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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the fiscal year ended
December 31, 1996 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 number 0-27718
NEOSE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3549286
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
102 Witmer Road 19044
Horsham, Pennsylvania (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (215) 441-5890
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
As of March 14, 1997, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $15,941,337. Such aggregate market value
was computed by reference to the closing sale price of the Common Stock as
reported on the National Market segment of The Nasdaq Stock Market on such date.
For purposes of making this calculation only, the registrant has defined
affiliates as including all directors and executive officers of the Company.
As of March 14, 1997, there were 9,488,123 shares of the registrant's Common
Stock outstanding.
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 the definitive proxy statement incorporated
by reference in Part III of this Annual Report on Form 10-K or any amendment to
this Annual Report on Form 10-K. / /
DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement (the "Proxy Statement") for the
registrant's 1997 Annual Meeting of Stockholders to be held on June 19, 1997 are
incorporated by reference in Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I ................................................................. 1
ITEM 1. BUSINESS................................................ 1
ITEM 2. PROPERTIES.............................................. 21
ITEM 3. LEGAL PROCEEDINGS....................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 21
PART II ................................................................. 22
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................... 22
ITEM 6. SELECTED FINANCIAL DATA................................. 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES.................. 27
PART III ................................................................. 27
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 27
ITEM 11. EXECUTIVE COMPENSATION.................................. 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................ 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 27
PART IV ................................................................. 28
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K .......................................... 28
Unless the context indicates otherwise, the terms "Neose" and "Company"
refer to Neose Technologies, Inc. This Annual Report on Form 10-K contains, in
addition to historical information, forward-looking statements that involve
risks and uncertainties. These forward-looking statements include statements
regarding the Company's future plans, events or performance. Such statements are
based on management's current expectations and are subject to a number of
uncertainties and risks that could cause actual results to differ materially
from those described in the forward-looking statements. Factors that may cause
such a difference include, but are not limited to, those described under
"Business--Factors Affecting the Company's Business, Operating Results and
Financial Condition."
NEOSE is a trade name of the Company. This Annual Report on Form 10-K
also includes trademarks and trade names of companies other than the Company.
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PART I
ITEM 1. BUSINESS.
Factors Affecting the Company's Business, Operating Results and Financial
Condition
In addition to the other information in this Annual Report on Form
10-K, the following factors should be carefully considered. These factors may
cause actual results, events or performance to differ materially from those
expressed in any forward-looking statements made by the Company in this Annual
Report on Form 10-K.
Early Stage of Development; Uncertainty of Product Development;
Technological Uncertainty; Novel Therapeutic Approach. The Company was founded
in 1989 and is at an early stage of development. The Company has not yet
completed the development of any of its products and, accordingly, has not begun
to market or generate revenues from the commercialization of products.
Substantially all of the Company's revenues received to date have resulted from
payments received under its strategic alliance with Abbott Laboratories
("Abbott"). The Company expects that substantially all of its revenues for the
foreseeable future will result from payments under its strategic alliance with
Abbott, license fees, payments from future strategic alliances and collaborative
arrangements, if any, and interest income. Such revenues will be subject to
significant fluctuations in both timing and amount. There can be no assurance
that the Company will receive royalty revenues from Abbott or that the Company
will be successful in entering into other strategic alliances or collaborative
arrangements that will result in significant revenues. The Company's products
under development will require significant time-consuming and costly research,
development, preclinical studies, clinical testing, regulatory approval, and
significant additional investment prior to their commercialization, which may
never occur. Moreover, the development and commercialization of complex
carbohydrates for pharmaceutical applications have been pursued successfully by
few companies. There can be no assurance that the Company's research and
development programs will be successful, that its oligosaccharide products will
exhibit the expected biological activities in humans, that its nutritional
additive will be successfully commercialized, that its pharmaceutical products,
if developed, will prove to be safe and efficacious in clinical trials, that the
Company or its collaborators will obtain the necessary regulatory approvals for
its products, or that the Company or its collaborators will be successful in
obtaining market acceptance of any of its products. The Company or its
collaborators may encounter problems and delays relating to research and
development, regulatory approval, manufacturing, and marketing. The failure by
the Company to address such problems and delays successfully would have a
material adverse effect on the Company's business, financial condition, and
results of operations. In addition, although several companies are focusing
research and development efforts in the area of xenotransplantation-based
products, such products represent a novel therapeutic approach that has not yet
been subject to extensive clinical testing. No xenogeneic organ or living tissue
has been approved by the United States Food and Drug Administration ("FDA") for
use in humans. There can be no assurance that any xenotransplantation-based
products, including the Company's NE-0501 oligosaccharide, will be approved by
the FDA or other regulatory authorities, or that, even if so approved, will be
accepted by the medical community or third-party payors.
Dependence on Abbott; Dependence on Other Collaborative Partners. The
Company's strategic alliance with Abbott provides, in part, for the receipt by
the Company of certain license fees, milestone payments, and, if
commercialization occurs, royalty payments. The Company has derived
substantially all of its revenues to date from its strategic alliance with
Abbott and anticipates that payments from Abbott will constitute all or a
substantial portion of its revenues for the next several years. Abbott has the
option at any time prior to the first commercial sale, if any, of infant formula
containing the Company's nutritional additive, to elect to make the underlying
license agreement with the Company non-exclusive, in which event the license
fees payable to the Company after commercialization would be reduced by 50%, and
Abbott's obligations to make contract and milestone payments would be
terminated. Abbott also has the right to terminate the underlying license
agreement upon 60 days' notice, in which event it would have no further funding
obligations to the Company. In addition, under the terms of the Abbott
agreement, if Abbott fails to make appropriate regulatory filings with the FDA
for the addition of Neose oligosaccharides in infant formula prior to December
1, 1997, Neose, at its option, may elect to convert the license of Neose
technology to a non-exclusive license to Abbott, in which event the license fees
payable by Abbott after commercialization would be reduced by 50%, and
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Abbott's obligations to make contract and milestone payments would be
terminated. The success of the strategic alliance will depend on Abbott's own
competitive, marketing and strategic considerations, including the relative
advantages of alternative products being developed or marketed by competitors.
The amount and timing of resources Abbott commits to these activities are
entirely within Abbott's control. There can be no assurance that Abbott will
pursue the development and commercialization of this product or that Abbott will
perform its obligations as expected. No assurance can be given that the
strategic alliance will result in the successful commercialization of the
Company's nutritional additive or that any future milestone payments or fees
will be received by the Company. The suspension or termination of the Company's
strategic alliance with Abbott, the failure of the strategic alliance to be
successful, or the delay in the development or commercialization of the
nutritional additive by Abbott would have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"--Strategic Alliance with Abbott."
The Company's strategy for the development and commercialization of its
pharmaceutical product candidates involves entering into collaborative
agreements with pharmaceutical and other companies. The Company may in the
future grant to its collaborative partners rights to license and commercialize
any products developed under these collaborative agreements, and such rights
would limit the Company's flexibility in considering alternatives for the
commercialization of such products. Under such agreements, the Company may rely
on its collaborative partners to conduct research and development efforts and
clinical trials on, obtain regulatory approvals for, and manufacture, market,
and commercialize certain of the Company's products. The amount and timing of
resources devoted to these activities generally will be controlled by each such
individual partner. To date, the Company has only entered into a limited number
of these collaborative arrangements, and none with respect to pharmaceutical
product candidates. There can be no assurance that the Company will be
successful in establishing any additional collaborative arrangements, that
existing or future collaborative arrangements will be successful in
commercializing products, or that the Company will derive any revenues from such
arrangements. In addition, the Company's strategy involves entering into
multiple, concurrent strategic alliances to pursue pharmaceutical discovery in
different disease areas. There can be no assurance that the Company will be able
to manage simultaneous programs successfully. With respect to existing and
potential future strategic alliances and collaborative arrangements, the Company
will be dependent upon the expertise and dedication of sufficient resources by
these outside parties to develop, manufacture, or market products. Should a
strategic alliance or collaborative partner fail to develop or commercialize a
product to which it has rights, the Company's business, financial condition, and
results of operations could be materially and adversely affected. See "--Other
Collaborative Relationships."
History of Operating Losses; Uncertainty of Future Profits. The Company
has not generated any revenues from operations, except for interest income and
revenues from strategic alliances. The Company has incurred losses since its
inception and, as of December 31, 1996, had a deficit accumulated during the
development stage of approximately $25.5 million for the period since inception.
The Company anticipates incurring additional losses over at least the next
several years. Such losses may fluctuate significantly from quarter to quarter
and are expected to increase as the Company expands its research and development
activities. To achieve profitability, the Company, alone or with others, must
successfully commercialize its nutritional additive, develop its pharmaceutical
products, conduct preclinical studies and clinical trials, obtain required
regulatory approvals and successfully manufacture, introduce, and market such
products. In addition, to the extent the Company relies upon others for
research, development, and commercialization activities, the Company's ability
to achieve profitability will be dependent upon the success of such outside
parties. The time required to reach profitability is highly uncertain, and there
can be no assurance that the Company will be able to achieve profitability on a
sustained basis, if at all. See "Management's Discussion and Analysis of
Financial Condition and Result of Operations."
Additional Financing Requirements; Access to Capital. The Company has
incurred negative cash flows from operations since its inception, and has
expended, and expects to continue to expend in the future, substantial funds to
continue its research and development programs. The Company expects that its
existing capital resources will be adequate to fund its capital requirements
through 1999. No assurance can be given that there will be no change that would
consume available resources significantly before such time. The Company's future
capital requirements and the adequacy of available funds will depend on many
factors, including progress in its research and development activities,
including its pharmaceutical discovery and development programs, the magnitude
and scope of these activities, progress
2
with preclinical studies and clinical trials, the costs involved in preparing,
filing, prosecuting, maintaining, and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
changes in existing collaborative research relationships and strategic
alliances, the ability of the Company to establish additional collaborative
arrangements for product development, the cost of manufacturing scale-up, and
developing effective marketing activities and arrangements. Additional funds
will be needed by the Company to expand its manufacturing capacity to
manufacture commercial quantities of its potential products. To the extent that
funds generated from the Company's operations, together with its existing
capital resources, are insufficient to meet current or planned operating
requirements, it is likely that the Company will seek to obtain additional funds
through equity or debt financings, collaborative or other arrangements with
corporate partners and others, and from other sources. The terms and prices of
any such financings may be significantly more favorable than those obtained by
present stockholders of the Company, which could have the effect of diluting or
adversely affecting the holdings or the rights of existing stockholders of the
Company. There can be no assurance that additional financing will be available
when needed or on terms acceptable to the Company. If adequate additional funds
are not available for these purposes or otherwise, the Company may be required
to delay, scale back, or eliminate certain of its research and product
development activities or certain other aspects of its business or attempt to
obtain funds through collaborative arrangements that may require the Company to
relinquish some or all of its rights to certain of its intellectual property,
product candidates, or products. If adequate funds are not available, the
Company's business, financial condition, and results of operations will be
materially and adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations --Liquidity and Capital
Resources."
Uncertainty Regarding Patents and Proprietary Rights. The Company's
success will depend in part on its ability to obtain patent protection for its
products, preserve its trade secrets, and operate without infringing the
proprietary rights of other parties. Because of the substantial length of time
and expense associated with bringing new products through development to the
marketplace, the pharmaceutical and biotechnology industries place considerable
importance on obtaining and maintaining patent and trade secret protection for
new technologies, products, and processes. The Company has an exclusive license
from the University of Pennsylvania ("Penn") to two U.S. patents as well as
certain related foreign patents and patent applications, subject to Penn's
reserved right of use, and right to permit use by non-profit organizations,
solely for educational and research purposes. Such license terminates upon the
expiration of the last to expire licensed patent in each country. The licensor
may, at its option, terminate the license upon 60 days' notice if the Company is
not using its continuing best efforts to develop or sell a product using the
licensed technology.
In addition, the Company owns three U.S. patents and has licensed two
other U.S. patents, and the Company and its licensors have filed a number of
U.S. and foreign patent applications. The Company may be dependent on licensors
or collaborators to prosecute certain of the Company's patent applications and
may be dependent on such parties to protect such patent rights if patents issue.
Legal standards relating to the scope of claims and the validity of patents in
the biotechnology field are uncertain and still evolving. There can be no
assurance that patent applications to which the Company holds rights will result
in the issuance of patents, that any patents issued or licensed to the Company
will not be challenged and held to be invalid, or that any such patents will
provide commercially significant protection to the Company's technology,
products, and processes. In addition, there can be no assurance that others will
not independently develop substantially equivalent proprietary information not
covered by patents to which the Company owns rights or obtain access to the
Company's know-how or that others will not be issued patents which may prevent
the sale of one or more of the Company's products, or require licensing and the
payment of significant fees or royalties by the Company to third parties in
order to enable the Company to conduct its business. Defense and prosecution of
patent claims can be expensive and time consuming, regardless of whether the
outcome is favorable to the Company, and can result in the diversion of
substantial financial, management, and other resources from the Company's other
activities. An adverse outcome could subject the Company to significant
liabilities to third parties, require the Company to obtain licenses from third
parties, or require the Company to cease any related research and development
activities or product sales. In addition, the laws of certain countries may not
protect the Company's intellectual property. No assurance can be given that any
licenses required under any such third-party patents or proprietary rights would
be made available on acceptable terms, if at all.
3
The Company's success is also dependent upon the skills, knowledge, and
experience of its scientific and technical personnel. To help protect its
rights, the Company requires all employees, consultants, advisors, and
collaborators to enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company, and
require disclosure and assignment to the Company of their ideas, developments,
discoveries, and inventions. There can be no assurance, however, that these
agreements will provide adequate protection for the Company's trade secrets,
know-how, or other proprietary information in the event of any unauthorized use
or disclosure.
The Company's management and scientific personnel have been recruited
primarily from other scientific companies, pharmaceutical companies, and
academic institutions. In some cases, these individuals may be continuing
research in the same areas with which they were involved prior to joining the
Company. As a result, the Company could be subject to allegations of violation
of trade secrets and similar claims. The Company has not received any notice of
any such claims and knows of no basis of any such claims. See "--Patents and
Proprietary Rights."
Substantial Competition; Risk of Technological Obsolescence. The
Company is engaged in highly competitive industries. The Company competes with
many public and private companies, including well-known nutritional products
manufacturers, pharmaceutical companies, chemical companies, specialized
biotechnology companies, and academic institutions. Many of the Company's
competitors have significantly greater financial, scientific, and technical
resources, and manufacturing and marketing capabilities than the Company. In
addition, many of the Company's competitors have significantly greater
experience conducting preclinical studies and clinical trials of new
pharmaceutical products, and in obtaining regulatory approvals for
pharmaceutical products. The Company is relying on Abbott to develop and
commercialize its nutritional additive. As a result, the success of the
Company's nutritional additive will depend, in significant part, on Abbott's
ability to compete in the highly competitive infant formula market. Abbott's
principal competitors in this market include Bristol-Myers Squibb Company,
American Home Products Corp., Nestle S.A., and Gerber Products Co. Competitors
of the Company and its collaborators may develop products that compete
successfully with the Company's products and may develop and commercialize such
products more rapidly than the Company and its collaborators. In addition, the
Company's products may be subject to competition from related products developed
by competitors or different products developed using techniques other than those
developed by the Company or based on advances that may render the Company's
products less competitive or obsolete, uneconomical or otherwise less
competitive. Competition may increase further as a result of potential advances
from the study of complex carbohydrates and greater availability of capital for
investment in this field. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective than any being developed by the Company, or that would render the
Company's technology and products obsolete or noncompetitive. See
"--Competition."
Government Regulation; No Assurance of Product Approval. The Company's
product candidates are subject to stringent regulation by a number of government
authorities in the United States and other countries, including the FDA.
NE-1340, the Company's infant formula ingredient, may be subject to FDA review
as a food additive. Substances that are generally recognized as safe ("GRAS")
are excluded from the definition of food additives. Information supporting the
safety of a food additive is submitted to the FDA in the form of a food additive
petition. The food additive petition process is generally expensive and lengthy,
frequently requiring several years after the petition is submitted to the FDA.
No assurance can be given that, if submitted, the FDA will accept the petition
or permit desired labeling claims and that, if accepted, such petition will not
result in the establishment of regulations which necessitate costly and
time-consuming compliance procedures. This process could be time-consuming and
expensive and would have a material adverse effect on the Company's business,
financial condition, and results of operations. The FDA has by regulation
affirmed a number of substances as GRAS, although it is not required that a
substance be affirmed as GRAS by regulation in order to be GRAS. A manufacturer
may make an independent determination that there is general recognition of
safety of a substance by qualified experts when used for a particular use. There
can be no assurance that Abbott will make such a determination or that the FDA
will agree with such a determination, if Abbott were to elect to make such a
determination. Accordingly, there is a risk that the FDA will disagree with the
determination. In such a circumstance the manufacturer must submit a GRAS
affirmation petition for the FDA to review and affirm GRAS status by regulation
in order to market and sell the additive or formula containing the additive.
This process could be
4
time-consuming and expensive and would have a material adverse effect on the
Company's business, financial condition, and results of operations.
If the Company's technology is incorporated in products claiming a
therapeutic benefit, such products could be regulated as a drug rather than as a
food. Regulation of these products as a drug would require extensive clinical
testing and review by the FDA to support the claims made for the product. The
uncertainty regarding the regulatory status of this type of product could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Any infant formula containing the Company's nutritional additive will
be subject to the provisions of the United States Infant Formula Act, which
amended the Food, Drug and Cosmetic Act (the "FDC Act") and established detailed
requirements for infant formulas, including their manufacture, composition, and
labeling. Pursuant to the Company's agreement with Abbott, Abbott is responsible
for all regulatory activities relating to the infant formula additive. There can
be no assurance that Abbott will be able to satisfy all applicable regulatory
requirements. Abbott may also market infant formula containing the additive in
foreign countries. Infant formula regulatory requirements vary widely from
country to country, and may be more or less stringent than FDA requirements. The
time required to obtain clearances, if required, in foreign countries may be
longer or shorter than that required in the United States.
Prior to marketing, any pharmaceutical product candidates developed by
the Company must undergo an extensive regulatory approval process required by
the FDA and by comparable agencies in other countries. This process, which
includes preclinical studies and clinical trials of each compound to establish
its safety and effectiveness and requires compliance with FDA good laboratory,
clinical, and manufacturing practices during testing and manufacturing, can take
many years, requires the expenditure of substantial resources, and gives larger
companies with greater financial resources a competitive advantage over the
Company. Failure to comply with applicable requirements can result in fines,
recall, or seizure of products, total or partial suspension of production,
withdrawal of existing product approvals, refusal to approve new drug
applications, and criminal prosecution. To date, no pharmaceutical product
candidate being developed by the Company has been submitted for approval or has
been approved by the FDA or any other regulatory authority for marketing, and
there can be no assurance that any such product will ever be approved for
marketing, or that the Company will be able to obtain the labeling claims
desired for its products. The Company is and will continue to be dependent upon
and require that the laboratories and medical institutions conducting its
preclinical studies and clinical trials maintain both good laboratory and good
clinical practices and that the manufacturers of its compounds maintain
compliance with current GMP. Data obtained from preclinical studies and clinical
trials are subject to varying interpretations that could delay, limit, or
prevent FDA regulatory approval. Delays or rejections may be encountered based
upon changes in FDA policy for drug approval during the period of development
and FDA regulatory review. For example, clinical trials using xenotransplants
raise unique safety issues, and the FDA has developed and is expected to
continue to develop additional requirements for investigational new drug ("IND")
applications for these types of trials. Similar delays also may be encountered
in foreign countries. Any delay in obtaining, or failure to obtain, such
approvals would adversely affect the Company's ability to generate product
revenues or royalties. There can be no assurance that regulatory approval will
be obtained for any product developed by the Company. Moreover, even if approval
is granted, such approval may entail commercially unacceptable limitations on
the labeling claims for which a product may be marketed. Even if such regulatory
approval is obtained, a marketed drug or compound and its manufacturer are
subject to continual review and inspection, and later discovery of previously
unknown problems with the product or manufacturer may result in restrictions or
sanctions on such product or manufacturer, including withdrawal of the product
from the market, and other enforcement actions. Additional governmental
regulations may be promulgated that would delay regulatory approval of the
Company's potential products. The Company cannot predict the impact of adverse
governmental action that might arise from future legislative and administrative
action. See "--Government Regulation."
No Commercial Manufacturing Capability or Experience. To be successful,
the Company's products must be manufactured in commercial quantities under GMP
prescribed by the FDA and at acceptable costs. The Company has not yet
manufactured any products in commercial quantities and currently does not have
the facilities to manufacture any products in commercial quantities under GMP.
Existing facilities of the Company are not adequate for commercial
5
scale manufacturing. Therefore, the Company will need to develop its own
commercial scale GMP manufacturing facility and/or depend on its collaborators,
licensees, or contract manufacturers for the commercial manufacture of its
products. In the event the Company determines to establish a manufacturing
facility, it will require substantial additional funds, the hiring and retention
of significant additional personnel and compliance with extensive regulations
applicable to such a facility. The Company has no experience in such commercial
manufacturing, and there can be no assurance that the Company will be able to
establish such a facility successfully and, if established, that it will be able
to manufacture products in commercial quantities for sale at competitive prices.
If the Company determines to rely on collaborators, licensees, or contract
manufacturers for the commercial manufacture of its products, the Company will
be dependent on such corporate partners or other entities for, and will have
only limited control over, the commercial manufacturing of its products. There
can be no assurance that the Company will be able to enter into any such
manufacturing arrangements on acceptable terms, if at all. If the Company is not
able to enter into commercial manufacturing agreements, it could encounter
delays in introducing its products into certain markets, or find that the
manufacture of its products in these markets is adversely affected. There can be
no assurance that the parties to the Company's future commercial manufacturing
agreements will perform their obligations as expected, or that any revenue will
be derived from these commercial manufacturing agreements. See
"--Manufacturing."
Limited Clinical Trial Experience; No Marketing or Sales Capability or
Experience. Before obtaining required regulatory approvals for the commercial
sale of its pharmaceutical product candidates, the Company must demonstrate
through human clinical trials that such products are safe and efficacious for
use. To date, the Company has very limited experience in conducting clinical
trials. The Company will either need to rely on third parties to design and
conduct any required clinical trials or expend resources to hire additional
personnel to administer such clinical trials. There can be no assurance that the
Company will be able to find appropriate third parties to design and conduct
clinical trials or that it will have the resources to hire personnel to
administer clinical trials in-house.
The Company has no experience in marketing, distributing, or selling
nutritional additives or pharmaceutical products, and will have to develop a
sales force and/or rely on its collaborators, licensees, or arrangements with
others to provide for the marketing, distribution, and sales of its products.
There can be no assurance that the Company will be able to establish marketing,
distribution, and sales capabilities or make arrangements with third parties to
perform such activities on acceptable terms, if at all. See "--Marketing,
Distribution, and Sales."
Risks Associated with the Infant Formula Industry. To the extent
NE-1340 is added to infant formula, the Company is subject to the risks
generally associated with the infant formula industry. These risks include: (i)
product tampering or production defects may occur requiring a recall of infant
formula containing NE-1340, or may reduce the demand for such infant formula;
(ii) an ingredient in such formula, including NE-1340, may be banned or its use
limited or declared unhealthful; and (iii) sales of infant formula may decline
or use of NE-1340 may be limited or discontinued due to real or perceived health
concerns, adverse publicity, or other reasons beyond the control of the Company.
Dependence on Key Personnel. The Company is highly dependent upon the
efforts of its senior management and scientific team. The loss of the services
of one or more members of the senior management and scientific team could
significantly impede the achievement of the Company's business and product
development objectives. Due to the specialized scientific nature of the
Company's business, the Company is also highly dependent upon its ability to
attract and retain qualified scientific, technical, and key management
personnel. The number of qualified scientific personnel is limited, and there is
intense competition for such persons and for other qualified personnel in the
areas of the Company's activities. There can be no assurance that the Company
will be able to continue to attract and retain the qualified personnel necessary
for the development of its existing business and its expansion into areas and
activities requiring additional expertise, such as production and marketing. The
Company may need to hire additional personnel or outside consultants skilled in
clinical testing and regulatory compliance as it develops its products. There
can be no assurance that the Company will be able to hire or retain such
personnel. The loss of, or failure to recruit, scientific, technical, and
managerial personnel could have a material adverse effect on the Company. In
addition, the Company relies on members of its scientific advisory board and
consultants to assist the Company in formulating its research and development
strategy. All of the members of the scientific advisory board and all of the
Company's consultants are employed by other employers, and each such member or
consultant may have commitments to, or consulting or advisory
6
contracts with, other entities that may limit their availability to the Company.
See "--Employees" and "--Executive Officers of the Registrant."
Third-Party Reimbursement; Uncertainty of Healthcare Reform Measures.
Successful commercialization of any pharmaceutical products the Company may
develop will depend in part upon the availability of reimbursement for the costs
of such products or funding from third-party healthcare payors such as
government and private insurance plans. Third-party payors are continuing their
efforts to contain or reduce the costs of healthcare through various means. For
example, third-party payors are increasingly challenging the coverage of and
prices charged for medical products and services. In addition, significant
uncertainty exists as to the coverage and reimbursement status of newly approved
pharmaceutical products. There can be no assurance that third-party
reimbursement or funding will be available or will permit price levels
sufficient to realize an appropriate return on the Company's investment in its
pharmaceutical product development. The U.S. Congress is considering a number of
legislative and regulatory reforms that may affect companies engaged in the
healthcare industry in the United States. Although the Company cannot predict
whether these proposals will be adopted or the effects such proposals may have
on its business, the existence and pendency of such proposals could have a
material adverse effect on the Company in general. In addition, the Company's
ability to commercialize potential pharmaceutical products may be adversely
affected to the extent that such proposals have a material adverse effect on
other companies that are prospective collaborators with respect to any of the
Company's pharmaceutical product candidates.
Product Liability; Lack of Product Liability Insurance. The Company's
business may be adversely affected by potential product liability risks which
are inherent in the testing, manufacturing, and marketing of the Company's
products it is developing or which it may develop. There can be no assurance
that product liability claims will not be asserted against the Company, its
collaborators, or licensees. In addition, the use of pharmaceutical products
developed by the Company through collaborative or licensing arrangements in
clinical trials and the subsequent sale of such products is likely to cause the
Company to bear all or a portion of those potential product liability risks. The
Company does not currently have product liability insurance. There can be no
assurance that it will be able to obtain or maintain adequate product liability
insurance on acceptable terms or that such insurance will provide adequate
coverage against potential liabilities. Furthermore, there can be no assurance
that any collaborators or licensees of the Company will agree to indemnify the
Company, be sufficiently insured, or have a net worth sufficient to satisfy the
product liability claims. As a result, a product liability claim or recall could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Hazardous Materials; Compliance with Environmental Regulations. The
Company's research and development activities involve the controlled use of
hazardous materials, chemicals, and radioactive compounds. The risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any resulting damages, and any such liability could exceed the resources of
the Company which would have a material adverse effect on the Company's
business, financial condition, and results of operations. The Company may incur
substantial additional costs to comply with environmental regulations if the
Company develops pharmaceutical manufacturing capacity. See "--Government
Regulation."
7
Business Overview
Neose is focused on the enzymatic synthesis of complex carbohydrates
(oligosaccharides), and the discovery and development of complex carbohydrates
for nutritional and pharmaceutical uses. Complex carbohydrates serve as
attachment sites for many pathogens that cause infectious diseases. Present on
all cells, these compounds also play a critical role in the immune response. Due
to their complexity, oligosaccharides are difficult and expensive to produce,
and their commercial development has been significantly limited despite the role
they play in human diseases. The Company believes that its proprietary
Multi-Transferase Reaction ("MTR") technology enables, for the first time, the
rapid and cost-efficient production of naturally-occurring oligosaccharides. The
Company, with Abbott, a leading provider of infant formula in the United States,
is applying its MTR technology to the development of breast milk
oligosaccharides as additives to infant formula. Breast milk oligosaccharides
are believed to play an important anti-infective role in infants. In its
therapeutic development programs, the Company is using its technology to develop
complex carbohydrates as pharmaceuticals to treat various bacterial infections,
such as gastrointestinal and pediatric ear infections, and to prevent
xenotransplant rejection.
Background
All human cell surfaces have complex carbohydrates that serve as
specific binding sites for other molecules and cells, including pathogens such
as bacteria, viruses, and other infectious microorganisms. The first step in the
development of many infectious diseases is the attachment of the bacterium,
virus, or other pathogen to the human cell. This attachment often occurs when a
specific receptor protein on the pathogen recognizes a specific carbohydrate on
the human cell. The protein/carbohydrate interaction, which allows the pathogen
to initiate the disease process, is highly dependent on the complementary shapes
of the protein and the carbohydrate.
Oligosaccharides are not, however, located only on cell surfaces.
Soluble oligosaccharides (oligosaccharides not bound to cells) produced by the
body are found in many body fluids, including breast milk, tears, urine, and
respiratory and gastrointestinal secretions. These soluble complex carbohydrates
are identical to the complex carbohydrates on cell surfaces, and are believed to
serve as decoys that bind to pathogens, preventing the pathogens from binding to
cells and causing disease. The pathogens are then expelled from the body in
respiratory and gastrointestinal secretions. For example, breast milk contains a
number of soluble oligosaccharides that are believed to prevent the attachment
of certain bacteria and viruses to gastrointestinal, respiratory, and urinary
tract cells in infants. Soluble oligosaccharides are, therefore, thought to be
one of the body's natural anti-infective agents (which also include white blood
cells and antibodies).
Oligosaccharides are chains of monosaccharides, or individual sugar
molecules, that can be joined in many different combinations. Because there are
ten types of individual sugar molecules in humans, and because any two of these
may be chemically linked in up to 22 different ways, oligosaccharides are very
complex. For example, four different monosaccharides can be arranged to make
35,560 different complex carbohydrates. In contrast, four different amino acids,
which are the building blocks of proteins, can be combined to make only 24
distinct peptides.
The specific biological properties of an oligosaccharide are dictated
by its component monosaccharides and the chemical linkage between those
monosaccharides. Because monosaccharide chains can be linked in so many
different combinations, with each combination potentially having a different
biological activity, synthesis of complex carbohydrates is difficult.
Traditional organic chemical synthesis of oligosaccharides is time-consuming,
prohibitively expensive, and becomes more complex as the length of a chain
increases. Moreover, because oligosaccharides are not directly encoded by genes,
they cannot be produced by established recombinant methods. Difficulties in
producing oligosaccharides efficiently and in sufficient quantities have
significantly limited their development and commercialization.
8
Neose's MTR Technology
Neose believes its proprietary MTR technology platform enables, for the
first time, the rapid and cost-effective synthesis of commercial quantities of
oligosaccharides. The Company's MTR technology utilizes enzymes to synthesize
specific chemical linkages among individual sugar molecules. These enzymes,
which are referred to as glycosyltransferases, are catalysts that join
monosaccharides together in highly specific ways. Generally, each
glycosyltransferase attaches a specific sugar molecule to another specific sugar
molecule by means of a specific chemical linkage.
Glycosyltransferases synthesize linkages at a very rapid rate. Because
glycosyltransferases can work for months before having to be replenished, the
Company believes that the correct preparation can generate the desired
oligosaccharide in a commercially scalable manner. Nevertheless, the cost of
manufacturing a product depends in significant part on the cost of obtaining the
glycosyltransferases. Neose has accordingly invested heavily in recombinant
methods of producing the glycosyltransferases necessary to manufacture
cost-effectively many naturally-occurring oligosaccharides. This procedure has
significantly reduced the costs, and increased the efficiencies, of
manufacturing certain oligosaccharides.
Products in Development
Neose has focused its initial research and development efforts on (i) a
nutritional additive product, NE-1340, a breast milk oligosaccharide that is
being developed in collaboration with Abbott for inclusion in its infant formula
products, and (ii) potential carbohydrate-based therapeutic products for the
treatment of chronic gastritis and peptic ulcers, pediatric ear infections, and
the prevention of xenotransplant rejection. The following table sets forth the
development status of each of the Company's product candidates:
Product Application/Indication Development Status (1)
- ------- ---------------------- ----------------------
NE-1340 Infant formula additive Manufacturing scale-up(2)
NE-0080 Gastritis and peptic ulcers (monovalent) Completed Phase IC trial;
Phase II trial planned in
early 1997
NE-1530 Pediatric ear infections Preclinical studies; IND
planned in late 1997
NE-0501 Prevention of xenotransplant rejection Preclinical studies
NE-1327 Gastritis and peptic ulcers (polyvalent) Preclinical studies
- ------------
(1) See "--Government Regulation" for a description of the various
regulatory requirements.
(2) At least 90 days prior to marketing, the manufacturer of a reformulated
infant formula must submit to the FDA the description of any major
reformulation or change in processing and assurances that the
reformulated infant formula will not be marketed without complying with
nutrient and quality factor requirements and GMP control requirements.
In the case of NE-1340, the manufacturer must either submit a GRAS
petition or food additive petition prior to such FDA submission, or
self-affirm GRAS, which may be the fastest route to commercialization,
at the time of such submission. If the FDA does not object within 90
days of such submission, the manufacturer may commence commercial sales
of infant formula containing the Company's additive in the United
States. Approval of the reformulated infant formula also will be
necessary in a number of foreign countries. See "--Government
Regulation."
9
Nutritional Additives
Breast milk contains more than two dozen complex carbohydrates that are
believed to provide infants with protection against bacterial and viral
infections. Commercial infant formula products, which are based on either cow's
milk or soy extracts, do not contain breast milk oligosaccharides. Studies
indicate that breast-fed infants have fewer bacterial and viral infections than
formula-fed infants. The Company believes that this is due, in part, to the
presence of oligosaccharides in breast milk. Neose is using its core technology
to develop breast milk oligosaccharides for inclusion as additives to commercial
infant formula. Neose has entered into an exclusive license agreement with
Abbott, a leading provider of infant formula in the United States, to
commercialize the Company's nutritional additives.
Infant formula marketing strategies are designed to convince
pediatricians and hospitals to recommend the brand of choice to new parents.
Barring complications, switching brands of infant formula is uncommon, and price
competition has not played a significant role in brand selection. The Company
believes that infant formula manufacturers are increasingly seeking ways to
differentiate their products, and to provide an impetus to switch brands of
infant formula. The Company's breast milk oligosaccharide additive is intended
to provide effective product differentiation without requiring significant
pricing adjustments.
Utilizing Neose's MTR technology, Abbott is currently developing the
capability to manufacture the infant formula additive in commercial quantities.
At least 90 days prior to marketing, the manufacturer of a reformulated infant
formula must submit to the FDA the description of any major reformulation or
change in processing, and assurances that the reformulated infant formula will
not be marketed without complying with nutrient and quality factor requirements
and GMP control requirements. In the case of NE-1340, the manufacturer must
either submit a GRAS petition or food additive petition prior to such FDA
submission, or self-affirm GRAS, which may be the fastest route to
commercialization, at the time of such submission. If the FDA does not object
within 90 days of such submission, the manufacturer may commence commercial
sales of infant formula containing the Company's additive in the United States.
Approval of the reformulated infant formula also will be necessary in a number
of foreign countries. See "--Strategic Alliance with Abbott" and "--Government
Regulation."
Additionally, the Company and Abbott are exploring the development of
additional breast milk oligosaccharides for use in infant formula, and the
inclusion of breast milk oligosaccharides in nutritional supplement products for
the elderly, or for nutritionally-compromised adults. In addition, the Company
is exploring with other collaborators the development of other oligosaccharides
for other nutritional and non-prescription healthcare products.
Pharmaceuticals
Neose's initial pharmaceutical development programs are targeted at the
discovery and development of novel oligosaccharide anti-infectives, specifically
anti-bacterials. The Company believes that oligosaccharide anti-infectives will
have substantial benefits as compared with conventional antibiotics.
Oligosaccharides are naturally-occurring, are cost-effective to produce
utilizing the Company's technology, have relatively low toxicity, and are less
likely to cause adverse side-effects. Conventional antibiotics, currently the
primary treatment for bacterial infections, act by killing bacteria and do not
interfere with the initial step of infection. In addition, bacteria are
increasingly becoming resistant to existing antibiotics, severely limiting their
effectiveness. Antibiotics, which act by killing pathogens, select for, and
consequently facilitate the proliferation of strains of the pathogen that are
resistant to the antibiotics. Because the Company's anti-infective product
candidates do not act by killing pathogens, but rather by preventing attachment
of pathogens to cell surfaces, the Company believes that use of its
anti-infectives is less likely to result in the development of resistant
strains.
Two of the Company's initial drug discovery and development efforts are
targeted to develop treatments for gastritis and peptic ulcers caused by
Helicobacter pylori: ("H. pylori") infections and pediatric ear infections.
Gastritis and Peptic Ulcers. Neose is developing a naturally-occurring
human gastrointestinal oligosaccharide to treat gastritis and peptic ulcers
caused by H. pylori infections. H. pylori has been acknowledged to be the cause
of
10
gastritis and over 80% of all peptic ulcer cases. An estimated four million
people suffer from active peptic ulcers each year in the United States, and
approximately 500,000 new cases are diagnosed annually. The Company estimates
that the direct medical costs of treating peptic ulcers in the United States
exceed $2.0 billion per year.
Until recently, treatment of gastritis and peptic ulcers focused on the
use of antagonists of acid secretion, such as the H-2 antagonists, Tagamet(R)
(cimetidine) and Zantac(R) (ranitidine), and the proton pump inhibitors,
Prilosec(R) (omeprazole) and Prevacid(R) (lansoprazole). While assisting in the
healing of gastritis and peptic ulcers, these drugs acting alone do not cure the
underlying H. pylori infection. Consequently, high rates of recurrence and the
need for chronic therapy are associated with these treatment regimes. One
approach currently used to treat gastritis and recurrent peptic ulcers involves
the administration of antibiotics, in combination with other drugs. Even the
most effective antibiotic treatments, however, may be complicated by (i) the
need to treat for prolonged periods with multiple drugs, (ii) side-effects and
problems with patient compliance, (iii) relapses if treatment is interrupted,
and (iv) the development of antibiotic-resistant strains of H. pylori.
NE-0080, Neose's product candidate for the treatment of H. pylori
infections, is a carbohydrate molecule that is identical to a human stomach cell
carbohydrate utilized by H. pylori to attach to its target cells. In in vitro
preclinical studies, NE-0080 prevented the attachment of H. pylori to human
stomach cell lines, and dislodged previously bound H. pylori bacteria from such
cells. Studies in two different animal models have shown that NE-0080 decreased
H. pylori levels. In November 1994, Neose completed preclinical studies of
NE-0080. The Company filed an IND with the FDA in December 1994 and completed
Phase IA and Phase IB clinical trials involving 24 healthy subjects in an
ascending single dose study in April 1995 and 32 subjects with asymptomatic H.
pylori infections in a 10-day repeat dose study in March 1996, respectively. The
results of these studies indicated that NE-0080 was well-tolerated and did not
cause any adverse side-effects. A Phase IC study, involving a 28-day repeat dose
study in 11 subjects with asymptomatic H. pylori infections, was completed in
November 1996. Although the study was designed primarily to test safety, the
Company also used the non-invasive urea breath test ("UBT") test to measure H.
pylori loads in the subjects over an eight-week period. NE-0080 caused a
statistically significant decrement in UBT values. The Company plans to initiate
Phase II studies on NE-0080 in mid-1997. Neose also is developing NE-1327, a
polyvalent configuration of NE-0080 that is significantly more effective than
the natural monovalent molecule in inhibiting in vitro binding of H. pylori
bacteria to human stomach cells.
Pediatric Ear Infections. Neose is developing NE-1530, a
naturally-occurring human airway oligosaccharide, for the treatment of pediatric
ear infections. Middle ear infections are one of the most frequent reasons for
pediatrician visits. According to an industry report, there are an estimated 40
million office visits and prescriptions each year attributable to middle ear
infections. Healthcare costs in the United States associated with middle ear
infections exceed $2.0 billion annually. Current antibiotic therapies are losing
their effectiveness due to the development of resistant strains of the bacteria
that cause these infections.
NE-1530 contains a sugar sequence identical to that of airway
carbohydrates to which respiratory disease-causing bacteria attach, and
subsequently initiate colonization. In in vitro tests, the compound blocked the
attachment to human airway cells of Streptococcus pneumoniae, Hemophilus
influenzae, and Moraxella catarrhalis, the bacteria most frequently associated
with a variety of respiratory infections, including pediatric ear infections,
acute infections associated with chronic bronchitis, and pneumonia. In addition,
results of animal studies indicate that this compound inhibits and reverses the
attachment of these bacteria. The Company is developing a formulation of NE-1530
for nasal administration, is conducting further preclinical studies, and intends
to file an IND application in late 1997. Although the Company has chosen
initially to develop NE-1530 for pediatric ear infections, the Company also may
develop this compound in the future for other indications, such as acute
infections associated with chronic bronchitis and pneumonia.
Xenotransplant Rejection. An estimated 20,000 human organ transplants
were performed in the United States in 1995 and many times that number of
patients are believed to die each year due to the lack of available human
organs. At the end of 1995, the waiting list for humans awaiting human organs
was approximately 44,000, and that list has grown significantly each year. There
have been efforts in the past to utilize animal organs, particularly pig organs
due
11
to their size, availability, and physiological similarities to humans, to
address the shortage of human organs. These efforts, however, have not been
successful. Although substantial resources have been committed to develop animal
organs for human transplants, hyperacute rejection ("HAR"), in which the
transplanted organ is rejected within minutes of transplantation, remains one of
the most critical obstacles to xenotransplantation. HAR results from an
antibody-mediated response against an oligosaccharide found on the cell surface
of most mammals, but absent in humans.
In vitro studies and limited in vivo surgeries indicate that it may be
possible to prevent, to some extent, HAR by administering sufficient quantities
of the Company's specific oligosaccharide prior to and following surgery to bind
and neutralize the circulating antibodies. Animal studies have demonstrated that
the administration of the appropriate oligosaccharide may prevent HAR to a
sufficient degree, and for a sufficient period of time, to allow the recipient
to accommodate the grafted organ. Once HAR is overcome, existing
immunosuppressive pharmaceuticals are available to help the physician manage the
ongoing accommodation of the new organ in most patients.
Neose has synthesized significant quantities of the oligosaccharide
that is the target of the antibody responsible for HAR, and has collaborated
with a leading transplant surgeon in preclinical studies of this compound,
designated NE-0501, as a preventive agent for HAR in xenotransplants utilizing
pig organs. During 1996, the Company conducted preclinical studies in which
unmodified pig hearts were grafted into two baboons receiving NE-0501
intravenously to neutralize the target antibodies. These studies demonstrated
that NE-0501, while present in the bloodstream in adequate concentrations,
allows the in vivo survival of the transplanted organ and neutralizes the
antibodies that initiate HAR. The Company is collaborating with other companies
that are pursuing xenotransplantation with several different approaches,
including transgenic modification of pig organs, and chimeric tolerization of
donor organs. The Company believes that the use of oligosaccharides may be an
important part of the therapies that will ultimately be utilized in the possible
commercialization of xenotransplantation in the future.
Other Potential Products
Other clinically important infections mediated by complex carbohydrates
include dental and periodontal infections, vaginitis, tuberculosis, sexually
transmitted diseases, diarrhea, urinary tract infections, and corneal ulcers.
The Company is currently pursuing research for two potential product
opportunities: oral hygiene complex carbohydrates to inhibit the activity of
plaque and gingivitis-causing bacteria; and (ii) complex carbohydrates that may
interrupt the activity of Chlamydia pneumoniae, a possible cause of
atherosclerosis. Using its proprietary technology, Neose believes it can
manufacture complex carbohydrates for eventual development as novel
anti-infective drugs to combat one or more of these infectious diseases.
In addition to potential anti-infective products, the Company, in
collaboration with Bracco Research USA Inc., is also exploring the use of
complex carbohydrates for development as in vivo diagnostic imaging agents. See
"--Other Collaborative Relationships--Bracco." The Company also intends to
explore the use of its core technology to create structural molecules for food
industry applications, and to target compounds that would have anti-bacterial
and anti-inflammatory applications in the cosmetics industry.
Strategic Alliance with Abbott
The Company and Abbott have entered into collaborative agreements to
develop breast milk oligosaccharides as additives to infant formula and other
nutritional products. Abbott has manufacturing rights and manufacturing
development responsibilities for the nutritional additives. Under this strategic
alliance, Neose has received approximately $11.2 million in contract payments,
license fees, milestone payments, and equity investments from Abbott. In
addition, Neose is to receive $5 million within 60 days of the first commercial
sale, if any, of infant formula containing the Company's nutritional additive.
Abbott will manufacture the nutritional additive for its own use and has agreed
to pay Neose ongoing fees based on the dry weight of the infant formula sold
containing the nutritional additive. The Company is required to credit $3.75
million of the license fees against the ongoing fees in equal amounts over four
years. In addition, Abbott has agreed to renegotiate the fees due Neose on the
sale of products containing the nutritional
12
additive in any case where Neose has made a contribution that both parties agree
will result in a substantial commercial advantage. Abbott is considering the
utilization of other proprietary technology exclusively licensed to Neose that
may further significantly reduce the cost of manufacture of the oligosaccharide
additives to infant nutritional formula. If Abbott determines to adopt this
technology in its manufacturing processes, Abbott has acknowledged to Neose that
it would be obligated under that provision of its agreement to renegotiate the
financial terms. There can be no assurance that Abbott will determine to utilize
the Neose technology in its manufacturing processes. Under the terms of the
Abbott agreements, if Abbott fails to make appropriate regulatory filings with
the FDA for the addition of Neose oligosaccharides in infant formula prior to
December 1, 1997, Neose, at its option, may elect to convert the license of
Neose technology to a non-exclusive license to Abbott, in which event the
license fees payable by Abbott after commercialization would be reduced by 50%,
and Abbott's obligations to make contract and milestone payments, including the
$5 million milestone payment, would be terminated. Abbott may, at any time prior
to the first commercial sale, if any, of infant formula containing the Company's
nutritional additive, elect to make its license agreement non-exclusive, in
which event the license fees payable by Abbott after commercialization would be
reduced by 50%, and Abbott's obligations to make contract and milestone
payments, including the $5 million milestone payment, would be terminated.
Abbott also has the right to cancel the underlying license agreement upon 60
days' written notice and return the technology, in which event it would have no
further funding obligations to the Company. The Company anticipates that its
manufacturing arrangement with Abbott will assist the Company in developing its
own manufacturing capability.
Other Collaborative Relationships
Neose seeks to complement its internal resources through the formation
of relationships with universities and other companies. The Company has formed
several such collaborative relationships to date, and intends to enter into
additional relationships in the future. The Company's other collaborative
relationships are described below.
Bracco
Neose has entered into a collaborative research agreement with Bracco
Research USA Inc. ("Bracco"), a unit of Bracco Industria SpA and formerly the
diagnostics division of Bristol-Myers Squibb Company. Under the terms of the
agreement, Neose will supply Bracco with complex carbohydrates, which Bracco
will attach to diagnostically useful agents. If the resulting new molecules can
highlight specific targets, they may be promising candidates for development as
human in vivo imaging agents. Under the terms of the three-year agreement,
Bracco has paid Neose $500,000 to date and is obligated to pay Neose $250,000
over the next 12 months to fund research and development. This agreement is
terminable at any time upon 60 days' notice, in which event Bracco would have no
further funding obligations to the Company.
The Rockefeller University
In October 1995, Neose licensed from The Rockefeller University
proprietary technology for a group of gene sequences that allow the recombinant
production of highly active and efficient enzymes involved in the synthesis of
carbohydrates. Neose expects that these enzymes will substantially reduce the
cost of manufacture of certain carbohydrates.
In addition, The Rockefeller University scientists have collaborated
with Neose in the area of carbohydrates involved in upper respiratory
infections. Neose has licensed one issued patent and one patent application from
The Rockefeller University directed toward the therapeutic uses of certain
oligosaccharides in these areas.
University of Pennsylvania
Neose has entered into an exclusive license agreement with the
University of Pennsylvania for the use, development, and commercialization of
patent and technology rights relating to the Company's proprietary MTR
13
technology substantially developed by Dr. Stephen A. Roth, the Company's
Chairman and Chief Executive Officer, while Professor of Biology at Penn. Penn
beneficially owns approximately 1.6% of the Company's Common Stock.
Research and Development
The Company conducts the majority of its research and development
activities through its own staff and facilities. The Company has assembled a
scientific staff with multidisciplinary skills in advanced research
technologies, including biochemistry, organic chemistry, analytic chemistry,
molecular biology, cell biology, microbiology, and enzymology. The Company
currently has 41 employees engaged in research and development. The Company's
research facilities include laboratories for each of the scientific staff's
disciplines, in vitro testing facilities, and formulation facilities.
In addition to its in-house research programs, the Company collaborates
with academic and research institutions to support research in areas of interest
to the Company. Usually, such research assistance is performed in conjunction
with additional in-house research. The faculty member supervising the outside
research effort may also participate as a consultant to the Company.
Patents and Proprietary Rights
The Company relies on patent rights, trade secrets, trademarks, and
nondisclosure agreements to establish and protect its proprietary rights in its
technologies and products. Despite these precautions, it may be possible for
unauthorized third parties to utilize the Company's technology or to obtain and
use information that the Company regards as proprietary. The Company may be
dependent on licensors or collaborators to prosecute certain of the Company's
patent applications and may be dependent on such parties to protect such patent
rights if patents issue. The laws of some foreign countries do not protect the
Company's proprietary rights in its technologies and products to the same extent
as do the laws of the United States.
To date, the Company, through its license with Penn, has obtained
exclusive, worldwide rights to two issued U.S. patents. Both patents expire in
2010. The first patent, for which certain corresponding foreign patents have
issued and other foreign patent applications are pending, is directed to an
apparatus for synthesizing carbohydrates or carbohydrate-containing compounds
utilizing three or more different glycosyltransferases. The second U.S. patent
is directed to an apparatus containing a specific pair of enzymes to synthesize
a breast milk oligosaccharide and to other apparatuses containing multiple
glycosyltransferases. In addition, the Company, through its license with Penn,
has received rights to a patent application directed to a process for obtaining
glycosyltransferases from natural sources. The Penn license terminates upon the
expiration of the last to expire licensed patent in each country. Penn may, at
its option, terminate the license upon 60 days' notice if the Company is not
using its continuing best efforts to develop or sell a product using the
licensed technology. The Company also has licensed from The Rockefeller
University two issued patents and one patent application. These are directed
toward certain gene sequences and therapeutic uses of certain oligosaccharides.
In addition to the licensed patents, three U.S. patents have been issued to the
Company within the past year. These patents are directed toward manufacturing
processes for, and therapeutic uses of, oligosaccharides. The Company, both
independently and through its licenses, has rights to a number of U.S., and
corresponding foreign, patent applications. See "--Certain Factors Affecting the
Company's Business, Operating Results and Financial Condition--Uncertainty
Regarding Patents and Proprietary Rights."
Government Regulation
The Company's product candidates and manufacturing facilities are
subject to stringent regulation by a number of government authorities in the
United States and other countries, including the FDA, pursuant to the FDC Act
and regulations thereunder. The Company's infant formula additive may be subject
to FDA review as a food additive, and the infant formula containing this
additive will be subject to the provisions of the United States Infant Formula
Act. The Company is also subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control Act,
the Resource Conservation and Recovery Act, and other similar federal, state and
14
local laws, rules, and regulations governing laboratory activities, waste
disposal, handling of toxic, dangerous or radioactive materials, and other
matters. The Company is unable to predict whether any governmental agency will
adopt requirements, including regulations, which would have a material and
adverse effect on any future product applications involving biotechnology. The
Company currently voluntarily complies with the National Institutes of Health
Guidelines for Research Involving Recombinant DNA Technologies. Although the
Company believes that it is in compliance with all applicable laws, rules, and
regulations, these laws, rules, and regulations change frequently, and there can
be no assurance that federal or state governments will not impose upon all or a
portion of the Company's activities additional restrictions which might
adversely affect the Company's business, prospects, financial condition, or
results of operations. See "--Certain Factors Affecting the Company's Business,
Operating Results and Financial Condition--Government Regulation; No Assurance
of Product Approval."
Regulation of Infant Formula Additives
Food and food ingredients are subject to the provisions of the FDC Act
regarding adulteration and misbranding of food. Food additives are broadly
defined as any substances that may become a component, or otherwise affect the
characteristics, of food, and the safety of which is established by regulation
rather than general recognition among experts. All new food additives require
premarket clearances. The Company's breast milk oligosaccharide, which is
intended to be marketed as an additive for infant formula, may be subject to the
extensive and lengthy FDA review process for food additives.
Information supporting the safety of a food additive is submitted to
the FDA in the form of a food additive petition. Such a petition is required to
contain reports of safety investigations of the food additive and details
regarding its physical, chemical, and biological properties. All product safety
studies submitted to the FDA usually must be conducted in accordance with FDA
Good Laboratory Practices ("GLP") requirements. Submission of a food additive
petition does not assure that the FDA will issue a food additive regulation. The
information must establish to a reasonable certainty that the food additive is
safe for its intended use at the level specified in the petition. The food
additive petition process generally is expensive and lengthy, frequently
requiring several years after the petition is submitted to the FDA. No assurance
can be given that the FDA will accept the petition or that, if accepted, such
petition will not result in the establishment of regulations concerning the use
of the product.
Substances that are GRAS are excluded from the definition of food
additives. A manufacturer may make an independent determination that qualified
experts would generally agree that a substance is GRAS for a particular use.
Alternatively, a GRAS affirmation petition may be submitted for the FDA to
review and affirm GRAS status by regulation. There can be no assurance that
Abbott will make an independent determination or that the FDA will agree with
such independent determination, if Abbott were to elect to make such a
determination. Accordingly, there is a risk that the FDA will disagree with the
independent determination. In such a circumstance, the manufacturer must submit
a GRAS affirmation petition for the FDA to review and affirm GRAS status by
regulation in order to market and sell the additive or formula containing the
additive. This process could be time-consuming and expensive and would have a
material adverse effect on the Company's business, financial condition, and
results of operations. Furthermore, a company's decision to rely on an
independent determination may limit the marketability of that company's products
as to food manufacturers, many of whom require confirmation of GRAS status from
the FDA before they will purchase substances for use in foods from third
parties.
The infant formula into which the Company's breast milk oligosaccharide
is introduced will be subject to review and approval under the Infant Formula
Act, which has detailed requirements for the manufacture, composition, and
labeling of infant formulas. Under the Infant Formula Act, infant formula
manufacturers are required to notify the FDA of any intent to revise, add, or
substitute any protein, fat, or carbohydrate in infant formula 90 days prior to
the intended date of commercial distribution. The submission must contain the
quantitative formulation of the new infant formula, a description of any
reformulation or change in processing, and assurances that the new infant
formula will not be marketed without complying with the nutrient and quality
factor requirements and GMP control requirements. Upon notification, the FDA has
a 90-day period in which to request additional information, or deny marketing
rights for the new formula. If no response is forthcoming from the FDA within 90
days of notification, the manufacturer may
15
proceed with commercial sales of the newly formulated product. Pursuant to the
Company's agreements with Abbott, Abbott is responsible for all regulatory
activities relating to the infant formula additive. There can be no assurance
that Abbott will be able to satisfy all applicable regulatory requirements.
In addition, Abbott may market infant formula containing the additive
in foreign countries. Infant formula regulatory requirements vary widely from
country to country, and may be more or less stringent than FDA requirements. The
time required to obtain clearances, if required, in foreign countries may be
longer or shorter than that required in the United States.
If the Company's technology is incorporated in products claiming a
therapeutic benefit, such products could be regulated as a drug rather than as a
food. Regulation of these products as a drug would require extensive clinical
testing and review by the FDA to support the claims made for the product. The
uncertainty regarding the regulatory status of this type of product could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Regulation of Pharmaceutical Products
The Company's research and development activities regarding, and the
future manufacturing and marketing of, its pharmaceutical products will be
subject to significant regulation by numerous government authorities in the
United States and other countries. Pharmaceutical products intended for
therapeutic use in humans are governed principally by the FDC Act and by FDA
regulations in the United States and by comparable laws and regulations in
foreign countries. The FDC Act and other federal statutes and regulations govern
the testing, manufacture, safety, labeling, storage, record keeping, approval,
advertising, and promotion of such products. Failure to comply with applicable
requirements can result in fines, recall, or seizure of products, total or
partial suspension of production, withdrawal of existing product approvals,
refusal to approve new drug applications, and criminal prosecution. The process
of completing clinical testing and obtaining FDA approval for a new drug or
biological product requires a number of years and the expenditure of substantial
resources and there can be no assurance that approval will be granted.
Following drug discovery, the steps required before a new
pharmaceutical product may be marketed in the United States include: (1)
preclinical laboratory and animal tests; (2) the submission to the FDA of an IND
application; (3) clinical and other studies to assess safety and parameters of
use; (4) adequate and well-controlled clinical trials, typically conducted in
three phases, to establish the safety and effectiveness of the drug; (5) the
submission of a New Drug Application ("NDA") to the FDA; and (6) FDA approval of
the NDA prior to any commercial sale or shipment of the drug.
Phase I clinical trials are designed to determine the metabolic and
pharmacologic effects of the drug in humans, the side-effects associated with
increasing doses, and possibly, to obtain early indications of efficacy. These
studies generally involve a small number of healthy volunteer subjects, but may
be conducted on people with the disease the drug is intended to treat. Phase II
studies are conducted to evaluate the effectiveness of the drug for a particular
indication and thus involve patients with the disease under study. These studies
also provide evidence of the short term side-effects and risks associated with
the drug. Phase III studies are generally designed to provide the substantial
evidence of safety and effectiveness of a drug required to obtain FDA approval.
They often involve a substantial number of patients in multiple study centers
and may include chronic administration of the drug in order to assess the
overall benefit-risk relationship of the drug. A clinical trial may combine the
elements of more than one phase and typically two or more Phase III studies are
required. Typical estimates of the total time required for completing such
clinical testing vary between four and ten years.
The Company has not submitted an NDA to the FDA or received approval
from any other regulatory authority to market any of its product candidates, and
there can be no assurance that any such product will ever be approved for
marketing, or that the Company will be able to obtain the labeling claims
desired for its products. Even after initial FDA approval has been obtained,
further studies may be required to provide additional data on safety, or to gain
approval for the use of a product as a treatment in clinical indications other
than those for which the product was initially tested.
16
The FDA may also require post-marketing testing and surveillance programs to
monitor the drug's effects. Side-effects resulting from the use of
pharmaceutical products may prevent or limit the further marketing of products.
Once the sale of a product is approved, the FDA regulates production,
manufacturing, marketing, and other activities to ensure compliance with the FDC
Act and the FDA's implementing regulations. Product approvals may be withdrawn,
or other actions may be ordered, or sanctions imposed if compliance with
regulatory requirements is not maintained.
For marketing outside the United States, the Company will be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs and devices. The requirements relating to the conduct of
clinical trials, product licensing, pricing, and reimbursement vary widely from
country to country. See "--Certain Factors Affecting the Company's Business,
Operating Results and Financial Condition--Government Regulation; No Assurance
of Product Approval."
Competition
The Company is engaged in highly competitive industries. The Company
competes with many public and private companies, including well-known
nutritional products manufacturers, pharmaceutical companies, chemical
companies, specialized biotechnology companies, and academic institutions. Many
of the Company's competitors have significantly greater financial, scientific,
and technical resources, and manufacturing and marketing capabilities than the
Company. In addition, many of the Company's competitors have significantly
greater experience conducting preclinical studies and clinical trials of new
pharmaceutical products, and in obtaining regulatory approvals for
pharmaceutical products.
The Company is relying on Abbott to develop and commercialize its
infant formula additive. As a result, the success of the Company's infant
formula additive will depend, in significant part, on Abbott's ability to
compete in the highly competitive infant formula market. Abbott's principal
competitors in this market include Bristol-Myers Squibb Company, American Home
Products Corp., Nestle S.A., and Gerber Products Co. Competitors of the Company
and its collaborators may develop products that compete successfully with the
Company's products and may develop and commercialize such products more rapidly
than the Company and its collaborators. Competition may increase further as a
result of potential advances from the study of complex carbohydrates and greater
availability of capital for investment in this field. There can be no assurance
that the Company's competitors will not succeed in developing technologies and
products that are more effective than any being developed by the Company, or
that would render the Company's technology and products obsolete or
noncompetitive. Although Neose is not aware of any companies that are developing
breast milk oligosaccharides as additives to infant formula, other companies are
investigating potential infant formula additives. Such compounds may compete as
additives to infant formula, but are not directly substitutable for, or
competitive with, carbohydrate additives.
The anti-H. pylori market is currently dominated by large
pharmaceutical companies with products that generally kill bacteria on a
non-specific basis. In response to recent evidence that infection with the
bacterium H. pylori is the major cause of peptic ulcers, certain of these
pharmaceutical companies and others have initiated or expanded research programs
aimed at the eradication of H. pylori. However, many of these research programs
are focusing on conventional antibiotic agents, each of which has reported
incidences of side-effects and resistance. To date, no single product has alone
received FDA approval of a labeling indication for H. pylori, although the FDA
has approved several combinations of multiple products with a specific labeling
indication for eradication of H. pylori. The market for treatment of respiratory
infections and otitis media is currently dominated by large pharmaceutical
companies with antibiotics that kill bacteria non-specifically. The use of
antibiotics often results in the development of side-effects and resistance. Due
to the significant commercial opportunities for respiratory infection and otitis
media therapeutics, many pharmaceutical and biotechnology companies are believed
to be developing alternative therapeutics and vaccines for the treatment and
prevention of respiratory infections and otitis media. Due to the limited supply
of human organs, there is a developing need for alternatives. The Company is
aware of several other pharmaceutical companies that are doing work in the area
of xenotransplants.
17
Several companies are developing oligosaccharide therapeutics, and one
company produces by enzymatic means a limited number of oligosaccharides and
oligosaccharide precursors. The Company believes that none of these companies
has the ability currently to manufacture a wide variety of human oligosaccharide
products in quantities sufficient for commercialization. Other companies,
however, that are developing non-human oligosaccharides may have the capability
to produce, via fermentation, quantities sufficient for clinical studies and
commercialization. In addition, some companies are investigating novel methods
of organic synthesis, sometimes in combination with enzymatic steps, in order to
produce commercial quantities of complex carbohydrates. There can be no
assurance that these and other efforts by potential competitors will not be
successful, or that other methods of carbohydrate synthesis will not be
developed to compete with the Company.
Manufacturing
To be successful, the Company's products must be manufactured in
commercial quantities under GMP prescribed by the FDA, and at acceptable costs.
The Company has not yet manufactured any products in commercial quantities and
currently does not have the facilities to manufacture any products in commercial
quantities under GMP. Although the Company is formulating amounts sufficient to
conduct initial clinical trials of one pharmaceutical product candidate under
GMP conditions, existing facilities of the Company are not adequate for
commercial scale manufacturing. The Company plans to construct GMP manufacturing
facilities in its current facility during 1997 adequate to provide capacity for
the GMP production of NE-0080, NE-1530, and NE-0501 in amounts necessary for the
conduct of anticipated clinical trials of those compounds. In addition, the
expanded facility is expected to give Neose the capacity to manufacture limited
amounts of GMP carbohydrate materials for third parties. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a description of the
anticipated financial aspects of this manufacturing expansion. The Company will
need to develop its own GMP manufacturing facility and/or depend on its
collaborators, licensees, or contract manufacturers for the commercial
manufacture of its products. In the event the Company determines to establish a
manufacturing facility, it will require substantial additional funds, the hiring
and retention of significant additional personnel, and compliance with extensive
regulations applicable to such a facility. The Company has no experience in such
commercial manufacturing, and there can be no assurance that the Company will be
able to establish such a facility successfully and, if established, that it will
be able to manufacture products in commercial quantities for sale at competitive
prices. If the Company determines to rely on collaborators, licensees, or
contract manufacturers for the commercial manufacture of its products, the
Company will be dependent on such corporate partners or other entities for, and
will have only limited control over the commercial manufacturing of, its
products. There can be no assurance that the Company will be able to enter into
any such manufacturing arrangements on acceptable terms, if at all. If the
Company is not able to enter into commercial manufacturing agreements, it could
encounter delays in introducing its products into certain markets, or find that
the manufacture of its products in these markets is adversely affected. There
can be no assurance that the parties to the Company's future commercial
manufacturing agreements will perform their obligations as expected, or that any
revenue will be derived from these commercial manufacturing agreements. See
"--Certain Factors Affecting the Company's Business, Operating Results and
Financial Condition--No Commercial Manufacturing Capability or Experience."
Marketing, Distribution, and Sales
The Company has no experience in marketing, distributing, or selling
nutritional additives or pharmaceutical products, and will have to develop a
sales force and/or rely on its collaborators or licensees, or on arrangements
with others to provide for the marketing, distribution, and sales of its
products. There can be no assurance that the Company will be able to establish
marketing, distribution, and sales capabilities or make arrangements with third
parties to perform such activities on acceptable terms, if at all. See
"--Certain Factors Affecting the Company's Business, Operating Results and
Financial Condition--Limited Clinical Trial Experience; No Marketing or Sales
Capability or Experience."
18
Employees
As of March 14, 1997, Neose had 51 employees (13 of whom held Ph.D.,
Pharm.D., or M.D. degrees), consisting of 41 employees engaged in research and
development activities and 10 employees devoted to business development,
finance, and administrative activities. The Company's staff includes
carbohydrate biochemists as well as scientists with expertise in organic
chemistry, analytic chemistry, molecular biology, microbiology, cell biology,
scale-up manufacture, and regulatory affairs. A significant number of the
Company's management and professional employees have prior experience with
pharmaceutical or biotechnology companies, and many have specialized training in
carbohydrate technology. None of the Company's employees is covered by
collective bargaining agreements, and Neose believes that it maintains good
relations with its employees.
19
Executive Officers of the Company
The following table sets forth certain information with respect to the
executive officers and key employees of the Company:
Name Age Position
- -------------------------- --- ------------------------------------------------
Stephen A. Roth, Ph.D..... 54 Chairman, Chief Executive Officer, and Director
P. Sherrill Neff.......... 45 President, Chief Financial Officer, and Director
Edward J. McGuire, Ph.D... 59 Vice President, Research and Development
David A. Zopf, M.D........ 54 Vice President, Drug Development
Robert L. Fleming......... 62 Director of Manufacturing and Operations
Marjorie Hurley, Pharm.D.. 37 Director of Regulatory Affairs
Paul M. Simon, Ph.D....... 46 Director of Drug Development
Dr. Roth has served as a director of the Company since December 1989
and as its Chairman and Chief Executive Officer since August 1994. Dr. Roth
co-founded the Company, and from April 1992 until August 1994, he served as
Senior Vice President, Research and Development and Chief Scientific Officer of
the Company. Prior to joining the Company, he was a consultant to the Company.
Dr. Roth was on the faculty of the University of Pennsylvania from 1980 to 1994
and was Chairman of Biology from 1982 to 1987. Dr. Roth serves on the Editorial
Board of Current Research in Developmental Biology, The Quarterly Review of
Biology, and The Journal of Molecular Recognition. Dr. Roth received his A.B. in
biology from The Johns Hopkins University, his Ph.D. in developmental biology
from the Case Western Reserve University and completed his post-doctorate
training in carbohydrate chemistry at The Johns Hopkins University.
Mr. Neff has served as President, Chief Financial Officer, and a
director of Neose since December 1994. From February 1993 to December 1994, Mr.
Neff was Senior Vice President, Corporate Development at U.S. Healthcare, Inc.,
a managed healthcare company, where Mr. Neff had responsibility for managing the
growth of several subsidiary companies, and sustaining growth through strategic
acquisitions, investments, and partnerships. From March 1984 to February 1993,
Mr. Neff worked at Alex. Brown & Sons Incorporated, an investment banking firm,
where he was Managing Director and Co-Head of the Financial Services Group. Mr.
Neff received his B.A. in religion from Wesleyan University and his J.D. from
the University of Michigan Law School. Mr. Neff is a director of JeffBanks,
Inc., a publicly traded bank holding company. Mr. Neff has been a member of the
Pennsylvania Bar since 1980.
Dr. McGuire has served as Vice President, Research and Development of
the Company since April 1990. He is responsible for leading the oligosaccharide
synthesis team. Dr. McGuire was on the faculty of the University of Pennsylvania
from 1985 to April 1990. From 1984 to 1985, Dr. McGuire served as a Senior
Researcher at Genetic Engineering, Inc., a biotechnology company, and from 1972
to 1984 he was a Research Biochemist at the National Jewish Hospital. Dr.
McGuire received his B.A. in biology from Blackburn College, his Ph.D. in
biochemistry/chemistry from the University of Illinois Medical School, and held
a National Institutes of Health ("NIH") post-doctoral fellowship at the
University of Michigan and The Johns Hopkins University.
Dr. Zopf has served as Vice President, Drug Development of the Company
since April 1992. From August 1991 to March 1992, Dr. Zopf was a consultant to
the Company on the biomedical applications of complex carbohydrates. From April
1988 to July 1991, Dr. Zopf served as Vice President and Chief Operating Officer
of BioCarb, Inc., a biotechnology company and the U.S. subsidiary of BioCarb AB,
where he managed the research and
20
development programs of novel carbohydrate-based diagnostics and therapeutics.
Dr. Zopf worked at NIH from 1971 to 1988, most recently as Chief, Section on
Biochemical Pathology at the National Cancer Institute. Dr. Zopf currently
serves on the editorial board of Archives of Biochemistry and Biophysics. Dr.
Zopf received his A.B. in zoology from Washington University and his M.D. from
Washington University School of Medicine.
Mr. Fleming has served as Director of Manufacturing and Operations of
the Company since February 1993. Mr. Fleming served as Director, Production and
Facilities at Vestar Inc., a drug distribution and manufacturing company, from
1986 to February 1993 and from 1979 to 1986, he served as Vice President,
Operations for Adria Laboratories Inc., a pharmaceutical company. Prior to
joining Adria Laboratories Inc., Mr. Fleming held a number of positions,
including Plant Manager, at the Mead-Johnson division of Bristol-Myers Squibb
Company from 1957 to 1979. Mr. Fleming received his B.S. in chemical engineering
from Purdue University and his M.B.A. from the University of Evansville.
Dr. Hurley has served as Director of Regulatory Affairs of the Company
since November 1993. From 1987 to November 1993, Dr. Hurley served in various
positions, including as Assistant Director, Regulatory Affairs at Cytogen Corp.,
a biotechnology company. From 1984 to 1987, she held several positions,
including project coordinator at the Wyeth-Ayerst Laboratories division of
American Home Products Corp. Dr. Hurley received her B.S. in pharmacy and her
Pharm.D. from the University of Michigan.
Dr. Simon has served as Director of Drug Development of the Company
since November 1992 and has been responsible for in vitro and in vivo
preclinical testing of Neose compounds. From March 1983 to September 1992, he
was a research immunologist in the cellular immunology of cancer, AIDS,
transplantation, and autoimmune diseases at E.I. DuPont ("DuPont") and DuPont
Merck Pharmaceuticals. Prior to joining DuPont, Dr. Simon trained as a
post-doctoral fellow at the University of California at Los Angeles and at the
Dana Farber Cancer Institute, Harvard Medical School. Dr. Simon received his
B.S. in mathematics from City College of New York and received his Ph.D.
in biology from Syracuse University.
ITEM 2. PROPERTIES.
Through March 19, 1997, the Company leased approximately 45,000 square
feet of laboratory and office space in Horsham, Pennsylvania. On March 20, 1997,
the Company purchased its previously leased facility for approximately $3.8
million. In addition, the Company has made and expects to make capital
expenditures from late 1996 through 1997 totaling approximately $7.5 million to
expand GMP manufacturing capabilities for its compounds under development. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a discussion of the financial
aspects of the facility purchase and manufacturing expansion. The Company
believes that its facility is adequate to meet the Company's purposes for at
least the next two years.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders
during the fourth quarter of fiscal year 1996.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "NTEC." Shares of the Company's Common Stock were first traded
publicly on February 15, 1996 in connection with the Company's initial public
offering at a price to the public of $12.50 per share. The following table sets
forth, for the periods indicated, the high and low closing sales price per share
of the Common Stock, as reported on the Nasdaq National Market, since the
Company's initial public offering in February 1996.
High Low
---- ---
1996
First Quarter (from February 15, 1996).......... 22 3/4 12 1/2
Second Quarter.................................. 24 18 3/8
Third Quarter................................... 20 7/8 11 5/8
Fourth Quarter.................................. 19 5/8 14 1/2
1997
First Quarter (through March 14, 1997).......... 19 1/4 16 1/2
There were approximately 420 holders of record of the Company's Common
Stock as of March 14, 1997. The Company currently anticipates that it will
retain all available funds for use in the operation of its business and for
potential acquisitions, and therefore does not anticipate paying any cash
dividends on its Common Stock for the foreseeable future. The Company paid a
certain holder of its Preferred Stock (all of which was converted into Common
Stock contemporaneously with the initial public offering) cash dividends accrued
thereon in the amount of $18,000 for the year ended December 31, 1995. The
Company has not otherwise declared or paid cash dividends on its capital stock
since 1992.
22
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below as of and for the years
ended December 31, 1992, 1993, 1994, 1995, and 1996, and for the period from
inception (January 17, 1989) to December 31, 1996, have been derived from the
Company's audited financial statements. The financial statements of the Company
for each of the three years in the period ended December 31, 1996, and for the
period from inception (January 17, 1989) to December 31, 1996, and the related
balance sheets at December 31, 1995 and 1996 included elsewhere in this Annual
Report on Form 10-K have been audited by Arthur Andersen LLP, independent public
accountants. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto appearing elsewhere
in this Annual Report on Form 10-K.
Period from
Inception
(January 17,
Year Ended December 31, 1989) to
---------------------------------------------------------- December 31,
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
Revenue from collaborative agreements.... $ -- $ 2,600 $ 48 $ 1,199 $ 1,383 $ 5,230
---------- --------- ---------- ------- -------- ----------
Operating expenses:
Research and development............... 1,941 3,399 5,004 4,733 6,502 22,978
General and administrative............. 1,324 1,577 1,319 1,665 2,505 9,194
---------- ---------- --------- --------- -------- ----------
Total expenses.................. 3,265 4,976 6,323 6,398 9,007 32,172
---------- ---------- --------- --------- -------- ----------
Interest income (expense), net.......... (90) (47) 63 132 1,483 1,419
----------- ----------- ---------- ---------- --------- -----------
Net loss................................. $(3,355) $(2,423) $(6,212) $(5,067) $(6,141) $(25,523)
======== ======== ======== ======== ========= =========
Pro forma net loss per share (1)........ $ (1.05) $(0.78)
========= =========
Shares used in computing pro forma net loss per 4,848 7,849
share(1).............................. ========= =========
As of December 31,
------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Balance Sheet Data: (In thousands)
Cash and cash equivalents $ 820 $ 1,500 $ 5,363 $ 11,189 $ 32,845
Total assets 2,743 3,534 8,196 14,639 37,118
Long-term debt 368 1,010 736 1,235 556
Deficit accumulated during the
development stage (5,680) (8,103) (14,315) (19,382) (25,523)
Total stockholders' equity 1,887 1,448 6,352 11,733 35,120
- ----------
(1) See Note 2 of Notes to Financial Statements.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Annual Report on Form
10-K. The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. These
forward-looking statements include statements regarding the Company's future
plans, events or performance. Such statements are based on management's current
expectations and are subject to a number of uncertainties and risks that could
cause actual results to differ materially from those described in the
forward-looking statements. Factors that may cause such a difference include,
but are not limited to, those described under "Business--Factors Affecting the
Company's Business, Operating Results and Financial Condition" in Part I of this
Annual Report on Form 10-K.
Overview
Neose, a development-stage company, commenced operations in 1990, and
has devoted substantially all of its resources to the development of its
enzymatic carbohydrate synthesis technology and to the discovery and development
of complex carbohydrates for a variety of applications, including nutritional
additives and pharmaceuticals. The Company anticipates that its primary sources
of revenue for the next several years will be payments under its strategic
alliance with Abbott and other collaborative arrangements, license fees,
payments from future strategic alliances and collaborative arrangements, if any,
and interest income. Payments under strategic alliances and collaborative
arrangements will be subject to significant fluctuation in both timing and
amount. Therefore, the Company's results of operations for any period may not be
comparable to the results of operations for any other period.
In December 1992, the Company entered into its strategic alliance with
Abbott for the development of breast milk oligosaccharides as nutritional
additives. The Company has received approximately $11.2 million in contract
payments, license fees, milestone payments, and equity investments in connection
with its strategic alliance with Abbott.
The Company has not generated any revenues from operations, except for
interest income and revenues from strategic alliances. The Company has incurred
losses since its inception and, as of December 31, 1996, had a deficit
accumulated during the development stage of approximately $25.5 million. The
Company anticipates incurring additional losses over at least the next several
years. Such losses may fluctuate significantly from quarter to quarter and are
expected to increase as the Company expands its research and development
programs, including preclinical studies and clinical trials for its
pharmaceutical product candidates under development, and as the Company expands
its manufacturing capabilities.
Results of Operations
Years Ended December 31, 1996 and 1995
Revenues from collaborative agreements increased to $1.4 million in
1996 from $1.2 million in 1995 due to increased revenues from the Company's
collaborative research agreement with Bracco.
Research and development expenses increased to $6.5 million in 1996
from $4.7 million in 1995. The increase was primarily attributable to the hiring
of additional scientific personnel, increased purchases of laboratory supplies
and services, increased clinical trial expenditures for NE-0080, and increased
funding of external research.
General and administrative expenses increased to $2.5 million in 1996
from $1.7 million in 1995. The increase was primarily attributable to increased
patent and business development expenses, and expenses associated with being a
public company.
24
Interest income increased to $1.7 million in 1996 from $0.3 million in
1995 due to higher average cash balances resulting from the Company's initial
public offering in February 1996. Interest expense increased to $247,000 in 1996
from $190,000 in 1995 due to higher average loan balances outstanding during
1996.
Years Ended December 31, 1995 and 1994
Revenues from collaborative agreements increased to $1.2 million in
1995 from $48,000 in 1994 due to the timing and size of milestone payments and
license fees received from Abbott.
Research and development expenses decreased to $4.7 million in 1995
from $5.0 million in 1994. The decrease was primarily attributable to a decrease
in expenses connected with the Company's strategic alliance with Abbott
resulting from the licensing in 1995 of certain manufacturing rights to Abbott.
The decrease was partly offset by increases in other research and development
activities.
General and administrative expenses increased to $1.7 million in 1995
from $1.3 million in 1994. The increase reflected additional management expenses
associated with a general increase in the level of the Company's activities.
Interest income increased to $322,000 in 1995 from $257,000 in 1994 due
to higher average cash balances during 1995. Interest expense decreased to
$190,000 in 1995 from $194,000 in 1994 due to slightly lower average loan
balances during 1995.
Liquidity and Capital Resources
From inception through December 31, 1996, the Company has incurred a
cumulative net loss of approximately $25.5 million, and has financed its
operations through private and public offerings of its securities and revenues
from its strategic alliances. The Company had $32.8 million in cash and cash
equivalents at December 31, 1996, compared to $11.2 million at December 31,
1995. This increase is primarily attributable to the receipt of net proceeds
from the Company's initial public offering in February 1996. In February and
March 1996, the Company sold 2,587,500 shares of Common Stock to the public at a
price per share of $12.50. The Company received proceeds of approximately $29.1
million after deducting underwriting commissions and offering expenses.
In January 1997, the Company sold 1,250,000 shares of Common Stock to
the public at a price per share of $17.50. The Company received proceeds of
approximately $20.3 million after deducting placement fees and offering
expenses.
The Company and Abbott have entered into collaborative agreements to
develop breast milk oligosaccharides as additives to infant formula and other
nutritional products. Under this strategic alliance, the Company has received
approximately $11.2 million in contract payments, license fees, milestone
payments, and equity investments. In addition, Abbott is obligated to make an
additional payment of $5 million to Neose within 60 days of the first commercial
sale, if any, of infant formula containing the Company's nutritional additive.
Abbott may (i) at any time prior to the first commercial sale, if any, of infant
formula containing the Company's nutritional additive, elect to make its license
agreement non-exclusive, in which event the license fees payable by Abbott after
commercialization would be reduced by 50%, and Abbott's obligations to make
contract and milestone payments, including the $5 million milestone payment,
would be terminated, or (ii) elect to terminate the license agreement and return
the licensed technology to Neose upon 60 days' notice, in which event it would
have no further funding obligation to the Company, including no obligation to
make the $5 million milestone payment. In addition, under the terms of the
Abbott agreement, if Abbott fails to make appropriate regulatory filings with
the FDA for the addition of Neose's oligosaccharide to infant formula prior to
December 1, 1997, Neose, at its option, may elect to convert the license of
Neose technology to a non-exclusive license to Abbott, in which event the
license fees payable by Abbott after commercialization would be reduced by 50%,
and Abbott's obligations to make contract and milestone payments, including the
$5 million milestone payment, would be terminated.
25
On March 20, 1997, the Company purchased its previously leased facility
for a total of approximately $3.8 million. In addition, the Company expects a
total of approximately $7.5 million of capital expenditures, which began in the
fourth quarter of 1996, to expand GMP manufacturing capabilities for NE-0080,
and to establish GMP manufacturing capabilities for NE-1530 and NE-0501. In each
case, the Company believes that the planned GMP capacity will be adequate to
complete clinical trials for the respective compounds. In addition, the Company
believes that the planned expansion will give it capacity to manufacture under
GMP conditions certain amounts of these and other carbohydrates for third
parties.
In connection with the purchase of its facility and the planned GMP
manufacturing expansion, on March 20, 1997, the Company issued, through the
Montgomery County (Pennsylvania) Industrial Development Authority, the aggregate
amount of $9.4 million of taxable and tax-exempt bonds. The bonds are supported
by a AA-rated letter of credit, and a reimbursement agreement between the
Company's bank and the letter of credit issuer. The interest rate on the bonds
will vary weekly, depending on market rates for AA-rated taxable and tax-exempt
obligations, respectively. The initial effective, blended interest rate at
issuance was 6.7% per annum, including letter-of-credit and other fees. To
provide credit support for this arrangement, the Company has given a first
mortgage on the land, building, improvements, and certain machinery and
equipment to its bank. In addition, the Company has agreed to certain covenants
for the maintenance of minimum cash and short-term investment balances, and for
minimum working capital requirements.
The Company has entered into a capital lease agreement with an
equipment finance company that provides for up to $1.5 million of financing, of
which approximately $1.4 million had been drawn on as of December 31, 1996.
During 1996, 1995, and 1994, the Company purchased approximately
$1,857,000, $875,000, and $975,000 of capital equipment and leasehold
improvements.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to continue its research and development programs. The Company
expects that its existing capital resources will be adequate to fund its capital
requirements through 1999. No assurance can be given that there will be no
change that would consume available resources significantly before such time.
The Company's future capital requirements and the adequacy of available funds
will depend on many factors, including progress in its research and development
activities, including its pharmaceutical discovery and development programs, the
magnitude and scope of these activities, progress with preclinical studies and
clinical trials, the costs involved in preparing, filing, prosecuting,
maintaining, and enforcing patent claims and other intellectual property rights,
competing technological and market developments, changes in existing
collaborative research relationships and strategic alliances, the ability of the
Company to establish additional collaborative arrangements for product
development, the cost of manufacturing scale-up, and developing effective
marketing activities and arrangements.
To the extent that funds generated from the Company's operations,
together with its existing capital resources, are insufficient to meet current
or planned operating requirements, it is likely that the Company will seek to
obtain additional funds through equity or debt financings, collaborative or
other arrangements with corporate partners and others, and from other sources.
The terms and prices of any such financings may be significantly more favorable
than those obtained by present stockholders of the Company, which could have the
effect of diluting or adversely affecting the holdings or the rights of existing
stockholders of the Company. There can be no assurance that additional financing
will be available when needed or on terms acceptable to the Company.
If adequate additional funds are not available for these purposes or
otherwise, the Company's business, financial condition, and results of
operations will be materially and adversely affected. In such circumstances, the
Company may be required to delay, scale back, or eliminate certain of its
research and product development activities or certain other aspects of its
business or attempt to obtain funds through collaborative arrangements that may
require the Company to relinquish some or all of its rights to certain of its
intellectual property, product candidates, or products.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements of the Company required by this item are
attached to this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item concerning directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the Company's 1997 Proxy Statement. The
required information as to executive officers is set forth in Part I hereof and
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference to the Company's 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by
reference to the Company's 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference to the Company's 1997 Proxy Statement.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The Financial Statements listed in the accompanying Index to Financial
Statements at page F-1 are filed as part of this Annual Report on Form 10-K.
2. Financial Statement Schedules.
All financial statement schedules have been omitted because they are
not applicable, or not required, or the information is shown in the Financial
Statements or Notes thereto.
3. Exhibits. (See (c) below)
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter ended
December 31, 1996.
(c) Exhibits.
The following is a list of exhibits filed as part of this Annual Report
on Form 10-K. 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 Second Amended and Restated Certificate of Incorporation of the
Registrant. (Exhibit 3.1)(1)
3.2 Amended and Restated By-Laws of the Registrant. (Exhibit 3.2)(1)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Second Amended and
Restated Certificate of Incorporation and Amended and Restated By-Laws
of the Registrant defining rights of holders of Common Stock of the
Registrant.
10.1 Stock Purchase Agreement, dated as of August 28, 1990, between the
Registrant and the University of Pennsylvania. (Exhibit 10.1)(1)
10.2 License Agreement, dated as of August 28, 1990, between the Registrant
and the University of Pennsylvania, as amended to date. (Exhibit
10.2)(1)
10.3 Form of Common Stock Subscription Agreement. (Exhibit 10.3)(1)
10.4 Form of Series A Preferred Stock Subscription Agreement.
(Exhibit 10.4)(1)
10.5 Form of Series B Preferred Stock Subscription and Stock Purchase
Agreement. (Exhibit 10.5)(1)
10.6 Form of Series C Preferred Stock Subscription Agreement.
(Exhibit 10.6)(1)
10.7 Form of Series D Preferred Stock Subscription Agreement.
(Exhibit 10.7)(1)
10.8(a)+ Series D Preferred Stock Purchase Agreement, dated as of December 30,
1992, between the Registrant and Abbott Laboratories.
(Exhibit 10.8(a))(1)
28
10.8(b)+ Supply Agreement, dated as of December 30, 1992, between the
Registrant and Abbott Laboratories. (Exhibit 10.8(b))(1)
10.8(c)+ Research and License Agreement, dated as of December 30, 1992, between
the Registrant and Abbott Laboratories. (Exhibit 10.8(c))(1)
10.8(d)+ Amendment to the Research and License Agreement, dated as of January
18, 1995, between the Registrant and Abbott Laboratories. (Exhibit
10.8(d))(2)
10.9 Form of Series E Preferred Stock Investors' Rights Agreement. (Exhibit
10.9)(1)
10.10 Form of Series F Preferred Stock Investors' Rights Agreement. (Exhibit
10.10)(1)
10.11 Form of Warrant to Purchase Common Stock, dated as of February 20,
1991. (Exhibit 10.11)(1)
10.12 Form of Warrant to Purchase Common Stock, dated as of June 30, 1993.
(Exhibit 10.12)(1)
10.13 Form of Warrant to Purchase Common Stock, dated as of February 16,
1994. (Exhibit 10.13)(1)
10.14 Form of Warrant to Purchase Series E Preferred Stock, dated as of July
29, 1994. (Exhibit 10.14)(1)
10.15 Warrant for the Purchase of Common Stock, dated as of June 30, 1995,
between the Registrant and Financing for Science International, Inc.
(Exhibit 10.15)(1)
10.16++ 1995 Stock Option/Stock Issuance Plan, as amended. (Exhibit 10.16)(2)
10.17++ Employee Stock Purchase Plan. (Exhibit 10.17)(1)
10.18 Lease Agreement dated January 9, 1992 between the Registrant and
Pennsylvania Business Campus Delaware, Inc., as amended to date.
(Exhibit 10.18)(1)
10.19++ Employment Agreement dated December 1, 1994 between the Registrant and
P. Sherrill Neff. (Exhibit 10.19)(1)
10.20++ Employment Agreement dated April 1, 1992 between the Registrant and
David A. Zopf, as amended to date. (Exhibit 10.20)(1)
10.21 Design-Build Agreement dated August 30, 1996 between the Registrant
and Irwin & Leighton, Inc. (Exhibit 10.21)(2)
11* Statement re: Computation of Net Loss Per Common Share.
23.1* Consent of Arthur Andersen LLP.
24* Powers of Attorney (included as part of signature page hereof).
27* Financial Data Schedule.
- ------------------
* Filed herewith
+ Portions of this Exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to an order of the Commission
granting the Registrant's application for confidential treatment filed
pursuant to Rule 406 under the Securities Act.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-80693) filed with the Commission on December
21, 1995, as amended.
29
(2) Filed as an Exhibit to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-19629) filed with the Commission on January
13, 1997.
Copies of the exhibits are available to stockholders (upon payment of a
fee to cover the Company's expenses in furnishing exhibits) from
Invester Relations, Neose Technologies, Inc., 102 Witmer Road, Horsham,
Pennsylvania 19044.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEOSE TECHNOLOGIES, INC.
Date: March 28, 1997 By /s/ Stephen A. Roth
---------------------------
Stephen A. Roth
Chief Executive Officer
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 and on the dates indicated.
Each person, in so signing also makes, constitutes and appoints Stephen
A. Roth, Chief Executive Officer of Neose Technologies, Inc., and P. Sherrill
Neff, President and Chief Financial Officer of Neose Technologies, Inc., and
each of them acting alone, as his true and lawful attorneys-in-fact, with full
power of substitution, in his name, place and stead, to execute and cause to be
filed with the Securities and Exchange Commission any or all amendments to this
report.
Name Capacity Date
- ---- -------- ----
/s/Stephen A. Roth Chief Executive Officer and March 28, 1997
- ---------------------------- Chairman of the Board
Stephen A. Roth (Principal Executive
Officer)
/s/P. Sherrill Neff President and Chief March 28, 1997
- ---------------------------- Financial Officer and
P. Sherrill Neff Director (Principal
Financial and Accounting
Officer)
/s/William F. Hamilton Director March 28, 1997
- ----------------------------
William F. Hamilton
/s/Douglas J. MacMaster, Jr. Director March 28, 1997
- ----------------------------
Douglas J. MacMaster, Jr.
/s/Lindsay A. Rosenwald Director March 28, 1997
- ----------------------------
Lindsay A. Rosenwald
/s/Lowell E. Sears Director March 28, 1997
- ----------------------------
Lowell E. Sears
/s/Jerry A. Weisbach Director March 28, 1997
- ----------------------------
Jerry A. Weisbach
31
Financial Statement Index
Report of Independent Public Accountants ................... F2
Balance Sheets ............................................. F3
Statements of Operations ................................... F4
Statements of Stockholders' Equity ......................... F5
Statements of Cash Flows ................................... F7
Notes to Financial Statements .............................. F8
F1
Neose Technologies, Inc. (a development-stage company)
Report of Independent Public Accountants
To Neose Technologies, Inc.:
We have audited the accompanying balance sheets of Neose Technologies, Inc.
(a Delaware corporation in the development stage), formerly Neose
Pharmaceuticals, Inc., as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996, and for the period from
inception (January 17, 1989) to December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Neose Technologies, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, and for
the period from inception (January 17, 1989) to December 31, 1996, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pennsylvania
January 29, 1997
F2
Neose Technologies, Inc. (a development-stage company)
Balance Sheets
December 31,
------------------------------
1995 1996
------------------------------
Assets
Current assets:
Cash and cash equivalents $ 11,189,001 $ 32,845,025
Restricted funds 148,300 73,828
Prepaid expenses and other 118,680 210,122
------------------------------
Total current assets 11,455,981 33,128,975
Property and equipment, net 2,685,613 3,973,619
Deferred financing costs 409,003 --
Restricted funds 73,066 --
Other assets 15,049 15,049
------------------------------
$ 14,638,712 $ 37,117,643
==============================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 764,552 $ 678,122
Accounts payable 301,023 217,283
Accrued compensation 191,318 264,440
Other accrued expenses 297,605 161,130
Deferred revenue 41,667 41,667
------------------------------
Total current liabilities 1,596,165 1,362,642
------------------------------
Other liabilities 74,986 78,806
------------------------------
Long-term debt 1,234,527 556,405
------------------------------
Commitments (Note 9)
Stockholders' Equity:
Convertible preferred stock 57,802 --
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 30,000,000 shares
authorized; 3,145,256 and 8,214,624 shares issued
and outstanding 31,453 82,146
Additional paid-in capital 31,385,927 60,830,513
Deferred compensation (359,900) (269,925)
Deficit accumulated during the development stage (19,382,248) (25,522,944)
------------------------------
Total stockholders' equity 11,733,034 35,119,790
------------------------------
$ 14,638,712 $ 37,117,643
==============================
The accompanying notes are an integral part of these statements.
F3
Neose Technologies, Inc. (a development-stage company)
Statements of Operations
Period from
inception
(January 17, 1989)
Year ended December 31, to December 31,
--------------------------------------------------------------
1994 1995 1996 1996
- -----------------------------------------------------------------------------------------------------------------------
Revenue from collaborative agreements $ 47,500 $1,198,863 $1,383,350 $ 5,229,713
--------------------------------------------------------------
Operating Expenses:
Research and development 5,003,780 4,732,788 6,502,001 22,978,558
General and administrative 1,318,884 1,665,320 2,504,958 9,193,686
--------------------------------------------------------------
Total operating expenses 6,322,664 6,398,108 9,006,959 32,172,244
--------------------------------------------------------------
Operating loss (6,275,164) (5,199,245) (7,623,609) (26,942,531)
Interest income 257,264 322,309 1,729,945 2,545,930
Interest expense (194,349) (189,839) (247,032) (1,126,343)
--------------------------------------------------------------
Net loss $(6,212,249) $(5,066,775) $(6,140,696) $(25,522,944)
==============================================================
Pro forma net loss per share $ (1.05) $ (0.78)
===========================
Pro forma weighted-average shares outstanding 4,848,000 7,849,000
===========================
F4
Neose Technologies, Inc. (a development-stage company)
Statements of Stockholders' Equity
Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional During the Total
---------------- --------------- Paid-in Deferred Development Stockholders'
Shares Amount Shares Amount Capital Compensation Stage Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 17, 1989 (inception) -- $-- -- $-- $-- $-- $-- $--
Initial issuance of common stock -- -- 1,302,000 13,020 (3,020) -- -- 10,000
Shares issued for consulting and
licensing -- -- 325,500 3,255 (1,255) -- -- 2,000
Sale of common stock -- -- 133,334 1,333 1,267 -- -- 2,600
Shares issued pursuant to
antidilutive agreements -- -- 2,864 29 (29) -- -- --
Net loss -- -- -- -- -- -- (460,307) (460,307)
---------------------------------------------------------------------------------------
Balance, December 31, 1990 -- -- 1,763,698 17,637 (3,037) -- (460,307) (445,707)
Sale of Series A preferred stock 100,000 1,000 -- -- 269,000 -- -- 270,000
Sale of Series B preferred stock 1,416,695 14,167 -- -- 4,195,952 -- -- 4,210,119
Sale of common stock -- -- 420,284 4,203 33,619 (7,264) -- 30,558
Shares issued for consulting
services -- -- 7,584 76 606 -- -- 682
Shares issued pursuant to
antidilutive agreements -- -- 137,193 1,372 (1,372) -- -- --
Capital contributions -- -- -- -- 9,971 -- -- 9,971
Dividends on Series A
preferred stock -- -- -- -- (18,000) -- -- (18,000)
Net loss -- -- -- -- -- -- (1,865,026) (1,865,026)
---------------------------------------------------------------------------------------
Balance, December 31, 1991 1,516,695 15,167 2,328,759 23,288 4,486,739 (7,264)(2,325,333) 2,192,597
Shares issued pursuant to
exercise of stock options -- -- 8,334 83 16,167 -- -- 16,250
Sale of Series C preferred stock 235,295 2,353 -- -- 1,847,647 -- -- 1,850,000
Sale of Series D preferred stock 25,000 250 -- -- 199,750 -- -- 200,000
Shares issued pursuant to
redemption of notes payable -- -- 24,120 241 462,165 -- -- 462,406
Exercise of stock warrants pursuant
to redemption of notes payable -- -- 83,339 833 220,609 -- -- 221,442
Shares issued pursuant to exercise
of warrants -- -- 12,501 125 34,562 -- -- 34,687
Dividends on Series A preferred
stock -- -- -- -- (36,000) -- -- (36,000)
Sale of common stock -- -- 16,989 170 295,458 -- -- 295,628
Amortization of deferred
compensation -- -- -- -- -- 4,843 -- 4,843
Net loss -- -- -- -- -- -- (3,354,974) (3,354,974)
---------------------------------------------------------------------------------------
Balance, December 31, 1992 1,776,990 17,770 2,474,042 24,740 7,527,097 (2,421)(5,680,307) 1,886,879
Sale of Series D preferred stock 250,000 2,500 -- -- 1,997,500 -- -- 2,000,000
Dividends on Series A preferred
stock -- -- -- -- (36,000) -- -- (36,000)
Shares issued to the University
of Pennsylvania -- -- 3,482 35 (35) -- -- --
Shares issued to Series A preferred
stockholder in lieu of cash
dividends -- -- 924 9 17,991 -- -- 18,000
Amortization of deferred
compensation -- -- -- -- -- 2,421 -- 2,421
Net loss -- -- -- -- -- -- (2,422,917) (2,422,917)
---------------------------------------------------------------------------------------
Balance, December 31, 1993 2,026,990 20,270 2,478,448 24,784 9,506,553 -- (8,103,224) 1,448,383
(continued)
F5
Neose Technologies, Inc. (a development-stage company)
Statements of Stockholders' Equity
(continued)
Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional During the Total
---------------- --------------- Paid-in Deferred Development Stockholders'
Shares Amount Shares Amount Capital Compensation Stage Equity
- -------------------------------------------------------------------------------- --------------------------------------------------
Sale of Series D preferred stock 250,000 2,500 -- -- 1,997,500 -- -- 2,000,000
Shares issued pursuant to exercise
of stock options -- -- 35,328 353 13,713 -- -- 14,066
Sale of Series E preferred stock 2,199,238 21,992 -- -- 9,043,355 -- -- 9,065,347
Dividends on Series A preferred
stock -- -- -- -- (18,000) -- -- (18,000)
Shares issued to Series A preferred
stockholder in lieu of cash dividends -- -- 9,474 95 53,905 -- -- 54,000
Net loss -- -- -- -- -- -- (6,212,249) (6,212,249)
------------------------------------- ---------------------------------------------------
Balance, December 31, 1994 4,476,228 44,762 2,523,250 25,232 20,597,026 -- (14,315,473) 6,351,547
Sale of Series F preferred stock 2,720,656 27,207 -- -- 10,064,668 -- -- 10,091,875
Dividends on Series A preferred
stock -- -- -- -- (36,000) -- -- (36,000)
Shares issued to Series A preferred
stockholder in lieu of cash dividends -- -- 3,158 32 17,968 -- -- 18,000
Shares issued pursuant to exercise
of stock options -- -- 15,638 156 30,525 -- -- 30,681
Shares issued to employees in lieu
of cash compensation -- -- 7,810 78 44,395 -- -- 44,473
Shares issued pursuant to exercise
of warrants -- -- 99,751 998 298,235 -- -- 299,233
Deferred compensation related to
grant of stock options -- -- -- -- 359,900 (359,900) -- --
Shares issued to stockholder in
connection with the offering -- -- 23,400 234 (234) -- -- --
Conversion of Series B preferred
stock into common stock (1,416,695)(14,167) 472,249 4,723 9,444 -- -- --
Net loss -- -- -- -- -- -- (5,066,775) (5,066,775)
------------------------------------- ---------------------------------------------------
Balance, December 31, 1995 5,780,189 57,802 3,145,256 31,453 31,385,927 (359,900) (19,382,248) 11,733,034
Sale of common stock in initial
public offering, net of offering costs -- -- 2,587,500 25,875 29,101,286 -- -- 29,127,161
Conversion of Series A, C, D, E,
and F preferred stock into
common stock (5,780,189)(57,802) 2,410,702 24,107 33,695 -- -- --
Shares issued pursuant to exercise
of stock options -- -- 63,009 630 163,403 -- -- 164,033
Shares issued pursuant to exercise
of warrants -- -- 2,526 25 (25) -- -- --
Shares issued pursuant to Employee
Stock Purchase Plan -- -- 5,631 56 59,774 -- -- 59,830
Deferred compensation related to
acceleration of option vesting -- -- -- -- 104,453 -- -- 104,453
Dividends on Series A preferred stock -- -- -- -- (18,000) -- -- (18,000)
Amortization of deferred compensation -- -- -- -- -- 89,975 -- 89,975
Net loss -- -- -- -- -- -- (6,140,696) (6,140,696)
------------------------------------- ---------------------------------------------------
Balance, December 31, 1996 -- $-- 8,214,624 $82,146 $60,830,513 $(269,925) $(25,522,944) $35,119,790
===================================== ===================================================
The accompanying notes are an integral part of these statements.
F6
Neose Technologies, Inc. (a development-stage company)
Statements of Cash Flows
Period from
inception
Year ended December 31, (January 17, 1989)
--------------------------------------------- to December 31,
1994 1995 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (6,212,249) $ (5,066,775) $ (6,140,696) $(25,522,944)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 309,303 389,331 763,203 1,938,798
Common stock issued for noncash charges and other -- -- -- 34,961
Changes in operating assets and liabilities:
Restricted funds (112,466) 351,753 147,538 (73,828)
Prepaid expenses and other (20,686) (62,030) (91,441) (210,122)
Other assets 416 (11,649) -- (15,049)
Accounts payable (112,219) 82,868 (83,740) 217,283
Accrued compensation 149,876 (135,880) 73,122 308,913
Other accrued expenses 84,794 201,394 (136,475) 161,130
Deferred revenue -- 41,667 -- 41,667
Other liabilities (133,606) 21,926 3,819 78,806
----------------------------------------------------------------
Net cash used in operating activities (6,046,837) (4,187,395) (5,464,670) (23,040,385)
----------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (975,175) (875,010) (1,856,781) (4,960,088)
Proceeds from sale-leaseback of equipment -- 1,382,027 -- 1,382,027
----------------------------------------------------------------
Net cash provided by (used in) investing activities (975,175) 507,017 (1,856,781) (3,578,061)
----------------------------------------------------------------
Cash flows from financing activities:
Proceeds from the issuance of notes -- -- -- 1,225,000
Repayment of notes payable -- -- -- (565,250)
Proceeds from issuance of short-term debt -- -- -- 290,000
Repayment of short-term debt -- -- -- (290,000)
Proceeds from issuance of long-term debt 100,000 -- -- 1,110,869
Repayment of long-term debt (294,324) (488,237) (764,552) (1,762,819)
Proceeds from issuance of preferred stock, net 11,065,347 10,091,875 -- 29,497,297
Proceeds from issuance of common stock, net -- -- 59,830 380,665
Proceeds from Initial Public Offering, net -- (409,003) 29,536,164 29,127,161
Proceeds from exercise of warrants, net -- 299,233 -- 333,920
Proceeds from exercise of stock options 14,066 30,681 164,033 225,030
Dividends paid -- (18,000) (18,000) (72,000)
Issuance costs resulting from conversion of notes to
common stock -- -- -- (36,402)
----------------------------------------------------------------
Net cash provided by financing activities 10,885,089 9,506,549 28,977,475 59,463,471
----------------------------------------------------------------
Net increase in cash and cash equivalents 3,863,077 5,826,171 21,656,024 32,845,025
Cash and cash equivalents, beginning of period 1,499,753 5,362,830 11,189,001 --
----------------------------------------------------------------
Cash and cash equivalents, end of period $ 5,362,830 $ 11,189,001 $ 32,845,025 $ 32,845,025
================================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 158,575 $ 200,008 $ 256,518 $ 1,049,711
================================================================
Noncash financing activities:
Issuance of common stock for dividends $ 54,000 $ 18,000 $ -- $ 90,000
================================================================
Issuance of common stock to employees in lieu of
cash compensation $ -- $ 44,473 $ -- $ 44,473
================================================================
The accompanying notes are an integral part of these statements.
F7
Neose Technologies, Inc. (a development-stage company)
Notes to Financial Statements
Note 1. Background
Neose Technologies, Inc., a development-stage company, formerly Neose
Pharmaceuticals, Inc. (the "Company"), is focused on the enzymatic synthesis of
complex carbohydrates and discovers and develops complex carbohydrates for
nutritional and pharmaceutical uses. The Company's products in development
include breast milk oligosaccharide additives to infant formula, and
pharmaceuticals to treat various bacterial infections, such as gastrointestinal
and pediatric ear infections, and to prevent xenotransplant rejection. The
Company has developed proprietary technologies that it believes enables, for the
first time, the rapid and cost-efficient production of naturally occurring
oligosaccharides.
The Company's initial public offering of common stock (the "Offering")
closed on February 22, 1996. The Company sold 2,587,500 shares, including the
exercise of the underwriters' overallotment option on March 4, 1996, of common
stock at a public offering price of $12.50 per share. The net proceeds to the
Company from the Offering after the underwriting discount and payment of
offering expenses were approximately $29,127,000. In connection with the
Offering, all outstanding shares of Series A, C, D, E and F Convertible
Preferred Stock converted into 2,410,702 shares of common stock (see Note 6).
On January 29, 1997, the Company sold 1,250,000 shares of common stock in a
public offering at a price of $17.50 per share. The net proceeds to the Company
after the payment of placement fees and offering expenses were approximately
$20,340,000.
The Company was incorporated in January 1989, and commenced operations in
August 1990. Since its inception, the Company has derived substantially all of
its revenues from its strategic alliance with Abbott Laboratories (see Note 3);
no product revenues have been generated to date. The Company has incurred losses
since its inception. The Company anticipates incurring additional losses over at
least the next several years. Such losses may fluctuate significantly from
quarter to quarter and are expected to increase as the Company expands its
research and development activities. Substantial financing will be needed by the
Company to fund its operations and to commercially develop its products. There
is no assurance that such financing will be available when needed. Operations of
the Company are subject to certain risks and uncertainties including, among
others, uncertainty of product development; technological uncertainty;
dependence on Abbott Laboratories and other collaborative partners; uncertainty
regarding patents and proprietary rights; substantial competition; risk of
technological obsolescence; comprehensive government regulations; no assurance
of product approval; no commercial manufacturing, marketing or sales capability
or experience; limited clinical trial experience; and dependence on key
personnel.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments consisting of purchases
with an original maturity of three months or less to be cash equivalents. Cash
equivalents at December 31, 1995, consisted of approximately $10,114,000 of
overnight repurchase agreements secured by United States Treasury Notes, and at
December 31, 1996, consisted of approximately $31,590,000 of 28-day repurchase
agreements secured by collateralized mortgage obligations.
F8
Neose Technologies, Inc. (a development-stage company
Notes to Financial Statements
(Continued)
)
Property and Equipment
Property and equipment are stated at cost. Property and equipment
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the lease term. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the related assets or the lease term, whichever is shorter. The Company uses
lives of two to seven years for office, research and manufacturing equipment.
Research and Development
Research and development costs are charged to expense as incurred.
Income Taxes
The Company accounts for income taxes in accordance with the Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
the objective of which is to recognize the amount of current and deferred income
taxes payable or refundable at the date of the financial statements as a result
of all events that have been recognized in the financial statements as measured
by enacted tax laws.
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $4,827,000. In addition, the
Company had federal research and development credit carryforwards of
approximately $642,000. The net operating loss and credit carryforwards begin to
expire in 2004 and are subject to review and possible adjustment by the Internal
Revenue Service.
The approximate income tax effect of each type of temporary difference and
carryforward is as follows:
December 31, 1995 1996
- ----------------------------------------------------
Benefit of operating
loss carryforwards $ 2,024,094 $ 1,641,038
Research and development
credit carryforwards 561,058 642,373
Start-up costs 2,027,935 2,643,024
Capitalized research
and development 2,109,947 3,667,565
Deferred revenue 14,167 --
Deferred compensation -- 30,592
Nondeductible depreciation
and amortization 397,768 591,152
Deferred rent 25,495 26,794
Valuation allowance (7,160,464) (9,242,538)
----------------------
$ -- $ --
======================
Due to the uncertainty surrounding the realization of the deferred tax
asset, the Company has provided a full valuation allowance against this amount.
Revenue Recognition
The Company records revenue from collaborative agreements when the specified
services are performed or ratably over the respective terms of the agreements.
Pro Forma Net Loss Per Share
Pro forma net loss per share was computed using the weighted average number
of common shares outstanding during the period, and includes all convertible
preferred stock which converted into shares of common stock immediately prior to
the closing of the Offering as if they were converted into common stock on their
original dates of issuance. In addition, pursuant to the requirements of the
Securities and Exchange Commission, common stock equivalents issued by the
Company during the 12 months immediately preceding the Offering have been
included in the calculation of pro forma weighted average shares outstanding,
using the Treasury Stock method as if they were outstanding for all periods
prior to the Offering. All other common stock equivalents were excluded for all
periods presented because they are antidilutive.
F9
Neose Technologies, Inc. (a development-stage company)
Notes to Financial Statements
(Continued)
Recapitalization
In December 1995, the Company's stockholders approved the following actions
which became effective upon the closing of the Offering: (i) a one-for-three
reverse stock split of the Company's common shares, (ii) a change in the number
of authorized shares of common stock and preferred stock to 30,000,000 and
5,000,000, respectively, and (iii) a change in the par value of common stock to
$.01 per share. All references in the financial statements to the number of
common shares, per-share amounts, and stock options and warrants exercisable
into common stock have been retroactively restated to reflect these changes.
Note 3. Agreements With Abbott Laboratories
The Company and Abbott Laboratories ("Abbott") have entered into
collaborative agreements (the "Abbott Agreements") to develop breast milk
oligosaccharides as additives to infant formula and other nutritional products.
Abbott has manufacturing rights and further manufacturing development
responsibilities for the nutritional additives. Under this strategic alliance,
the Company has received approximately $10.7 million in contract payments,
license fees, milestone payments, and equity investments through December 31,
1996. In addition, the Company received $500,000 in January 1997, and is to
receive $5 million within 60 days of the first commercial sale, if any, of
infant formula containing the Company's nutritional additive. Abbott will
manufacture the nutritional additive for its own use and has agreed to pay the
Company ongoing fees based on the dry weight of the infant formula sold
containing the nutritional additive. The Company is required to credit $3.75
million of the license fees against the ongoing fees in equal amounts over four
years. In addition, Abbott has agreed to renegotiate the fees due the Company on
the sale of products containing the nutritional additive in any case where the
Company has made a contribution that both parties agree will result in a
substantial commercial advantage. Abbott may, at any time prior to the first
commercial sale, if any, of infant formula containing the Company's nutritional
additive, elect to make its license agreement non-exclusive, in which event the
license fees payable by Abbott after commercialization would be reduced by 50%
and Abbott's obligations to make contract and milestone payments, including the
$5 million milestone payment, would be terminated. Abbott also has the right to
cancel the underlying license agreement upon 60 days' written notice and return
the technology, in which event it would have no further funding obligations to
the Company. Under the terms of the Abbott Agreements, if Abbott fails to make
appropriate regulatory filings with the FDA for the addition of Neose's
oligosaccharides to infant formula prior to December 1, 1997, Neose, at its
option, may elect to convert the license of Neose technology to a non-exclusive
license to Abbott, in which event the license fees payable by Abbott after
commercialization would be reduced by 50%, and Abbott's obligations to make
contract and milestone payments, including the $5 million milestone payment,
would be terminated. The Company anticipates that its manufacturing arrangement
with Abbott will assist the Company in developing its own manufacturing
capability. As part of the strategic alliance, in January 1993, and April 1994,
Abbott invested an aggregate of $4 million to acquire 500,000 shares of the
Company's Series D Convertible Preferred Stock at $8 per share. In February
1996, Abbott invested $2 million to acquire 160,000 shares of the Company's
common stock in the Offering (see Note 1).
During 1995, Abbott made contractual payments to the Company under the
Abbott Agreements totaling $1 million. In addition, Abbott purchased raw
materials from the Company for $105,000, which was included in revenue for the
year ended December 31, 1995. In 1996, Abbott made additional contractual
payments to the Company under the Abbott Agreements totaling $1 million.
F10
Neose Technologies, Inc. (a development-stage company)
Notes to Financial Statements
(Continued)
Note 4. Property and Equipment:
December 31, 1995 1996
- ----------------------------------------------------
Research equipment $1,413,646 $1,660,874
Leasehold improvements 1,447,100 1,741,676
Manufacturing equipment 601,950 652,072
Computer and office equipment 208,469 266,672
----------------------
3,671,165 4,321,294
Less- Accumulated depreciation
and amortization (985,552) (1,554,327)
----------------------
2,685,613 2,766,967
Construction in progress -- 1,206,652
----------------------
$2,685,613 $3,973,619
======================
Depreciation and amortization expense was $309,303, $389,331, and $568,775
for the years ended December 31, 1994, 1995 and 1996, respectively.
During 1995, the Company financed certain property including leasehold
improvements, manufacturing equipment and construction in progress, in
accordance with the lease agreement described in Note 9. Total property and
equipment under this capital lease was $1,382,027 at December 31, 1996.
Amortization of assets recorded under the capital lease was included with
depreciation. Title to this property is owned by the leasing company. At
December 31, 1996, other property and equipment totaling $1,116,869 were pledged
as collateral for equipment loans (see Note 5).
Note 5. Long-Term Debt:
December 31, 1995 1996
- -----------------------------------------------------
Tenant improvement loan due to
landlord, interest at 10%,
monthly principal and
interest payments of
$10,858 through April 1997 $162,018 $42,543
Equipment loan due to a finance
company, interest at 15.5%,
monthly principal and interest
payments for 48 months
subsequent to each draw
down of funds 496,729 213,451
Equipment loan due to a municipal
development corporation,
interest at 5%, monthly
principal and interest
payments of $1,887
through September 1999 77,288 58,070
Capital lease obligation
(see Note 9) 1,263,044 920,463
----------------------
1,999,079 1,234,527
Less current portion (764,552) (678,122)
----------------------
$1,234,527 $556,405
======================
The Company entered into a Master Equipment Loan (the "Equipment Loan") with
a finance company. As of December 31, 1996, $1,010,869 had been borrowed. In
connection with the Equipment Loan, the Company granted the finance company
warrants to purchase 16,668 and 7,072 shares of common stock at $19.50 and
$14.85 per share, respectively (see Note 7).
Minimum principal repayments of long-term debt as of December 31, 1996,
excluding capitalized lease obligations, were as follows:
- ----------------------------------------------------
1997 $ 273,993
1998 23,436
1999 16,635
---------
$ 314,064
=========
F11
Neose Technologies, Inc. (a development-stage company)
Notes to Financial Statements
(continued)
Note 6. Stockholders' Equity
Common Stock
The Company's initial public offering closed on February 22, 1996. The
Company sold 2,587,500 shares, including the exercise of the underwriters'
overallotment option on March 4, 1996, of common stock at a public offering
price of $12.50 per share. The net proceeds to the Company from the Offering
after the underwriting discount and payment of offering expenses were
approximately $29,127,000. In connection with the Offering, all outstanding
shares of Series A, C, D, E, and F Convertible Preferred Stock converted into
2,410,702 shares of common stock. Certain of these common shares have
registration rights.
From 1991 through 1995, the Company sold 7,196,884 shares of Convertible
Preferred Stock Series A, B, C, D, E, and F. On December 7, 1995, all
outstanding shares of Series B Convertible Preferred Stock converted into
472,249 shares of common stock. As of December 31, 1995, 5,780,189 shares of
convertible preferred stock were outstanding (liquidation preference of
$25,629,004 at December 31, 1995). As discussed above, in connection with the
Offering, all outstanding shares of Series A, C, D, E, and F converted into
2,410,702 shares of common stock.
In 1991, the Company issued $1,225,000 in subordinated notes, with warrants
to purchase 204,180 shares of common stock at $3 per share. In 1992 and 1993,
the Company redeemed the subordinated notes and accrued interest of $183,750
with the Company's common stock or with cash, at the election of the holder.
This redemption resulted in the issuance of 107,459 shares of common stock and
the payment of $688,500.
During 1995, 99,751 shares of common stock were issued at an exercise price
of $3 per share, pursuant to the exercise of warrants by the noteholders; 8,589
of the noteholders' warrants expired; 7,810 shares of common stock were issued
at fair market value of $5.70 per share as payment for bonuses and other
compensation; and 23,400 shares of common stock were issued to a stockholder in
connection with the Offering. The deemed value of the shares for accounting
purposes was recorded as Offering costs.
In connection with the issuance of the Series E Convertible Preferred Stock
("Series E"), the Company issued warrants to the placement agent to purchase
Series E, which in connection with the Offering converted into warrants to
purchase 119,961 shares of common stock at $9.45 per share. During 1996, 6,538
warrants were exercised to purchase 2,526 shares of common stock via a cashless
exercise provision contained in the warrant (see Notes 7 and 10).
Note 7. Equity Plans
Stock Option Plans
The Company has three stock option plans, the 1991, 1992, and 1995 Plans,
under which maximums of 250,000, 333,333 and 933,333 options, respectively, may
be granted at prices not less than 100% of the fair market value of the
Company's common stock on the date of grant. The 1995 Stock Option Plan (the
"Plan") incorporates the two predecessor plans and provides for the granting of
both incentive stock options and nonqualified stock options to employees,
officers, directors and consultants of the Company as well as issuing shares of
common stock directly either through the immediate purchase of shares or as a
bonus tied to the individual's performance or the Company's attainment of
prescribed milestones. In addition, the Plan includes stock appreciation rights
to be granted at the Plan Administrator's discretion. The stock options are
exercisable over a period determined by the board of directors, but no longer
than ten years after the date of grant. Information with respect to options
granted under the Plan and options granted outside the Plan is as follows:
F12
Neose Technologies, Inc. (a development-stage company
Notes to Financial Statements
(continued)
Options Outstanding
- ------------------------------------------------------------------
Weighted
Average
Available Exercise
for Grant Shares Price
- ------------------------------------------------------------------
Balance,
December 31, 1993 115,480 459,519 $ 3.04
Granted (201,750) 201,750 4.02
Exercised -- (35,328) .40
Canceled 113,895 (113,895) 2.82
---------------------
Balance,
December 31, 1994 27,625 512,046 3.66
Authorized 933,333 -- --
Granted (349,644) 349,644 10.18
Granted outside
the Plan -- 69,998 17.94
Exercised -- (15,638) 1.96
Canceled 5,389 (5,389) 3.98
---------------------
Balance,
December 31, 1995 616,703 910,661 7.29
Granted (369,182) 369,182 15.46
Exercised -- (63,009) 2.60
Canceled 15,747 (15,747) 8.11
---------------------
Balance,
December 31, 1996 263,268 1,201,087 $ 10.03
---------------------
At December 31, 1996, options for the issuance of 419,297 shares were
exercisable at a weighted-average exercise price of $5.54 per share. Of the
1,201,087 options outstanding at December 31, 1996, 426,730 had exercise prices
between $.09 and $5.70, with a weighted-average exercise price of $3.39 and a
weighted-average remaining contractual life of 7 years. 276,349 of these options
are exercisable at a weighted-average exercise price of $2.99. An additional
704,527 of the 1,201,087 options outstanding at December 31, 1996, had exercise
prices between $9.00 and $15.13, with a weighted-average exercise price of
$12.99 and a weighted-average remaining contractual life of 9.1 years. 141,698
of these options are exercisable at a weighted-average exercise price of $10.42.
The final 69,830 of the 1,201,087 options outstanding at December 31, 1996, had
exercise prices between $17.50 and $24.84, with a weighted-average exercise
price of $20.79 and a weighted-average remaining contractual life of 9.1 years.
1,250 of these options are exercisable at a weighted-average exercise price of
$18.00.
During 1995, options were granted outside of the Plan for 69,998 shares of
common stock at a weighted-average exercise price of $17.94 per share. In
December 1995, the Company issued options to employees and recorded deferred
compensation of $359,000 for the difference between the deemed value for
accounting purposes per share and the exercise price per share and is amortizing
the deferred compensation amount over the four-year vesting period.
The Company accounts for options and the Employee Stock Purchase Plan under
APB Opinion No. 25, under which no compensation cost was recognized during 1995
and $89,975 was recognized during 1996. Had compensation cost for the Company's
options and the Employee Stock Purchase Plan been determined consistent with
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's pro forma
net loss and loss per share would have been increased to $5,194,829, or $1.07
per share, and $7,344,205, or $.94 per share, for the years ended December 31,
1995 and 1996, respectively.
The weighted-average fair value of those options granted at market during
1995 and 1996, was $4.14 and $8.62, respectively. The weighted-average fair
value of those options granted above market during 1995 was $4.42. The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model, with the following weighted-average
assumptions for 1995 and 1996 grants: risk-free interest rate of 6 percent, an
expected life of 5 years, volatility of 70 percent, and a dividend yield of
zero.
F13
Neose Technologies, Inc. (a development-stage company)
Notes to Financial Statements
(continued)
The weighted-average fair value of the employee purchase rights granted in
1996 was $5.67. For 1996, the fair value of the purchase rights was estimated
using the Black-Scholes model with the following weighted-average assumptions:
risk-free interest rate of 5.7 percent, an expected life of sixteen months,
volatility of 70 percent and a dividend yield of zero.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Stock Warrants
The following table summarizes outstanding warrants at December 31, 1996.
All warrants are currently exercisable and the exercise price is subject to
adjustment as set forth in the warrant agreement.
Outstanding Exercise Issuance Expiration
Warrants Price Date Date
- -------------------------------------------------------------------------
16,668 $19.50 June 30, 1993 June 30, 1998
7,072 14.85 Feb. 16, 1994 Feb. 16, 1999
113,423 9.45 July 31, 1994 July 31, 1999
10,527 14.25 June 30, 1995 June 30, 2002
- -----------
147,690
===========
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan that allows any
individual who is employed on a basis under which he or she is expected to work
for more than 20 hours per week for more than five months per calendar year the
opportunity to purchase shares of the Company's common stock through payroll
deductions at the end of semiannual purchase periods. Pursuant to the plan,
which became effective in February 1996, 100,000 shares of common stock have
been reserved for issuance. The purchase price is 85% of the lower of fair
market value on the employee's entry date into that offering period or the fair
market value on that purchase date. An employee may purchase up to a maximum of
10% of his or her eligible compensation or $25,000, whichever is less, provided
that the employee's ownership of the Company's stock is less than 5% as defined
in the plan. During the year ended December 31, 1996, the Company sold 5,631
shares under the plan and received proceeds of $59,830. As of December 31, 1996,
there were 94,369 shares available for future purchase, exclusive of stock
subscriptions receivable outstanding of approximately $70,000 for the purchase
of shares of common stock.
Note 8. 401(k) Plan
The Company has a 401(k) Savings Plan (the "401(k) Plan") for employees.
Employee contributions are voluntary and are determined on an individual basis,
with a maximum annual amount equal to the lesser of the maximum amount allowable
under federal income tax regulations or 15% of the participant's compensation.
The Company matches employee contributions up to specified limits. The Company
contributed $53,171, $62,270 and $60,608 to the 401(k) Plan for the years ended
December 31, 1994, 1995 and 1996, respectively.
Note 9. Commitments
Agreements with the University of Pennsylvania
In 1990, the Company entered into an agreement whereby the University of
Pennsylvania ("Penn") granted to the Company an exclusive license to use Penn's
patent rights and technology to produce certain products. In consideration, the
Company issued 147,063 shares of common stock to Penn pursuant to a Stock
Purchase Agreement. In addition, the Company is required to pay Penn royalties
based on sales of applicable products. The Company is also required to reimburse
Penn for all reasonable fees incident to the acquisition and maintenance of
Penn's patent rights. The Company paid $70,979, $21,469 and $40,718 in
patent-related fees on Penn's behalf for the years ended December 31, 1994, 1995
and 1996, respectively. This agreement will terminate upon the expiration of the
patent rights.
F14
Neose Technologies, Inc. (a development-stage company)
Notes to Financial Statements
(continued)
Agreement with Bracco Research U.S.A. Inc.
In September 1995, the Company entered into a collaborative research
agreement with Bracco Research U.S.A. Inc. ("Bracco"). Under the terms of the
agreement, the Company will supply Bracco with complex carbohydrates, which
Bracco will attach to diagnostically useful agents. The resulting new molecules
will be tested and developed. In consideration, Bracco committed to six
semiannual payments to Neose in the amount of $125,000, for a total of $750,000.
The Company recognized $83,333 and $250,000 of revenue under this agreement for
the years ended December 31, 1995 and 1996, respectively.
Employment Agreements
In November 1994, the Company entered into a three-year employment agreement
with its President and Chief Financial Officer which provides for certain annual
base salaries and bonuses of up to 50% of base salary at the discretion of the
Compensation Committee of the board of directors. In connection with this
agreement, the Company granted options to purchase 100,000 shares of common
stock at $5.70 per share, 20,000 of which vested immediately, with the remainder
vesting ratably over four years (see Note 7).
Leases and Construction Agreement
In January 1992, the Company entered into a ten-year operating lease for
office and laboratory facilities effective May 1992. The lease includes
escalation clauses and is cancelable by the Company after five or seven years.
Pursuant to this lease, the Company is required to maintain an escrow balance
which is reduced ratably over the lease term.
On August 30, 1996, the Company entered into a construction agreement for
the planned expansion of its manufacturing capabilities. The Company expects to
make capital expenditures for this expansion totaling approximately $7.5
million, which began in the fourth quarter of 1996. Termination of the agreement
by the Company will result in a penalty. In connection with this expansion, on
December 5, 1996, the Company entered into a nonbinding letter of intent with
the owner of the leased facility to purchase the facility for approximately $3.8
million contingent upon, among other things, the Company obtaining financing for
the acquisition.
In June 1995, the Company entered into a master equipment lease agreement
with a finance company that provides for up to $1.5 million in financing, of
which $1,382,027 had been drawn as of December 31, 1996. In connection with the
lease, the Company granted the lessor warrants to purchase 10,527 shares of
common stock at $14.25 per share (see Note 7).
Future minimum lease payments under the Company's leases as of December 31,
1996 are as follows:
Operating Capital
Leases Lease
-----------------------
1997 $319,675 $527,382
1998 322,236 563,695
1999 108,165 --
------------------------
Total minimum lease payments $750,076 1,091,077
=========
Less amount representing interest (170,614)
---------
Present value of future minimum
lease payments 920,463
Less current portion (404,129)
---------
$516,334
=========
Rent expense was $322,275, $309,249 and $309,249 for the years ended
December 31, 1994, 1995 and 1996, respectively. In addition, the Company has
recorded a deferred rent liability for escalating rent payments in future years
of $78,806 at December 31, 1996.
F15
Neose Technologies, Inc. (a development-stage company)
Notes to Financial Statements
(continued)
Note 10. Related-Party Transactions
In 1994, the Company entered into an agreement with Paramount Capital, Inc.
("Paramount") for the private placement of the Series E. The sole shareholder of
Paramount is a member of the Company's board of directors. The Company paid
$1,246,505 in commissions and expenses pursuant to the agreement. Additionally,
Paramount received warrants to purchase 216,780 shares of the Company's Series E
at $5.23 per share.
In 1995, Paramount acted as a placement agent for a portion of the Series F
Convertible Preferred Stock. The Company paid $425,247 in commissions to
Paramount in the year ended December 31, 1995. In addition, in December 1995,
the Company granted an employee of Paramount options to purchase 49,999 shares
of common stock at a weighted average exercise price of $17.94 per share,
vesting in various amounts over five years, for financial advisory services.
In February 1994, a member of the Company's board of directors advanced the
Company $440,000 to fund the Company's restricted funds account held in escrow
pursuant to the Company's facility lease. In April 1994, the Company repaid this
balance.
F16
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Second Amended and Restated Certificate of Incorporation of the
Registrant. (Exhibit 3.1)(1)
3.2 Amended and Restated By-Laws of the Registrant. (Exhibit 3.2)(1)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Second Amended and
Restated Certificate of Incorporation and Amended and Restated By-Laws
of the Registrant defining rights of holders of Common Stock of the
Registrant.
10.1 Stock Purchase Agreement, dated as of August 28, 1990, between the
Registrant and the University of Pennsylvania. (Exhibit 10.1)(1)
10.2 License Agreement, dated as of August 28, 1990, between the Registrant
and the University of Pennsylvania, as amended to date. (Exhibit
10.2)(1)
10.3 Form of Common Stock Subscription Agreement. (Exhibit 10.3)(1)
10.4 Form of Series A Preferred Stock Subscription Agreement. (Exhibit
10.4)(1)
10.5 Form of Series B Preferred Stock Subscription and Stock Purchase
Agreement. (Exhibit 10.5)(1)
10.6 Form of Series C Preferred Stock Subscription Agreement. (Exhibit
10.6)(1)
10.7 Form of Series D Preferred Stock Subscription Agreement. (Exhibit
10.7)(1)
10.8(a)+ Series D Preferred Stock Purchase Agreement, dated as of December 30,
1992, between the Registrant and Abbott Laboratories. (Exhibit
10.8(a))(1)
10.8(b)+ Supply Agreement, dated as of December 30, 1992, between the
Registrant and Abbott Laboratories. (Exhibit 10.8(b))(1)
10.8(c)+ Research and License Agreement, dated as of December 30, 1992, between
the Registrant and Abbott Laboratories. (Exhibit 10.8(c))(1)
10.8(d)+ Amendment to the Research and License Agreement, dated as of January
18, 1995, between the Registrant and Abbott Laboratories. (Exhibit
10.8(d))(2)
10.9 Form of Series E Preferred Stock Investors' Rights Agreement. (Exhibit
10.9)(1)
10.10 Form of Series F Preferred Stock Investors' Rights Agreement. (Exhibit
10.10)(1)
10.11 Form of Warrant to Purchase Common Stock, dated as of February 20,
1991. (Exhibit 10.11)(1)
10.12 Form of Warrant to Purchase Common Stock, dated as of June 30, 1993.
(Exhibit 10.12)(1)
10.13 Form of Warrant to Purchase Common Stock, dated as of February 16,
1994. (Exhibit 10.13)(1)
10.14 Form of Warrant to Purchase Series E Preferred Stock, dated as of July
29, 1994. (Exhibit 10.14)(1)
10.15 Warrant for the Purchase of Common Stock, dated as of June 30, 1995,
between the Registrant and Financing for Science International, Inc.
(Exhibit 10.15)(1)
10.16++ 1995 Stock Option/Stock Issuance Plan, as amended. (Exhibit 10.16)(2)
10.17++ Employee Stock Purchase Plan. (Exhibit 10.17)(1)
10.18 Lease Agreement dated January 9, 1992 between the Registrant and
Pennsylvania Business Campus Delaware, Inc., as amended to date.
(Exhibit 10.18)(1)
10.19++ Employment Agreement dated December 1, 1994 between the Registrant and
P. Sherrill Neff. (Exhibit 10.19)(1)
10.20++ Employment Agreement dated April 1, 1992 between the Registrant and
David A. Zopf, as amended to date. (Exhibit 10.20)(1)
10.21 Design-Build Agreement dated August 30, 1996 between the Registrant
and Irwin & Leighton, Inc. (Exhibit 10.21)(2)
11* Statement re: Computation of Net Loss Per Common Share.
23.1* Consent of Arthur Andersen LLP.
24* Powers of Attorney (included as part of signature page hereof).
27* Financial Data Schedule.
- ------------------
* Filed herewith
+ Portions of this Exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to an order of the Commission
granting the Registrant's application for confidential treatment filed
pursuant to Rule 406 under the Securities Act.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-80693) filed with the Commission on December
21, 1995, as amended.
(2) Filed as an Exhibit to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-19629) filed with the Commission on January
13, 1997.