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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 for the fiscal year ended December 31, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ________ to ________
Commission File Number 0-27718
NEOSE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3549286
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
102 Witmer Road
Horsham, Pennsylvania 19044
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(Address of principal executive offices) (Zip Code)
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
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None None
Securities registered pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights
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(Title of class)
Common Stock, par value $.01 per share
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(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
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As of February 2, 1998, the aggregate market value of the Common Stock
held by non-affiliates of the registrant was $125,037,502. 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 February 2, 1998, there were 9,534,140 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 1998 Annual Meeting of Stockholders 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....................................................................20
ITEM 3. LEGAL PROCEEDINGS.............................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................20
PART II....................................................................................21
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................................21
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 COMPANY...............................27
ITEM 11. EXECUTIVE COMPENSATION........................................................27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................................28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................28
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.
NEOSE is a trademark of the Company. This Annual Report on Form 10-K (the
"Report") also includes trademarks and trade names of companies other than the
Company.
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PART I
ITEM 1. BUSINESS.
Forward-Looking Statements
In this Annual Report on Form 10-K or the Exhibits hereto, the
statements contained or incorporated by reference that are not historical facts
or statements of current condition are forward-looking statements. Such
forward-looking statements may be identified by, among other things, the use of
forward-looking terminology such as "believes," "expects," "forecasts,"
"estimates," "plans," "continues," "may," "will," "should," "anticipates," or
"intends" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy or intentions. These forward-looking
statements, such as statements regarding present or anticipated scientific
progress, development of potential pharmaceutical products, future revenues,
capital expenditures, research and development expenditures, future financings
and collaborations, management, manufacturing development and capabilities, and
other statements regarding matters that are not historical facts, involve
predictions. The Company's actual results, performance, or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Potential risks and uncertainties that could affect
the Company's actual results, performance, or achievements include, but are not
limited to, the "Risk Factors" set forth below, and general financial, economic,
regulatory, and political conditions affecting the biotechnology industry in
general. Given these uncertainties, current or prospective investors are
cautioned not to place undue reliance on any such forward-looking statements.
Furthermore, the Company disclaims any obligation or intent to update any such
factors or forward-looking statements to reflect future events or developments.
Risk Factors
In addition to the other information in this Annual Report on Form
10-K, the following risk factors should be carefully considered.
Early Stage of Development; Uncertainty of Product and Manufacturing
Process Development; Technological Uncertainty; Novel Therapeutic Approach. The
Company 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
products 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 agreements with Abbott Laboratories ("Abbott"). The
Company expects that any revenues for the next several years will result from
payments under its existing, and future, if any, collaborative agreements and
interest income. Such revenues will be subject to significant fluctuations in
both timing and amount. There can be no assurance that the product being
developed by Abbott will be commercialized, or that Neose will receive any
further revenues from Abbott. There also can be no assurance that the joint
development project with Johnson & Johnson ("J&J") will be successful, that the
intended products will be successfully commercialized, or that Neose will
receive any product revenues in connection therewith. Further, there can be no
assurance that the Company will be successful in entering into other
collaborative arrangements.
All of the Company's products under development will require
time-consuming and costly research, development, preclinical studies, clinical
testing, regulatory approval, and development and scale-up of manufacturing
processes, and significant additional investment prior to their
commercialization, which may never occur. Moreover, there has been only very
limited development and commercialization of complex carbohydrates for
pharmaceutical applications, and production of complex carbohydrates in
commercial quantities will be extremely difficult and expensive and will require
substantial manufacturing development. There can be no assurance that the
Company's research and development programs will be successful, that the Company
will be able to complete development of cost-effective, commercial-scale,
manufacturing processes, that its oligosaccharide products will exhibit the
expected biological activities in humans, 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 or its collaborators to address such problems and delays
1
successfully would have a material adverse effect on the Company's business,
financial condition, and results of operations.
Substantial Risks of Pharmaceutical Development; Uncertainty Regarding
Clinical Trials. Some of the Company's drug candidates are currently undergoing
the initial stages of human clinical trials, while others are in research or
preclinical development. The Company's drug candidates will require significant
additional research and development and laboratory testing prior to submission
of any regulatory application, and all of its drug candidates will require
significant clinical testing and regulatory approval prior to commercialization.
There can be no assurance that the Company will be permitted by regulatory
authorities to conduct additional clinical testing of the Company's compounds,
nor that, if permitted, such additional clinical testing will prove that such
drugs are safe and efficacious to the extent necessary to permit the Company to
obtain marketing approvals for them from regulatory authorities. The results of
preclinical studies and completed clinical trials are not necessarily indicative
of results obtained in future clinical trials. Adverse or inconclusive clinical
trials results concerning any of the Company's drug candidates could result in
increased costs and significantly delay the filing for marketing approval for
such drug candidates with the U.S. Food and Drug Administration ("FDA"), or
result in a filing for a narrower indication. In such event, expensive and
time-consuming studies would be required with respect to other indications to
support any filing of a supplemental application covering such indications.
There can be no assurance that the Company's research and development,
preclinical testing, or clinical trials, will be successfully completed, that
regulatory approvals will be obtained or will be as broad as sought, that the
Company's products will be capable of being produced in commercial quantities at
reasonable costs, or that any products, if introduced, will achieve market
acceptance. Any problems or delays relating to research and development,
regulatory approval, and manufacturing, or the failure to address such problems
or delays, could have a material adverse effect on the Company. See "Government
Regulation" and "Products in Development--Pharmaceuticals."
The Company's drug candidates and future pharmaceutical development
efforts are subject to the substantial risks of failure inherent in the
development of any pharmaceutical product. These risks include the possibilities
that any, or all, of the Company's drug candidates will be found to be
ineffective, unsafe, toxic, or otherwise fail to meet applicable regulatory
standards or receive necessary regulatory approvals or clearances. There can be
no assurance that unacceptable toxicities or side effects will not occur at any
dose level at any time in the course of toxicological studies or human clinical
trials of the Company's drugs. Furthermore, drug candidates, such as NE-1530,
that are being developed for pediatric indications, may be subject to heightened
scrutiny. The appearance of any such unacceptable toxicities, or side effects,
in toxicology studies or human clinical trials could cause the Company, or
regulatory authorities, to interrupt, limit, delay, or abort the development of
any of the Company's drugs, and could ultimately prevent their approval for any
of the targeted indications. Even after receiving approval, products may later
exhibit adverse effects that prevent their widespread use, and necessitate their
withdrawal from the market. There can be no assurance that any products under
development by the Company will be safe when administered to patients.
Human clinical trials are very costly and time-consuming. The cost to
the Company of conducting human clinical trials for any potential product can
vary dramatically based on a number of factors, including the order and timing
of clinical indications pursued, the rate of subject enrollment, and the extent
of development and financial support, if any, from collaborators. The Company
may have difficulty obtaining sufficient subject populations, clinicians, or
support to conduct its clinical trials as planned, and may have to expend
substantial additional funds to obtain access to such resources, or delay or
modify its plans significantly. To date, the Company has had only limited
experience in conducting clinical trials. While the Company designs and manages
its preclinical studies and clinical trials (often in consultation with outside
advisors), the Company engages contract research organizations to perform
certain aspects of such preclinical studies and clinical trials. As a result,
the Company depends on such outside advisors and contract research organizations
to assist in the completion of its studies and trials.
The Company's competitors may succeed in developing technologies or
products that are more effective or cost-effective than those of the Company.
Rapid technological changes or developments by others may result in the
Company's drug candidates becoming obsolete or noncompetitive. See
"--Substantial Competition; Risk of Technological Obsolescence."
Dependence on Abbott, Johnson & Johnson, and Other Potential
Collaborators. The Company has derived substantially all of its revenues to date
2
from its agreements with Abbott. The Company's agreements with Abbott provide,
in part, for the receipt by the Company of a milestone payment and license fees,
if commercialization occurs. There can be no assurance that Abbott will
ultimately use the technology licensed from the Company to commercialize any
oligosaccharide, and thus, there can be no assurance that the Company will ever
receive any further revenues from Abbott. Abbott has the option at any time
prior to the first commercial sale, if any, of infant formula containing an
oligosaccharide manufactured using the Company's technology, 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 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, because Abbott has failed to make a certain regulatory
filing by a specified date, Neose, at its option, may now similarly elect to
convert the license of the Company's technology to a non-exclusive license to
Abbott on the same financial terms. Neose has not exercised that right, and
Neose and Abbott are currently engaged in discussions concerning possible
modifications of their agreements. Neose has been advised that Abbott is
continuing to pursue the development and commercialization of infant formula
containing an oligosaccharide manufactured using the Company's technology. There
can be no assurance that Neose would be able to interest another party in a
non-exclusive license for these purposes in the event that either party elects
to convert to a non-exclusive license.
Further revenues, if any, from the Company's agreements with Abbott
will depend entirely on Abbott's own competitive, marketing, and strategic
considerations, including the relative advantages of alternative products being
developed or marketed by competitors. Abbott is responsible for developing any
oligosaccharides manufactured using the Company's technology, completing
manufacturing scale-up activities, and assuring that the compounds, when used as
nutritional additives, comply with applicable regulatory requirements, which
requirements have not yet been satisfied by Abbott. See "--Extensive Government
Regulation; No Assurance of Product Approval." Furthermore, there are special
risks, in addition to the extensive regulatory review, associated with the
infant formula industry. These risks include: (i) product tampering or
production defects requiring a recall of infant formula, or reducing the demand
for such infant formula; (ii) ingredients in infant formula, such as
oligosaccharides, being banned or their use limited or declared unhealthful; and
(iii) declining sales of infant formula due to real or perceived health
concerns, adverse publicity in respect to infant formula in general or
nutritional additives such as oligosaccharides, or other reasons beyond the
control of Abbott or the Company.
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 any oligosaccharides using the
Company's technology. No assurance can be given that the agreements will result
in the successful commercialization of any oligosaccharides using the Company's
technology, or that any future milestone payments or fees will be received by
the Company. The suspension or termination of the Company's agreements with
Abbott, the failure of the agreements to be successful, the conversion by Abbott
to a non-exclusive license of the Company's technology, or a delay by Abbott in
the development or commercialization of any nutritional additives manufactured
using the Company's technology would have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Agreements with Abbott."
The Company's agreement with J&J provides, in part, for the joint
development of novel technology. There can be no assurance that such development
will be successful, and either Neose or J&J may terminate the agreement on 30
days' prior notice. If such development is successful, there can be no assurance
that the Company and J&J will agree on the terms for commercial development of
the products that may arise from the technology, or on the funding of the
capital expenditures and operating expenses necessary to fund further
development and commercialization of the products. Furthermore, if the
technology development program with J&J is successful, the parties will have to
reach agreement upon the structure and financing of a large-scale manufacturing
facility. See "Agreement with J&J."
The Company's strategy for the development and commercialization of
other product candidates involves entering into collaborative agreements with
pharmaceutical and other companies. The Company may in the future grant to its
collaborators rights to manufacture 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 collaborators 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
3
controlled by each such collaborator. To date, the Company has entered into only
a limited number of these collaborative agreements, and none with respect to
pharmaceutical product candidates. There can be no assurance that the Company
will be successful in establishing any additional collaborative agreements, that
existing, or future, if any, collaborative agreements will be successful in
commercializing products, or that the Company will derive any revenues from such
agreements. With respect to existing and potential future collaborative
agreements, the Company will be dependent upon the expertise and dedication of
sufficient resources by these collaborators to develop, manufacture, or market
products. Should a collaborator 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.
History of Operating Losses; Uncertainty of Future Profits. The Company
has not generated any revenues from operations, except for interest income and
revenues from collaborative agreements. The Company has incurred losses since
its inception and, as of December 31, 1997, had a deficit accumulated during the
development stage of approximately $34.6 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
and manufacturing scale-up activities. To achieve profitability, the Company,
alone or with others, must successfully develop cost-effective,
commercial-scale, manufacturing processes, commercialize its nutritional
additive, develop its pharmaceutical products, conduct preclinical studies and
clinical trials, obtain required regulatory approvals, successfully manufacture,
or have manufactured, introduce, and market such products, or successfully
commercialize other products. In addition, to the extent the Company relies upon
others for research, development, manufacturing scale-up, 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 "Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Substantial Additional Financing Requirements; Existing Long-term Debt
Covenants; 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's future capital requirements and the adequacy of
available funds will depend on many factors, including possible
commercialization of any nutritional additives using the Company's technology,
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 relationships, the
ability of the Company to establish additional collaborative agreements, 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, and if the technology development program with J&J is successful, the
parties will have to reach agreement upon the structure and financing of a
large-scale manufacturing facility. See "Agreement with J&J." In addition, the
financing arrangements for the purchase and improvement of the Company's
facility contain certain covenants for the maintenance of minimum cash and
short-term investment balances, and for minimum working capital requirements,
and require the Company to deposit cash collateral in the event it does not
comply with such provisions. See "Item 7--Management's Discussion and Analysis
of Financial Condition and Results of Operations."
To the extent that existing capital resources, together with revenues,
if any, from the Company's collaborative agreements are insufficient to meet
these requirements, it is likely that the Company will seek to obtain additional
funds through equity or debt financings, collaborative or other arrangements,
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, nor 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 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.
4
See "Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Uncertainty Regarding, and Dependence Upon, Patents and Proprietary
Rights. The Company's success will depend in part on its ability to obtain
patent protection for its products and manufacturing processes, 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 owns five U.S. patents, and the Company and its
licensors have filed a number of U.S. and foreign patent applications.
The Company has an exclusive license from the University of
Pennsylvania ("Penn") to two U.S. patents as well as certain related U.S. patent
applications and 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. 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 has also licensed an additional four U.S.
patents, two U.S. patent applications, and corresponding foreign patents and
patent applications. Upon commercialization of certain products, including
products being developed by Abbott, the Company will be required to pay
royalties to Penn and other licensors.
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 that may prevent
the manufacture or 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,
development, or manufacturing activities or product sales. 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. In
addition, the laws of certain countries may not protect the Company's
intellectual property.
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. 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. 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. Many of the Company's competitors have
significantly greater financial, scientific,
5
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 solely on Abbott to develop, manufacture, and
commercialize any nutritional additives manufactured using the Company's
technology. Thus, the Company's ability to successfully commercialize its
technology will depend, in part, on Abbott's ability to compete in the highly
competitive infant formula market. Abbott's principal competitors in this market
are believed to include Bristol-Myers Squibb Company, Nestle S.A., Novartis, and
American Home Products.
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 related
manufacturing processes, 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."
Extensive Government Regulation; No Assurance of Product Approval.
Development, manufacture, and sale of the Company's product candidates are
subject to stringent regulation by a number of government authorities in the
U.S. and other countries, including the FDA.
Infant Formula Additive. Utilizing Neose's technology, Abbott is
developing a complex carbohydrate that is identical to a naturally-occurring
carbohydrate found in mother's milk as a nutritional additive to infant formula.
As with any additive to infant formula, this proposed additive must undergo
rigorous safety testing and be subject to intensive regulation.
Any infant formula is 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. Abbott has not yet completed a certain
regulatory filing required under this act. See "Government
Regulation--Regulation of Infant Formula Additives." In addition, at the request
of the FDA, the Life Science Research Organization ("LSRO") is conducting a
thorough review of allowed nutrients in infant formula, including the possible
inclusion of oligosaccharides such as any developed by Abbott using the
Company's technology. There can be no assurance that the timing of, or the
recommendations resulting from, that review, if adopted by the FDA, will not be
materially adverse to Abbott's efforts to commercialize any oligosaccharides
using the Company's technology as additives to infant formula.
Oligosaccharides may also be subject to FDA review as 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 that
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. Substances
that are generally recognized as safe ("GRAS") are excluded from the definition
of food additives. 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. If the FDA
disagrees with a determination, 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.
6
If, in the United States, infant formula, or any additive to infant
formula, claims, or is deemed by the FDA to claim on its labeling that the
product is intended to cure, treat, mitigate, or prevent disease, 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. A determination by the FDA that an
oligosaccharide manufactured by Abbott using the Company's technology is a drug
could have a material adverse effect on the scope of resources required to
develop such a product and timing of any potential commercialization.
Pharmaceutical Product Candidates. 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 expensive and
time-consuming 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 to the FDA or any other regulatory authority for
marketing. 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, the laboratories and medical institutions conducting its
preclinical studies and clinical trials to maintain both good laboratory and
good clinical practices, and that the manufacturers of its compounds maintain
compliance with current good manufacturing practices ("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, including any
changes implemented by the Food and Drug Modernization Act of 1997 ("FDAMA").
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. The Company is
entirely dependent on Abbott for manufacturing any oligosaccharides manufactured
using the Company's technology for inclusion in Abbott's infant formula. The
Company's other potential products, to be successful, 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.
Although the Company has recently constructed a facility to manufacture certain
products in limited quantities under GMP, the existing facility of the Company
is not adequate for large-scale, commercial manufacturing. Therefore, the
Company will need to develop commercial-scale GMP manufacturing facilities, or
depend on its collaborators, licensees, or contract manufacturers for the
commercial manufacture of its potential products.
In the event the Company determines to establish additional
manufacturing facilities, it will require substantial additional funds, the
hiring and retention of significant additional personnel, and compliance with
extensive regulations applicable to such facilities. The Company has no
experience in such commercial manufacturing, and there can be no assurance that
the Company will be able to establish such facilities successfully nor, 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 collaborators
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
7
manufacturing 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."
If the technology development program with J&J is successful, the
parties will have to reach agreement upon the structure and financing of a
large-scale manufacturing facility. See "Agreement with J&J."
No Marketing or Sales Capability or Experience. The Company has no
experience in marketing, distributing, or selling pharmaceutical or other
products, and will have to develop a sales force 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 Potential Xenotransplantation-Based Products. The
Company has done limited preclinical research on the potential use of an
oligosaccharide as an aid to xenotransplantation. 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 clinical testing. 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. No xenogeneic organ or
living tissue has been approved by the 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. See "Products in Development--Pharmaceuticals--
Xenotransplant Rejection."
Dependence on Key Personnel. The Company is highly dependent upon the
efforts of its senior management and scientific team. See "Employees." 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. The Company does not maintain "key man"
insurance on any of its key employees. 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 will 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;
furthermore, retention of such personnel typically requires equity compensation
arrangements, which could lead to additional dilution to current stockholders.
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
most of the Company's consultants are employed by other employers, and each such
member or consultant may have commitments to, or consulting or advisory
contracts with, other entities that may limit their availability to the Company.
Uncertainty Related to Reimbursement Policies; Health Care Reform.
Successful commercialization of the Company's potential pharmaceutical products
will be dependent in part on the coverage and reimbursement of such products
from third-party payors, such as government authorities, private health
insurers, and other organizations, such as managed care organizations. There can
be no assurance that such coverage and reimbursement will be available or, if
available, will be in adequate amounts.
The revenues and profitability of pharmaceutical companies have been
significantly affected by the efforts of governmental and third-party payors to
contain or reduce the cost of health care through various means. For example, in
the United States, pricing of prescription pharmaceutical products has been
significantly impacted by the efforts of managed care organizations and other
third-party payors, and, in certain foreign markets, pricing of prescription
pharmaceutical products is subject to government control. Government and
third-party payors have also taken more
8
aggressive steps to limit the availability of new, and often more costly
therapeutics, especially where they believe that the incremental therapeutic
benefit is not justified by the additional cost. All of these trends are
expected to continue in the future.
Various proposals have been put forth to reform the current health care
system in the United States. Additionally, several states have modified their
health system to control costs. Such reform measures could adversely affect the
amount of reimbursement available from governmental agencies of third-party
insurers, or could affect the ability to set prices for newly-approved
therapeutic products. Similar proposals are being considered by governmental
officials in other significant pharmaceutical markets, including Europe.
The Company cannot predict if such reforms will be implemented, or the
effect any such reforms might have on the Company's business, and no assurance
can be given that any such reforms will not have a material adverse effect on
the Company's business, financial condition, and results of operations. In
particular, it is possible that any such reform could impact the manner in which
drugs or therapies are marketed and could include restrictions on the ability of
pharmaceutical and biotechnology companies to price drugs or therapies. Such
reforms could impact the ability of biotechnology companies, such as the
Company, to obtain financing for the continued development of potential
products. Furthermore, any such reform could also impose limits on the overall
growth of health care spending, as well as limits on the growth of Medicare and
Medicaid spending, all of which could have an adverse effect on the Company's
business, financial condition, and results of operations.
Product Liability; Lack of Product Liability Insurance. The Company's
business may be adversely affected by potential product liability risks that are
inherent in the testing, manufacturing, and marketing of the products that the
Company or its collaborators or licensees may develop. There can be no assurance
that product liability claims will not be asserted against the Company, its
collaborators, or licensees. The Company does not currently have product
liability or clinical trial 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 processes involve the controlled use of
hazardous materials, chemicals, and radioactive compounds. The Company is
subject to stringent federal, state, and local laws, rules, regulations, and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling, and disposal of these materials and other wastes.
There can be no assurance that the Company will not be required to incur
significant costs to comply with environmental laws, rules, regulations, and
policies, or that the business, financial position, or results of operations of
the Company will not be materially and adversely affected by current or future
environmental laws, rules, regulations, and policies, or by any releases or
discharges of materials that could be hazardous.
In its research activities, the Company utilizes radioactive and other
material that could be hazardous to human health or safety, or the environment.
These materials and various wastes resulting from their use are stored at the
Company's facility pending ultimate use and disposal. The risk of accidental
injury or contamination from these materials cannot be entirely 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 Company's resources.
The Company does not maintain a separate insurance policy for these types of
risks. The Company may incur substantial additional costs to comply with
environmental regulations as the Company develops additional manufacturing
capacity.
Business Overview
Neose is focused on the enzymatic synthesis of complex carbohydrates
(oligosaccharides), and the discovery, development, and commercialization of
complex carbohydrates for nutritional, pharmaceutical, consumer, and industrial
uses. Due to their structural complexity, oligosaccharides are difficult and
expensive to produce, and their commercial development has been significantly
limited. The Company believes that its proprietary technologies enable the rapid
and cost-efficient enzymatic production of naturally-occurring oligosaccharides.
Abbott, a leading provider of infant formula
9
in the U.S., has licensed the Company's technology to develop 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 potential pharmaceuticals to treat various bacterial
infections, such as gastrointestinal and pediatric ear infections, and to
prevent xenotransplant rejection. With J&J, the Company is developing novel
technology for the large-scale production of another class of complex
carbohydrates that may have a number of consumer health care and other
applications.
Technology Background
Biological Function of Oligosaccharides. 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.
Anti-Infective Functions. 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).
Structural Complexity. 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.
Carbohydrate Synthesis. The specific biological properties of an
oligosaccharide are dictated by its component monosaccharides and the chemical
linkages among 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.
Neose's Proprietary Technologies
Neose believes its proprietary technology platform enables the rapid
and cost-effective enzymatic synthesis of commercial quantities of a wide range
of oligosaccharides. The Company's technologies utilize 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
some glycosyltransferases can work for weeks before having to be replenished,
the Company believes that the correct preparation can generate desired
oligosaccharides 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 in recombinant
10
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.
Historically, the largest cost component in enzymatic synthesis of
complex carbohydrates was the cost of purifying glycosyltransferases from
natural sources. Later, as recombinant methods were developed to produce these
enzymes from mammalian sources, these costs began to decline, but the resulting
enzymes generally still had very low efficiencies. Neose has developed bacterial
gene sources for the recombinant production of enzymes with higher efficiencies
and specific activities.
The next largest cost component in enzymatic synthesis of complex
carbohydrates has been the cost of sugar donors, or sugar nucleotides. As
markets have developed for large-scale production of carbohydrates, the prices
of commercially available sugar nucleotides have decreased sharply. Moreover,
the Company has developed two other methods to synthesize complex carbohydrates
enzymatically without the need to use sugar nucleotides. The Company believes
that the cost of sugar nucleotides no longer represents a significant barrier to
the large-scale, low-cost production of some carbohydrates.
Products in Development
Neose has focused its initial research and development efforts on (i)
the development of technology to manufacture a breast milk oligosaccharide that
is being developed by Abbott for inclusion in Abbott's infant formula products,
(ii) carbohydrate-based therapeutic products for the potential prevention and
treatment of chronic gastritis and peptic ulcers, pediatric ear infections, and
the prevention of xenotransplant rejection, and (iii) the development, with J&J,
of novel technologies for the large-scale production of a class of carbohydrates
for potential consumer health care and other applications.
Nutritional Additives Being Developed by Abbott
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, based on cow's milk or soy
extracts, do not contain breast milk oligosaccharides. Breast-fed infants have
fewer bacterial and viral infections than formula-fed infants. The Company
believes that this may be due, in part, to the presence of oligosaccharides in
breast milk. Abbott has licensed the Company's technology to develop breast milk
oligosaccharides for inclusion as additives to infant formula. 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. A breast milk oligosaccharide may provide effective product
differentiation without requiring significant pricing adjustments.
Any infant formula is subject to the provisions of the United States
Infant Formula Act, which amended the FDC Act and established detailed
requirements for infant formulas, including their manufacture, composition, and
labeling. Abbott has not yet completed a certain regulatory filing required
under this act. See "Government Regulation--Regulation of Infant Formula
Additives." In addition, at the request of the FDA, the LSRO is conducting a
thorough review of allowed nutrients in infant formula, including the possible
inclusion of oligosaccharides such as any developed by Abbott using the
Company's technology. There can be no assurance that the timing of, or the
recommendations resulting from, that review, if adopted by the FDA, will not be
materially adverse to Abbott's effort to commercialize any oligosaccharides
using the Company's technology as additives to infant formula.
Oligosaccharides may also be subject to FDA review as 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 that
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. Substances
that are GRAS are excluded from the definition of food additives. 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
11
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.
If the FDA disagrees with a determination, 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.
If, in the United States, infant formula, or any additive to infant
formula, claims, or is deemed by the FDA to claim on its labeling that the
product is intended to cure, treat, mitigate, or prevent disease, 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. A determination by the FDA that an
oligosaccharide manufactured by Abbott using the Company's technology is a drug
could have a material adverse effect on the scope of resources required to
develop such a product and timing of any potential commercialization. See "Risk
Factors--Dependence on Abbott, Johnson & Johnson, and Other Potential
Collaborators" and "Risk Factors--Extensive Government Regulation; No Assurance
of Product Approval."
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 may
have substantial benefits when 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 than antibiotics to cause adverse side-effects. Bacteria are becoming
increasingly resistant to antibiotics, which kill pathogens and select for, and
consequently facilitate the proliferation of, strains of the pathogens that are
resistant to the antibiotics. Because the Company's anti-infective product
candidates do not kill pathogens, but rather prevent 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. For these reasons, the
Company believes that, unlike conventional antibiotics, complex carbohydrates
may be useful for prophylatic, as well as therapeutic, applications.
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.
Helicobacter pylori Infections. Neose is developing a compound that is
identical to a naturally-occurring human gastrointestinal oligosaccharide for
use in the treatment H. pylori infections. H. pylori has been acknowledged to be
the cause of gastritis and over 80% of all peptic ulcer cases. An estimated four
million people suffer from active peptic ulcers each year in the U.S., 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. The
approach currently favored to treat gastritis and recurrent peptic ulcers
involves the administration of antibiotics in combination with other drugs. The
leading antibiotic approved for the treatment of H. pylori infections is
Biaxin(R) (clarithromycin). 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 believed to be 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. The Company filed an IND application with
the FDA in December 1994 and completed Phase
12
IA and Phase IB clinical trials involving, respectively, 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. 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 completed a pilot dose-ranging
Phase II study on NE-0080 in January 1998, and plans to initiate expanded Phase
II trials with symptomatic subjects in Europe in mid-1998. 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. There are estimated to be in excess of 24 million office
visits and prescriptions each year attributable to middle ear infections. Health
care 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 occurrence of resistant strains of the bacteria that
cause these infections.
NE-1530 contains a sugar sequence believed to be 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 filed an IND application with the FDA
for NE-1530 in October 1997, and completed a Phase I adult safety study in
December 1997. The Company plans to initiate pediatric safety studies in the
United States and in Finland in mid-1998, and hopes to initiate pediatric
efficacy studies in late 1998. 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 19,000 human organ transplants
were performed in the United States in 1996, but many times that number of
patients are believed to die each year due to the lack of available human
organs. At the end of 1997, the waiting list for humans awaiting human organs
was approximately 57,000, and that list has grown significantly each year. There
have been efforts in the past to utilize animal organs, particularly pig organs
due 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 studies 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 may help physicians 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. The Company has 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. Although the Company does not plan any further independent development of
NE-0501, the Company is collaborating with other companies that are pursuing
xenotransplantation with several different approaches, including transgenic
13
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.
The Company's drug candidates and future pharmaceutical development
efforts are subject to the substantial risks of failure inherent in the
development of any pharmaceutical product. See "Risk Factors--Substantial Risks
of Pharmaceutical Development; Uncertainty Regarding Clinical Trials" and "Risk
Factors--Extensive Government Regulation; No Assurance of Product Approval."
Product Development with J&J; Other Potential Products
In collaboration with J&J, the Company is developing novel technology
that may be useful in the large-scale manufacture of a class of complex
carbohydrates for a number of consumer health and other applications. The
Company also intends to explore the use of its core technology to produce
molecules for food industry and other industrial applications, and to target
compounds that would have anti-bacterial and anti-inflammatory applications in
the cosmetics industry. 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: (i) 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.
Agreements with Abbott
The Company and Abbott have entered into collaborative agreements under
which Abbott has licensed technology from Neose to develop breast milk
oligosaccharides as additives to infant formula and other nutritional products.
Abbott has development and regulatory responsibilities for the nutritional
additives and exclusive manufacturing rights.
The Company's agreements with Abbott provide, in part, for the receipt
by the Company of a milestone payment and license fees, if commercialization
occurs. Under this arrangement, Neose has received to date approximately $11.2
million in contract payments, milestone payments, and equity investments from
Abbott. Also, Neose is to receive $5 million within 60 days of the first
commercial sale, if any, of infant formula containing nutritional additives
manufactured using the Company's technology. Abbott has agreed to pay Neose
ongoing fees based on the dry weight of infant formula sold containing
nutritional additives manufactured using the Company's technology. 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 covered by the technology licensed to
Abbott by Neose in any case where, aside from and in addition to such
technology, Neose has made a contribution in the methods, processes, or
compounds used in the manufacture of the product that both parties agree will
result in a substantial commercial advantage. There can be no assurance that
Abbott will ultimately commercialize any oligosaccharide manufactured using the
Company's technology, and thus, there can be no assurance that the Company will
ever receive any further revenues from Abbott.
Abbott has the option at any time prior to the first commercial sale,
if any, of infant formula containing an oligosaccharide manufactured using the
technology licensed from the Company, 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 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, because Abbott has failed to make a certain regulatory
filing by a specified date, Neose, at its option, may now similarly elect to
convert the license of the Company's technology to a non-exclusive license to
Abbott on the same financial terms. Neose has not exercised that right, and
Neose and Abbott are currently engaged in discussions concerning possible
modifications of their agreements. Neose has been advised that Abbott is
continuing to pursue the development and commercialization of infant formula
containing an oligosaccharide manufactured using the Company's technology. There
can be no assurance that
14
Neose would be able to interest another party in a non-exclusive license for
these purposes in the event that either party elects to convert to a
non-exclusive license.
Further revenues, if any, from the Company's agreements with Abbott
will depend on Abbott's own competitive, marketing, and strategic
considerations, including the relative advantages of alternative products being
developed or marketed by competitors. Furthermore, Abbott is responsible for
developing any oligosaccharides manufactured using the Company's technology,
completing manufacturing scale-up activities, and assuring that the compounds,
when used as nutritional additives, comply with applicable regulatory
requirements, which requirements have not yet been satisfied by Abbott. See
"Risk Factors--Extensive Government Regulation; No Assurance of Product
Approval." 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 any oligosaccharides
manufactured using the Company's technology. No assurance can be given that the
agreements will result in the successful commercialization of any
oligosaccharides manufactured using the Company's technology or that any future
milestone payments or fees will be received by the Company. The suspension or
termination of the Company's agreement with Abbott, the conversion by Abbott to
a non-exclusive license of the Company's technology, or a delay by Abbott in the
development or commercialization of any nutritional additives manufactured using
the Company's technology would have a material adverse effect on the Company's
business, financial condition, and results of operations. See "Risk
Factors--Dependence on Abbott, Johnson & Johnson, and Other Potential
Collaborators."
Agreement with J&J
In November 1997, the Company entered into a joint development
agreement with McNeil Specialty Products Company, a subsidiary of J&J, for the
joint development of novel technology for the large-scale production of a class
of complex carbohydrates for a number of consumer health and other applications.
Under the terms of the agreement, the costs of such joint development will be
borne equally by Neose and J&J, and the technology developed will be owned
jointly. Either party may terminate the agreement on 30 days' notice. If the
technology development is successful, agreements will need to be reached between
Neose and J&J concerning the future structure and financing of a large-scale
manufacturing facility, product development, marketing, and sales. See "Risk
Factors--Dependence on Abbott, Johnson & Johnson, and Other Potential
Collaborators."
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 46 employees engaged in research and development. The Company's
research facilities include laboratories for each of the scientific 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 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 to the same extent as do the laws of the United
States. See "Risk Factors--Uncertainty Regarding, and Dependency Upon, Patents
and Proprietary Rights."
The Company owns five issued U.S. patents and seven U.S. patent
applications directed to manufacturing processes for, and therapeutic uses of,
oligosaccharides. Through its license with Penn, the Company 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
15
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 other U.S. patent is directed to an
apparatus containing a specific pair of enzymes for synthesizing 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 another institution four
issued patents and two patent applications. These are directed toward certain
gene sequences, and therapeutic uses of certain oligosaccharides. The Company,
both independently and through its licenses, has rights to a number of U.S., and
corresponding foreign, patent applications.
Government Regulation
The Company's product candidates and manufacturing facilities are
subject to stringent regulation by a number of government authorities in the
U.S. and other countries, including the FDA, pursuant to the FDC Act and
regulations thereunder. See "Risk Factors--Extensive Government Regulation; No
Assurance of Product Approval."
The Company's operations are 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 local laws, rules, and regulations governing
laboratory activities, waste disposal, handling dangerous materials, and other
matters. The Company is unable to predict whether any governmental agency will
adopt requirements, including regulations that 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 currently in compliance in all material respects with all
applicable laws, rules, and regulations governing its current activities, 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 that might adversely affect the
Company's business, prospects, financial condition, or results of operations.
See "Risk Factors--Hazardous Materials; Compliance with Environmental
Regulations."
Regulation of Infant Formula Additives
The United States Infant Formula Act has detailed requirements for the
manufacture, composition, and labeling of infant formulas. Under the United
States 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 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. The Company has
been advised that Abbott has not yet made any such submission. There can be no
assurance that Abbott will be able to satisfy all applicable regulatory
requirements. See "Risk Factors--Extensive Government Regulation; No Assurance
of Product Approval--Infant Formula Additive."
In addition, at the request of the FDA, LSRO is conducting a thorough
review of allowed nutrients in infant formula, including the possible inclusion
of oligosaccharides such as any developed by Abbott using the Company's
technology. There can be no assurance that the timing of, or the recommendations
resulting from, that review, if adopted by the FDA, will not be materially
adverse to Abbott's efforts to commercialize any oligosaccharides using the
Company's technology as additives to infant formula.
16
Food and food ingredients are also subject to the provisions of the FDC
Act regarding adulteration and misbranding of food. Food additives are not
considered to be GRAS and are broadly defined as any substances that may become
a component, or otherwise affect the characteristics, of food. All new food
additives require premarket clearances. The breast milk oligosaccharide that
Abbott is developing under a license from the Company is intended to be marketed
by Abbott as an additive to infant formula, and 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. Product safety
studies submitted to the FDA are typically 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 with 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. If the FDA disagrees with a determination, 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.
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, in the United States, the Company's technology is incorporated in
products claiming on their labeling to cure, treat, mitigate, or prevent
disease, 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. See
"--Regulation of Pharmaceutical Products." A determination by the FDA that an
oligosaccharide manufactured by Abbott using the Company's technology is a drug,
could have a material adverse effect on the scope of resources required to
develop such a product, and timing of any potential commercialization.
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. See "Risk
Factors--Extensive Government Regulation; No Assurance of Product
Approval--Pharmaceutical Product Candidates."
17
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 may
be required. Under the FDAMA, data from one such clinical trial may be
sufficient to establish effectiveness. 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. 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 "Risk Factors--Substantial Risks of Pharmaceutical
Development; Uncertainty Regarding Clinical Trials" and "Risk Factors--Extensive
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 currently is relying solely on Abbott to develop,
manufacture, and commercialize nutritional additives manufactured using the
Company's technology. Thus, the Company's ability to commercialize its
technology successfully will depend, in part, on Abbott's ability to compete in
a highly competitive infant formula market. Abbott's principal competitors in
this market are believed to include Bristol-Myers Squibb Company, Nestle S.A.,
Novartis, and American Home Products Corp. There can be no assurance that
Abbott's competitors or others will not succeed in developing technologies and
products that are more commercially successful than any being developed by
Abbott, or that would render technology licensed from the Company, or Abbott's
products obsolete or noncompetitive. Although Neose is not aware of any other
companies that are developing breast milk oligosaccharides as additives to
infant
18
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, oligosaccharides.
The anti-H. pylori market is currently dominated by large
pharmaceutical companies with products that generally kill bacteria
non-specifically. 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 or 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 xenotransplantation.
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. See "Risk Factors--Substantial
Competition; Risk of Technological Obsolescence."
Manufacturing
The Company is entirely dependent on Abbott for manufacturing any
oligosaccharides manufactured using the Company's technology for inclusion in
Abbott's infant formula.
The Company's other potential products, to be successful, must be
manufactured in commercial quantities, at acceptable costs, and, with respect to
pharmaceutical products, under GMP prescribed by the FDA. During 1997, the
Company purchased its facility and substantially expanded its GMP manufacturing
facility. The Company's expanded facility has the capacity to manufacture only
limited amounts of GMP carbohydrate materials for clinical trials and limited
commercial needs. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for a
description of the financial aspects of this manufacturing expansion. The
Company will need to develop additional GMP manufacturing facilities or depend
on its collaborators, licensees, or contract manufacturers for the commercial
manufacture of any potential products. If the Company determines to establish a
commercial-scale 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.
Furthermore, if the technology development program with J&J is successful, the
parties will have to reach agreement upon the structure and financing of a
large-scale manufacturing 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, nor, 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 collaborators 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
19
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 "Risk Factors--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 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 "Risk Factors--No
Marketing or Sales Capability or Experience."
Employees
As of February 2, 1998, Neose had 58 employees (14 of whom held Ph.D.,
Pharm.D., or M.D. degrees), consisting of 46 employees engaged in research and
development activities and 12 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. See "Risk Factors--Dependence on Key Personnel."
ITEM 2. PROPERTIES.
Through March 1997, the Company leased approximately 45,000 square feet
of laboratory and office space in Horsham, Pennsylvania. In March 1997, the
Company purchased its previously leased facility for approximately $3.8 million.
In addition, the Company made capital expenditures from late 1996 through 1997
totaling approximately $8.2 million to expand GMP manufacturing capabilities for
its compounds under development. See "Item 7--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 will need to develop additional GMP manufacturing
facilities, or depend on its collaborators, licensees, or contract manufacturers
for the commercial manufacture of its products. See "Item
1--Business--Manufacturing."
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material 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 1997.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Price Range of Common Stock
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "NTEC." 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.
High Low
------ ------
1997
First Quarter..................................... $ 18 3/4 $ 13 3/4
Second Quarter.................................... 16 1/4 11 7/8
Third Quarter..................................... 18 12 3/4
Fourth Quarter.................................... 19 1/8 12 3/4
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
There were approximately 350 holders of record of the Company's Common
Stock as of February 2, 1998. 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.
Use of Proceeds from Initial Public Offering
The Company's first Registration Statement on Form S-1 (Commission File
No. 33-80693) was declared effective on February 15, 1996 (the "IPO"). The
Company received net proceeds of approximately $29.1 million ("Net Proceeds").
As of December 31, 1997, the Company had used Net Proceeds as follows:
$13.6 million for research and development activities; $6.0 million for general
corporate purposes; $2.7 million for the purchase and installation of machinery
and equipment; $2.1 million for the repayment of debt; and $1.0 million for the
construction of plant, building, and facilities. The remaining $3.7 million has
been temporarily invested in a U.S. Treasury note.
At the time of the IPO, the Company expected to use $10.0 million of
the Net Proceeds for research and development activities, $3.0 million for
capital expenditures, and $16.1 million for working capital and general
corporate purposes. As of December 31, 1997, the Company had expended
approximately $3.6 million more than anticipated for its research and
21
development activities, and $0.7 million more than anticipated for capital
expenditures. These amounts were more than offset by $8.0 million of lower than
anticipated disbursements for working capital and general corporate purposes
(including disbursements for the repayment of debt), of which approximately $3.7
million had been temporarily invested in a U.S. Treasury note.
22
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below as of and for the years
ended December 31, 1993, 1994, 1995, 1996, and 1997, and for the period from
inception (January 17, 1989) to December 31, 1997, 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, 1997, and for the
period from inception (January 17, 1989) to December 31, 1997, and the related
balance sheets at December 31, 1996 and 1997 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 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
Year ended December 31, (January 17, 1989)
------------------------------------------------------ to December 31,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- ------------------
(in thousands, except per share data)
Statement of Operations Data:
Revenue from
collaborative agreements $ 2,600 $ 48 $ 1,199 $ 1,383 $ 725 $ 5,955
Operating expenses:
Research and development 3,399 5,004 4,733 6,502 8,013 30,992
General and administrative 1,577 1,319 1,665 2,505 3,884 13,078
------- ------- ------- ------- ------- --------
Total expenses 4,976 6,323 6,398 9,007 11,897 44,070
------- ------- ------- ------- ------- --------
Interest income (expense), net (47) 63 132 1,483 2,108 3,528
------- ------- ------- ------- ------- --------
Net loss $(2,423) $(6,212) $(5,067) $(6,141) $(9,064) $(34,587)
======= ======= ======= ======= ======= ========
Basic and diluted net loss per
share (1) $ (1.99) $ (0.82) $ (0.96)
======== ======= ========
Basic and diluted weighted-average
shares outstanding (1) 2,550 7,494 9,405
======== ======= ========
As of December 31,
---------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ----------- ----------- -----------
(in thousands)
Balance Sheet Data:
Cash and marketable securities $ 1,500 $ 5,363 $ 11,189 $ 32,845 $ 43,303
Total assets 3,534 8,196 14,639 37,118 58,886
Long-term debt 1,010 736 1,235 556 8,917
Deficit accumulated during
the development stage (8,103) (14,315) (19,382) (25,523) (34,587)
Total stockholders' equity 1,448 6,352 11,733 35,120 46,954
(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 statements set forth below that are not historical facts or
statements of current condition are forward-looking statements. Such
forward-looking statements may be identified by, among other things, the use of
forward-looking terminology such as "believes," "expects," "forecasts,"
"estimates," "plans," "continues," "may," "will," "should," "anticipates," or
"intends," or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy or intentions. These forward-looking
statements, such as statements regarding present or anticipated scientific
progress, development of potential pharmaceutical products, future revenues,
capital expenditures, research and development expenditures, future financings
and collaborations, management, manufacturing development and capabilities, and
other statements regarding matters that are not historical facts, involve
predictions. The Company's actual results, performance, or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Potential risks and uncertainties that could affect
the Company's actual results, performance, or achievements include, but are not
limited to, the "Risk Factors" set forth in Item 1 of this Annual Report on Form
10-K, and general financial, economic, regulatory, and political conditions
affecting the biotechnology industry in general. Given these uncertainties,
current or prospective investors are cautioned not to place undue reliance on
any such forward-looking statements. Furthermore, the Company disclaims any
obligation or intent to update any such factors or forward-looking statements to
reflect future events or developments.
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.
In December 1992, the Company entered into collaborative agreements
with Abbott under which Abbott has licensed technology from Neose for the
development by Abbott of breast milk oligosaccharides as additives to infant
formula and other nutritional products. The Company has received approximately
$11.2 million in contract payments, license fees, milestone payments, and equity
investments in connection with its agreements with Abbott. The Company has not
generated any material revenues from operations, except for interest income and
revenues from collaborative agreements, including its agreements with Abbott.
The Company has incurred losses since its inception and, as of December
31, 1997, had a deficit accumulated during the development stage of
approximately $34.6 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, and as the Company expands its manufacturing
capabilities. The Company anticipates that the only material sources of revenue
for the next several years will be payments under its collaborative agreements,
license fees, payments from future collaborative agreements, if any, and
interest income. Payments under collaborative agreements 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.
Results of Operations
Years Ended December 31, 1997 and 1996
Revenues from collaborative agreements decreased to $0.7 million in
1997 from $1.4 million in 1996 due to decreased revenues from the Company's
collaborative agreements.
Research and development expenses increased to $8 million in 1997 from
$6.5 million in 1996. The increase was primarily attributable to the increased
preclinical and clinical trial expenditures for NE-1530, increased depreciation
expense related to property and improvements expenditures, and financing
expenses associated with the Montgomery County (Pennsylvania) Industrial
24
Development Authority ("MCIDA") bond issuance. Research and development expenses
are expected to continue to increase in 1998, due principally to additional
expenditures in connection with a research and development program with J&J (See
"Item 1--Business--Agreement with J&J") and additional clinical trial
expenditures.
General and administrative expenses increased to $3.9 million in 1997
from $2.5 million in 1996. The increase was primarily attributable to increased
patent and business development expenses, and expenses associated with being a
public company.
Interest income increased to $2.7 million in 1997 from $1.7 million in
1996 due to higher average cash and marketable securities' balances resulting
from the Company's public offering in January 1997. Interest expense increased
to $0.6 million in 1997 from $0.2 million in 1996 due to higher average loan
balances outstanding during 1997.
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 agreements.
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.
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.
Liquidity and Capital Resources
From inception through December 31, 1997, the Company had incurred a
cumulative net loss of approximately $34.6 million, and had financed its
operations through private and public offerings of its securities and revenues
from its collaborative agreements. The Company had $43.3 million in cash and
marketable securities as of December 31, 1997, compared to $32.8 million as of
December 31, 1996. This increase was primarily attributable to the receipt of
net proceeds from the Company's public offering in January 1997. The Company
sold 1,250,000 shares of Common Stock 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 under
which Abbott has licensed technology from Neose to develop breast milk
oligosaccharides as additives to infant formula and other nutritional products.
Abbott has development and regulatory responsibilities for the nutritional
additives and exclusive manufacturing rights.
The Company's agreements with Abbott provide, in part, for the receipt
by the Company of a milestone payment and license fees, if commercialization
occurs. Under this arrangement, Neose has received to date approximately $11.2
million in contract payments, milestone payments, and equity investments from
Abbott. Also, Neose is to receive $5 million within 60 days of the first
commercial sale, if any, of infant formula containing nutritional additives
manufactured using the Company's technology. Abbott has agreed to pay Neose
ongoing fees based on the dry weight of infant formula sold containing
nutritional additives manufactured using the Company's technology. 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 covered by the technology licensed to
Abbott by Neose in any case where, aside from and in addition to such
technology, Neose has made a contribution in the methods, processes, or
compounds used in the manufacture of the product that both parties agree will
result in a substantial commercial advantage. There can be no
25
assurance that Abbott will ultimately commercialize any oligosaccharide
manufactured using the Company's technology, and thus, there can be no assurance
that the Company will ever receive any further revenues from Abbott.
Abbott has the option at any time prior to the first commercial sale,
if any, of infant formula containing an oligosaccharide manufactured using the
technology licensed from the Company, 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 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, because Abbott has failed to make a certain regulatory
filing by a specified date, Neose, at its option, may now similarly elect to
convert the license of the Company's technology to a non-exclusive license to
Abbott on the same financial terms. Neose has not exercised that right, and
Neose and Abbott are currently engaged in discussions concerning possible
modifications of their agreements. Neose has been advised that Abbott is
continuing to pursue the development and commercialization of infant formula
containing an oligosaccharide manufactured using the Company's technology. There
can be no assurance that Neose would be able to interest another party in a
non-exclusive license for these purposes in the event that either party elects
to convert to a non-exclusive license.
Further revenues, if any, from the Company's agreements with Abbott
will depend on Abbott's own competitive, marketing, and strategic
considerations, including the relative advantages of alternative products being
developed or marketed by competitors. Furthermore, Abbott is responsible for
developing any oligosaccharides manufactured using the Company's technology,
completing manufacturing scale-up activities, and assuring that the compounds,
when used as nutritional additives, comply with applicable regulatory
requirements, which requirements have not yet been satisfied by Abbott. See
"Item 1--Business--Risk Factors--Extensive Government Regulation; No Assurance
of Product Approval." 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 any products using
the Company's technology. No assurance can be given that the agreements will
result in the successful commercialization of any oligosaccharides manufactured
using the Company's technology, or that any future milestone payments or fees
will be received by the Company. The suspension or termination of the Company's
agreement with Abbott, the conversion by Abbott to a non-exclusive license of
the Company's technology, or a delay by Abbott in the development or
commercialization of any nutritional additives manufactured using the Company's
technology would have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Item
1--Business--Agreements with Abbott."
In March 1997, the Company purchased its previously leased facility for
a total of approximately $3.8 million. In addition, beginning in the fourth
quarter of 1996, the Company commenced a construction project in its facility to
expand GMP manufacturing capabilities for NE-0080, and to establish GMP
manufacturing capabilities for NE-1530 and NE-0501. The Company believes that
the GMP facility now has the capacity to manufacture sufficient quantities of
such compounds to complete clinical trials. In addition, the Company believes
that it now has capacity to manufacture under GMP conditions certain amounts of
these and other carbohydrates for third parties. In connection with the
manufacturing expansion, the Company expended approximately $8.2 million. See
"Item 1--Business--Manufacturing."
If the technology development program with J&J is successful, the
parties will have to reach agreement upon the structure and financing of a
large-scale manufacturing facility. See "Item 1--Business--Agreement with J&J."
In connection with the purchase of its facility and the expansion, in
March 1997, the Company issued, through the MCIDA, $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. As of
December 31, 1997, the effective, blended interest rate was 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,
and is required to post cash collateral if it does not meet certain of such
covenants.
26
During 1995, 1996, and 1997, the Company purchased approximately $0.9
million, $1.9 million, and $11.5 million of property, equipment, and building
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 relationships, the ability of the Company to establish additional
collaborative arrangements, the cost of manufacturing scale-up, and the
development of 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 collaborators 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.
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 COMPANY.
The information required by this item is incorporated herein by
reference to the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference to the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders.
27
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 Proxy Statement for its 1998 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference to the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders.
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
A Current Report on Form 8-K dated, September 17, 1997, was filed with
the Securities and Exchange Commission (the "Commission") on October 1, 1997,
reporting information under "Item 5" relating to the adoption of the Company's
Shareholder Rights Plan (see Note 8 of Notes to Financial Statements filed as
part of this Annual Report on Form 10-K).
(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
Company. (Exhibit 3.1)(1)
3.2 Amended and Restated By-Laws of the Company. (Exhibit 3.3)(5)
3.3 Certificate of Designation establishing and designating the Series A
Junior Participating Preferred Stock. (Exhibit 3.2)(5)
4.1 See Exhibits 3.1, 3.2, and 3.3 for instruments defining rights of
holders of Common Stock.
4.2 Representation of the Company pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K. (Exhibit 4.1)(3)
4.3 Trust Indenture, dated as of March 1, 1997, between Montgomery County
Industrial Development Authority and Dauphin Deposit Bank and Trust
Company. (Exhibit 4.2)(3)
28
4.4 Form of Montgomery County Industrial Development Authority Federally
Taxable Variable Rate Demand Revenue Bond (Neose Technologies, Inc.
Project) Series B of 1997. (Exhibit 4.3)(3)
4.5 Rights Agreement, dated as of September 26, 1997, between the Company
and American Stock Transfer & Trust Company, as Rights Agent. (Exhibit
4.1)(5)
10.1 Stock Purchase Agreement, dated as of August 28, 1990, between the
Company and the University of Pennsylvania. (Exhibit 10.1)(1)
10.2 License Agreement, dated as of August 28, 1990, between the Company and
the University of Pennsylvania, as amended to date. (Exhibit 10.2)(1)
10.3(a)+ Series D Preferred Stock Purchase Agreement, dated as of December 30,
1992, between the Company and Abbott Laboratories. (Exhibit 10.8(a))(1)
10.3(b)+ Supply Agreement, dated as of December 30, 1992, between the Company
and Abbott Laboratories. (Exhibit 10.8(b))(1)
10.3(c)+ Research and License Agreement, dated as of December 30, 1992, between
the Company and Abbott Laboratories. (Exhibit 10.8(c))(1)
10.3(d)+ Amendment to the Research and License Agreement, dated as of January
18, 1995, between the Company and Abbott Laboratories. (Exhibit
10.8(d))(2)
10.4 Form of Series E Preferred Stock Investors' Rights Agreement. (Exhibit
10.9)(1)
10.5 Form of Series F Preferred Stock Investors' Rights Agreement. (Exhibit
10.10)(1)
10.6 Form of Warrant to Purchase Common Stock, dated as of February 20,
1991. (Exhibit 10.11)(1)
10.7 Form of Warrant to Purchase Common Stock, dated as of June 30, 1993.
(Exhibit 10.12)(1)
10.8 Form of Warrant to Purchase Common Stock, dated as of February 16,
1994. (Exhibit 10.13)(1)
10.9 Form of Warrant to Purchase Series E Preferred Stock, dated as of July
29, 1994. (Exhibit 10.14)(1)
10.10 Warrant for the Purchase of Common Stock, dated as of June 30, 1995,
between the Company and Financing for Science International, Inc.
(Exhibit 10.15)(1)
10.11++ 1995 Stock Option/Stock Issuance Plan, as amended. (Exhibit 99.1)(4)
10.12++ Employee Stock Purchase Plan. (Exhibit 10.17)(1)
10.13++ Employment Agreement dated April 1, 1992, between the Company and David
A. Zopf, as amended to date. (Exhibit 10.18)(1)
10.14 Design-Build Agreement dated August 30, 1996, between the Company and
Irwin & Leighton, Inc. (Exhibit 10.19)(2)
10.15 Agreement for Purchase and Sale of Real Property, dated March 14, 1997,
by and between the Company and Pennsylvania Business Campus Delaware,
Inc. (Exhibit 2.1)(3)
10.16 Loan Agreement, dated as of March 1, 1997, between the Company and
Montgomery County Industrial Development Authority. (Exhibit 10.1)(3)
29
10.17 Participation and Reimbursement Agreement, dated as of March 1, 1997,
between Jefferson Bank and CoreStates Bank, N.A. (Exhibit 10.2)(3)
10.18 Form of CoreStates Bank, N.A. Irrevocable Letter of Credit. (Exhibit
10.3)(3)
10.19 Pledge, Security and Indemnification Agreement, dated as of March 1,
1997, by and among the Company, CoreStates Bank, N.A., and Jefferson
Bank. (Exhibit 10.4)(3)
10.20 Reimbursement Agreement, dated as of March 1, 1997, between the Company
and Jefferson Bank. (Exhibit 10.5)(3)
10.21 Specimen of Note from Company to Jefferson Bank. (Exhibit 10.6)(3)
10.22 Mortgage, Assignment and Security Agreement, dated March 20, 1997,
between the Company and Jefferson Bank. (Exhibit 10.7)(3)
10.23 Security Agreement, dated as of March 1, 1997, by and between the
Company and Jefferson Bank. (Exhibit 10.8)(3)
10.24 Assignment of Contract, dated as of March 20, 1997, between the Company
and Jefferson Bank. (Exhibit 10.9)(3)
10.25 Custodial and Collateral Security Agreement, dated as of March 20,
1997, by and among the Company, Offitbank, and Jefferson Bank. (Exhibit
10.10)(3)
10.26 Placement Agreement, dated March 20, 1997, among the Company,
Montgomery County Industrial Development Authority, and CoreStates
Capital Markets. (Exhibit 10.11)(3)
10.27 Remarketing Agreement, dated as of March 1, 1997, between the Company
and CoreStates Capital Markets. (Exhibit 10.12)(3)
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).
27.1* Financial Data Schedule.
27.2* Restated 1996 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 Company'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 Company'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 Company's Registration Statement on Form S-1
(Registration No. 333-19629) filed with the Commission on January 13,
1997.
(3) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1997.
30
(4) Filed as an Exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-35283) filed with the Commission on September 10,
1997.
(5) Filed as an Exhibit to the Company's Current Report on Form 8-K filed
with the Commission on October 1, 1997.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEOSE TECHNOLOGIES, INC.
Date: February 23, 1998 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
Company 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 February 23, 1998
- -------------------------------- Chairman of the Board
Stephen A. Roth (Principal Executive
Officer)
/s/ P. Sherrill Neff President and Chief February 23, 1998
- -------------------------------- Financial Officer and
P. Sherrill Neff Director (Principal
Financial and Accounting
Officer)
/s/ William F. Hamilton Director February 23, 1998
- --------------------------------
William F. Hamilton
/s/ Douglas J. MacMaster, Jr. Director February 23, 1998
- --------------------------------
Douglas J. MacMaster, Jr.
/s/ Lindsay A. Rosenwald Director February 23, 1998
- --------------------------------
Lindsay A. Rosenwald
/s/ Lowell E. Sears Director February 23, 1998
- --------------------------------
Lowell E. Sears
/s/ Jerry Weisbach Director February 23, 1998
- --------------------------------
Jerry Weisbach
32
Financial Statement Index
Report of Independent Public Accountants F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-7
Notes to Financial Statements F-8
F-1
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), as of December 31, 1996
and 1997, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997,
and for the period from inception (January 17, 1989) to December 31, 1997. 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, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997,
and for the period from inception (January 17, 1989) to December 31, 1997, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pennsylvania
January 23, 1998
F-2
Neose Technologies, Inc.
(a development-stage company)
Balance Sheets
(In thousands, except per share amounts)
December 31,
-------------------------
Assets 1996 1997
-------------------------
Current assets:
Cash and cash equivalents (Note 4) $ 32,845 $ 17,098
Marketable securities -- 26,205
Restricted funds (Note 7) 74 450
Prepaid expenses and other 210 514
-------- --------
Total current assets 33,129 44,267
Property and equipment, net (Note 5) 3,974 14,616
Other assets 15 3
-------- --------
Total assets $ 37,118 $ 58,886
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt (Note 7) $ 678 $ 1,040
Accounts payable 217 347
Accrued expenses (Note 6) 426 1,628
Deferred revenue 42 --
-------- --------
Total current liabilities 1,363 3,015
Other liabilities 79 --
Long-term debt (Note 7) 556 8,917
-------- --------
Total liabilities 1,998 11,932
-------- --------
Commitments (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 30,000 shares
authorized; 8,215 and 9,525 shares issued and 82 95
outstanding
Additional paid-in capital 60,831 81,807
Deferred compensation (270) (361)
Deficit accumulated during the development-stage (25,523) (34,587)
-------- --------
Total stockholders' equity 35,120 46,954
-------- --------
Total liabilities and stockholders' equity $ 37,118 $ 58,886
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
Neose Technologies, Inc.
(a development-stage company)
Statements of Operations
(In thousands, except per share amounts)
Period from
inception
(January 31,
Year ended December 31, 1989)
----------------------------------------- to December 31,
1995 1996 1997 1997
------ ------- -------- ---------------
Revenue from collaborative agreements $1,199 $ 1,383 $ 725 $ 5,955
Operating expenses:
Research and development 4,733 6,502 8,013 30,992
General and administrative 1,665 2,505 3,884 13,078
------ ------- -------- --------
Total operating expenses 6,398 9,007 11,897 44,070
------ ------- -------- --------
Operating loss (5,199) (7,624) (11,172) (38,115)
Interest income 322 1,730 2,663 5,209
Interest expense (190) (247) (555) (1,681)
------ ------- -------- --------
Net loss $(5,067) $(6,141) $ (9,064) $(34,587)
====== ======= ======== ========
Basic and diluted net loss per share $(1.99) $ (0.82) $ (0.96)
====== ======= ========
Basic and diluted weighted-average
shares outstanding 2,550 7,494 9,405
====== ======= ========
The accompanying notes are an integral part of these financial statements.
F-4
Neose Technologies, Inc.
(a development-stage company)
Statements of Stockholders' Equity
(In thousands)
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 13 (3) -- -- 10
Shares issued for
consulting and
licensing -- -- 326 3 (1) -- -- 2
Sale of common stock -- -- 133 1 1 -- -- 2
Shares issued pursuant to
antidilutive agreements -- -- 3 -- -- -- -- --
Net loss -- -- -- -- -- -- (460) (460)
-------------------------------------------------------------------------------------
Balance, December 31, 1990 -- -- 1,764 17 (3) -- (460) (446)
Sale of preferred stock 1,517 15 -- -- 4,465 -- -- 4,480
Sale of common stock -- -- 420 4 34 (7) -- 31
Shares issued for
consulting -- -- 8 -- 1 -- -- 1
Shares issued pursuant to
antidilutive agreements -- -- 137 1 (1) -- -- --
Capital contributions -- -- -- -- 10 -- -- 10
Dividends on preferred stock -- -- -- -- (18) -- -- (18)
Net loss -- -- -- -- -- -- (1,865) (1,865)
-------------------------------------------------------------------------------------
Balance, December 31, 1991 1,517 15 2,329 22 4,488 (7) (2,325) 2,193
Sale of preferred stock 260 2 -- -- 2,048 -- -- 2,050
Sale of common stock -- -- 17 -- 296 -- -- 296
Shares issued pursuant to
redemption of notes
payable -- -- 24 -- 462 -- -- 462
Exercise of stock warrants
pursuant to redemption
of notes payable -- -- 83 1 220 -- -- 221
Exercise of stock options
and warrants -- -- 21 -- 51 -- -- 51
Amortization of deferred
compensation -- -- -- -- -- 5 -- 5
Dividends on preferred stock -- -- -- -- (36) -- -- (36)
Net loss -- -- -- -- -- -- (3,355) (3,355)
-------------------------------------------------------------------------------------
Balance, December 31, 1992 1,777 17 2,474 23 7,529 (2) (5,680) 1,887
Sale of preferred stock 250 3 -- -- 1,997 -- -- 2,000
Shares issued to licensor -- -- 3 -- -- -- -- --
Shares issued to preferred
stockholder in lieu of
cash dividends -- -- 1 -- 18 -- -- 18
Amortization of deferred
compensation -- -- -- -- -- 2 -- 2
Dividends on preferred stock -- -- -- -- (36) -- -- (36)
Net loss -- -- -- -- -- -- (2,423) (2,423)
-------------------------------------------------------------------------------------
Balance of December 31, 1993 2,027 20 2,478 23 9,508 -- (8,103) 1,448
Sale of preferred stock 2,449 25 -- -- 11,040 -- -- 11,065
Exercise of stock options -- -- 35 1 14 -- -- 15
Shares issued to preferred
stockholder in lieu of
cash dividends -- -- 10 1 53 -- -- 54
Dividends on preferred stock -- -- -- -- (18) -- -- (18)
Net loss -- -- -- -- -- -- (6,212) (6,212)
-------------------------------------------------------------------------------------
Balance, December 31, 1994 4,476 45 2,523 25 20,597 -- (14,315) 6,352
The accompanying notes are an integral part of these financial statements.
F-5
Neose Technologies, Inc.
(a development-stage company)
Statements of Stockholders' Equity
(In thousands)
(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 preferred stock 2,721 27 -- -- 10,065 -- -- 10,092
Exercise of stock options
and warrants -- -- 116 1 329 -- -- 330
Shares issued to employees
in lieu of cash compensation -- -- 8 -- 44 -- -- 44
Deferred compensation
related to grant of
stock options -- -- -- -- 360 (360) -- --
Shares issued to
stockholder in
connection with the
initial public offering -- -- 23 -- -- -- -- --
Shares issued to preferred
stockholder in lieu
cash dividends -- -- 3 -- 18 -- -- 18
Dividends on preferred stock -- -- -- -- (36) -- -- (36)
Conversion of preferred
stock into common stock (1,417) (14) 472 5 9 -- -- --
Net loss -- -- -- -- -- -- (5,067) (5,067)
------ --- ----- -- ------ ---- ------- ------
Balance, December 31, 1995 5,780 58 3,145 31 31,386 (360) (19,382) 11,733
Dividends on preferred stock -- -- -- -- (18) -- -- (18)
Sale of common stock in
initial public offering,
net of offering costs -- -- 2,588 26 29,101 -- -- 29,127
Conversion of preferred
stock into common stock (5,780) (58) 2,411 24 34 -- -- --
Exercise of stock options
and warrants -- -- 65 1 162 -- -- 163
Shares issued pursuant to
employee stock purchase plan -- -- 6 -- 60 -- -- 60
Deferred compensation
related to acceleration
of option vesting -- -- -- -- 106 -- -- 106
Amortization of deferred
compensation -- -- -- -- -- 90 -- 90
Net loss -- -- -- -- -- -- (6,141) (6,141)
------ --- ----- -- ------ ---- ------- ------
Balance, December 31, 1996 -- -- 8,215 82 60,831 (270) (25,523) 35,120
Sale of common stock in
public offering, net of
offering costs -- -- 1,250 13 20,326 -- -- 20,339
Exercise of stock options
and warrants -- -- 42 -- 139 -- -- 139
Shares issued pursuant to
employee stock purchase plan -- -- 18 -- 189 -- -- 189
Deferred compensation
related to issuance of stock
options to consultants -- -- -- -- 322 (322) -- --
Amortization of deferred
compensation -- -- -- -- -- 231 -- 231
Net loss -- -- -- -- -- -- (9,064) (9,064)
------ --- ----- -- ------ ---- ------- ------
Balance, December 31, 1997 -- $ -- 9,525 $ 95 $ 81,807 $ (361) $(34,587) $ 46,954
------ --- ----- -- ------ ---- ------- ------
The accompanying notes are an integral part of these financial statements.
F-6
Neose Technologies, Inc.
(a development-stage company)
Statements of Cash Flows
(In thousands)
Period from
inception
(January 17,
Year ended December 31, 1989)
------------------------------------- to December 31,
1995 1996 1997 1997
-------- ------- --------- ---------
Cash flows from operating activities:
Net loss $ (5,067) $(6,141) $ (9,064) $ (34,587)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 389 763 1,117 3,056
Common stock issued for noncash charges and other -- -- -- 35
Changes in operating assets and liabilities:
Restricted funds 352 148 (305) (379)
Prepaid expenses and other (62) (91) (304) (514)
Other assets (12) -- 12 (3)
Accounts payable 83 (84) 130 347
Accrued expenses 65 (63) 477 946
Deferred revenue 42 -- (42) --
Other liabilities 22 4 (79) --
-------- ------- --------- ---------
Net cash used in operating activities (4,188) (5,464) (8,058) (31,099)
-------- ------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (875) (1,857) (10,803) (15,763)
Proceeds from sale-leaseback of equipment 1,382 -- -- 1,382
Purchases of marketable securities -- -- (26,808) (26,808)
Proceeds from sales of marketable securities -- -- 603 603
-------- ------- --------- ---------
Net cash provided by (used in) investing
activities 507 (1,857) (37,008) (40,586)
-------- ------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt -- -- 9,329 11,955
Repayment of debt (488) (765) (677) (3,295)
Proceeds from issuance of preferred stock, net 10,092 -- -- 29,497
Proceeds from issuance of common stock, net -- 60 189 534
Proceeds from public offerings, net (409) 29,536 20,339 49,466
Proceeds from exercise of stock options and warrants, net 330 164 139 698
Dividends paid (18) (18) -- (72)
-------- ------- --------- ---------
Net cash provided by financing activities 9,507 28,977 29,319 88,783
-------- ------- --------- ---------
Net increase (decrease) in cash and cash equivalents 5,826 21,656 (15,747) 17,098
Cash and cash equivalents, beginning of period 5,363 11,189 32,845 --
-------- ------- --------- ---------
Cash and cash equivalents, end of period $ 11,189 $32,845 $ 17,098 $ 17,098
======== ======= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 200 $ 257 $ 511 $ 1,561
======== ======= ========= =========
Noncash financing activities:
Issuance of common stock for dividends $ 18 $ -- $ -- $ 90
======== ======= ========= =========
Issuance of common stock to employees in lieu of
cash compensation $ 44 $ -- $ -- $ 44
======== ======= ========= =========
The accompanying notes are an integral part of these financial statements.
F-7
Neose Technologies, Inc.
(a development-stage company)
Notes to Financial Statements
Note 1. Background
Neose Technologies, Inc. (the "Company"), a development-stage company,
is focused on the enzymatic synthesis of complex carbohydrates, and the
discovery, development, and commercialization of complex carbohydrates for
nutritional, pharmaceutical, consumer, and industrial uses. Due to their
structural complexity, oligosaccharides are difficult and expensive to produce,
and their commercial development has been significantly limited. The Company
believes that its proprietary technologies enable the rapid and cost-efficient
enzymatic production of naturally-occurring oligosaccharides. Abbott
Laboratories ("Abbott"), a leading provider of infant formula in the United
States, has licensed the Company's technology to develop breast milk
oligosaccharides as additives to infant formula. In its therapeutic development
programs, the Company is using its technology to develop complex carbohydrates
as potential pharmaceuticals to treat various bacterial infections, such as
gastrointestinal and pediatric ear infections, and to prevent xenotransplant
rejection. With Johnson & Johnson ("J&J"), the Company is developing novel
technology for the large-scale production of another class of complex
carbohydrates that may have a number of consumer health care and other
applications.
The Company's initial public offering of common stock (the "IPO")
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 IPO after the underwriting discount and payment of offering
expenses were approximately $29.1 million. In connection with the IPO, all
outstanding shares of Series A, C, D, E, and F Convertible Preferred Stock
converted into approximately 2.4 million shares of common stock (see Note 8).
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 $20.3 million.
The Company commenced operations in August 1990. Since its inception,
the Company has derived substantially all of its revenues from a collaborative
agreement with Abbott (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 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.
F-8
Neose Technologies, Inc.
(a development-stage company)
Notes to Financial Statements
(continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less from the date of purchase to be cash equivalents.
Marketable Securities
Marketable securities consist of U.S. Treasury notes with original
maturities greater than 90 days. The Company has established guidelines relative
to concentration, maturities, and credit ratings that maintain safety and
liquidity.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
determines the appropriate classification of debt and equity securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date. As of December 31, 1997, all marketable securities were classified as
"available-for-sale" securities. Available-for-sale securities are carried at
fair value, based on quoted market prices, with unrealized gains and losses
reported as a separate component of stockholders' equity. As of December 31,
1997, unrealized gains were not material to the financial statements. All
realized gains and losses, computed using specific identification, and any
declines in value determined to be permanent are recognized in the Statements of
Operations.
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
depreciable lives of three to seven years for office, research, and
manufacturing equipment, and twenty years for building and improvements.
Research and Development
Research and development costs are charged to expense as incurred.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards 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.
Revenue Recognition
The Company records revenue from collaborative agreements when the
specified services are performed or ratably over the respective terms of the
agreements.
F-9
Neose Technologies, Inc.
(a development-stage company)
Notes to Financial Statements
(continued)
Net Loss Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128 ("SFAS 128"), "Earnings per Share," which supersedes APB Opinion No. 15
("APB No.15"), "Earnings per Share," and which is effective for all periods
ending after December 15, 1997. SFAS 128 requires dual presentation of basic and
diluted earnings per share ("EPS") for complex capital structures on the face of
the Statements of Operations. Basic EPS is computed by dividing net income by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution from the exercise or conversion of
securities into common stock. For the years ended December 31, 1995, 1996, and
1997, the effects of the (i) exercise of outstanding stock options and warrants
and (ii) conversion of the outstanding shares of convertible preferred stock (as
if converted on their dates of issuance) were excluded from the calculation of
diluted EPS because their effect was antidilutive.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," and Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information," were issued in June 1997. SFAS 130 and SFAS 131 are
effective for fiscal years beginning subsequent to December 15, 1997, and,
therefore, will be adopted by the Company on January 1, 1998. The Company does
not expect the adoption of SFAS 130 or SFAS 131 to result in any substantive
changes in its disclosure.
Reclassifications
Certain prior year amounts have been reclassified to conform with
current year presentation.
Note 3. Collaborative Agreements
Abbott Agreements
The Company and Abbott have entered into collaborative agreements under
which Abbott has licensed technology from Neose to develop breast milk
oligosaccharides as additives to infant formula and other nutritional products.
Abbott has development and regulatory responsibilities for the nutritional
additives and exclusive manufacturing rights.
The Company's agreements with Abbott provide, in part, for the receipt
by the Company of a milestone payment and license fees, if commercialization
occurs. Under this arrangement, Neose has received to date approximately $11.2
million in contract payments, milestone payments, and equity investments from
Abbott. Also, Neose is to receive $5 million within 60 days of the first
commercial sale, if any, of infant formula containing nutritional additives
manufactured using the Company's technology. Abbott has agreed to pay Neose
ongoing fees based on the dry weight of infant formula sold containing
nutritional additives manufactured using the Company's technology. The Company
is required to credit $3.75 million of the license fees against the
F-10
Neose Technologies, Inc.
(a development-stage company)
Notes to Financial Statements
(continued)
ongoing fees in equal amounts over four years. In addition, Abbott has agreed to
renegotiate the fees due Neose on the sale of products covered by the technology
licensed to Abbott by Neose in any case where, aside from and in addition to
such technology, Neose has made a contribution in the methods, processes, or
compounds used in the manufacture of the product that both parties agree will
result in a substantial commercial advantage. There can be no assurance that
Abbott will ultimately commercialize any oligosaccharide manufactured using the
Company's technology, and thus, there can be no assurance that the Company will
ever receive any further revenues from Abbott.
Abbott has the option at any time prior to the first commercial sale,
if any, of infant formula containing an oligosaccharide manufactured using the
technology licensed from the Company, 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 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, because Abbott has failed to make a certain regulatory
filing by a specified date, Neose, at its option, may now similarly elect to
convert the license of the Company's technology to a non-exclusive license to
Abbott on the same financial terms. Neose has not exercised that right, and
Neose and Abbott are currently engaged in discussions concerning possible
modifications of their agreements. Neose has been advised that Abbott is
continuing to pursue the development and commercialization of infant formula
containing an oligosaccharide manufactured using the Company's technology. There
can be no assurance that Neose would be able to interest another party in a
non-exclusive license for these purposes in the event that either party elects
to convert to a non-exclusive license.
Further revenues, if any, from the Company's agreements with Abbott
will depend on Abbott's own competitive, marketing, and strategic
considerations, including the relative advantages of alternative products being
developed or marketed by competitors. Furthermore, Abbott is responsible for
developing any oligosaccharides manufactured using the Company's technology,
completing manufacturing scale-up activities, and assuring that the compounds,
when used as nutritional additives, comply with applicable regulatory
requirements, which requirements have not yet been satisfied by Abbott. 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 any oligosaccharides manufactured using the
Company's technology. No assurance can be given that the agreements will result
in the successful commercialization of oligosaccharides manufactured using the
Company's technology or that any future milestone payments or fees will be
received by the Company. The suspension or termination of the Company's
agreement with Abbott, the conversion by Abbott to a non-exclusive license of
the Company's technology, or a delay by Abbott in the development or
commercialization of any nutritional additives manufactured using the Company's
technology would have a material adverse effect on the Company's business,
financial condition, and results of operations.
As part of the agreements, 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 IPO (see Note 1). The Company recognized $1 million, $1 million, and $0.5
million of revenue under the Abbott agreements for the years ended December 31,
1995, 1996, and 1997. In addition, Abbott purchased raw materials from the
Company for $105,000, which was included in revenue for the year ended December
31, 1995.
F-11
Neose Technologies, Inc.
(a development-stage company)
Notes to Financial Statements
(continued)
Other Collaborative Agreements
In November 1997, the Company entered into a joint development
agreement with McNeil Specialty Products Company, a subsidiary of J&J, for the
joint development of novel technology for the large-scale production of a class
of complex carbohydrates for a number of consumer health and other applications.
Under the terms of the agreement, the costs of such joint development will be
borne equally by Neose and J&J, and the technology developed will be owned
jointly.
The Company recognized approximately $83,000, $250,000, and $209,000 of
revenue under its collaborative research agreement with Bracco Research USA Inc.
("Bracco") for the years ended December 31, 1995, 1996, and 1997, respectively.
The Company and Bracco mutually agreed to terminate their research collaboration
in September 1997.
Note 4. Cash and Cash Equivalents
The Company held the following cash and cash equivalents on the dates
indicated below (in thousands).
December 31, 1996 1997
- -----------------------------------------------------------------------------
Cash and money market accounts $ 1,255 $ 2,210
Repurchase agreements 31,590 --
U.S. Government agency security -- 14,888
---------------------- ---------------
$ 32,845 $ 17,098
====================== ===============
Note 5. Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31, 1996 1997
- -----------------------------------------------------------------------------
Building and improvements $ 1,742 $ 12,967
Research equipment 1,661 2,206
Manufacturing equipment 652 776
Computer and office equipment 266 400
---------------------- ---------------
4,321 16,349
Less accumulated depreciation
and amortization (1,554) (2,440)
---------------------- ---------------
2,767 13,909
Land -- 700
Construction in progress 1,207 7
---------------------- ---------------
$ 3,974 $ 14,616
====================== ===============
Depreciation and amortization expense was approximately $389,000,
$569,000, and $886,000 for the years ended December 31, 1995, 1996, and 1997,
respectively. Upon purchasing its previously leased facility in March 1997, the
operating lease for the Company's office and laboratory facilities was
terminated. Rent expense was approximately $309,000, $309,000, and $92,000 for
the years ended December 31, 1995, 1996, and 1997, respectively.
F-12
Neose Technologies, Inc.
(a development-stage company)
Notes to Financial Statements
(continued)
Note 6. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 31, 1996 1997
- --------------------------------------------------------------------------
Accrued compensation $ 265 $ 341
Accrued building improvements -- 725
Other accrued expenses 161 562
---------------------- -------------
$ 426 $ 1,628
====================== =============
Note 7. Long-Term Debt
Long-term debt consisted of the following (in thousands):
December 31, 1996 1997
- -----------------------------------------------------------------------------
MCIDA bond issuance $ -- $ 9,400
Capital lease obligation 920 517
Equipment loans 271 40
Tenant improvement loan 43 --
---------------------- -------------
1,234 9,957
Less current portion (678) (1,040)
---------------------- -------------
$ 556 $ 8,917
====================== =============
Minimum principal repayments of long-term debt (including capital lease
obligations) as of December 31, 1997 were as follows (in thousands):
1998--$1,040; 1999--$617; 2000--$1,000; 2001--$1,100; 2002--$1,100; and
thereafter--$5,100.
MCIDA Bond Issuance
In March 1997, the Company issued, through the Montgomery County
(Pennsylvania) Industrial Development Authority, $9.4 million of taxable and
tax-exempt bonds (the "MCIDA Bond Issuance"). The bonds were issued to finance
the purchase of the Company's previously leased facility in March 1997 and a
manufacturing expansion completed during 1997. The bonds are supported by the
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. As of December 31, 1997, the effective blended
interest rate was 7% per annum, including letter-of-credit and other fees.
The terms of the MCIDA Bond Issuance provide for monthly, interest-only
payments and a single repayment of principal at the end of the 20-year life of
the bonds. However, under the Company's agreement with its bank, the Company has
committed to make monthly payments to an escrow account to provide for annual
prepayment of principal.
As of December 31, 1997, the Company had restricted funds of $450,000,
of which $379,000 consisted of its monthly payments to an escrow account plus
interest revenues on the balance in the escrow account. The remaining $71,000 of
restricted funds consisted of MCIDA Bond Issuance proceeds not yet released to
the Company for reimbursement of certain building improvement expenditures.
F-13
Neose Technologies, Inc.
(a development-stage company)
Notes to Financial Statements
(continued)
The principal amount of bonds to be redeemed each year are as follows
(in thousands): 1998--$500; 1999--$600; 2000--$1,000; 2001 and 2002--$1,100;
2003 and 2004--$1,200; 2005--$100; 2006--$200; 2007--$100; 2008 through
2011--$200; 2012--$300; 2013--$200; 2014--$300; 2015--$200; 2016--$300; and
2017--$200.
To provide credit support for the MCIDA Bond Issuance, 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 is required
to deposit cash collateral in the event that it does not comply with certain of
these covenants.
Capital Lease Obligation
In June 1995, the Company entered into a master equipment lease
agreement with a finance company that provided for up to $1.5 million in
financing, of which the Company eventually borrowed $1.4 million. In connection
with the lease, the Company granted the lessor warrants to purchase 10,527
shares of common stock at $14.25 per share. As of December 31, 1997, the
Company's future minimum lease payments (all of which are payable during 1998)
were approximately $564,000, of which approximately $47,000 represented
interest.
Equipment Loans
In June 1993, the Company entered into a master equipment loan
("Equipment Loan A") with a finance company. During 1993 and 1994, the Company
financed equipment and improvements of approximately $1,011,000 under Equipment
Loan A. The Company is obligated to make monthly principal and interest payments
of approximately $2,000 through January 1998. Outstanding balances under
Equipment Loan A bear interest at the annual rate of 15%. In connection with
Equipment Loan A, 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 8).
In August 1994, the Company borrowed $100,000 to finance certain
equipment from a municipal development agency ("Equipment Loan B"). The Company
is obligated to make monthly principal and interest payments of approximately
$2,000 through September 1999. Outstanding balances under Equipment Loan B bear
interest at the annual rate of 5%.
Tenant Improvement Loan
In January 1992, the Company financed approximately $504,000 of
building improvements in connection with the lease of its current facility. Upon
purchasing the facility in March 1997, the Company satisfied its remaining
obligations under the tenant improvement loan.
Note 8. Stockholders' Equity
Common Stock
On January 29, 1997, the Company offered and sold 1,250,000 shares of
common stock at a public offering price of $17.50 per share (the "Follow-on
Offering"). The net proceeds to the Company from the Follow-on Offering after
the payment of placement fees and offering expenses were approximately
$20,339,000.
F-14
Neose Technologies, Inc.
(a development-stage company)
Notes to Financial Statements
(continued)
The Company's IPO 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 IPO, 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 discussed above, in connection with the IPO,
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 IPO. 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 IPO, converted into warrants to
purchase 119,961 shares of common stock at $9.45 per share. During 1996 and
1997, warrants to purchase 6,538 and 2,490 shares of common stock, respectively,
were exercised to purchase 2,526 and 880 shares of common stock, respectively,
via a cashless exercise provision contained in the warrant (see below).
Stock Warrants
The following table summarizes outstanding warrants as of December 31,
1997. 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 February 16, 1994 February 16, 1999
110,933 9.45 July 31, 1994 July 31, 1999
10,527 14.25 June 30, 1995 June 30, 2002
-------
145,200
=======
Shareholder Rights Plan
In September 1997, the Company adopted a Shareholder Rights Plan ("the
Rights Plan"). Under the Rights Plan, holders of common stock are entitled to
receive one right for each share of common stock held. Separate rights
certificates would be issued and become exercisable in the event that any
acquiring party accumulates 15% or more of the Company's common stock, or
announces an offer to acquire 15% or more of the outstanding Company common
stock. Each right will entitle a holder, except a 15% or more holder, to buy one
one-hundredth share of Series A Junior Participating Preferred Stock (the
"Preferred Stock") at an exercise price of $150 per unit. Each one
F-15
Neose Technologies, Inc.
(a development-stage company)
Notes to Financial Statements
(continued)
one-hundredth share of such Preferred Stock is essentially equivalent to one
share of the Company's common stock. However, if an acquiring party accumulates
15% or more of the Company's common stock or certain other events occur, each
right entitles the holder (other than a 15% holder) to purchase, depending on
the circumstances, for $150 either $300 worth of the Company's common stock or
$300 worth of the 15% acquiror's common stock. The rights expire in September
2007 and may be redeemed by the Company at a price of $.01 per right at any time
up to ten days after they become exercisable.
Note 9. Employee Benefit Plans
Stock Option Plans
The Company has three stock option plans, the 1991, 1992, and 1995
Plans, under which an aggregate of 2,016,666 shares of common stock have been
reserved. 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.
Incentive stock options may not be granted at an exercise price less than the
fair market value on the date of grant. 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:
Options Outstanding Exercisable Options
------------------------------------------ ------------------------
Weighted Weighted
Average Average
Available for Exercise Exercise
Grant Shares Price Shares Price
------------- -------- ---------- ------- ---------
January 1, 1995 27,625 512,046 $ 3.66 199,166 $ 4.01
======= ========
Authorized 933,333
Granted
Price = Fair Value (169,644) 169,644 7.77
Price > Fair Value (180,000) 180,000 12.54
Granted outside the Plan
Price > Fair Value -- 69,998 17.94
Exercised -- (15,638) 1.96
Canceled 5,389 (5,389) 3.98
-------- --------- -------
December 31, 1995 616,703 910,661 7.29 298,630 3.85
======= ========
Granted
Price = Fair Value (369,182) 369,182 15.46
Exercised -- (63,009) 2.60
Canceled 15,747 (15,747) 8.11
-------- --------- -------
December 31, 1996 263,268 1,201,087 10.03 419,297 5.54
======= ========
Authorized 500,000
Granted
Price = Fair Value (402,665) 402,665 15.75
Price > Fair Value (10,000) 10,000 20.50
Price < Fair Value (7,039) 7,039 9.68
Exercised -- (41,618) 3.40
Canceled 14,997 (14,997) 11.48
-------- --------- -------
December 31, 1997 358,561 1,564,176 $ 11.73 636,164 $ 7.84
======== ========= ======= ======= ========
F-16
Neose Technologies, Inc.
(a development-stage company)
Notes to Financial Statements
(continued)
Options Outstanding at Exercisable Options at
December 31, 1997 December 31, 1997
- -------------------------------------------------------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Exercise Exercise
Exercise Prices Shares Life (Years) Price Shares Price
----------------- --------- --- ------- ------- -------
$ 0.09 - $ 9.00 539,206 6.1 $ 4.98 426,994 $ 4.65
$ 11.88 - $ 15.13 729,140 8.9 13.96 188,338 13.73
$ 15.25 - $ 24.84 295,830 9.4 18.51 20,832 20.06
----------------- --------- --- ------- ------- -------
$ 0.09 - $ 24.84 1,564,176 8.0 $ 11.73 636,164 $ 7.84
================= ========= === ======= ======= =======
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option and
employee stock purchase plans. The Company records deferred compensation for
option grants to employees for the amount that (i) the deemed value for
accounting purposes per share (prior to the IPO) or (ii) the market price per
share (subsequent to the IPO) exceeds the exercise price per share. In addition,
the Company records deferred compensation for option grants to non-employees in
the amount of the fair value per share, as computed using the Black-Scholes
option-pricing model. The Company amortizes deferred compensation amounts over
the vesting periods of each option. The Company recognized compensation expense
of approximately $0, $90,000, and $231,000 for the years ended December 31,
1995, 1996, and 1997, respectively.
Had compensation cost for the Company's stock option and employee stock
purchase plans been determined consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net
loss and basic and diluted net loss per share would have been increased to the
pro forma amounts indicated below (in thousands, except per share data):
1995 1996 1997
--------------------- -------------------- ---------------------
Net loss - as reported $ (5,067) $ (6,141) $ (9,064)
Net loss - pro forma $ (5,195) $ (7,344) $ (11,257)
Basic and diluted net loss per share - as reported $ (1.99) $ (0.82) $ (0.96)
Basic and diluted net loss per share - pro forma $ (2.04) $ (0.98) $ (1.20)
The resulting effect on pro forma net loss and net loss per share
disclosed for 1995, 1996, and 1997 is not likely to be representative of the
effects on net loss and net loss per share on a pro forma basis in future years,
because 1995, 1996, and 1997 pro forma results include the impact of only one,
two, and three years, respectively, of grants and related vesting, while
subsequent years will include additional years of grants and vesting.
The weighted-average fair value of those options granted at market
during 1995, 1996, and 1997 was $4.14, $8.62, and $7.88, respectively. The
weighted-average fair value of those options granted above market during 1995
and 1997 was $4.42 and $7.52, respectively. The weighted-average fair value of
those options granted below market during 1997 was $12.58. 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,
1996, and 1997 grants, respectively: risk-free interest rate of 5.9%, 6.0%, and
5.8%; an expected life of 5.1, 5.0, and 5.3 years; volatility of 70%, 70%, and
60%; and a dividend yield of zero.
F-17
Neose Technologies, Inc.
(a development-stage company)
Notes to Financial Statements
(continued)
The weighted-average fair value of employee purchase rights granted
under the Company's employee stock purchase plan (see below) in 1996 and 1997
was $5.67 and $5.97, respectively. The fair value of the purchase rights was
estimated using the Black-Scholes model with the following weighted-average
assumptions for 1996 and 1997, respectively: risk-free interest rate of 5.7%, an
expected life of sixteen and seventeen months, volatility of 70% and 60%, and a
dividend yield of zero.
Employee Stock Purchase Plan
The Company maintains an employee stock purchase plan ("the ESPP") 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. The ESPP,
which became effective in February 1996, provides for successive, two-year
offering periods, each of which is contemplated to have four semiannual purchase
periods. Pursuant to the ESPP, 100,000 shares of common stock were reserved for
issuance. The purchase price is 85% of the lower of the market price per share
on the employee's entry date into the offering period or the market price per
share on the purchase date. An employee may purchase up to a maximum of (i) 10%
of his or her eligible compensation; (ii) 1,000 shares per purchase; or (iii)
the number of shares per year which when multiplied by the market price per
share on the employee's entry date into the offering period does not exceed
$25,000; whichever is less, provided that the employee's ownership of the
Company's stock is less than 5% as defined in the ESPP. A total of 94,369 and
76,712 shares of common stock remained available for issuance under the ESPP at
December 31, 1996 and 1997, respectively. The aggregate purchases of common
stock under the ESPP, during the years ended December 31, 1996 and 1997, were
5,631 shares at an aggregate purchase price of approximately $60,000 and 17,657
shares at an aggregate purchase price of approximately $189,000, respectively.
No compensation expense has been recorded related to the ESPP.
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 approximately $62,000, $61,000, and
$67,000 to the 401(k) Plan for the years ended December 31, 1995, 1996, and
1997, respectively.
Note 10. 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 approximately $21,000,
$41,000, and $181,000 in patent-related fees on Penn's behalf for the years
ended December 31, 1995, 1996, and 1997, respectively. This agreement will
terminate upon the expiration of the patent rights.
F-18
Neose Technologies, Inc.
(a development-stage company)
Notes to Financial Statements
(continued)
Note 11. Income Taxes
As of December 31, 1997, the Company had net operating loss ("NOL")
carryforwards for federal and state income tax purposes of approximately
$5,000,000 and $250,000, respectively. In addition, the Company had federal
research and development credit ("R&D Credit") carryforwards of approximately
$900,000. The NOL and R&D Credit carryforwards begin to expire in 2004. Due to
the uncertainty surrounding the realization of the tax benefit associated with
these carryforwards, the Company has provided a full valuation allowance against
this tax benefit. In addition, pursuant to the Tax Reform Act of 1986, the
annual utilization of the Company's NOL carryforwards will be limited. The
Company does not believe that such limitation will have a material adverse
impact on the utilization of its NOL carryforwards.
The approximate income tax effect of each type of temporary difference
and carryforward is as follows (in thousands):
December 31, 1996 1997
- ------------------------------------------------------------------------------
Benefit of NOL carryforwards $ 1,641 $ 1,718
R&D Credit carryforwards 642 915
Start-up costs 2,643 4,409
Capitalized research and development 3,668 6,410
Deferred compensation 31 173
Nondeductible depreciation and amortization 591 991
Deferred rent 27 --
------------- -------
9,243 14,616
Valuation allowance (9,243) (14,616)
============= =======
$ -- $ --
============= =======
Note 12. Related-Party Transactions
In 1997, the Company entered into an agreement with an employee of
Paramount Capital, Inc. ("Consultant") for consulting services. The sole
shareholder of Paramount Capital, Inc. ("Paramount") is a member of the
Company's board of directors. Pursuant to the agreement, which may be terminated
by either party upon 60 days' notice, the Company granted the Consultant options
to purchase 15,000 shares of common stock at prices equal to and in excess of
the then market price (with a weighted-average exercise price of $18 per share),
vesting in equal, annual amounts over four years. In addition, the Company is
obligated to pay the Consultant an annual amount of $50,000.
In 1995, Paramount acted as a placement agent for a portion of the
Series F Convertible Preferred Stock. The Company paid approximately $0.4
million in commissions to Paramount in the year ended December 31, 1995. In
addition, in December 1995, the Company granted the Consultant options to
purchase 49,999 shares of common stock at prices equal to and in excess of the
then market price (with a weighted-average exercise price of $17.94 per share),
vesting in various amounts over five years, for financial advisory services.
F-19
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Second Amended and Restated Certificate of Incorporation of the
Company. (Exhibit 3.1)(1)
3.2 Amended and Restated By-Laws of the Company. (Exhibit 3.3)(5)
3.3 Certificate of Designation establishing and designating the Series A
Junior Participating Preferred Stock. (Exhibit 3.2)(5)
4.1 See Exhibits 3.1, 3.2, and 3.3 for instruments defining rights of
holders of Common Stock.
4.2 Representation of the Company pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K. (Exhibit 4.1)(3)
4.3 Trust Indenture, dated as of March 1, 1997, between Montgomery County
Industrial Development Authority and Dauphin Deposit Bank and Trust
Company. (Exhibit 4.2)(3)
4.4 Form of Montgomery County Industrial Development Authority Federally
Taxable Variable Rate Demand Revenue Bond (Neose Technologies, Inc.
Project) Series B of 1997. (Exhibit 4.3)(3)
4.5 Rights Agreement, dated as of September 26, 1997, between the Company
and American Stock Transfer & Trust Company, as Rights Agent. (Exhibit
4.1)(5)
10.1 Stock Purchase Agreement, dated as of August 28, 1990, between the
Company and the University of Pennsylvania. (Exhibit 10.1)(1)
10.2 License Agreement, dated as of August 28, 1990, between the Company and
the University of Pennsylvania, as amended to date. (Exhibit 10.2)(1)
10.3(a)+ Series D Preferred Stock Purchase Agreement, dated as of December 30,
1992, between the Company and Abbott Laboratories. (Exhibit 10.8(a))(1)
10.3(b)+ Supply Agreement, dated as of December 30, 1992, between the Company
and Abbott Laboratories. (Exhibit 10.8(b))(1)
10.3(c)+ Research and License Agreement, dated as of December 30, 1992, between
the Company and Abbott Laboratories. (Exhibit 10.8(c))(1)
10.3(d)+ Amendment to the Research and License Agreement, dated as of January
18, 1995, between the Company and Abbott Laboratories. (Exhibit
10.8(d))(2)
10.4 Form of Series E Preferred Stock Investors' Rights Agreement. (Exhibit
10.9)(1)
10.5 Form of Series F Preferred Stock Investors' Rights Agreement. (Exhibit
10.10)(1)
10.6 Form of Warrant to Purchase Common Stock, dated as of February 20,
1991. (Exhibit 10.11)(1)
10.7 Form of Warrant to Purchase Common Stock, dated as of June 30, 1993.
(Exhibit 10.12)(1)
10.8 Form of Warrant to Purchase Common Stock, dated as of February 16,
1994. (Exhibit 10.13)(1)
10.9 Form of Warrant to Purchase Series E Preferred Stock, dated as of July
29, 1994. (Exhibit 10.14)(1)
10.10 Warrant for the Purchase of Common Stock, dated as of June 30, 1995,
between the Company and Financing for Science International, Inc.
(Exhibit 10.15)(1)
10.11++ 1995 Stock Option/Stock Issuance Plan, as amended. (Exhibit 99.1)(4)
10.12++ Employee Stock Purchase Plan. (Exhibit 10.17)(1)
10.13++ Employment Agreement dated April 1, 1992, between the Company and David
A. Zopf, as amended to date. (Exhibit 10.18)(1)
10.14 Design-Build Agreement dated August 30, 1996, between the Company and
Irwin & Leighton, Inc. (Exhibit 10.19)(2)
10.15 Agreement for Purchase and Sale of Real Property, dated March 14, 1997,
by and between the Company and Pennsylvania Business Campus Delaware,
Inc. (Exhibit 2.1)(3)
10.16 Loan Agreement, dated as of March 1, 1997, between the Company and
Montgomery County Industrial Development Authority. (Exhibit 10.1)(3)
10.17 Participation and Reimbursement Agreement, dated as of March 1, 1997,
between Jefferson Bank and CoreStates Bank, N.A. (Exhibit 10.2)(3)
10.18 Form of CoreStates Bank, N.A. Irrevocable Letter of Credit. (Exhibit
10.3)(3)
10.19 Pledge, Security and Indemnification Agreement, dated as of March 1,
1997, by and among the Company, CoreStates Bank, N.A., and Jefferson
Bank. (Exhibit 10.4)(3)
10.20 Reimbursement Agreement, dated as of March 1, 1997, between the Company
and Jefferson Bank. (Exhibit 10.5)(3)
10.21 Specimen of Note from Company to Jefferson Bank. (Exhibit 10.6)(3)
10.22 Mortgage, Assignment and Security Agreement, dated March 20, 1997,
between the Company and Jefferson Bank. (Exhibit 10.7)(3)
10.23 Security Agreement, dated as of March 1, 1997, by and between the
Company and Jefferson Bank. (Exhibit 10.8)(3)
10.24 Assignment of Contract, dated as of March 20, 1997, between the Company
and Jefferson Bank. (Exhibit 10.9)(3)
10.25 Custodial and Collateral Security Agreement, dated as of March 20,
1997, by and among the Company, Offitbank, and Jefferson Bank. (Exhibit
10.10)(3)
10.26 Placement Agreement, dated March 20, 1997, among the Company,
Montgomery County Industrial Development Authority, and CoreStates
Capital Markets. (Exhibit 10.11)(3)
10.27 Remarketing Agreement, dated as of March 1, 1997, between the Company
and CoreStates Capital Markets. (Exhibit 10.12)(3)
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).
27.1* Financial Data Schedule.
27.2* Restated 1996 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 Company'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 Company'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 Company's Registration Statement on Form S-1
(Registration No. 333-19629) filed with the Commission on January 13,
1997.
(3) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1997.
(4) Filed as an Exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-35283) filed with the Commission on September 10,
1997.
(5) Filed as an Exhibit to the Company's Current Report on Form 8-K filed
with the Commission on October 1, 1997.