based compensation expenses increased by approximately $1.3
million in the twelve months ended December 31, 2001 compared to the same
period in 2000. An increase in other expenses, including office rent and
office expense of approximately $0.9 million, compared to the same period in
2000 resulted from an increase in office space because of additional
personnel.
General and Administrative Expenses. Our general and administrative
expenses increased to approximately $15.2 million for the twelve months ended
December 31, 2001 from approximately $7.6 million in the twelve months ended
December 31, 2000, an increase of approximately $7.6 million. The increase is
primarily due to approximately $1.0 million of higher payroll expenses related
to additional personnel, approximately $0.9 million of higher amortization of
deferred stock-based compensation expense, approximately $3.5 million of
marketing expenses related to alvimopan, approximately $0.4 million of
investor and public relations expenses, approximately $0.4 million of
corporate legal fees, approximately $0.5 million in consulting fees, and
increases of approximately $0.8 million for other expenses including
insurance, office rent and office expense.
Net Interest Income (Expense). Our interest income increased from
approximately $2.3 million for the year ended December 31, 2000 to
approximately $7.5 million for the year ended December 31, 2001 due to the
investment returns on the proceeds from our initial public offering in
November 2000 and a follow-on round of financing in May 2001. Our interest
expense represents interest incurred on the financing of insurance premiums.
Net Loss. Our net loss for the twelve months ended December 31, 2001 and
2000 was approximately $42.4 million and approximately $21.2 million,
respectively. The increase in the net loss reflects higher costs associated
with the expansion of Phase II and Phase III clinical development of our
product candidates, higher manufacturing costs for the clinical trial
materials for alvimopan and increased staffing levels partially offset by
higher revenues.
Net Loss Allocable to Common Stockholders. For the year ended December 31,
2001, the net loss allocable to common stockholders was approximately $42.4
million, an amount equal to the net loss for the period. For the same period
in 2000, the net loss allocable to common stockholders was approximately $74.2
million and included a net loss of approximately $21.2 million, a beneficial
conversion feature on mandatorily redeemable convertible preferred stock of
approximately $48.9 million and undeclared dividends attributable to
mandatorily redeemable convertible preferred stock of approximately $4.1
million. Therefore, the net loss allocable to common stockholders decreased by
approximately $31.8 million for the period ended December 31, 2001 compared to
the same period in 2000 due to the non-recurring items in 2000.
Years Ended December 31, 2000 and 1999
Grant and License Revenues. Our grant and license revenues were $43,860 and
$10,965 for the years ended December 31, 2000 and 1999, respectively. Revenues
recognized for the year ended December 31, 2000 consisted of $26,316 which is
a portion of the $500,000 license fee received from an affiliate of
GlaxoSmithKline on signing that agreement in July 1999, and $17,544 which is a
portion of the $500,000 license fee received from Santen Pharmaceutical Co.,
Ltd. on signing that agreement in April 2000. Revenue recognized for the year
ended December 31, 1999 consisted of a portion of the $500,000 license fee
received from the affiliate of the GlaxoSmithKline agreement signed in July
1999. These revenues were recognized on a straight line basis over the
remaining life of the patents that were licensed in those collaborations.
Research and Development Expenses. Our research and development expenses
consist primarily of salaries and other personnel-related expenses, costs of
clinical trials, costs to manufacture drug candidates, stock-based
compensation and other research expenses. Research and development expenses
increased to approximately $15.9 million for the year ended December 31, 2000
from approximately $7.4 million for the year ended December 31, 1999. This
increase is primarily due to the costs of developing our product candidates as
well as higher personnel costs resulting from increased staffing levels. In
the year 2000, the costs of conducting
28
Phase I, Phase II and the initiation of Phase III clinical trial activities
and the costs of manufacturing the clinical trial materials for alvimopan
increased by approximately $4.9 million compared to the same period in 1999.
Personnel costs increased by approximately $1.6 million in the year ended
December 31, 2000 compared to the same period in 1999. Amortization of
deferred stock-based compensation expenses increased by approximately $1.7
million in the year ended December 31, 2000 compared to the same period in
1999. However, clinical development costs for ADL 2-1294 decreased by
approximately $0.8 million for the year ended December 31, 2000 compared to
the same period in 1999 because the affiliate of GlaxoSmithKline and Santen
became responsible for those costs.
General and Administrative Expenses. Our general and administrative
expenses increased to approximately $7.6 million for the year ended December
31, 2000 from approximately $3.7 million in the same period in 1999, an
increase of $3.9 million. The increase is primarily due to approximately $1.2
million of higher amortization of deferred stock-based compensation expense,
approximately $1.3 million for higher personnel expenses related to additional
personnel and approximately $1.1 million of expenses which were incurred in
connection with our postponed initial public offering in April 2000.
Net Interest Income (expense). Our interest income increased from $424,667
for the year ended December 31, 1999 to approximately $2.3 million for the
year ended December 31, 2000 due to investment returns on the proceeds from
the sale of our initial public offering in November 2000 and the sale of
Series G and H preferred stock in January 2000 and July 2000, respectively.
Our interest expense represents interest incurred on our equipment financing
facility and the financing of insurance premiums.
Net Loss. Our net loss for the years ended December 31, 1999 and 2000 was
approximately $10.7 million and $21.2 million, respectively. The increase in
the net loss reflects higher costs associated with the expansion of Phase II
clinical development and manufacturing costs for alvimopan, increased staffing
levels and costs for the postponed initial public offering.
Net Loss Allocable to Common Stockholders. Our net loss allocable to common
stockholders was approximately $13.1 million for the year ended December 31,
1999 compared to approximately $74.2 million in the same period of 2000. The
increase of approximately $61.1 million reflects the increase in the net loss
of $10.5 million, an increase in undeclared dividends and accretion of
offering costs related to the convertible preferred stock of $1.7 million and
a beneficial conversion feature on Series G and H mandatorily redeemable
convertible preferred stock of $12.3 million and $36.6 million, respectively.
Beneficial Conversion Feature. In January 2000, we sold 12,306,000 shares
of Series G mandatorily redeemable convertible preferred stock for net
proceeds of $12.3 million. In July 2000, we sold 23,921,425 shares of Series H
mandatorily redeemable convertible preferred stock for net proceeds of $36.6
million. After evaluating the fair value of our common stock in contemplation
of our initial public offering, we determined that the issuance of the Series
G and H mandatorily redeemable convertible preferred stock resulted in a
beneficial conversion feature calculated in accordance with Emerging Issues
Task Force consensus No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features." Because the shares of Series G and H
mandatorily redeemable convertible preferred stock were issued below the
deemed fair value of our common stock, a beneficial conversion feature of
$48.9 million was reflected in calculating the net loss allocable to common
shareholders for the year ended December 31, 2000.
Liquidity and capital resources
As of December 31, 2001, we had cash, cash equivalents and short term
investments of approximately $156.4 million, and working capital was
approximately $149.7 million.
From inception through December 31, 2001, net cash used in operating
activities was approximately $74.4 million. Net cash used in investing
activities since inception was approximately $5.4 million for the acquisition
of laboratory equipment, leasehold improvements and furniture and fixtures and
office equipment, and $105.7 million for net purchases of short-term
investments.
29
From inception through December 31, 2001, we financed our operations
primarily from the net proceeds generated from the issuance of mandatorily
redeemable convertible preferred stock (preferred stock), the issuance of
common stock in our initial public offering and the issuance of common stock
in a follow-on offering.
Through December 31, 2000, we had received total net proceeds of
approximately $79.1 million from the sales of mandatorily redeemable
convertible preferred stock. On November 13, 2000 and November 30, 2000, we
received net proceeds of approximately $95.4 million from the sale of common
stock, including the exercise of the over-allotment option, from our initial
public offering. In May 2001, we received net proceeds of approximately $59.0
million in a follow-on round of financing.
Our capital expenditures in the year 2001 were approximately $2.9 million.
We lease three corporate and research and development facilities and other
equipment under operating leases expiring in October 2002, May 2003 and
October 2004. Current total minimum annual payments under these leases are
$893,068 for 2002, $258,153 for 2003 and $72,127 for 2004.
Research and development expenditures, including clinical trial expenses,
are expected to increase as we continue to develop our product candidates. We
expect that our operating expenses and capital expenditures will increase in
future periods as a result of the manufacturing scale-up in anticipation of
commercialization of our product candidates, assuming we receive the necessary
regulatory approvals. The initiation of commercial activities will require the
hiring of additional staff to coordinate contract-manufacturing services at
multiple locations. Sales and marketing activities will require hiring and
training of a sales and marketing staff in 2002 and 2003. As of December 31,
2001, we may be required to pay up to an aggregate of $6.0 million upon the
occurrence of certain future clinical and regulatory events under various
agreements (including our agreement with Lilly). We also intend to hire
additional research and development, clinical and administrative staff. Our
capital expenditure requirements will depend on numerous factors, including
the progress of our research and development programs, the time required to
file and process regulatory approval applications, the development of
commercial manufacturing capability, the ability to obtain additional
licensing arrangements, and the demand for our product candidates, if and when
approved by the FDA or other regulatory authorities.
In summary, the following represents our contractual obligations as of
December 31, 2001:
Contractual Obligations
Less than 1-3
Total 1 year years 4-5 years Thereafter
--------- --------- ------- --------- ----------
Long-Term Debt............... 214,819 214,819 -- -- --
Operating Leases............. 1,223,348 893,068 258,153 72,127 --
--------- --------- ------- ------ ---
Total Contractual Cash
Obligations................. 1,438,167 1,107,887 258,153 72,127 --
========= ========= ======= ====== ===
(1) This table does not include any milestone payments under agreements we
have entered into in relation to our in-licensed technology, as the timing
and likelihood of such payments are not known. Also, minimum annual
research expenditures pursuant to such license agreements have been
excluded from this table as we expect to spend those amounts as we
progress the development of the underlying technologies.
Future compensation expense relating to all options outstanding at December
31, 2001 is estimated to be approximately $5,095,325, $4,788,852 and
$1,643,520 for the years ending December 31, 2002, 2003 and 2004,
respectively. Compensation expense relating to the non-employee portion of
options granted is subject to change each reporting period based upon changes
in the fair value of our common stock, estimated volatility and the risk free
interest rate until the non-employee completes his or her performance under
the option agreement.
We expect that we will require significant additional financing in the
future to fund operations. We do not know whether additional financing will be
available when needed, or that if available, we will obtain financing on terms
favorable to our stockholders or to us. We have used substantial amounts of
cash to date and expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure, research and
development activities and marketing activities.
30
We believe that existing cash and investment securities and anticipated
cash flow from existing collaborations will be sufficient to support our
current operating plan through the third quarter of 2003. We have based this
estimate on assumptions that may prove to be wrong. Our future capital
requirements depend on many factors that affect our research, development and
sales and marketing activities.
To the extent we raise additional capital by issuing equity securities, our
stockholders may experience substantial dilution. To the extent we raise
additional funds through collaboration and licensing arrangements, we may be
required to relinquish rights to our technologies or product candidates, or
grant licenses on terms that are not favorable to us. If adequate funds are
not available, we will not be able to continue developing our product
candidates.
Additional financing may not be available on acceptable terms from any
source as a result, of among other factors, our inability to file and obtain
regulatory approval of our product candidates, our inability to achieve
commercial acceptance of our product candidates if approved, our inability to
generate revenue through our existing collaborative agreements, our inability
to enter into new collaborative agreements and our inability to file,
prosecute, defend and enforce any patent claims or any intellectual property
rights.
Income Taxes
As of December 31, 2001 we had approximately $30,052,000 of Federal and
$30,888,000 of state net operating loss carryforwards available to offset
future taxable income. The Federal and state net operating loss carryforwards
will begin expiring in 2009 and 2005, respectively, if not utilized. In
addition, the utilization of the state net operating loss carryforwards is
subject to a $2 million annual limitation. At December 31, 2001, we also had
approximately $1,387,000 of Federal and $48,000 of state research and
development tax credit carryforwards, which begin expiring in 2011, and are
available to reduce Federal and state income taxes.
The Tax Reform Act of 1986 (the Act) provides for a limitation on the
annual use of net operating loss and research and development tax credit
carryforwards (following certain ownership changes, as defined by the Act)
that could significantly limit our ability to utilize these carryforwards. We
may have experienced various ownership changes, as defined by the Act, as a
result of past financings. Additionally, because United States tax laws limit
the time during which these carryforwards may be applied against future taxes,
we may not be able to take full advantage of these attributes for Federal
income tax purposes.
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations. SFAS No. 141 requires the use of the purchase
method of accounting for all business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. The adoption of SFAS No.
141 will not have an impact on our historical consolidated financial
statements.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires goodwill and other intangible assets with
indefinite lives to no longer be amortized, but instead tested for impairment
at least annually. In addition, the standard includes provisions for the
reclassification of certain existing intangibles as goodwill and reassessment
of the useful lives of existing recognized intangibles. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. The adoption of
SFAS No. 142 will not have an impact on our consolidated financial statements
because we have no goodwill or intangible assets.
In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 143, Accounting for Asset Retirement Obligations. SFAS 143
requires the recognition of a liability for an asset retirement obligation in
the period in which it occurred. A retirement obligation is defined as one in
which a legal obligation exists in the future resulting from existing laws,
statutes or contracts. SFAS 143 is effective for fiscal years beginning after
June 15, 2002. The Company does not believe the adoption of SFAS No. 143 will
have an impact on its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supercedes both SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, and the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a business
31
segment (as previously defined in that Opinion). SFAS No. 144 retains the
fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to
be disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. For example, SFAS No. 144 provides guidance on
how long-lived assets that are used as part of a group should be evaluated for
impairment, establishes criteria for when a long-lived asset is held for sale,
and prescribes the accounting for a long-lived asset that will be disposed of
other than by sale. SFAS No. 144 retains the basic provisions of APB No. 30 on
how to present discontinued operations in the income statement but broadens
that presentation to include a component of an entity (rather than a segment
of a business). Unlike SFAS No. 121, an impairment assessment under SFAS No.
144 will never result in a write-down of goodwill. Rather, goodwill is
evaluated for impairment under SFAS No. 142, Goodwill and Other Intangible
Assets.
We are required to adopt SFAS No. 144 no later than the year beginning
after December 15, 2001, and plan to adopt its provisions for the quarter
ending March 31, 2002. We do not expect the adoption of SFAS No. 144 for
assets held for use to have a material impact on our consolidated financial
statements because the impairment assessment under SFAS No. 144 is largely
unchanged from SFAS No. 121. The provisions of the new standard for assets
held for sale or disposal generally are required to be applied prospectively
after the adoption date to newly initiated disposal activities. Therefore, we
cannot determine the potential effects that the adoption of these provisions
of SFAS No. 144 will have on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A substantial portion of our assets are investment grade debt instruments
such as direct obligations of the U.S. Treasury and corporate securities,
including commercial paper and corporate debt instruments. The market value of
such investments fluctuates with current market interest rates. In general, as
rates increase, the market value of a debt instrument would be expected to
decrease. The opposite is also true. To minimize such market risk, we have in
the past and, to the extent possible, will continue in the future to hold such
debt instruments to maturity at which time the debt instrument will be
redeemed at its stated or face value. Due to the short duration and nature of
these instruments, we do not believe that we have a material exposure to
interest rate risk related to our investment portfolio. The investment
portfolio at December 31, 2001 was $106.4 million and the weighted-average
interest rate was approximately 3.96%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial
statements filed herewith is found at "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates by reference the information contained under the
captions "Election of Directors, Item 1 on Proxy Card", "Executive Officers of
the Registrant" and "Section 16(a) Beneficial Ownership Reporting Compliance"
in its Definitive Proxy Statement relative to its annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Report pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates by reference the information contained under the
caption "Compensation Table" in its Definitive Proxy Statement related to its
annual meeting of stockholders, to be filed within 120 days after the end of
the year covered by this Report pursuant to Section 14(a) of the Securities
Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates by reference the information contained under the
caption "Security Ownership of Certain Beneficial Owners and Directors and
Officers" in its Definitive Proxy Statement related to its annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Report pursuant to Section 14(a) the Securities Exchange Act of 1934, as
amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information contained under the
caption "Certain Relationships and Related Transactions" in its Definitive
Proxy Statement related to its annual meeting of stockholders, to be filed
within 120 days after the end of the year covered by this Report pursuant to
Section 14(a) the Securities Exchange Act of 1934, as amended.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Reference is made to the Index to Consolidated Financial Statements on
Page F-1.
2. Financial Statement Schedules
None
(b) Report of Form 8-K
None
(c) Exhibits
The following is a list of exhibits required by Item 601 of Regulation S-K
to be filed as part of this Report. Where so indicated by footnote, exhibits
which were previously filed are incorporated by reference. For exhibits
incorporated by reference, the location of the exhibit in the previous filing
is indicated in parentheses.
Reference is made to the Exhibit Index on page 36.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Security Exchange
Act of 1934, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 28, 2002 Adolor Corporation
/s/ John J. Farrar
By: _________________________________
Name: John J. Farrar
Title: President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities set forth above.
Signature Title Date
--------- ----- ----
/s/ John J. Farrar President, Chief Executive Officer March 28, 2002
____________________________________ and Director (Principal Executive
John J. Farrar Officer)
/s/ Peter J. Schied Senior Vice President, Chief March 28, 2002
____________________________________ Financial Officer and Secretary
Peter J. Schied (Principal
Financial Officer)
/s/ Ellen M. Feeney Director March 28, 2002
____________________________________
Ellen M. Feeney
/s/ Paul Goddard Director March 28, 2002
____________________________________
Paul Goddard
/s/ David M. Madden Director March 28, 2002
____________________________________
David M. Madden
/s/ Robert T. Nelsen Director March 28, 2002
____________________________________
Robert T. Nelsen
/s/ Claude H. Nash Director March 28, 2002
____________________________________
Claude H. Nash
35
EXHIBIT INDEX
The following is a list of exhibits required by Item 601 of Regulation S-
K filed as part of this Report. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits incorporated
by reference, the location of the exhibit in the previous filing is indicated
in parentheses.
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of Adolor
(incorporated by reference to Exhibit 3.1 to the Report on Form 10-Q
filed by the Company on August 14, 2001).
3.2 Restated Bylaws of Adolor (incorporated by reference to Exhibit 3.2 to
the Report on Form 10-K filed by the Company on April 2, 2001).
4.1 Series A Convertible Preferred Stock Purchase Agreement among Opian
Pharmaceuticals, Inc. and the parties set forth therein, dated
November 7, 1994 (incorporated by reference to Exhibit 4.1 to the
Registration Statement filed by the Company on February 8, 2000
(Registration No. 333-96333)).
4.2 Series B Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated March 1, 1996 (incorporated
by reference to Exhibit 4.2 to the Registration Statement filed by the
Company on February 8, 2000).
4.3 Series C Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated March 1, 1997 (incorporated
by reference to Exhibit 4.3 to the Registration Statement filed by the
Company on February 8, 2000).
4.4 Stock Purchase Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997 (incorporated by reference to Exhibit
4.4 to the Registration Statement filed by the Company on February 8,
2000).
4.5 Series E Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated December 8, 1998
(incorporated by reference to Exhibit 4.5 to the Registration
Statement filed by the Company on February 8, 2000).
4.6 Series F Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated July 26, 1999 (incorporated
by reference to Exhibit 4.6 to the Registration Statement filed by the
Company on February 8, 2000).
4.7 Series G Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated January 10, 2000
(incorporated by reference to Exhibit 4.7 to the Registration
Statement filed by the Company on February 8, 2000).
4.8 Registration Rights Agreement among Opian Pharmaceuticals, Inc. and
the parties set forth therein, dated November 4, 1994 (incorporated by
reference to Exhibit 4.8 to the Registration Statement filed by the
Company on February 8, 2000).
4.9 Amendment No. 1 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated February 27, 1996 (incorporated by
reference to Exhibit 4.9 to the Registration Statement filed by the
Company on February 8, 2000).
4.10 Amendment No. 2 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated May 1, 1997 (incorporated by
reference to Exhibit 4.10 to the Registration Statement filed by the
Company on February 8, 2000).
4.11 Amendment No. 3 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated December 8, 1998 (incorporated by
reference to Exhibit 4.11 to the Registration Statement filed by the
Company on February 8, 2000).
4.12 Amendment No. 4 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated July 26, 1999 (incorporated by
reference to Exhibit 4.12 to the Registration Statement filed by the
Company on February 8, 2000).
36
Exhibit
Number Description
------- -----------
4.13 Amendment No. 5 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated January 10, 2000 (incorporated by
reference to Exhibit 4.13 to the Registration Statement filed by the
Company on February 8, 2000).
4.14 Form of Common Stock Certificate (incorporated by reference to Exhibit
4.14 to Amendment No. 3 to the Registration Statement filed by the
Company on March 21, 2000).
4.15 Series H Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated July 6, 2000 (incorporated by
reference to Exhibit 4.15 to Amendment No. 8 to the Registration
Statement filed by the Company on October 23, 2000).
4.16 Amendment No. 6 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated June 29, 2000 (incorporated by
reference to Exhibit 4.16 to Amendment No. 8 to the Registration
Statement filed by the Company on October 23, 2000).
4.17 Rights Agreement, dated as of February 20, 2001, between Adolor and
StockTrans, Inc., as Rights Agent (incorporated by reference to
Exhibit 4.1 to Form 8-K filed by the Company on February 23, 2000),
which included as Exhibit B thereto the Form of Rights Certificate,
incorporated by reference to Exhibit 1.1 to the Company's Registration
Statement on Form 8-A, dated February 22, 2001.
10.1 Form of Amended and Restated 1994 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1 to the Report on 10-Q filed
by the Company on August 14, 2001).***
10.2 Option and License Agreement between Adolor and Roberts Laboratories,
Inc., dated June 10, 1998 (incorporated by reference to Exhibit 10.2
to Amendment No. 1 to the Registration Statement filed by the Company
on February 18, 2000).**
10.3 License Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997 (incorporated by reference to Exhibit
10.2 to Amendment No. 1 to the Registration Statement filed by the
Company on February 18, 2000).**
10.4 License Agreement between Adolor and SB Pharmaco Puerto Rico Inc.,
dated July 26, 1999 (incorporated by reference to Exhibit 10.4 to
Amendment No. 3 to the Registration Statement filed by the Company on
March 21, 2000).**
10.5 Development and License Agreement between Adolor and Santen
Pharmaceutical Co., Ltd., dated April 25, 2000 (incorporated by
reference to Exhibit 10.5 to Amendment No. 10 to the Registration
Statement filed by the Company on November 9, 2000).**
10.6 Sublease Agreement between Adolor and Environ Products, Inc., dated
October 11, 2000 (incorporated by reference to Exhibit 10.6 to
Amendment No. 8 to the Registration Statement filed by the Company on
October 23, 2000).
10.7 Letter Agreement between Opian Pharmaceuticals, Inc. and John J.
Farrar, dated October 9, 1994 (incorporated by reference to Exhibit
10.7 to Amendment No. 8 to the Registration Statement filed by the
Company on October 23, 2000).***
10.8 Letter Agreement between Adolor and Alan L. Maycock dated January 6,
1995 (incorporated by reference to Exhibit 10.8 to Amendment No. 8 to
the Registration Statement filed by the Company on October 23,
2000).***
10.9 Letter Agreement between Adolor and Peter J. Schied dated April 23,
1997 (incorporated by reference to Exhibit 10.9 to Amendment No. 8 to
the Registration Statement filed by the Company on October 23,
2000).***
10.10 Letter Agreement between Adolor and Andrew Reddick dated March 27,
2000 (incorporated by reference to Exhibit 10.10 to Amendment No. 8 to
the Registration Statement filed by the Company on October 23,
2000).***
37
Exhibit
Number Description
------- -----------
10.12 Letter Agreement between Adolor and Pacific Growth Equities, Inc.,
dated May 2, 2000 (incorporated by reference to Exhibit 10.12 to
Amendment No. 9 to the Registration Statement filed by the Company on
November 8, 2000).
23.1 Consent of KPMG LLP.*
- --------
*Filed herewith.
**Confidential Treatment Granted.
***A management contract or compensatory plan or arrangement.
38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements, and the related Notes
thereto, of Adolor Corporation and the Report of Independent Auditors are
filed as a part of this Form 10-K.
Page
----
Independent Auditors' Report.............................................. F-2
Financial Statements:
Consolidated Balance Sheets at December 31, 2000 and 2001............... F-3
Consolidated Statements of Operations for the years ended December 31,
1999, 2000 and 2001, and for the period from August 9, 1993 (Inception)
to December 31, 2001................................................... F-4
Consolidated Statements of Comprehensive Loss for the years ended
December 31, 1999, 2000 and 2001, and for the period from August 9,
1993 (Inception) to December 31, 2001.................................. F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the period
from August 9, 1993 (Inception) to December 31, 1998, and for the years
ended December 31, 1999, 2000 and 2001................................. F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 2000 and 2001, and for the period from August 9, 1993 (Inception)
to December 31, 2001................................................... F-8
Notes to Consolidated Financial Statements.............................. F-9
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Adolor Corporation:
We have audited the accompanying consolidated balance sheets of Adolor
Corporation (a development-stage company) and Subsidiary as of December 31,
2000 and 2001, and the related consolidated statements of operations,
comprehensive loss, stockholders' equity (deficit) and cash flows for each of
the years in the three-year period ended December 31, 2001 and for the period
from August 9, 1993 (Inception) to December 31, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Adolor
Corporation (a development-stage company) and Subsidiary as of December 31,
2000 and 2001, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2001, and for
the period from August 9, 1993 (Inception) to December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 15, 2002
F-2
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2000 2001
------------- ------------
Assets
Current assets:
Cash and cash equivalents........................ $ 67,392,849 $ 50,017,499
Short-term investments........................... 64,237,605 106,426,917
Prepaid expenses and other current assets........ 2,503,248 4,234,509
------------- ------------
Total current assets............................ 134,133,702 160,678,925
Equipment and leasehold improvements, net........ 1,390,450 3,420,576
Other assets..................................... 86,007 82,035
------------- ------------
Total assets.................................... $ 135,610,159 $164,181,536
============= ============
Liabilities and Stockholders' Deficit
Current liabilities:
Notes payable--current portion................... $ 521,053 $ 214,819
Accounts payable................................. 1,696,975 2,294,545
Accrued expenses................................. 3,192,533 8,434,747
Deferred licensing fees.......................... 52,632 26,316
------------- ------------
Total current liabilities....................... 5,463,193 10,970,427
Notes payable, less current portion.............. 214,819 --
Deferred licensing fees.......................... 892,543 429,824
------------- ------------
Total liabilities............................... 6,570,555 11,400,251
------------- ------------
Commitments
Stockholders' equity:
Series A Junior Participating preferred stock,
$0.01 par value, 35,000 shares authorized, none
issued and outstanding.......................... -- --
Preferred stock, $0.01 par value; 1,000,000
shares authorized; none issued and outstanding.. -- --
Common stock, par value $.0001 per share;
99,000,000 shares authorized; 27,944,852 and
31,104,304 shares issued and outstanding at
December 31, 2000 and 2001, respectively........ 2,794 3,110
Additional paid-in capital....................... 200,335,775 259,043,017
Notes receivable for stock options............... (1,056,488) (818,046)
Deferred compensation............................ (18,125,961) (11,527,697)
Unrealized gains on available for sale
securities...................................... 125,581 730,228
Deficit accumulated during the development
stage........................................... (52,242,097) (94,649,327)
------------- ------------
Total stockholders' equity...................... 129,039,604 152,781,285
------------- ------------
Total liabilities and stockholders' equity...... $ 135,610,159 $164,181,536
============= ============
See accompanying notes to consolidated financial statements.
F-3
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 2000 and 2001, and for the period from
August 9, 1993 (inception) to December 31, 2001
Period from
August 9,
1993
(inception)
Year ended December 31, to
-------------------------------------- December 31,
1999 2000 2001 2001
------------ ----------- ----------- ------------
Grant and license
revenues............... $ 10,965 43,860 1,386,803 1,591,611
------------ ----------- ----------- ------------
Operating expenses in-
curred during the
development stage:
Research and
development.......... 7,398,468 15,884,100 36,005,044 75,967,086
General and
administrative....... 3,697,484 7,626,455 15,229,041 31,462,979
------------ ----------- ----------- ------------
Total operating
expenses........... 11,095,952 23,510,555 51,234,085 107,430,065
------------ ----------- ----------- ------------
Other income (expense):
Interest income....... 424,667 2,282,907 7,480,587 11,472,073
Interest expense...... (21,142) (54,620) (40,535) (282,946)
------------ ----------- ----------- ------------
403,525 2,228,287 7,440,052 11,189,127
------------ ----------- ----------- ------------
Net loss................ (10,681,462) (21,238,408) (42,407,230) (94,649,327)
Undeclared dividends and
accretion of offering
costs attributable to
mandatorily redeemable
convertible preferred
stock.................. 2,429,884 4,102,796 -- 10,546,314
Beneficial conversion
feature on mandatorily
redeemable convertible
preferred stock........ -- 48,905,779 -- 48,905,779
------------ ----------- ----------- ------------
Net loss allocable to
common stockholders.... $(13,111,346) (74,246,983) (42,407,230) (154,101,420)
============ =========== =========== ============
Basic and diluted net
loss per share alloca-
ble to
common stockholders
(note 2)............... $ (12.55) (13.99) (1.42)
============ =========== ===========
Shares used in computing
basic and diluted net
loss per share alloca-
ble to common stock-
holders (note 2)....... 1,044,571 5,307,375 29,801,136
============ =========== ===========
See accompanying notes to consolidated financial statements.
F-4
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years ended December 31, 1999, 2000 and 2001,
and the period August 9, 1993 (Inception) to December 31, 2001
Period from
August 9, 1993
Years ended December 31, (inception) to
---------------------------------------- December 31,
1999 2000 2001 2001
------------ ------------ ------------ --------------
Net loss................ $(10,681,462) $(21,238,408) $(42,407,230) $(94,649,327)
------------ ------------ ------------ ------------
Other comprehensive
income (loss):
Unrealized gains on
available for sale
securities........... -- 125,581 604,647 730,228
Realized gain on
available for sale
securities........... -- -- (119,862) (119,862)
------------ ------------ ------------ ------------
Comprehensive loss.... $(10,681,462) $(21,112,827) $(41,922,445) $(94,038,961)
------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements.
F-5
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the period from August 9, 1993 (Inception) to December 31, 1998, for the
years ended
December 31, 1999, 2000, and 2001
Unrealized Deficit
Common stock gain on accumulated Total
----------------- Additional available during the stockholders'
Number paid-in Notes Deferred for sale development equity
of shares Amount capital receivable compensation securities stage (deficit)
---------- ------ ----------- ---------- ------------ ---------- ------------ -------------
Inception, August 9,
1993..................... -- $-- -- -- -- -- -- --
Issuance of common stock
to founder in November
1994 at $.001 per share.. 100,000 10 12,490 -- (12,400) -- -- 100
Issuance of restricted
stock in
November 1994 and May 1996.. 565,411 57 72,355 -- (66,767) -- -- 5,645
Issuance of common stock
for technology license
agreements in December
1995 at $.125 per share.. 50,000 5 6,245 -- -- -- -- 6,250
Value attributed to
issuance of warrants..... -- -- 60,000 -- -- -- -- 60,000
Exercise of common stock
options.................. 310,807 31 60,395 -- -- -- -- 60,426
Deferred compensation
resulting from grant
of options............... -- -- 491,009 -- (491,009) -- -- --
Amortization of deferred
compensation............. -- -- -- -- 277,019 -- -- 277,019
Net loss.................. -- -- -- -- -- -- (20,322,227) (20,322,227)
---------- ----- ----------- ---------- ----------- ------- ------------ -----------
Balance, December 31,
1998..................... 1,026,218 103 702,494 -- (293,157) -- (20,322,227) (19,912,787)
Issuance of common stock
for services in April
1999 at $3.736 per
share.................... 3,570 -- 13,339 -- -- -- -- 13,339
Exercise of common stock
options.................. 25,224 3 7,990 -- -- -- -- 7,993
Deferred compensation
resulting from grant of
options.................. -- -- 2,806,195 -- (2,806,195) -- -- --
Amortization of deferred
compensation............. -- -- -- -- 982,708 -- -- 982,708
Net loss.................. -- -- -- -- -- -- (10,681, 462) (10,681,462)
---------- ----- ----------- ---------- ----------- ------- ------------ -----------
Balance, December 31,
1999..................... 1,055,012 106 3,530,018 -- (2,116,644) -- (31,003,689) (29,590,209)
Notes grantd to employees
for stock options........ -- -- -- (1,056,488) -- -- -- (1,056,488)
Accretion of Series H
preferred stock issuance
costs.................... -- -- (281,794) -- -- -- -- (281,794)
Exercise of common stock
options.................. 1,171,419 116 1,393,123 -- -- -- -- 1,393,239
Unrealized gain on
investments.............. -- -- -- -- -- 125,581 -- 125,581
Conversion of preferred
shares................... 18,818,421 1,882 80,381,821 -- -- -- -- 80,383,703
Net Proceeds from Initial
Public Offering.......... 6,900,000 690 95,375,779 -- -- -- -- 95,376,469
Deferred compensation
resulting from grant of
options.................. -- -- 19,936,828 -- (19,936,828) -- -- --
Amortization of deferred
compensation............. -- -- -- -- 3,927,511 -- -- 3,927,511
Net loss.................. -- -- -- -- -- -- (21,238,408) (21,238,408)
---------- ----- ----------- ---------- ----------- ------- ------------ -----------
Balance, December 31,
2000..................... 27,944,852 2,794 200,335,775 (1,056,488) (18,125,961) 125,581 (52,242,097) 129,039,604
Payments on notes granted
to employees for
stock options............ -- -- -- 156,839 -- -- -- 156,839
Interest receivable
converted to principal on
employee notes -- -- -- (69,339) -- -- -- (69,339)
See accompanying notes to consolidated financial statements.
F-6
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--Continued
For the period from August 9, 1993 (inception) to December 31, 1998, for the
years ended
December 31, 1999, 2000 and 2001
Unrealized Deficit
Common stock gain on accumulated Total
------------------ Additional available during the stockholders'
Number of paid-in Notes Deferred for sale development equity
shares Amount capital receivable compensation securities stage (deficit)
---------- ------ ----------- ---------- ------------ ---------- ----------- -------------
Forfeiture of stock
options................ (67,303) (7) (1,124,660) 150,942 973,725 -- -- --
Exercise of common stock
options................ 226,755 23 307,313 -- -- -- -- 307,336
Unrealized gain on
investments............ -- -- -- -- -- 604,647 -- 604,647
Net proceeds from
issuance of newly
registered shares of
common stock........... 3,000,000 300 58,962,347 -- -- -- -- 58,962,647
Deferred compensation
resulting from grant of
options................ -- -- 562,242 -- (562,242) -- -- --
Amortization of deferred
compensation........... -- -- -- -- 6,186,781 -- -- 6,186,781
Net loss................ -- -- -- -- -- -- (42,407,230) (42,407,230)
---------- ------ ----------- -------- ----------- ------- ----------- -----------
Balance, December 31,
2001................... 31,104,304 $3,110 259,043,017 (818,046) (11,527,697) 730,228 (94,649,327) 152,781,285
========== ====== =========== ======== =========== ======= =========== ===========
See accompanying notes to consolidated financial statements.
F-7
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 2000 and 2001, and for the period from
August 9, 1993 (inception) to December 31, 2001
Period from
August 9, 1993
Year ended December 31, (inception) to
--------------------------------------- December 31,
1999 2000 2001 2001
------------ ----------- ------------ --------------
Net cash flows from
operating activities:
Net loss............... $(10,681,462) (21,238,408) (42,407,230) (94,649,327)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Non-cash compensation
expense.............. 982,708 3,927,511 6,186,781 11,374,019
Non-cash warrant
value................ -- -- -- 60,000
Depreciation and
amortization
expense.............. 267,622 375,871 873,691 1,964,676
Issuance of common
stock for technology
license agreements... -- -- -- 6,250
Changes in assets and
liabilities:
Prepaid expenses and
other current
assets.............. (68,184) (2,312,355) (1,731,261) (4,234,509)
Other assets......... (5,378) (47,709) 3,972 (82,035)
Accounts payable..... (359,496) 1,132,233 597,570 2,294,545
Accrued expenses..... 597,877 1,463,414 5,242,214 8,434,747
Deferred licensing
fees................ 489,035 456,140 (489,035) 456,140
------------ ----------- ------------ ------------
Net cash used in
operating
activities......... (8,777,278) (16,243,303) (31,723,298) (74,375,494)
------------ ----------- ------------ ------------
Net cash flows from
investing activities:
Purchases of equipment
and leasehold
improvements......... (448,309) (1,000,816) (2,903,817) (5,371,912)
Purchases of short-
term investments..... (2,221,062) (73,806,621) (115,569,886) (211,911,794)
Maturities of short-
term investments..... 2,502,853 11,486,128 73,985,221 106,215,105
------------ ----------- ------------ ------------
Net cash provided by
(used in) investing
activities......... (166,518) (63,321,309) (44,488,482) (111,068,601)
------------ ----------- ------------ ------------
Net cash flows from
financing activities:
Net proceeds from
issuance of
mandatorily
redeemable
convertible preferred
stock and Series B
warrants............. 2,525,000 47,101,909 -- 78,501,909
Proceeds from Series D
mandatorily
redeemable
convertible preferred
stock subscription... -- -- -- 600,000
Net proceeds from
issuance of
restricted common
stock and exercise of
common stock
options.............. 7,993 336,750 307,336 718,250
Proceeds from notes
payable--related
parties.............. -- -- -- 1,000,000
Proceeds from notes
payable.............. -- 957,126 88,033 1,490,144
Payment of notes
payable.............. (89,764) (286,957) (609,086) (1,275,325)
Proceeds received on
notes receivable..... -- -- 156,839 156,839
Interest receivable
converted to
principal on notes... -- -- (69,339) (69,339)
Net proceeds from
issuance of newly
registered shares of
common stock......... -- -- 58,962,647 58,962,647
Net proceeds from
IPO.................. -- 95,376,469 -- 95,376,469
------------ ----------- ------------ ------------
Net cash provided by
financing
activities......... 2,443,229 143,485,297 58,836,430 235,461,594
------------ ----------- ------------ ------------
Net increase (decrease)
in cash and cash
equivalents........... (6,500,567) 63,920,685 (17,375,350) 50,017,499
Cash and cash
equivalents at
beginning of year..... 9,972,731 3,472,164 67,392,849 --
------------ ----------- ------------ ------------
Cash and cash
equivalents at end of
year.................. $ 3,472,164 67,392,849 50,017,499 50,017,499
============ =========== ============ ============
Supplemental disclosure
of cash flow
information:
Cash paid for
interest............. $ 21,142 54,620 40,535 193,071
============ =========== ============ ============
Supplemental disclosure
of non-cash financing
activities:
Unrealized gains
(losses) on available
for sale securities.. -- 125,581 604,647 730,228
Deferred compensation
from issuance of
common stock,
restricted common
stock and common
stock options........ $ 2,806,195 19,936,828 562,242 23,875,441
Issuance of common
stock for technology
license agreements or
for services......... 13,339 -- -- 19,589
Conversion of Series A
through H preferred
stock for common
stock................ -- 80,383,703 -- 80,383,703
Conversion of stock
subscription to
Series D mandatorily
redeemable preferred
stock................ -- -- -- 600,000
Conversion of bridge
financing, including
accrued interest, to
Series B mandatorily
redeemable preferred
stock................ -- -- -- 1,019,787
============ =========== ============ ============
See accompanying notes to consolidated financial statements.
F-8
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
Adolor Corporation (together with its subsidiaries, "Adolor" or the
"Company") is a development-stage pharmaceutical company engaged in the
development of peripheral and central analgesics based on opiate receptors and
opiate-like receptors. The Company commenced operations on November 7, 1994.
The Company is currently devoting substantially all of its efforts toward
conducting pharmaceutical discovery and development, licensing technology,
obtaining regulatory approval for products under development, negotiating
strategic corporate relationships, recruiting personnel and raising capital.
The accompanying consolidated financial statements include the results of
operations of the Company for the period from August 9, 1993 (inception) to
December 31, 2001.
The Company has licensed its core technology from certain universities and
research institutions in exchange for present and future cash payments and, in
certain instances, common stock. The cost of obtaining such technology has
been charged as incurred, to research and development expense in the
accompanying consolidated statements of operations because the core technology
which was licensed had not reached technological feasibility and had no
alternative future uses.
The Company has not generated any product sales revenues and has not yet
achieved profitable operations. There is no assurance that profitable
operations, if ever achieved, could be sustained on a continuing basis. In
addition, development activities and clinical and pre-clinical testing and
commercialization of the Company's proprietary technology will require
significant additional financing.
The Company has not generated positive cash flows from operations, and
there are no assurances that the Company will be successful in obtaining an
adequate level of financing for the long-term development and
commercialization of its planned products.
2. BASIS OF ACCOUNTING AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Adolor
Corporation and its wholly owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
cash and cash equivalents are held in United States financial institutions or
obligations of the United States Treasury. The carrying amount of cash and
cash equivalents approximates its fair value due to its short-term nature.
Marketable Securities
The Company's entire portfolio of marketable securities is currently
classified as available for sale and is stated at fair value as determined by
quoted market values. All marketable securities, including securities with
maturities in excess of one year, are classified as current, as management can
sell them any time at their option. Changes in the net unrealized holding
gains and losses are included as a separate component of stockholders' equity
and comprehensive loss. For purposes of determining gross realized gains and
losses, the cost of marketable securities sold is based upon specific
identification. The Company has not experienced any significant realized gains
or losses on its investments through December 31, 2001.
F-9
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Concentration of Credit Risk
The Company invests its excess cash and short-term investments in
accordance with a policy objective that seeks to ensure both liquidity and
safety of principal. The policy limits investments to certain types of
instruments issued by the U.S. Government and Institutions with strong
investment grade credit ratings and places restrictions on their terms and
concentrations by type and issuer.
Equipment and Leasehold Improvements
Equipment, consisting of computer, office and laboratory equipment,
furniture and fixtures and leasehold improvements, are recorded at cost.
Depreciation and amortization is provided using the straight-line method over
the estimated useful lives of the assets or lease term, whichever is shorter,
generally three to seven years. Expenditures for repairs and maintenance are
expensed as incurred.
Revenue Recognition
Contract revenues are earned and recognized according to the provisions of
each agreement. Contract milestone payments related to the achievement of
substantive steps or regulatory events in the development process are
recognized as revenue upon completion of the milestone event or requirement.
Payments, if any, received in advance of performance under a contract are
deferred and recognized as revenue when earned. Up-front licensing fees where
the company has continuing involvement are deferred and amortized over the
estimated performance period or when the continuing involvement terminates.
Grant revenue is recognized over the period the related research is performed.
Research and Development
Research and product development costs are expensed as incurred. Costs
incurred under research agreements with third parties are expensed as incurred
and in accordance with the specific contractual performance terms of such
research agreements. Research and development costs include, among other
costs, salaries and other personnel-related costs, costs of clinical trials,
costs to manufacture drug candidates, stock-based compensation and allocated
and direct facility costs.
Accounting for Income Taxes
Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits which are not expected to be
realized. The effect on deferred income tax assets and liabilities of a change
in tax rates is recognized in the period that such tax rate changes are
enacted.
Use of Estimates
The preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
Some of the more significant estimates include accounting for stock-based
compensation under APB Opinion No. 25 rather than SFAS No. 123 and the use of
the percentage of completion method in recognizing expenses related to
clinical trial contracts.
F-10
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Stock-Based Compensation
The Company accounts for share option issuances to employees and members of
the Board of Directors in accordance with the provisions of APB No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, deferred compensation is recorded to the extent that the current
estimated fair value of the underlying stock exceeds the exercise price of the
options on the date of grant. Such deferred compensation is amortized on a
straight-line basis over the respective vesting periods of such option grants.
The Company has adopted the disclosure requirements of SFAS No. 123
"Accounting for Stock-Based Compensation" which allows entities to continue to
apply the provisions of APB No. 25 for financial reporting purposes and
provide pro forma net loss and pro forma net loss per share footnote
disclosures for employee stock option grants. Transactions with non-employees,
in which goods or services are the consideration received for the issuance of
equity instruments, are accounted for on a fair-value basis.
Segment Information
The Company is managed and operated as one business. The entire business is
managed by a single management team that reports to the chief executive
officer. The Company does not operate separate lines of business or separate
business entities with respect to any of its product candidates. Accordingly,
the Company does not prepare discrete financial information with respect to
separate product areas or by location and does not have separately reportable
segments.
Net Loss per Share
Net loss per share is computed by dividing the net loss allocable to common
stockholders by the weighted average number of shares of common stock
outstanding. Net loss allocable to common stockholders is calculated as the
net loss plus preferred dividends accrued for the respective period, whether
or not declared plus the beneficial conversion feature on mandatorily
redeemable convertible preferred stock. The numerator and the denominator used
in computing both basic and diluted net loss per share allocable to common
stockholders are equal due to the fact that when a net loss exists, dilutive
shares are not included in the calculation.
3. SHORT-TERM INVESTMENTS
Short-term Investments--consist of fixed income securities with original
maturities of greater than three months including U.S. Treasury obligations
and corporate securities and high-grade commercial paper. At December 31, 2000
and 2001, all of the short-term investments were deemed as "available for
sale" investments.
The following summarizes the "available for sale" investments at December
31, 2000 and 2001:
Gross Gross
unrealized unrealized
Cost gains losses Fair value
------------ ---------- ---------- ------------
Commercial paper........... $ 12,412,679 12,346 -- $ 12,425,025
Corporate Bonds............ 51,699,345 151,103 37,868 51,812,580
------------ -------- ------- ------------
December 31, 2000........ $ 64,112,024 163,449 37,868 $ 64,237,605
============ ======== ======= ============
US Government obligations &
agencies.................. $ 23,588,892 27,972 32,043 $ 23,584,821
Commercial paper........... 497,309 1,326 -- 498,635
Corporate Bonds............ 81,610,488 740,458 7,485 82,343,461
------------ -------- ------- ------------
December 31, 2001........ $105,696,689 $769,756 $39,528 $106,426,917
============ ======== ======= ============
F-11
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
At December 31, 2001, maturities of investments were as follows:
Gross Gross
unrealized unrealized
Cost gains losses Fair value
------------ ---------- ---------- ------------
Less than 1 year............. $ 74,139,804 359,034 39,528 $ 74,459,310
Due in 1-5 years............. 31,556,885 410,722 -- 31,967,607
------------ -------- ------- ------------
December 31, 2001.......... $105,696,689 $769,756 $39,528 $106,426,917
============ ======== ======= ============
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
December 31,
--------------------
2000 2001
---------- ---------
Laboratory, computer and office equipment............... $2,114,749 4,588,300
Furniture, fixtures and leasehold improvements.......... 353,346 783,612
---------- ---------
2,468,095 5,371,912
Less accumulated depreciation and amortization.......... 1,077,645 1,951,336
---------- ---------
$1,390,450 3,420,576
========== =========
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
--------------------
2000 2001
---------- ---------
Consulting and contracted research...................... $2,335,517 8,037,213
Professional fees....................................... 319,493 230,294
Payroll and related costs............................... 537,523 167,240
---------- ---------
$3,192,533 8,434,747
========== =========
6. NOTES PAYABLE
In December 2000, the Company entered into a loan agreement to finance the
Company's insurance policies. The balance on this loan as of December 31,
2001, is $214,819 due in May 2002, and bears interest at 6.7%.
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
From November 1994 (Commencement of operation) through the November 2000
initial public offering, the Company financed operations primarily from net
proceeds of approximately $79.1 million from the sale of mandatorily
redeemable convertible preferred stock (Series A through H).
The holders of the mandatorily redeemable convertible preferred stock voted
together with all other classes and series of stock of the Company as a single
class on all actions to be taken by the stockholders of the Company. Each
share of preferred stock entitled the holder to an equal number of votes as
the number of common shares into which each share of preferred stock was
convertible.
The preferred stockholders were entitled to a liquidation preference over
all other types of capital stock. Each series of preferred shares were
entitled to a specified amount of cumulative accrued and unpaid dividends
F-12
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
ranging from $0.02 to $0.12 per share, whether or not declared. Such
cumulative dividends for the preferred shares outstanding as of the date of
the initial public offering was approximately $10,264,520.
Each share of outstanding mandatorily redeemable convertible preferred
stock (Series A through H) was converted into common stock at a conversion
ratio of 5-for-1 upon the consummation of the initial public offering in
November 2000. Additionally, with the closing of the initial public offering,
all dividends ceased to accrue and were no longer payable.
8. COMMON STOCK AND COMMON STOCK OPTIONS
On March 28, 2000, the Company filed a Restated Certificate of
Incorporation which, changed the number of authorized shares of common stock
to 96,024,821 and authorized 1,000,000 shares of undesignated preferred stock,
and effected a reverse stock split of its common stock on a 1-for-4.5 basis.
In July 2000, the reverse stock split and the authorization of the
undesignated preferred stock was reversed.
On September 13, 2000 the Board of Directors approved a reverse stock split
of its common stock on a 1-for-5 basis, changed the number of authorized
shares of common stock to 99,000,000 and authorized 1,000,000 shares of
undesignated preferred stock which actions became effective on March 22, 2001.
All common share, options, and per share amounts in the accompanying financial
statements have been retroactively adjusted to reflect the reverse stock split
for all periods presented.
In November 1994 (commencement of operations), the Company issued 100,000
shares of common stock to an investor at a price of $.001 per share. The
difference between the fair value of such stock and the price paid at the
issuance date aggregated $12,400, which amount was charged to operations in
1994.
In November 1994, the Company issued 453,280 shares of restricted common
stock to an executive officer of the Company at a price of $.003 per share and
92,131 shares of restricted common stock to a scientific consultant at a price
of $.003 per share. These shares vested ratably over 48 months. The difference
between the fair value of such stock and the per share price paid at the
issuance date aggregated $66,767 which amount was recorded as deferred
compensation and was amortized to operations over the vesting period.
Compensation expense related to these shares aggregated $16,692 in 1997,
$13,910 in 1998 and none in 1999 or 2000. In addition, in May 1996, the
Company issued 20,000 shares of restricted common stock to a director for cash
at a price of $0.21 per share (the fair value at date of grant as determined
by the Board of Directors). These shares vested ratably over 48 months.
We sold 6,000,000 shares of our common stock on November 14, 2000. Upon the
exercise of the underwriter's over-allotment option, we sold an additional
900,000 shares of common stock. The effective date of the registration
statement on Form S-1 for the 6,900,000 shares of common stock sold in our
initial public offering was November 13, 2000 and the file number is 333-
96333.
The price to the public of the 6,900,000 shares of common stock sold in our
initial public offering was $15.00 per share and the gross proceeds were
$103,500,000. The total underwriting discounts and commissions were
$7,245,000. The net proceeds were $95,376,000. The total costs and expenses
incurred in the offering, exclusive of the underwriting discount, were
approximately $879,000.
On May 20, 2001, the company sold 3 million shares of newly issued common
stock of the Company to certain current institutional investors for
approximately $59.0 million, net of expenses.
F-13
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Shareholder Rights Plan
The Company's Board of Directors adopted a Shareholder Rights Plan (the
"Plan") in February 2001. Under the Plan, preferred stock purchase rights were
distributed as a dividend at the rate of one Right for each share of Common
Stock outstanding as of the close of business on February 20, 2001. Each Right
entitles the holder to purchase one ten-thousandth of a share of newly created
Series A Junior Participating Preferred Stock of Adolor at an exercise price
of $155.00 per Right. In general, the Rights will be exercisable if a person
or group becomes the beneficial owner of 15% or more of the outstanding Common
Stock of Adolor or announces a tender offer for 15% or more of the Common
Stock of Adolor. The Board of Directors will in general be entitled to redeem
the Rights for $.0001 per Right at any time prior to the occurrence of the
stock acquisition events described above. If not redeemed, the Rights will
expire on February 19, 2011.
Stock Options
The Company granted 1,748,635 common stock options in 2000 at exercise
prices ranging from $2.25 to $3.50 per share for which a compensation charge
amounting to approximately $20,360,190 will be recorded over the respective
vesting periods of the options based on a fair value of $14.40 per share on
the grant date. Compensation expense relating to these option grants was
approximately $4.8 million for the year ended December 31, 2001. Future
compensation expense relating to such option grants will be approximately
$4.6 million for the year ending December 31, 2002, $4.6 million for the year
ending December 31, 2003 and $1.6 million for the year ending December 31,
2004.
During March 2000, certain officers and employees exercised options to
purchase 472,067 shares of common stock. The exercised options are scheduled
to vest monthly over four years, during which time the Company has the right
to repurchase any unvested shares. In connection with such exercises, the
employees delivered promissory notes to the Company in the aggregate amount of
approximately $1,062,200 as consideration for the exercise price. As of
December 31, 2001, six employees have left the company and four employees have
paid or partially paid their loans, which reduced the notes receivable to
$818,046. The promissory notes are full recourse and are secured by shares of
the Company's common stock. The promissory notes accrue interest at an annual
rate of 6.80% and are payable in March 2007. As the makers of the promissory
notes sell the shares of the Company's common stock that secure the notes, the
makers are required to repay the principal amounts due under the notes secured
by the sold shares. As of December 31, 2001, 186,446 shares were subject to
buyback at the purchase price paid by the employee.
The Company's 1994 Amended and Restated Equity Compensation Plan, as
amended, (the 1994 Plan) allows the granting of incentive and nonqualified
stock options to employees, directors, consultants and contractors to purchase
an aggregate of 4,550,000 shares of the Company's common stock. The options
are exercisable generally for a period of seven to ten years from the date of
grant and vest over terms ranging from immediately to four years.
F-14
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
A summary of activity under the 1994 Plan from January 1, 1998 to December
31, 2001, is as follows:
Exercise
Number of price
options per share
---------- -----------
Balance, January 1, 1999............................. 728,454 $.126-.50
Granted............................................ 499,744 .376-1.50
Exercised.......................................... (25,224) .126-.376
Cancelled.......................................... (50,262) .21-.376
----------
Balance, December 31, 1999........................... 1,152,712 .126-1.50
Granted............................................ 1,748,635 2.25-3.50
Exercised.......................................... (1,171,419) .13-3.50
Cancelled.......................................... (46,745) .21-2.25
----------
Balance, December 31, 2000........................... 1,683,183
Granted............................................ 556,782 11.32-27.99
Exercised.......................................... (226,755) .125-19.50
Cancelled.......................................... (86,989) .21-21.81
----------
Balance, December 31, 2001........................... 1,926,221
==========
AT DECEMBER 31, 2001, THE PLAN HAD THE FOLLOWING OPTIONS OUTSTANDING AND
EXERCISABLE BY PRICE RANGE, AS FOLLOWS:
Options Outstanding Options Exercisable
----------------------------------------- ----------------------
Weighted Weighted Weighted
average average Number average
Number remaining exercise price of exercise price
Range of exercise prices of shares contractual life (per share) shares (per share)
------------------------ --------- ---------------- -------------- ------- --------------
$0.00 -1.49............. 348,196 5.7 $0.36 246,427 $0.35
$1.50 -2.24............. 13,110 7.9 1.50 11,901 1.50
$2.25 -3.29............. 432,892 8.1 2.51 180,696 2.47
$3.30 -4.94............. 582,471 8.5 3.50 201,109 3.50
$4.95 -11.14............ -- -- -- -- --
$11.15 -16.72........... 138,250 9.6 15.40 11,538 15.90
$16.73 -25.09........... 398,802 9.3 20.40 134,770 21.05
$25.10 -37.64........... 12,500 9.4 27.99 1,561 27.99
--------- -------
1,926,221 $7.21 788,002 $5.48
========= =======
The Company applies APB No. 25 in accounting for its stock option plan.
During the years ended December 31, 1999 and 2000, certain employees of the
Company were granted options to acquire 450,576 and 1,657,035 shares of the
Company's common stock, respectively. The weighted average fair values of
common stock for the years ended December 31, 1999 and 2000, were $7.22 per
share and $14.40 per share, respectively. The differences between the fair
value, as determined by the Board of Directors, prior to the Company's initial
public offering and the respective exercise prices at the grant dates has been
recorded as deferred compensation ($1,831,402 and $18,702,976 for 1999 and
2000, respectively) which is being amortized on a straight-line basis to
expense over the vesting period of the options.
Had the Company determined compensation cost for options granted during the
years ended December 31, 1999, 2000 and 2001 based on the minimum value method
prior to the initial public offering, at the grant date
F-15
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
under SFAS No. 123, the Company's net loss and net loss per share would have
been increased to the pro forma amounts indicated below:
Years Ended December 31,
-------------------------------------
1999 2000 2001
----------- ----------- -----------
Net loss allocable to common
stockholders:
As reported....................... (13,111,346) (74,246,983) (42,407,230)
Pro forma under SFAS No. 123...... (13,350,599) (74,536,116) (43,250,047)
Basic and diluted net loss per share
allocable to common stockholders:
As reported....................... $ (12.55) $ (13.99) $ (1.42)
Pro forma under SFAS No. 123...... $ (12.78) $ (14.04) $ (1.45)
Pro forma net loss reflects only options granted since 1995. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net loss amounts presented above because
compensation expense is recorded under SFAS 123 over the respective vesting
period of such options, and options granted by the Company prior to January 1,
1995 are not reflected in the pro forma net loss figures above.
In April 1995 and December 1995, the Company issued 17,500 shares and
32,500 shares of common stock to a research institution and a researcher,
respectively, as compensation for certain technology license agreements.
Research and development expense of $6,250 was recognized in 1995 related to
the issuance of these shares. In 1999, 2000 and 2001 the Company issued
46,168, 91,600 and 20,000 stock options, respectively, to non-employees. Such
options vest over future service periods. The Company recorded deferred
compensation of $974,793, $1,233,852 and $562,242 in 1999, 2000 and 2001,
respectively, based on the fair value as determined using a Black-Scholes
pricing model. Such deferred compensation is being amortized to expense using
the methodology prescribed in FASB Interpretation No. 28 over the vesting
period. The amount of amortization for the 1999 and 2000 grants is subject to
change each reporting period based upon changes in the fair value of the
Company's common stock, estimated volatility and the risk free interest rate
until the non-employee completes his or her performance under the option
agreement.
Before November 13, 2000, all options were granted with exercise prices
less than the fair value of the Company's common stock. The per share
weighted-average minimum value of the stock options granted to employees
during 1999 and 2000 was $4.34 and $5.02 per share, respectively, on the date
of grant. The per share weighted-average fair value of stock options granted
to non-employees during 1999 and 2000 was $12.90 and $13.47 per share,
respectively, on the date of grant. Such values were determined using the
minimum value method for employees and a Black-Scholes option-pricing model
for non-employees with the following weighted average assumptions: expected
dividend yield 0%; risk free interest rate of 5.49% for 1999 and 6.5% for
2000; volatility of 0% for employees and 60% for non-employees; an expected
option life of 4 years for employees and 10 years for non-employees. There
were no stock option grants in 2000 after the Company's initial public
offering.
9. LICENSE AND RESEARCH AGREEMENTS
On June 22, 1995, the Company and the University of California at San Diego
(UCSD) entered into an exclusive, worldwide license for certain technology
rights covered under UCSD patents. The Company paid a $10,000 license fee, and
committed to a $10,000 annual license maintenance fee. The Company also agreed
to bear UCSD's prosecution costs for patents covering the licensed technology.
Payments of $50,000 and $150,000
F-16
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
are payable upon commencement of Phase III clinical trials and NDA filing,
respectively, and the agreement provides for royalties at various rates on
sales proceeds of products resulting from the licensed technology, if any.
In November 1997, the Company entered into a license agreement with Kwang
Dong which granted them the rights in South Korea and North Korea to develop
and market one of the Company's compounds for certain indications. Under the
terms of the agreement, the Company will receive payments upon the achievement
of defined clinical and regulatory milestones of up to an aggregate of
$720,000, and royalties on any future sales proceeds in South Korea and North
Korea, if any, resulting from the licensed technology. The Company will supply
formulated bulk drug, including certain free amounts during the first year of
sales, and Kwang Dong will be responsible for clinical development and
regulatory approvals in South Korea and North Korea. To date, the Company has
not transferred sufficient technology under the license agreement to allow
commercialization of ADL 2-1294 in South Korea and North Korea. As a result
the Company does not anticipate material revenues under the license agreement
in the foreseeable future. Kwang Dong also made an equity investment in the
Company.
On June 10, 1998, the Company entered into an exclusive, world-wide license
agreement with Roberts Laboratories Inc. (Roberts), which merged with Shire
Pharmaceutical, plc, for technology relating to alvimopan. Upon signing the
agreement the Company made a $300,000 nonrefundable payment to Roberts which
was recorded as research and development expense because the licensed
technology had not reached technological feasibility and had no alternative
future uses. The Company will also be required to make payments totaling up to
$2,200,000 upon the occurrence of future events. In addition, royalties are
payable from the sale proceeds of products resulting from the licensed
technology, if any. In 1999, the Company paid $300,000 to Roberts to exercise
certain licensing rights as defined in the agreement, which was recorded as
research and development expense.
On July 26, 1999, the Company entered into a license agreement with an
affiliate of GlaxoSmithKline, (SB) granting SB an exclusive license to certain
of the Company's compounds for certain indications in most of the world. Upon
signing the agreement, the Company received a non-refundable licensing fee of
$500,000. This licensing fee had been deferred and was being recognized over
the remaining life of the patents. In December 2001, SB discontinued this
license agreement. Upon termination of this agreement, the remaining balance
of $438,596 of deferred revenue was recognized as revenue based on the fact
that the balance was non-refundable and there would be no further continuing
involvement.
SB also made an equity investment in the Company (see footnote 7). The
proceeds received from the licensing fee and the equity instrument have been
allocated to their related financial statement components based upon the
amounts specified in the separate agreements which represent management's
estimate of the fair value of such components. The rights to this license
agreement reverted back to Adolor upon termination.
On April 25, 2000, the Company entered into a license agreement with Santen
Pharmaceutical Co., Ltd. granting Santen an exclusive royalty bearing license
to develop and sell products in the field of ophthalmic pain in all countries
other than South Korea and North Korea. Santen will pay Adolor royalties on
annual net sales of the products. Santen will pay Adolor $1,000,000 when gross
sales in major markets achieve $75,000,000 and an additional payment of
$1,500,000 when aggregate sales achieved is $150,000,000. A $500,000 non-
refundable payment has been paid to Adolor upon execution of the agreement.
Such amount was recorded as deferred revenue and is being recognized over the
remaining patent life.
The Company has entered into various licensing, research and other
agreements. Under these agreements, the Company is working in collaboration
with various other parties. Should any discoveries be made under such
F-17
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
arrangements, the Company would be required to negotiate the licensing of the
technology for the development of respective discoveries, and possible
royalties on future product sales, if any. Under these agreements, the Company
would be obligated to make payments aggregating up to approximately $3,600,000
upon the achievement of certain milestones and to make future royalty payments
on sales proceeds of products, if any, a portion of which could be offset by
previously made milestone payments.
The Company intends to expense to research and development expense
milestone payments that are required to be made upon the occurrence of future
events prior to NDA approval. The Company intends to capitalize payments that
are required to be made upon the occurrence of future events commencing with
NDA approval.
10. INCOME TAXES
No federal and state taxes are payable as of December 31, 2000 and 2001. As
of December 31, 2001, the Company had approximately $30,052,000 of Federal and
$30,888,000 of state net operating loss carryforwards available of offset
future taxable income. The Federal and state net operating loss carryforwards
will expire as follows:
State Federal
----------- -----------
2005................................................. $ 450,000 $ --
2006................................................. 1,232,000 --
2007................................................. 2,063,000 --
2008................................................. 3,519,000 --
2009................................................. 3,938,000 33,000
2010................................................. 6,780,000 482,000
2011................................................. 12,906,000 1,079,000
Thereafter........................................... -- 28,458,000
----------- -----------
$30,888,000 $30,052,000
=========== ===========
In addition, the utilization of the state net operating loss carryforwards
is subject to a $2 million annual limitation. At December 31, 2001, the
Company also has approximately $1,387,000 of Federal and $48,000 of state
research and development tax credit carryforwards, which begin expiring in
2011, and are available to reduce Federal and state income taxes.
The Tax Reform Act of 1986 (the Act) provides for a limitation on the
annual use of net operating loss and research and development tax credit
carryforwards (following certain ownership changes, as defined by the Act)
that could significantly limit the Company's ability to utilize these
carryforwards. The Company may have experienced various ownership changes, as
defined by the Act, as a result of past financings and the initial public
offering. Accordingly, the Company's ability to utilize the aforementioned
carryforwards may be limited. The Company has not yet determined whether or
not ownership changes, as defined by the Act, have occurred. Additionally,
because U.S. tax laws limit the time during which these carryforwards may be
applied against future taxes, the Company may not be able to take full
advantage of these attributes for Federal income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are shown below. At December 31, 2001, a valuation allowance of $41,690,000
has been recognized to fully offset the deferred tax assets as realization of
such assets is not "more likely than not." A valuation allowance to reduce the
deferred tax assets reported is required if based on weight of the evidence it
is more likely than not that some, or all, of the deferred tax assets will not
be realized. Realization of the Company's deferred tax assetsis dependent upon
generating future taxable income. After considering all ofthe evidence,
including the Company's net losses since inception
F-18
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
and the uncertainty of future profitability, management has determined that a
valuation allowance is necessary to reduce the net deferred tax assets to
zero. The change in the valuation allowance in 2000 and 2001 were increases of
$14,056,000 and $14,879,000 respectively, related primarily to additional net
operating losses and capitalized research and development costs incurred by
the Company.
2000 2001
----------- -----------
Deferred tax assets:
Net operating loss carryforwards................. 10,923,000 12,524,000
Capitalized research and development costs....... 12,151,000 20,994,000
Tax credit carryforwards......................... 582,000 1,435,000
Accrued expenses and other....................... 3,209,000 6,782,000
----------- -----------
Total deferred tax assets...................... 26,865,000 41,735,000
Less valuation allowance......................... (26,811,000) (41,690,000)
----------- -----------
Net deferred tax assets........................ 54,000 45,000
Deferred tax liability............................. (54,000) (45,000)
----------- -----------
Net deferred tax............................... -- --
=========== ===========
11. COMMITMENTS
Future minimum lease payments under non-cancelable operating leases for
office and laboratory space are as follows:
Year ending December 31,
------------------------
2002............................................................ $ 893,068
2003............................................................ 258,153
2004............................................................ 72,127
----------
$1,223,348
==========
Rent expense was $258,805, $425,791 and $843,854 for the years ended
December 31, 1999, 2000 and 2001, respectively. In October 2000, we signed a
two-year lease for additional office space with the first year's minimum
rental payment of $465,000 and second year's minimum rental payment of
$485,000.
The Company has an agreement with an officer to provide for certain
payments upon certain forms of termination of employment.
12.401(k) PROFIT SHARING PLAN
In 1995, the Company adopted a 401(k) Profit Sharing Plan (the 401(k) Plan)
available to all employees meeting certain eligibility criteria. The 401(k)
Plan permits participants to contribute up to 20% of their salary,
not to exceed the limits established by the Internal Revenue Code. All
contributions made by participants vest immediately into the participant's
account. The Company is not required to make and did not make any
contributions to the 401(k) Plan in 1999, 2000 and 2001. The Company's common
stock is not an investment option for Plan participants.
F-19
ADOLOR CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
13. QUARTERLY INFORMATION (UNAUDITED)
This table summarizes the unaudited results of operations for each quarter
of fiscal 2001 and 2000:
Quarter Ended
-------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In thousands, except Per share amounts)
Fiscal 2001
Revenue...................... 533 29 31 794
Net loss..................... (6,980) (9,695) (13,855) (11,877)
Net loss allocable to common
stockholders................ (6,980) (9,695) (13,855) (11,877)
Basic and diluted earnings
per share................... (.25) (.34) (.45) (.38)
Fiscal 2000
Revenue...................... 7 11 13 13
Net loss..................... (4,032) (4,970) (4,642) (7,594)
Net loss allocable to common
stockholders................ (17,292) (5,593) (42,727) (8,635)
Basic and diluted earnings
per share................... (12.61) (3.78) (23.90) (.55)
F-20