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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-19410
Sepracor Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2536587
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
111 Locke Drive, Marlborough, Massachusetts 01752
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (508) 481-6700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
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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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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of voting Common Stock held by nonaffiliates of the
registrant was approximately $4,061,988,000 based on the last reported sale
price of the Common Stock on the Nasdaq consolidated transaction reporting
system on March 15, 1999.
Number of shares outstanding of the registrant's class of Common Stock as of
March 15, 1999: 32,739,935 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1998 Annual Report to Stockholders - Part II
Proxy Statement for the 1999 Annual Meeting of Stockholders - Part III
PART I
Item 1. Business.
The Company
Sepracor Inc. ("Sepracor" or the "Company") is a specialty
pharmaceutical company focused on the cost-effective development of safer, purer
and more effective drugs that are improved versions of widely-prescribed
pharmaceutical compounds. Typically, these improved chemical entities ("ICEs")
are patented, single-isomer or active-metabolite forms of the parent compound.
The Company selects for development widely-sold parent drugs with potential for
improved efficacy, side-effect profile, or both. The Company develops these
drugs by leveraging its broad patent position, expertise in chiral chemistry and
pharmacology, and experience in conducting clinical trials and seeking
regulatory approvals for new drugs. Sepracor's drug development program has
yielded an extensive portfolio of drug candidates intended to treat a broad
range of indications. To date, certain of these candidates are being developed
at lower cost and in less time than the new chemical entities ("NCEs") that
characterize traditional drug development. In addition, the Company believes
that the probability of U.S. Food and Drug Administration ("FDA") approval of
its ICE(TM) drug candidates may be increased because the parent drugs have
previously been approved.
Recent Corporate Collaborations
The Company's strategy for commercializing its ICEs includes
licensing and co-promotion collaborations with major pharmaceutical companies
and direct marketing through one or more specialty sales forces.
On December 7, 1998, Sepracor announced an exclusive license
agreement with Eli Lilly and Company ("Lilly") relating to development and
commercialization of (R)-fluoxetine, an isomer of fluoxetine, which is marketed
as Prozac(R) by Lilly. (R)-fluoxetine is currently in Phase I clinical
development in the U.S. Under the terms of the agreement, Lilly will have the
worldwide, exclusive right to develop and market products containing
(R)-fluoxetine. Lilly will be responsible for all subsequent development,
regulatory submissions, product manufacturing, marketing and sales relating to
(R)-fluoxetine. Upon the effective date of the agreement, Sepracor is entitled
to receive a milestone payment and license fee totaling $20 million. Sepracor
also may receive up to $70 million in milestone payments based on the
progression of (R)-fluoxetine through development. In addition, Sepracor is
entitled to royalties, if any, on worldwide sales of (R)-fluoxetine beginning
upon first commercial sale. Effectiveness of the agreement is subject to the
expiration or earlier termination of the notice and waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act").
Under the HSR Act, Sepracor has received a request from the Federal Trade
Commission for additional information in connection with the R-fluoxetine
agreement. Sepracor plans to fully respond to the request and
expects the agreement to become effective as soon as the Federal Trade
Commission completes its review.
In July 1998, Sepracor entered into a development and license
agreement with Janssen Pharmaceutica, N.V., a wholly-owned subsidiary of Johnson
& Johnson ("Janssen"), relating to (+)-norcisapride, an isomer of the active
metabolite of cisapride, which is marketed by Janssen as Propulsid(R). Propulsid
is indicated for the symptomatic treatment of patients with nocturnal heartburn
due to gastroesophageal reflux disease. Under the terms of the agreement,
Janssen will have worldwide exclusive rights to develop and market products
containing norcisapride enantiomers. Sepracor is entitled to royalties, if any,
on product sales beginning upon the first commercial sale and the royalty rate
will escalate upon achievement of sales volume milestones. Under certain
circumstances, Sepracor may co-promote the product in the pediatric market.
In February 1998, Sepracor announced a collaboration and license
agreement with Janssen relating to the development and marketing of
norastemizole. Under the terms of the agreement, Sepracor and Janssen will
jointly fund the development of norastemizole, and Janssen has an option to
acquire certain rights regarding the product in the U.S. and abroad. Upon
exercise of such option, Janssen and Sepracor will share equally the costs and
profits associated with the further development, marketing and sale of
norastemizole in the U.S. and Sepracor will have the right to co-promote the
product in the U.S. Alternatively, in the event Sepracor decides not to
co-promote the product, it is entitled to royalties, if any, on Janssen's sales
of the product in the U.S. Outside of the U.S., Janssen has the right to develop
and market norastemizole subject to the payment of royalties to Sepracor. In
addition, Janssen has exclusive worldwide rights to sell over-the-counter forms
of norastemizole subject to the payment of royalties to Sepracor. In each
country in which Janssen does not exercise its option to complete the
development of, and market and sell, norastemizole, Sepracor will have a license
to all patent rights relating to norastemizole held by Janssen.
In December 1997, Sepracor licensed to Schering-Plough Ltd.
("Schering-Plough") worldwide rights to develop and market desloratadine, an
active-metabolite form of loratadine. Currently, Schering Corporation, a wholly
owned subsidiary of Schering-Plough ("Schering Corporation"), markets loratadine
as Claritin(R).
In July 1997, the Company filed a new drug application ("NDA") with
the FDA for the nebulized form of Xopenex(R), the Company's single-isomer form
of albuterol, for the treatment of asthma. The Company's NDA filing was accepted
by the FDA in September 1997 and the FDA issued to the Company an approvable
letter for the NDA in July 1998. On March 25, 1999, the Company received
marketing approval from the FDA for Xopenex. The Company intends to commence
marketing Xopenex through its direct sales force in the second quarter of 1999.
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Background
Chiral Compounds
Approximately 500 currently available drugs are chiral compounds.
Chiral compounds frequently exist as mixtures of mirror-image molecules known as
isomers. Although these isomers are identical in chemical composition, their
three-dimensional structures differ and, as a result, often interact differently
with cell receptors in a living organism. This interaction between the drug and
the receptor may stimulate or inhibit a biological function of the receptor and
thereby may initiate a therapeutic or toxic effect. In some cases, only one of
the isomers is the desired active ingredient while the other isomer is inactive
or may cause undesirable side effects. When a chiral compound contains equal
amounts of both isomers, it is a racemic mixture. These two isomers are
generally referred to as (S)-isomers (left) and (R)-isomers (right). Typically,
in its product formulation process, Sepracor purifies racemic mixtures of two
isomers into compounds containing only one isomer.
Active Metabolites
A metabolite is a compound resulting from metabolism of a drug by a
living organism. Like the different isomers of a chiral drug, the activity of
metabolites and the isomers of metabolites may vary from the activity of the
parent compound depending upon their interaction with specific cell receptors.
Occasionally, harmful drug interaction may occur when two or more drugs exist
together in an organism. The metabolite of a drug may lessen or eliminate this
harmful interaction. Sepracor and its licensees are developing certain compounds
in active-metabolite form in an effort to improve the parent drug.
ICE Development Program
Sepracor has licensed or is developing the following ICEs intended to
treat a broad range of indications:
Respiratory
Sepracor is or has been involved in the development of
active-metabolite versions of Schering Corporation's Claritin, Hoechst Marion
Roussel, Inc.'s ("HMRI") Seldane(R) and Janssen's Hismanal(R). In addition, the
Company has an issued patent covering the use of a single isomer form of
cetirizine (Pfizer/UCB's Zyrtec(R)) to treat allergic rhinitis. All of these
drugs are known as antihistamines because they block the action of histamine
in the body.
The market for asthma medications is dominated by the bronchodilator
class of drugs. The leading short-acting bronchodilator is albuterol, introduced
in 1969.
-3-
Several long-acting drugs such as formoterol and salmeterol have been introduced
more recently. Sepracor is seeking to develop improved versions of both
short-acting and long-acting bronchodilators.
Norastemizole, an active metabolite of Hismanal. Hismanal is a
non-sedating antihistamine marketed by Janssen. Hismanal carries a "black box"
label warning of the potential for serious cardiac side effects and adverse
drug-drug interactions. Hismanal must also be administered for up to a week
before reaching full efficacy. Sepracor's preclinical studies suggest that
norastemizole is potentially a safe and potent non-sedating antihistamine with
rapid onset and long duration of action, making once-a-day dosing possible. The
Company believes that this combination of properties, if substantiated in
additional clinical trials, would be sufficient to give norastemizole an
attractive profile against competing nonsedating antihistamines. Sepracor is
continuing its clinical trial program with norastemizole. The Company has a
method-of-use patent application and several other patent applications pending
covering norastemizole. Sepracor and Janssen have entered into an agreement with
respect to the joint development and co-promotion of norastemizole. Janssen has
a composition of matter patent expiring in 1999 and a patent claiming
anti-allergic use and pharmaceutical formulations expiring in 2006.
Desloratadine, an active metabolite of Claritin. Claritin, a
nonsedating antihistamine, is marketed by Schering Corporation. Sepracor's
preclinical studies have shown that desloratadine may be more potent than other
commercially available antihistamines. Sepracor's patent portfolio for
desloratadine includes U.S. patents covering the use of desloratadine to treat
allergic rhinitis and allergic asthma that expire in 2014 and U.S. patent
applications pending covering pharmaceutical formulations and additional uses.
In December 1997, Sepracor and Schering-Plough entered into a license agreement
giving Schering-Plough exclusive worldwide rights to Sepracor's patents covering
desloratadine. Schering-Plough has indicated it intends to develop and market
desloratadine worldwide. Schering-Plough is currently conducting Phase III
clinical trials with desloratadine for the treatment of allergic rhinitis and
Phase II clinical trials for the treatment of urticaria (or hives).
Fexofenadine, an active metabolite of Seldane. Seldane, marketed by
HMRI, was the leading non-sedating antihistamine until the FDA mandated that
Seldane carry a "black box" label warning of its potential cardiovascular side
effects and adverse drug-drug interactions. In July 1993, Sepracor licensed to
HMRI its U.S. patent rights covering fexofenadine. In October 1996, HMRI
introduced Allegra(R) (fexofenadine) as an improved version of Seldane. In
January 1998, HMRI announced its intention to withdraw Seldane from the market
due to the availability of its Allegra product line. Under Sepracor's license to
HMRI, Sepracor would be entitled to royalties upon the expected expiration in
2001 of the HMRI composition-of-matter patent covering fexofenadine. However, in
July 1997, the U.S. Patent and Trademark Office (the "PTO") declared an
interference between Sepracor and HMRI regarding a patent
-4-
application and an issued U.S. patent of Sepracor for the use of fexofenadine
for the treatment of allergic rhinitis, and a certain patent application of
HMRI, which may result in the Company not receiving royalties from HMRI on sales
of Allegra. See "Item 3. Legal Proceedings."
Xopenex (Levalbuterol HC1), a single-isomer form of Ventolin(R) and
Proventil(R). Albuterol is marketed by GlaxoWellcome plc ("GlaxoWellcome"),
Schering-Plough and others. In July 1997, two years after initiating clinical
trials, Sepracor submitted an NDA to the FDA for the nebulized form of Xopenex,
Sepracor's levalbuterol HC1, a single isomer form of albuterol. The clinical
portion of Sepracor's NDA is based on nine clinical studies conducted with over
500 patients. In the 362-patient, four-week pivotal study conducted by Sepracor,
patients who received Xopenex were shown to have a greater improvement in lung
function than those who received racemic albuterol. Xopenex taken chronically
showed equivalent or greater changes in forced expiratory volume over one second
(FEV1), compared to the marketed dose of racemic albuterol. At doses
demonstrating equivalent efficacy to albuterol, Xopenex demonstrated decreases
in beta-mediated side effects. These include an increase in pulse rate, muscular
tremor, a decrease in blood potassium levels, and an increase in blood glucose
levels. In addition, the Phase III clinical trials suggested a more long-term
effect on lung function of patients, as compared to albuterol, especially in
those patients not receiving concomitant steroid therapy. In a controlled
double-blind, single-dose study, efficacy and safety were also suggested for
Xopenex over a wide range of doses in children ages three to 11 years old. The
Company's NDA filing was accepted by the FDA in September 1997, and the FDA
issued to the Company an approvable letter for the NDA in July 1998. On March
25, 1999, Sepracor received marketing approval from the FDA for Xopenex. The
Company plans to introduce Xopenex in the U.S. market through its direct sales
force.
In addition to formulating a nebulizer solution, Sepracor is
developing Xopenex for use in several delivery systems, including syrup, tablet,
a dry-powder inhaler and metered-dose inhalers using both chlorofluorocarbon and
hydrofluoroalkane based propellants. Sepracor has four issued U.S. patents for
the use of Xopenex for the treatment of asthma, three of which expire in 2011
and one of which expires in 2013.
(R,R)-formoterol, a single-isomer form of Foradil(R) and Atock(R).
Foradil is marketed in Canada and Europe by Novartis and Atock is marketed in
Japan by Yamanouchi Pharmaceuticals. Sepracor is developing (R,R)-formoterol as
a bronchodilator intended to offer benefits over existing drugs, including rapid
onset and long duration of action. If successfully developed, (R,R)-formoterol
would compete against Foradil and Atock, and against GlaxoWellcome's
Serevent(R). Sepracor's pre-clinical and clinical research indicate that
(R,R)-formoterol has the potential to be the first once-a-day long acting
bronchodilator. If successfully developed, the Company
-5-
intends to market (R,R)-formoterol through its direct sales force. Sepracor has
an issued U.S. patent covering the use of (R,R)-formoterol that expires in 2012.
Urology/Gastroenterology
(S)-oxybutynin, a single-isomer form of Ditropan(R). Ditropan is
marketed by HMRI for the treatment of urinary incontinence. Ditropan is the
leading pharmaceutical treatment for urinary incontinence in adults. Urinary
incontinence affects approximately 10 million women and 3 million men in the
U.S. Current treatment for urinary incontinence consists primarily of diapers,
pads, disposable briefs, shields, guards, mechanical devices, and surgical
intervention. Pharmaceutical products capture only about 5% of this market.
Sepracor believes that drug therapy represents such a small segment of the
incontinence treatment market largely because pharmaceutical treatments,
including racemic oxybutynin, can cause undesirable anticholinergic side
effects, such as dry mouth, nausea, restlessness, and heart palpitations.
Sepracor has recently completed a 186 patient, double blind, placebo controlled
Phase II trial. In this two week trial, Sepracor demonstrated that S-oxybutynin
improved both urinary frequency (18% better than placebo) and urinary
incontinence (30% better than placebo) while being well tolerated (15% incidence
of moderate/severe dry mouth). The Company currently plans to initiate large
scale dose ranging trials in 1999. Sepracor has two issued U.S. patents for
(S)-oxybutynin covering methods of treating urinary incontinence and
pharmaceutical compositions that expire in 2015.
(S)-doxazosin, a single-isomer form of Cardura(R). Cardura is
marketed by Pfizer Inc. primarily to treat benign prostatic hyperplasia ("BPH"),
or enlargement of the prostate, a condition that is estimated to affect a
majority of males over the age of 55. A side effect of doxazosin is orthostatic
hypotension, the lowering of blood pressure after standing that can cause severe
dizziness or fainting. Sepracor's preclinical studies indicate that
(S)-doxazosin exhibits potential for a significant reduction in orthostatic
hypotension and is more potent than the parent drug. Sepracor believes that an
improved version could reduce the cost of treatment by reducing the number of
required doctor visits. While further extensive studies and clinical work are
needed to determine the efficacy and safety profile of this compound, Sepracor
believes this compound may offer a pharmacoeconomic benefit as compared to the
parent drug. Sepracor is preparing an investigational new drug application
("IND") in order to commence Phase I human clinical trials in 1999. Sepracor has
an issued U.S. patent for the use of (S)-doxazosin to treat BPH that expires in
2013.
Norcisapride, a metabolite of Propulsid. Propulsid is marketed by
Janssen for treatment of gastroesophageal reflux disease ("GERD"). Propulsid
carries a "black box" label warning of the potentional for serious cardiac
arrhythmias when taken with certain other drugs. In preclinical studies,
norcisapride has been found by Sepracor to have the potential to be not only
useful for GERD, but a potent anti-emetic
-6-
without the risk of cardiac arrhythmias. The Company has an issued U.S. patent
for the use of (-)-norcisapride to treat GERD and emesis, which expires in 2015,
as well as pending patent applications for other indications. The Company has an
issued U.S. patent for the use of (+)-norcisapride to treat emesis, which
expires in 2016, as well as pending patent applications for other indications.
In July 1998, the Company exclusively licensed its norcisapride rights to
Janssen, and is entitled to receive royalties on product sales beginning upon
the first commercial sale. Under the agreement, royalties will escalate upon
achievement of sales volume milestones.
(S)-lansoprazole, a single-isomer form of Prevacid(R). Prevacid is
marketed in the U.S. by TAP Pharmaceuticals. This protein pump inhibitor drug is
used to treat diseases associated with excess gastric acid secretions. Based on
preclinical studies, Sepracor believes that (S)-lansoprazole may offer more
consistent dosing and efficacy, as compared to Prevacid. The Company has a
patent application pending with respect to (S)-lansoprazole.
(-)-pantoprazole, a single-isomer form of Pantozol(R). Pantozol is
marketed by Byk-Gulden for the treatment of GERD. Sepracor's preclinical work
suggests that (-)-pantoprazole has the potential for consistent plasma levels
that may lead to improved safety and efficacy. The Company has a patent
application pending with respect to (-)-pantoprazole.
Psychiatry/Neurology
(R)-fluoxetine, a single-isomer form of Prozac. Prozac, marketed by
Lilly, cannot be easily co-administered with, or switched to, other psychoactive
medications due to the slow elimination from the body (approximately 30 days) of
both Prozac and an active metabolite of Prozac, and an adverse drug-drug
interaction profile. Sepracor believes that the (R)-isomer alone is equally
potent as an antidepressant, more rapidly cleared, and is metabolized to an
inactive isomer, resulting in faster elimination from the body, similar to
Paxil(R) and Zoloft(R), two competitors that have comparable therapeutic benefit
with this more rapid metabolism. This benefit may also increase the suitability
of Prozac for treatment of the elderly, as well as other patient groups that
have difficulty metabolizing certain drugs. Sepracor has an issued U.S. patent
for (R)-fluoxetine for the treatment of depression that expires in 2015.
Sepracor filed a U.S. IND in October 1998 and is currently conducting single and
multiple dose Phase I clinical trials with (R)-fluoxetine.
On December 7, 1998, Sepracor announced a license agreement with
Lilly relating to development and commercialization of (R)-fluoxetine. Under the
terms of the agreement, Lilly shall have the worldwide exclusive right to
develop and market products containing (R)-fluoxetine. Lilly will be responsible
for all subsequent development work on (R)-fluoxetine, regulatory submissions,
product manufacturing, marketing and sales.
-7-
Under the HSR Act, Sepracor has received a request from the Federal Trade
Commission for additional information in connection with the R-fluoxetine
agreement. Sepracor plans to fully respond to the request and expects the
agreement to become effective as soon as the Federal Trade Commission completes
its review. See "--Recent Corporate Collaborations."
(S)-fluoxetine, the other single-isomer form of Prozac. Sepracor is
also developing the (S)-isomer of fluoxetine, currently in Phase II clinical
trials as a treatment to prevent migraine. Migraine affects approximately 23
million people in the U.S. Sumatriptan, marketed as Imitrex by GlaxoWellcome, is
approved for acute but not prophylactic treatment of migraine and is the leading
anti-migraine drug on the market. In Phase II trials, Sepracor demonstrated a
statistically significant decrease in the frequency of migraine attacks for
patients receiving (S)-fluoxetine. Sepracor has an issued U.S. patent for
(S)-fluoxetine for the prevention of migraine that expires in 2013.
(S)-zopiclone(R), a single-isomer form of Imovane(R). Imovane is
marketed by Rhone-Poulenc Rorer Inc. Imovane is a non-benzodiazepine,
short-acting hypnotic/sedative approved for marketing in Europe for the
treatment of sleep disorders. The Company's preclinical studies to date have
demonstrated that (S)-zopiclone has the potential for a reduction in
anticholinergic side effects, in particular, dry mouth, when compared to
Imovane. The Company has an issued U.S. patent relating to the use of
(S)-zopiclone to treat sleep disorders and other indications which expires in
2015. Sepracor intends to submit an IND and initiate Phase I clinical trials
with (S)-zopiclone in the first half of 1999.
(R)-bupropion, a single-isomer form of Zyban(R). Zyban is marketed by
GlaxoWellcome for smoking cessation. However, Zyban has been shown to induce
seizures in certain patients, including those with no prior history of seizure
disorder. The Company has initiated an exploratory program to determine whether
(R)-bupropion has the potential for an improved side-effect profile, including
less incidence of seizures, dry mouth, shaking and insomnia. The Company has a
patent application pending with respect to (R)-bupropion.
(+)-desmethylsibutramine, a single-isomer metabolite form of
Meridia(R). Meridia is marketed by Knoll Pharmaceutical Co., a division of BASF
AG, for the treatment of obesity. The Company has initiated an exploratory
program and its preclinical studies have suggested that (+)-desmethylsibutramine
is a potent seritonin, norepinephrine and dopamine reuptake inhibitor. While
further extensive studies
-8-
and clinical work are needed, this triple mode of action may make (+)-
desmethylsibutramine an antidepressant drug that offers potential benefit in the
treatment of chronic pain syndromes, obesity, attention deficit disorders,
anxiety and stress urinary incontinence. Sepracor intends to submit an IND and
initiate Phase I clinical trials with (+)-desmethylsibutramine in 1999.
(R)-ketoprofen, a single-isomer form of Orudis(R). Orudis is marketed
by American Home Products for pain relief. Sepracor's preclinical studies have
indicated that (R)-ketoprofen has the potential to be a potent analgesic and has
the potential for reduced gastrointestinal side effects. The Company has an
issued U.S. patent covering the use of (R)-ketoprofen as an analgesic agent,
which expires in 2012.
Other
(+)-hydroxyitraconazole, a single-isomer metabolite form of
Sporanox(R). Sporanox is marketed by Janssen for the treatment of yeast and
fungal infections. Sepracor's preclinical studies suggest that
(+)-hydroxyitraconazole has the potential to retain full antifungal activity but
with reduced risk of drug-drug interactions and cardiac side effects. The
Company has a patent application pending with respect to (+)-
hydroxyitraconazole.
Other Indications
The Company is also developing R-ondansetron, a single-isomer form of
Zofran(R), marketed by GlaxoWellcome, for the treatment of emesis.
Drug Discovery
The Company is broadening its development focus to include discovery
and development of NCEs. The accessibility and widespread use of the new
technologies of combinatorial chemistry and ultra high throughput screening
provide an opportunity for Sepracor to participate in the area of NCE discovery.
Sepracor's approach to the discovery of NCEs is identifying novel compounds
which are of strategic interest to Sepracor, with in vitro and in vivo
biological activity in the anti-infective, anti-inflammatory, pain and
behavioral disease therapeutic areas.
Other Matters
The Securities and Exchange Commission has notified the Company that
it is conducting an informal inquiry with respect to the trading activity of
Sepracor Common Stock in the period prior to the Company's announcement on
December 7, 1998 of its agreement with Lilly for the license and development of
(R)-fluoxetine.
Subsidiaries
In 1994, Sepracor established and independently financed BioSepra
Inc. ("BioSepra") as a subsidiary, through an initial public offering of its
common stock. The establishment of this and other subsidiaries has allowed
Sepracor to concentrate on its core pharmaceutical business while allowing its
subsidiaries to focus on the development and commercialization of the Company's
bioprocessing technologies.
BioSepra, a 64% subsidiary of the Company, develops, manufactures and
sells chromatographic media for use by pharmaceutical companies in the
purification and production of biopharmaceuticals. BioSepra's products enable
pharmaceutical
-9-
companies to reduce the time and cost required to develop and manufacture
biopharmaceuticals. BioSepra's media products are currently used by
pharmaceutical companies in the production of several commercial
biopharmaceuticals, including interferons, insulin, human growth hormone,
special enzymes and vaccines.
On January 5, 1999, BioSepra announced the acquisition of a 51%
interest in Biosphere Medical S.A. ("Biosphere") and completed the acquisition
on February 25, 1999. The principle purpose for the acquisition was to gain
access to product know-how and CE (the European equivalent to the FDA) approval
of Biosphere's product Biospheres(TM), a spherical bead used in three medical
applications within the European medical community. The Company believes that
this technology has applicability for the treatment of uterine fibroids without
intervention.
Overview. Purification is a critical process in almost every stage in
the development and commercialization of a biopharmaceutical, from research
through production for clinical trials to commercial production. It is estimated
that biopharmaceutical purification accounts for about one-half of overall
commercial production costs.
Chromatography is the principal method used for biopharmaceutical
purification. In chromatographic processes, the solution containing both the
desired product and unwanted contaminants and impurities is flowed through
columns that are packed with chromatographic particles ("media"). As the
solution flows through the columns, the target biomolecules are absorbed by the
media. The productivity of a chromatographic media depends on the protein
binding capacity of the media, the speed at which biomolecules are able to reach
the binding sites and the ability of the media to achieve the desired product
purity (resolution).
Products. BioSepra has developed chromatographic media products to
enable biopharmaceutical companies to increase the productivity of their
purification processes. The media products are based on established
technologies, including its developed HyperD(R) media, and new in-licensed
technology.
HyperD Media. In March 1993, BioSepra introduced its advanced
HyperDiffusion Chromatography media, called HyperD media, which combines the
high protein binding capacity of soft gels with the higher flow advantages of
rigid porous materials. The soft gel provides a high number of protein binding
sites, while the rigid porous materials (or shell) enables the media to resist
compression even as solution is flowing at high speeds. The media is therefore
able to achieve rapid flow rates while maintaining a high level of protein
binding capacity. BioSepra believes that HyperD media can, in many applications,
significantly increase productivity. BioSepra believes that the unique structure
of BioSepra's HyperD chromatography media can enable companies to produce
monoclonal antibody-based drugs faster and at higher purity and yield than they
could using other products currently on the
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market. HyperD media is currently being used by several major pharmaceutical
companies in production and/or development of biopharmaceuticals. BioSepra
currently intends to reinforce its chromatography media product line with the
development of products specifically designed for the purification of various
classes of monoclonal antibodies.
In 1997, BioSepra further developed its market position with respect
to antibody purification by gaining access to several families of ligands.
BioSepra entered into a long-term supply agreement for recombinant protein-A, a
key ligand for antibody purification. BioSepra also obtained a worldwide
exclusive license for chromotography to a family of peptide mimetics of
protein-A and licensed hydrophobic charge induction technology for the
purification of antibodies.
In March 1995, BioSepra entered into a strategic marketing alliance
with Beckman Instruments, Inc. ("Beckman") appointing Beckman as its exclusive
distributor worldwide (except in Japan) of certain HyperD media in several sizes
of prepacked columns for use in the research and method development markets. In
1996, BioSepra extended the agreement to include Japan and the non-exclusive
distribution of additional media for use in the research and method development
market.
Other Media Products. BioSepra offers a line of other chromatographic
media products, most of which were introduced in the 1980s. These products,
which were developed for use primarily in the blood fractionation industry still
account for a significant but declining percentage of BioSepra's sales. BioSepra
plans to continue to sell these media products for use in existing commercial
scale processes that use these products, as well as new applications that do not
require the high bioprocessing performance of HyperD.
Other Products. BioSepra sells several chemical products used in
biopharmaceutical research. BioSepra offers its proprietary UpScale(TM) Process
columns designed for larger scale applications with volume capacities ranging
from one to 130 liters of media.
In addition, BioSepra is developing new purification devices for use
by genomics and proteomics companies. These products under development may also
be used by large pharmaceutical companies in their drug discovery programs.
BioSepra expects that sales of its historical line of chromatography
bioprocessing products will not increase in 1999 and that the future success of
its business will depend on market acceptance of BioSepra's more recent
products, such as HyperD, in the faster growing markets of the biopharmaceutical
industry such as monoclonal antibodies. However, there can be no assurance that
BioSepra's more recent products will be developed successfully or achieve market
acceptance.
-11-
Affiliates
HemaSure
In 1994, Sepracor established and independently financed HemaSure
Inc. ("HemaSure") as a subsidiary. Through two public offerings of HemaSure's
common stock, HemaSure became a 33%-owned affiliate of the Company. HemaSure is
applying its proprietary filtration technology to develop products to increase
the safety of donated blood and to improve certain blood collection and
transfusion procedures.
On February 25, 1999, the Company entered into an agreement with
HemaSure pursuant to which the Company invested $2,000,000 in HemaSure in
exchange for 1,333,334 shares of HemaSure common stock and warrants to purchase
667,000 additional shares of HemaSure common stock. Therefore, Sepracor's
ownership of HemaSure increased to 42% as of February 25, 1999.
Versicor
Versicor Inc. ("Versicor") was formed as a majority-owned subsidiary
of the Company in May 1995 to develop novel drug candidates principally for the
treatment of infectious diseases. In December 1997, Versicor announced the
completion of a private equity financing for approximately $22,000,000.
Following this financing, Sepracor retains an approximately 22% equity ownership
in Versicor.
Research and Development
Sepracor
The Company's total research and development expenses were
$63,062,000, $43,055,000 and $35,828,000 for 1998, 1997 and 1996, respectively.
Collaborative research and development revenues totaled $5,044,000, $58,000 and
$25,000 in 1998, 1997 and 1996, respectively.
-12-
BioSepra
BioSepra's research and development group consists of 13 persons.
BioSepra's research and development efforts are primarily dedicated to the
development of chromatographic products to speed up and optimize process design
and development and reduce production time and cost for biopharmaceutical drug
development and manufacture with a specific focus on monoclonal antibodies and
the genomics and gene therapy markets. During 1998, 1997 and 1996, BioSepra
spent $2,399,000, $1,859,000 and $1,299,000, respectively, on research and
development.
Marketing and Sales
Sepracor
The Company's marketing strategy includes arrangements with corporate
marketing partners, outlicensing product rights in exchange for royalties and
marketing through its direct sales force. The Company believes that corporate
partnering arrangements allow the Company to market its ICEs more quickly and to
use the partner's marketing expertise. The Company currently has collaborative
agreements with Lilly, Schering-Plough, HMRI and Janssen. In each of these
collaborative agreements, the Company is dependent upon the efforts of its
collaboration partner and there is no assurance that such efforts will be
successful.
The Company has established a direct sales force consisting of
representatives and technical specialists to market its single isomer form of
albuterol, Xopenex, in anticipation of expected FDA approval and commercial
introduction of such drug in 1999. The sales representatives will demonstrate
the use of the Company's products while educating physicians as to the clinical
benefits of the ICEs. The technical specialists will act as a resource to
provide physicians with relevant information regarding the Company's products.
As the Company begins to enter into co-promotion arrangements or
market and sell additional products directly, the Company will need to
significantly expand its direct sales force which will require substantial
efforts and significant management and financial resources. The Company's
business and future operating results will depend in significant part upon its
ability to attract and retain skilled sales and marketing personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be successful in attracting or retaining such personnel. There can be no
assurance that the Company will be able to build such a marketing staff or sales
force, that establishing such a marketing staff or sales force will be
cost-effective or that the Company's sales and marketing efforts will be
successful.
-13-
In 1998, Sepracor's sales were primarily made up of collaborative
research and development fees and license fees. Sales to Janssen and
Schering-Plough accounted for approximately 48% and 50%, respectively, of
Sepracor's revenues in 1998.
BioSepra
In 1998, BioSepra marketed its products to the biopharmaceutical
industrial market through direct sales efforts in the U.S. and some parts of
Europe and through distributors in other countries. BioSepra markets and sells
its products through field sales representatives and distributors, supported by
application specialists, product managers, and technical support/application
development personnel in BioSepra's research and development department.
Pursuant to BioSepra's agreement with Beckman, Beckman distributes worldwide
certain HyperD media products.
In 1998, 1997 and 1996, 75%, 43% and 47%, respectively, of BioSepra's
sales were outside the U.S. In 1998, 1997 and 1996, media and biochemicals
accounted for 92%, 61% and 69%, respectively, of BioSepra's revenues. The
increase in 1998 for media and biochemicals as a percentage of total revenues,
resulted from the discontinuation of the instrument business at the end of 1997.
In 1998, sales to two major biopharmaceutical companies accounted for
approximately 22% and 11% of BioSepra's revenues, respectively. The loss of
either or both of these customers could have a material adverse effect on the
results of operations of BioSepra.
Manufacturing
Sepracor
The Company conducts the formulation of its drug compounds primarily
at its laboratories in Marlborough, Massachusetts. The Company also currently
owns and operates a current Good Manufacturing Practices ("cGMP") compliant
32,400 square foot fine chemical manufacturing facility in Windsor, Nova Scotia,
which the Company believes has sufficient capacity to support the production of
its drugs in quantities required for its clinical trials. As Sepracor's drugs
become approved for sale, the Company will need to either manufacture such drugs
itself or license the manufacturing and marketing rights to third parties. While
the Company believes that it has the capability to scale up its manufacturing
process to support the production in commercial quantities of certain of the
drugs which it intends to market and sell directly, the production of a
substantial portion of those drugs must be contracted out to third-party
manufacturers. Prior to December 31, 2001, the Company is obligated to purchase
from ChiRex Inc., a Delaware corporation ("ChiRex"), all of its pharmaceutical
active ingredients (other than commercial quantities of its drugs which Sepracor
is capable of producing at its Nova Scotia
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manufacturing plant) of those drugs which it intends to directly market and
sell, subject to certain pricing, supply and quality control conditions.
BioSepra
BioSepra's facilities are located in Marlborough, Massachusetts and
Villeneuve-la-Garenne and Louvres, France. In Massachusetts, BioSepra subleases
approximately 15,000 square feet of space from Sepracor, and in France, BioSepra
subleases approximately 28,500 square feet of space in Villeneuve-la-Garenne and
11,000 square feet of space in Louvres. Of the total, approximately 20,440
square feet are used for manufacturing operations.
Competition
Sepracor
Sepracor's principal competitors are generic drug companies that seek
to market the racemic mixture of a compound following expiration of the
innovator's composition-of-matter patent and also pharmaceutical companies which
develop new patented therapies to treat the disease indications that Sepracor is
targeting. The Company expects that these companies will seek to compete against
Sepracor's differentiated products with lower pricing, which could adversely
affect the prices charged by Sepracor. In addition, any ICE developed by the
Company is likely to encounter competition from the original brand-name parent
drug, potentially in a generic form, following expiration of the innovator's
composition-of-matter patent. Many competitors and potential competitors have
substantially greater resources, manufacturing and marketing capabilities,
research and development staff and production facilities than Sepracor and its
subsidiaries.
In its ICE program, the Company expects to compete primarily by
obtaining use patents on the single-isomer or active-metabolite forms of
existing, widely-sold racemic drugs and by establishing, through preclinical and
clinical tests, that such products in single-isomer or active-metabolite form
offer benefits over the racemic compounds, such as reduced side effects,
improved therapeutic efficacy, new indications or improved dosage forms. Any
such patents obtained by Sepracor should exclude others from marketing the
targeted single-isomer compound for the indications claimed in Sepracor's issued
use patents.
BioSepra
BioSepra encounters intense competition in the sale of its current
products and expects to encounter intense competition in the sale of its future
products. BioSepra's principal competitors are Amersham-Pharmacia-BioTech,
Bio-Rad and PerSeptive Biosystems, Inc. ("PerSeptive"), a subsidiary of
Perkin-Elmer Corp. These
-15-
competitors, as well as certain other companies selling or developing products
for the bioseparations market, have financial, marketing and other resources
greater than those of BioSepra. In addition, certain competitors have had
long-term relationships with many of BioSepra's existing and potential
customers. BioSepra competes primarily on the basis of product price and
performance (speed resolution and capacity) and production capability.
Sales of chromatographic media products typically involve long lead
times and customers generally evaluate several different media products before
committing to a volume purchase. Also, customers typically are reluctant to
change the media used in a production process previously approved by the FDA
because such a change may require additional FDA approval. There can be no
assurance that BioSepra will be able to compete effectively against its existing
or future competitors or that developments by others will not render BioSepra's
products or technologies obsolete or noncompetitive.
Government Regulation
Sepracor
The Company and its customers are required to obtain the approval of
the FDA and similar health authorities in foreign countries to test clinically
and sell commercially pharmaceuticals and biopharmaceuticals for human use.
Human therapeutics are normally subject to rigorous preclinical and
clinical testing. The standard process required by the FDA before a drug may be
marketed in the U.S. includes (i) preclinical laboratory tests with toxicity
and, often, carcinogenicity testing, (ii) submission to the FDA of an
application for an IND, which must be approved before human clinical trials may
commence, (iii) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug for its intended indication, (iv) submission
to the FDA of an NDA and (v) FDA approval of the NDA prior to any commercial
sale or shipment of the drug. In the past, the Company has attempted to shorten
the regulatory approval process of its ICEs by relying on preclinical and
clinical toxicology data already on file with the FDA with respect to the parent
drug.
Typically, clinical evaluation involves a three-phase process. In
Phase I, the initial introduction of the drug to humans, the drug is tested for
safety (adverse effects), dosage tolerance, absorption, distribution, metabolism
and excretion. Phase II involves studies in a limited patient population to (i)
determine the efficacy of the drug for specific targeted indications, (ii)
determine dosage tolerance and optimal dosage and (iii) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase II evaluations, Phase III trials
are undertaken to evaluate further clinical efficacy and to
-16-
test further for safety within an expanded patient population at geographically
dispersed clinical study sites. The process of completing clinical testing,
obtaining FDA regulatory approval and commencing commercial marketing is likely
to take a number of years. There can be no assurance that Phase I, Phase II or
Phase III testing will be completed successfully within any specified time
period, if at all, with respect to any of the Company's products subject to such
testing. Furthermore, there can be no assurance that the FDA will accept the
Company's evidence that a particular product meets the Company's claims of
superiority.
FDA regulations pertain not only to healthcare products, but also to
the processes and production facilities used to produce such products. Although
the Company has designed the required portions of its U.S. facility to conform
to cGMP, the FDA will not review the facilities for compliance until the Company
produces a product for which FDA commercial approval has been sought.
Environmental legislation provides for restrictions and prohibitions on releases
or emissions of various substances produced in, and waste by-products from,
Sepracor's operations.
The FDA also imposes requirements relating to the marketing of drug
products after approval, including requirements relating to the promotion of
drug products to buyers and to the reporting to the FDA of adverse drug
experiences known to companies holding approved applications. Failure of the
Company to adhere to these requirements could lead to regulatory action by the
FDA. Information reported to the FDA in compliance with these requirements could
cause the FDA to withdraw drug approval or to require modification of labeling
(e.g., to add warnings or contraindications). The FDA has the statutory
authority to seek judicial remedies and sanctions and to take administrative
corrective action for violation of these and other FDA requirements and
standards.
BioSepra
BioSepra's customers are required to obtain the approval of the FDA
and similar health authorities in foreign countries to test clinically and sell
commercially pharmaceuticals for human use. Although BioSepra's products do not
require FDA approval for sale, the FDA and comparable foreign authorities
typically review the manufacturing procedures and inspect the facilities and
equipment of BioSepra's customers for compliance with applicable rules and
regulations. BioSepra's customers will often review and inspect BioSepra's
manufacturing facilities prior to ordering products for use in an FDA-approved
production process. BioSepra believes that its production and documentation
procedures are consistent with cGMP. Also, BioSepra files with the FDA Drug
Master Files that facilitate the use by pharmaceutical companies of BioSepra's
media for both clinical trial production and commercial production.
-17-
Historically, in the production of a biopharmaceutical, any material
change by a manufacturer of process or equipment generally necessitates
additional FDA review and approval. Manufacturers were therefore typically
reluctant to change production methods for existing products. For this reason,
BioSepra has in the past encountered difficulties in selling its media products
to customers which have already applied for or obtained FDA licenses for
production processes that specify a different supplier's product.
While this difficulty remains an issue for various categories of
biopharmaceuticals, new guidelines issued in 1996 by the FDA give
biopharmaceutical companies greater flexibility to make changes in the
production processes for certain classes of drugs, including monoclonal
antibody-based drugs, and to continue optimization of their production processes
subsequent to drug approval. In the past, a drug manufacturing process was
"locked in" during clinical trials, prior to product approval. Companies were
reluctant to make any process changes because the FDA would have required new
clinical studies. Now, companies affected by these new guidelines need only
demonstrate a product's biological equivalence to adopt process changes without
new clinical trials.
Patents and Proprietary Technology
Sepracor
Sepracor (including its affiliates and subsidiaries) has filed patent
applications in the U.S. relating to the use of and compositions containing
single isomer or active metabolite compounds, chiral synthesis and separations,
membrane affinity separations and methods of protein purification. Sepracor has
filed many patent applications in selected countries other than the U.S. In
addition, the Company has licensed from third parties certain rights under
various patents and patent applications.
To the extent that Sepracor invents or discovers a new or useful
improvement to an existing racemic mixture for a specific use and files a U.S.
patent application for such use, a composition or method-of-use patent may be
issued. The Company has been issued U.S. patents on the use of single-isomer or
active-metabolite forms of drugs currently marketed as racemic mixtures. The
Company is currently pursuing a policy of aggressively seeking patent protection
for the use of single-isomer forms of certain existing drugs now sold as racemic
mixtures.
Many of the ICEs for which the Company has obtained method-of-use
patents or filed patent applications may be subject to composition-of-matter or
other patents held by third parties. For example, each of the following ICEs is
claimed by third party U.S. patents as indicated:
-18-
Third Party Expiration of
Composition of Matter or Other Third Party
ICE U.S. Patents Patent
- -------------------------------------------------------------------------------------------------
(S)-doxazosin doxazosin and pharmaceutical 2000
formulations
fexofenadine fexofenadine 1999
\
substantially pure fexofenadine 2013
(R)-fluoxetine fluoxetine 2001
methods of use 2003
(S)-lansoprazole lansoprazole 2009
pharmaceutical formulations 2008
methods of use 2005
norcisapride norcisapride 2009
(+)-desmethylsibutramine desmethylsibutramine and 2002
methods of treating depression
(+)-hydroxyitraconazole hydroxyitraconazole 2005
(R)-ondansetron ondansetron 2005
methods of use to treat emesis 2006
(-)-pantoprazole pantoprazole and methods of use 2005
(-)-cetirizine cetirizine 2007
The third party patents claiming fexofenadine may be subject to patent term
extension. In addition, there are foreign equivalents to a number of the U.S.
patents identified above, the scope and expiration of which vary from country to
country. Even if a patent is issued to the Company for the use of a
single-isomer or active-metabolite form of a racemic mixture which is currently
claimed by one or more third party patents, products based on any such patent
issued to the Company may not be sold until the expiration of all of such third
party patents (unless a license is obtained to the corresponding third party
patents or such third party patents expire or are determined to be invalid,
unenforceable, or not infringed by a court of proper jurisdiction). In addition,
there may be pending additional third party patent
-19-
applications covering the Company's ICEs which, if issued, may preclude the sale
of an ICE.
BioSepra
Sepracor has entered into a Technology Transfer and License Agreement with
BioSepra under which Sepracor has transferred to BioSepra rights to the
technology developed by Sepracor relating to the separation of biological
molecules (excluding the fields of chiral synthesis, chiral separations and the
development, use and sale of chiral drugs and chiral drug intermediates and also
excluding the field relating to HemaSure's business). BioSepra holds several
patents and pending patent applications, including a U.S. composition-of-matter
patent (and comparable foreign patent applications) on HyperD media. BioSepra's
additional patents relate primarily to the composition of its other media
products and certain biopharmaceutical production processes.
Employees
At March 1, 1999, Sepracor and its wholly-owned subsidiaries employed
300 persons, of whom 126 were primarily engaged in research, development and
engineering activities, 21 in manufacturing, and the remainder in marketing,
sales, administration, finance and accounting; and BioSepra employed 50 persons.
Factors Affecting Future Operating Results
The Company believes that this document contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are subject to risks and uncertainties and are based
on the beliefs and assumptions of management of the Company, based on
information currently available to the Company's management. Use of words such
as "believes," "expects," "anticipates," "intends," "plans," "estimates,"
"should," "likely" or similar expressions, indicate a forward looking statement.
Forward-looking statements involve risks, uncertainties and assumptions. Certain
of the information contained in this Annual Report on Form 10-K, including
information with respect to the safety, efficacy and potential benefits of the
Company's ICEs under development and the scope of patent protection with respect
to these products and information with respect to the other plans and strategy
for the Company's business and the business of the subsidiaries and certain
affiliates of the Company, consists of forward-looking statements. Important
factors that could cause actual results to differ materially from the
forward-looking statements include the following:
Sepracor Has Operating Losses
Sepracor has not been profitable since inception, and it is possible
that it will not achieve profitability. Sepracor incurred net losses applicable
to common shares on a consolidated basis of approximately $93.4 million for the
year ended December 31, 1998 and $26.7 million for the year ended December 31,
1997. These net losses include dividends paid on Sepracor's Series B Preferred
Stock totaling $150,000 for the year ended December 31, 1998 and $600,000 for
the year ended December 31, 1997. Sepracor expects to continue to incur losses
in future periods.
-20-
Many of Sepracor's Products are in the Early Stage of Product
Development and May Not Be Developed Successfully
Sepracor is focused on the development of ICEs. Most of Sepracor's
ICEs are still undergoing clinical trials or are at the early stages of
development. Sepracor's drugs may not provide greater benefits or fewer side
effects than the original versions of these drugs and its research efforts may
not lead to the discovery of new drugs with improved characteristics. All of
Sepracor's drugs under development will require significant additional research,
development, preclinical and/or clinical testing, regulatory approval and a
commitment of significant additional resources prior to their commercialization.
Sepracor's potential products may not:
o be developed successfully;
o be proven safe and efficacious in clinical trials;
o offer therapeutic or other improvements over comparable
drugs;
o meet applicable regulatory standards;
o be capable of being produced in commercial quantities at
acceptable costs; or
o be successfully marketed.
There Are Uncertainties Involved with Patents
Sepracor's success depends in part on its ability to obtain and
maintain patents, protect trade secrets and operate without infringing upon the
proprietary rights of others. Sepracor has filed various patent applications
covering the composition of, and the methods of using, single-isomer or
active-metabolite forms of various compounds for specific applications.
Sepracor may not be issued patents in respect of the patent
applications already filed or that it may file in the future. Moreover, the
patent position of companies in the pharmaceutical industry generally involves
complex legal and factual questions, and recently has been the subject of much
litigation. No consistent policy has emerged from the PTO or the courts
regarding the breadth of claims allowed or the degree of protection afforded
under patents and other proprietary rights. Therefore, any patents Sepracor has
obtained, or obtains in the future, may be challenged, invalidated or
circumvented.
Sepracor's ability to commercialize successfully any ICE will largely
depend upon its ability to obtain and maintain use patents of sufficient scope
to prevent third
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parties from developing similar or competitive products. Third parties,
typically drug companies, hold patents or patent applications covering the
composition of matter for most of the ICEs for which Sepracor has use patents or
patent applications. In each such case, unless Sepracor has or obtains a license
agreement, Sepracor generally may not commercialize the ICE until the expiration
of these third-party patents. Licenses may not be available to Sepracor on
acceptable terms, if at all. In addition, it would be costly to contest the
validity of a third-party patent or defend any claim that Sepracor infringes a
third-party patent. Moreover, litigation involving third-party patents may not
be resolved in Sepracor's favor.
Developing new products and processes is expensive and time
consuming. Therefore, it is important for Sepracor to obtain patent and trade
secret protection for significant new technologies, products and processes.
Protection of Sepracor's proprietary rights from unauthorized third-party use
requires that the rights either be covered by valid and enforceable patents or
be maintained in confidence as trade secrets. Some of the technology that
Sepracor uses in its products is not covered by any patents or patent
applications. In the absence of patent protection, competitors may adversely
affect Sepracor's business by developing independently substantially equivalent
technology. This independent development may circumvent any trade secret
protection applicable to Sepracor's products.
Sepracor is Involved In a Patent Interference
In July 1997, the PTO informed Sepracor that it had declared an
interference between Sepracor's use patent on fexofenadine to treat allergic
rhinitis and another similar use patent application filed by it, and HMRI's use
patent application on the anti-histaminic effects of fexofenadine on hepatically
impaired patients. The primary objective of a patent interference, which only
the PTO can declare, is to determine which party first invented the overlapping
subject matter claimed by more than one party. In the course of an interference,
the parties typically present evidence relating to their invention of the
overlapping subject matter. The PTO then reviews the evidence and issues a
patent in the overlapping subject matter to the party it believes has the
earliest legally sufficient date of invention.
The process to resolve an interference can take many years and the
outcome of interferences varies considerably. If Sepracor loses the
interference, HMRI will be issued a U.S. patent for the overlapping subject
matter. Further, HMRI may not be obligated to pay the milestone or royalty
payments called for in the existing agreement in which Sepracor licenses its
U.S. patent rights covering fexofenadine to HMRI. If Sepracor prevails in the
interference, it will retain all of its claims in Sepracor's issued patent. A
favorable decision, however, does not ensure meaningful protection of Sepracor's
proprietary rights.
-22-
Sepracor is using arbitration to resolve the interference, and the
arbitration proceeding is ongoing. The arbitrator may or may not render a
decision during the first half of 1999. Once rendered, the arbitrator's decision
must be submitted to the PTO for final approval.
There is No Certainty that Sepracor will Obtain Government Approvals;
The Approval Process is Costly and Lengthy
The FDA and similar foreign agencies must approve the marketing and
sale of pharmaceutical products developed by Sepracor or its development
partners. The regulatory process to obtain marketing approval requires clinical
trials of a product to establish its safety and efficacy. Problems that may
arise during clinical trials include:
o results of clinical trials may not be consistent with
pre-clinical study results;
o results from later phases of clinical trials may not be
consistent with the results from earlier phases; and
o products may not be shown to be safe and efficacious.
The clinical trial and regulatory approval process can take many
years and require substantial expenditures. Sepracor may not obtain regulatory
approval for products on a timely basis, if at all. With respect to certain of
Sepracor's ICEs, Sepracor has been able to shorten the regulatory approval
process by relying on the parent drug's preclinical and clinical toxicology data
already on file with the FDA. However, it is possible that the FDA will not
permit Sepracor to use this strategy in the future. Accordingly, Sepracor may be
required to expend significant resources to complete preclinical and clinical
studies for its other ICEs which would significantly delay the regulatory
approval process.
Sepracor's failure to obtain regulatory approval on a timely basis
and any unanticipated significant expenditures on preclinical and clinical
studies could adversely affect Sepracor's financial condition. Even if the FDA
grants Sepracor regulatory approval of a product, such approval may be subject
to limitations on the indicated uses for which the product may be marketed or
contain requirements for costly post-marketing follow-up studies.
-23-
If Sepracor fails to comply with applicable regulatory requirements,
it may be subject to fines, suspension or withdrawal of regulatory approvals,
product recalls, seizure of products, operating restrictions and criminal
prosecutions.
Risks Due to Sepracor's Limited Sales and Marketing Experience
Sepracor currently has very limited sales and marketing experience.
If Sepracor successfully develops and obtains regulatory approval for the
products it is currently developing, Sepracor expects to license some of them to
large pharmaceutical companies and market and sell others through its direct
specialty sales forces or through other arrangements, including co-promotion
arrangements. Sepracor has established a direct sales force to market its single
isomer form of albuterol, Xopenex, in anticipation of commercial introduction of
this drug in 1999. Further, as Sepracor begins to enter into co-promotion
arrangements or market and sell additional products directly, Sepracor will need
to significantly expand its sales force. Sepracor expects to incur significant
expense in expanding its direct sales force.
Sepracor's ability to realize significant revenues from direct
marketing and sales activities depends on its ability to attract and retain
qualified sales personnel in the pharmaceutical industry. If Sepracor is unable
to attract and retain qualified sales personnel, Sepracor will not be able to
successfully expand its marketing and direct sales force on a timely or cost
effective basis. Further, Sepracor's sales and marketing efforts may not be
successful, and the need to comply with FDA limits on drug product marketing,
including limits on claims of comparative safety or efficacy, may inhibit the
effectiveness of such marketing. In addition, Sepracor will need to enter into
co-promotion arrangements with third parties where its direct sales force is
neither well situated nor large enough to achieve maximum penetration in the
market. Sepracor may not be successful in entering into any such arrangements,
and the terms of any such arrangements may not be favorable to it.
Manufacturing Uncertainties
Sepracor currently operates a manufacturing plant that is cGMP
compliant and that it believes can produce commercial quantities of Xopenex and
support the production of its other possible products in amounts needed for its
clinical trials. Sepracor believes it has the capability, without additional
expansion, to scale up its manufacturing processes and manufacture sufficient
amounts of the products which may be approved for sale. However, Sepracor will
not have the capability to manufacture in sufficient quantities all of the
products which may be approved for sale. Accordingly, Sepracor may be required
to spend money to expand its current manufacturing facility, build an additional
manufacturing facility or contract the production of these drugs to third-party
manufacturers.
-24-
Sepracor currently has a supply contract with ChiRex that commits
Sepracor to purchase through December 31, 2001 all of its annual requirements of
those drugs that it will market directly through its specialty sales force,
provided ChiRex meets certain pricing, supply and quality control conditions.
Under this supply agreement, however, Sepracor retains the right to manufacture
commercial quantities of its drugs in its Nova Scotia manufacturing plant.
Sepracor may not successfully scale up its manufacturing processes or
maintain cGMP compliance. Failure in either respect can lead to refusal by the
FDA to approve marketing applications. Failure to maintain cGMP compliance may
also be the basis for action by the FDA to withdraw approvals previously granted
and for other regulatory action.
Sepracor Will Be Exposed to Product Liability Claims and Maintain
Product Liability Insurance
Sepracor's business exposes it to the risk of product liability
claims that are inherent in the testing, manufacturing, marketing and sale of
human health care products. Sepracor maintains limited product liability
insurance coverage for both the clinical trials and commercialization of its
products. It is possible that Sepracor will not be able to obtain further
product liability insurance on acceptable terms, if at all, and that insurance
subsequently obtained will not provide adequate coverage against all potential
claims. If Sepracor is unable to obtain insurance at acceptable cost or
otherwise protect against potential product liability claims, Sepracor could be
exposed to significant liabilities. These liabilities could prevent or interfere
with Sepracor's product commercialization efforts.
Sepracor Depends on Collaborative Partners
Sepracor's ability to commercialize certain drugs that Sepracor
develops is likely to depend significantly on its continued ability to enter
into collaborative agreements with pharmaceutical companies to fund all or part
of the costs to complete the development of such drugs and to manufacture and/or
market such drugs. To date, Sepracor has entered into five such collaborative
agreements. Sepracor has licensed to HMRI its U.S. patent rights to
fexofenadine, which is marketed by HMRI as Allegra, and is entitled to receive
royalties on all U.S. sales of Allegra when the patent on the parent drug
expires. Sepracor, however, is currently party to an interference involving
Allegra which, if decided against Sepracor, could result in the loss of all or
substantially all of the royalties to which it is entitled under the license
agreement on future sales of Allegra. See " -- Sepracor is Involved in a Patent
Interference." Sepracor has also licensed its worldwide patent rights in
desloratadine to Schering-Plough, pursuant to which it is entitled to receive
royalties from Schering-Plough upon the initial sale of the product. Sepracor
has entered into an agreement with Janssen with respect to the joint development
and co-promotion of
-25-
norastemizole. Sepracor has exclusively licensed its norcisapride rights to
Janssen, and is entitled to receive royalties on product sales beginning upon
the first commercial sale. These royalties will escalate upon achievement of
sales volume milestones. Sepracor has exclusively licensed its R-fluoxetine
rights to Lilly, and, in addition to initial license and development milestone
payments, is entitled to receive royalties on product sales beginning upon the
first commercial sale. This agreement will be effective on the next business day
following the expiration or earlier termination of the notice and waiting period
under the HSR Act. Under the HSR Act, Sepracor has received a request from the
Federal Trade Commission for additional information in connection with the
R-fluoxetine agreement. Sepracor plans to fully respond to the request and
expects the agreement to become effective as soon as the Federal Trade
Commission completes its review.
In each of these collaborative arrangements and, to the extent that
Sepracor enters into additional collaborative arrangements, Sepracor depends
upon the efforts of its collaboration partners, and these efforts may not be
successful. If any of Sepracor's collaboration partners were to breach or
terminate their agreements with Sepracor or fail to perform their obligations to
Sepracor in a timely manner, the development and commercialization of the
products could be delayed or terminated. Any delay or termination of this type
could have a material, adverse effect on Sepracor's financial condition and
results of operation. Any failure or inability by Sepracor to perform certain of
its obligations under a collaborative agreement could reduce or extinguish the
benefits to which Sepracor is otherwise entitled under the agreement. Sepracor
cannot be assured that it will be able to enter into collaborative agreements
for ICEs in the future or that the terms of the collaborative agreements, if
any, will be favorable to Sepracor.
Sepracor is Highly Leveraged
As of December 31, 1998, Sepracor's total long-term debt was
approximately $492.1 million and its stockholders' equity was $4.4 million.
Neither the 6 1/4% convertible subordinated debentures due 2005 nor the 7%
convertible subordinated debentures due 2005 restrict Sepracor's ability or its
subsidiaries' ability to incur additional indebtedness, including debt that
ranks senior to the 6 1/4% debentures or the 7% debentures. Additional
indebtedness of Sepracor may rank senior to or pari passu with the 6 1/4%
debentures or the 7% debentures in certain circumstances. Sepracor's ability to
satisfy its obligations will depend upon Sepracor's future performance, which is
subject to many factors, including factors beyond its control. It is possible
that Sepracor will be unable to meet its debt service requirements on the 6 1/4%
debentures or the 7% debentures. Moreover, Sepracor may be unable to repay the
6 1/4% debentures or 7% debentures at maturity or otherwise in accordance with
the debt instruments.
-26-
Sepracor May Need Additional Funds
Sepracor may require additional funds for its research and product
development programs, operating expenses, the pursuit of regulatory approvals
and the expansion of Sepracor's production, sales and marketing capabilities.
Historically Sepracor has satisfied its funding needs through collaborative
arrangements with corporate partners or equity or debt financings. Sepracor
cannot be assured that these funding sources will be available to it when needed
in the future, or, if available, will be on terms acceptable to Sepracor.
Insufficient funds could require Sepracor to delay, scale back or eliminate
certain of its research and product development programs or to license third
parties to commercialize products or technologies that Sepracor would otherwise
develop or commercialize itself. Sepracor's cash requirements may vary
materially from those now planned because of factors including:
o increased research and development expenses;
o patent developments;
o relationships with collaborative partners;
o the FDA regulatory process; and
o Sepracor's capital requirements.
Sepracor Faces Intense Competition
Sepracor expects to encounter intense competition in the sale of its
future products. Sepracor's competitors include pharmaceutical companies,
biotechnology firms, universities and other research institutions. The fields in
which Sepracor competes are subject to rapid and substantial technological
change. Developments by others may render Sepracor's products or technologies
obsolete or noncompetitive. Many of Sepracor's competitors and potential
competitors have substantially greater resources, manufacturing and marketing
capabilities, research and development staff and production facilities than
Sepracor has.
Fluctuation of Sepracor's Quarterly Operating Results
Sepracor's quarterly operating results are likely to fluctuate
significantly. These fluctuations will depend on factors which include:
o the timing of collaborative agreements for Sepracor's
pharmaceutical development candidates and development
costs for those pharmaceuticals;
-27-
o the timing of product sales and market penetration;
o the timing of operating expenses, including marketing
expenses and the costs of expanding and maintaining a
direct sales force;
o the timing of significant orders for the products of
BioSepra; and
o the losses of HemaSure and Versicor, to the extent
Sepracor is required to recognize these losses.
Sepracor's Operating Results May Be Affected By The Future Operating
Results of Its Subsidiaries And Affiliates
Factors that may affect the future operating results of Sepracor
include the ability of BioSepra to obtain additional financing, the dependence
on BioSepra sales of HyperD media, which was introduced in 1993, and BioSepra's
ability to sell its products to customers at the early stage of their product
development cycles. Additional factors that may affect the future operating
results of Sepracor include the ability of HemaSure to obtain additional
financing and HemaSure's ability to develop commercially viable products.
Because of the foregoing factors, past financial results should not
be relied upon as an indication of future performance. Sepracor believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and it expects that its results of operations may fluctuate from
period to period in the future.
Year 2000 issue
The year 2000 issue is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Any of
Sepracor's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in
miscalculation or system failures. In 1996, Sepracor began a comprehensive
project, fully supported by senior management, to determine the risks and
impacts of the Year 2000, or Y2K, computer problem on Sepracor's ability to
operate into the next century. This plan took into account Sepracor's status as
a pharmaceutical research and development company, and its transition to a
fully-developed pharmaceutical company, with research and development,
manufacturing, distribution and sales functions. The project relates to the
following areas: (i) Sepracor's internal systems (including information
technology systems, such as financial systems, and non-information technology
systems, such as telephones and facilities); and (ii) the readiness of
Sepracor's vendors. As an emerging pharmaceutical company, direct customers are
not expected to play a
-28-
critical role in Sepracor's Y2K analysis. In addition, Sepracor's products under
development will not require Y2K compliance.
Department managers in every business area participate in the
project, under the leadership of a Y2K Project Manager. Sepracor began this
project in 1996 so as to incorporate Y2K readiness into its business strategy,
and to identify and replace non-compliant systems and procedures as part of its
normal operating plan and budget.
Sepracor's goal is to be fully Y2K ready, in respect to both its own
systems and those of its key vendors and strategic alliance partners, no later
than July 1999.
To date, Sepracor has spent $145,000 to retrofit or replace
computer-based systems, which were identified as lacking compliance. This
included the migration of all of Sepracor's desktop computers to an operating
status Sepracor considers to be Y2K certified, through software upgrades or full
system replacements. Sepracor's key telecommunications systems were also
upgraded and/or replaced. These costs have been minimal due to the fact that Y2K
compliance has been a prerequisite to all new systems acquisitions and
maintenance upgrades.
Sepracor estimates approximately $400,000 in additional direct costs
to complete its Y2K certification efforts. This funding will be used to contract
with an independent testing firm to perform a platform and system review of
Sepracor's IT-based systems. At this time, Sepracor also plans to contract with
an independent auditor to perform a full review of its compliance efforts,
including contingency planning. This funding will also be used to address any
system or process replacement requirements that may be identified as these
reviews progress.
Areas that need further attention include vendor compliance
certification, which is in progress at this time, and contingency planning.
Completion of the vendor compliance certification is impacted by vendors'
respective Y2K efforts. Sepracor expects to have initial vendor responses
completed by April 1999, and will determine what follow-up is required at that
time. Sepracor relies on third party suppliers and service providers. If these
or other third parties experience Year 2000 failures or malfunctions, there
could be an adverse impact on Sepracor's ability to conduct operations,
including conducting continued pharmaceutical development efforts and
manufacturing pharmaceutical products. Sepracor has minimal Year 2000 related
contingency plans because there are virtually no legacy systems at Sepracor and
because very few potential issues have surfaced to date. A review of these plans
will be held once vendor certification is completed.
Sepracor's focus for the coming months will be to determine the exact
level of exposure with outside vendors/customers, and to complete independent
verification of internal compliance efforts. Based on the activities described
above, Sepracor does
-29-
not believe that the Year 2000 problem will have a material adverse effect on
Sepracor's business or results of operations.
Item 2. Properties.
Sepracor's facilities, including those used by BioSepra, are located
in Marlborough, Massachusetts, Windsor, Nova Scotia, Villeneuve-la-Garenne and
Louvres, France. In Massachusetts, the Company leases a total of 101,292 square
feet of space in two buildings. Approximately 5,000 square feet is devoted to
manufacturing operations and the remainder to research and development and
administration. The two leases currently in effect extend to June 2007 for
32,477 square feet and June 2007 for 68,815 square feet. In
Villeneuve-la-Garenne, France, BioSepra leases approximately 28,500 square feet
of space under a contract that can be terminated by either party upon 18 months'
notice. BioSepra also leases 11,000 square feet of space in Louvres, France. In
Nova Scotia, Sepracor's primary manufacturing location is a 32,400-square-foot
fine chemical manufacturing facility located on a three-acre site in Windsor,
Nova Scotia. The Company has an option to purchase additional abutting land
which expires in July 1999. The facility was acquired by the Company in March
1994. Production at the Nova Scotia facility began in February 1995. See
"Business -- Manufacturing" for information concerning facilities of BioSepra.
Item 3. Legal Proceedings.
In July 1997, the PTO informed Sepracor that it had declared an
interference between Sepracor's previously issued method-of-use patent on
fexofenadine to treat allergic rhinitis and another similar patent application
of Sepracor, and HMRI's method-of-use patent application on the anti-histaminic
effects of fexofenadine on hepatically impaired patents. The primary objective
of a patent interference, which can only be declared by the PTO, is to determine
the first to invent any overlapping subject matter claimed by more than one
party. In the course of an interference, the parties typically present evidence
relating to their inventive activities as to the overlapping subject matter. The
PTO then reviews the evidence to determine which party has the earlier legally
sufficient inventive date, and, therefore, is entitled to a patent claiming the
overlapping subject matter.
If Sepracor prevails in the interference, Sepracor will retain all of
its claims in its issued patent. If, however, Sepracor loses the interference,
HMRI will be issued a U.S. patent containing its allowable claims involved in
the interference and may not be obligated to pay Sepracor milestone or royalty
payments pursuant to the terms of the license agreement whereby Sepracor
licensed its U.S. patent rights covering fexofenadine to HMRI in 1993.
-30-
In May 1998, HMRI filed an action in Belgium alleging that Sepracor's
European patent relating to fexofenadine is invalid in Belgium, or is not
infringed by HMRI's sales of fexofenadine in Belgium and Germany. In September
1998, Sepracor commenced infringement proceedings in the United Kingdom against
HMRI and related companies for infringement of Sepracor's European patent
relating to fexofenadine.
HemaSure is a defendant in two lawsuits brought by Pall Corporation
("Pall"). In complaints filed in February 1996 and November 1996, Pall alleged
that HemaSure's manufacture, use and/or sale of the LeukoNet product infringes
upon three patents held by Pall.
On October 14, 1996 in connection with the first action concerning
U.S. Patent No. 5,451,321 (the "321 patent") HemaSure filed for summary judgment
of noninfringement. Pall filed a cross motion for summary judgment of
infringement at the same time.
In October 1997 the U.S. District Court for the Eastern District of
New York granted in part Pall's summary judgment motion and held that LeukoNet
product infringes a single claim from the 321 patent. HemaSure has terminated
the manufacture, use, sale and offer for sale of the filter subject to the
court's order. HemaSure appealed the October 1997 decision to the Court of
Appeals for the Federal Circuit. Oral arguments were heard in February 1999.
HemaSure now awaits a decision from the Federal Circuit. Remaining discovery
relating to the damages phase of the first action has been completed.
With respect to the second action concerning U.S. Patent No.
4,952,572 (the "572 patent"), HemaSure has answered the complaint stating that
it does not infringe any claim of the asserted patents. Further, HemaSure has
counterclaimed for declaratory judgment of invalidity, noninfringement and
unenforceability of the '572 patent. Pall has amended its complaint to add
Lydall, Inc. ("Lydall") whose subsidiary supplied filter media for the LeukoNet
product, as a co-defendant. HemaSure has filed for summary judgment of
non-infringement, and Pall has cross- filed for summary judgment of infringement
at the same time. Lydall supported HemaSure's motion for summary judgment of
non-infringement and has served a motion for summary judgment that the asserted
claims of the '572 patent are invalid as a matter of law. Discovery has been
completed in the action.
HemaSure believes, based on advice of its patent counsel, that a
properly informed court should conclude that the manufacture, use and/or sale by
HemaSure or its customers of the LeukoNet product does not infringe any valid
enforceable claim of the two asserted Pall patents. However, there can be no
assurance that HemaSure will prevail in the pending litigations, and an adverse
outcome in a patent
-31-
infringement action would have a material adverse effect on HemaSure's financial
condition and future business and operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders of the
Company, through solicitation of proxies or otherwise, during the last quarter
of the year ended December 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
current executive officers of the Company as of December 31, 1998.
Name Age Position
- ---- --- --------
Timothy J. Barberich 51 President, Chief Executive Officer and Director
David S. Barlow 42 Executive Vice President; President,
Pharmaceuticals
David P. Southwell 38 Executive Vice President; Chief Financial Officer
and Secretary
Paul D. Rubin, M.D. 45 Executive Vice President, Drug Development and
ICE Research
James R. Hauske, Ph.D. 45 Senior Vice President, Discovery
Robert F. Scumaci 39 Senior Vice President, Finance and
Administration and Treasurer
Douglas Reedich, Ph.D. 41 Senior Vice President, Legal Affairs and Chief
Patent Counsel
Mr. Barberich, a founder of the Company, has been a director of the
Company and its President and Chief Executive Officer since the Company's
organization in 1984. Prior to founding the Company, Mr. Barberich served in a
number of executive and managerial capacities at Millipore Corporation, which he
joined in 1973. Most recently, prior to founding Sepracor, Mr. Barberich served
as Vice President and General Manager of Millipore's Medical Products Division
and as General Manager of Millipore's Laboratory Products Division. Mr.
Barberich is Chairman of the Board of Directors of BioSepra and is a director of
HemaSure and Versicor.
-32-
Mr. Barlow has served as Executive Vice President and President,
Pharmaceuticals since October 1995. From July 1993 to October 1995, Mr. Barlow
held the position of Senior Vice President and General Manager of the
Pharmaceutical Division of Sepracor. From 1991 to 1993, he was President of the
Business Group, a management consulting firm. Previously, he was Vice President,
Worldwide Marketing and Business Development of Armour Pharmaceutical Company, a
subsidiary of Rhone-Poulenc, from 1988 to 1991. Prior to that time, he was
associated with Pfizer and Ares-Serono, Inc. in various business planning and
marketing positions. Mr. Barlow is a director of HemaSure.
Mr. Southwell has served as Executive Vice President, Chief
Financial Officer of the Company since October 1995 and served as Senior Vice
President and Chief Financial Officer of the Company from July 1994 to October
1995. From August 1988 until July 1994, Mr. Southwell was associated with Lehman
Brothers Inc., a securities firm, in various positions with the investment
banking division, most recently in the position of Vice President. Mr. Southwell
is a director of BioSepra.
Dr. Rubin has served as Executive Vice President, Drug Development
and ICE Research of the Company since January 1999. He was Senior Vice
President, Drug Development of the Company from April 1996 until January 1999.
He was formerly Vice President and Worldwide Director of Clinical Pharmacology
for Glaxo-Wellcome, a pharmaceutical company, from 1993 until 1996 and Vice
President, Immunology and Metabolic Disease for Abbott Laboratories, a
pharmaceutical company, from 1987 until 1993. Dr. Rubin was responsible for
early clinical development of Glaxo-Wellcome's entire portfolio. While at Abbott
Laboratories, Dr. Rubin was responsible for the development of the
5-lipoxygenase inhibitor, zileuton. Dr. Rubin is a director of Endorex Corp.
Dr. Hauske has served as Senior Vice President, Discovery of the
Company since October 1995. Prior to joining the Company, from June 1994 to
October 1995 Dr. Hauske was employed by Arris Pharmaceuticals, a pharmaceutical
company, as Director of Combinatorial Chemistry and Receptor Chemistry. Before
joining Arris Pharmaceuticals, Dr. Hauske worked for Pfizer Central Research in
Groton, Connecticut. While, at Pfizer, Dr. Hauske was a member of the project
management team that discovered Pfizer's azamacrolide antibacterial
Zithromax(R).
Mr. Scumaci has served as Senior Vice President, Finance and
Administration and Treasurer of the Company since March 1996. He was Vice
President and Controller of the Company from March 1995 until March 1996. From
1987 to 1994, Mr. Scumaci was employed by Ares-Serono Group, a multinational
pharmaceutical company, most recently as Vice President, Finance and
Administration of North American Operations. Previously, he was associated with
Revlon and Coopers & Lybrand in various finance and accounting capacities.
-33-
Dr. Reedich has served as Senior Vice President, Legal Affairs and
Chief Patent Counsel of the Company since January 1999 and has served as Chief
Patent Counsel since June 1995. From October 1987 to June 1995, he was employed
by 3M Company ("3M"), most recently as patent counsel for 3M's Pharmaceuticals
Division. Prior to joining 3M, Dr. Reedich was employed as a chemist by Eli
Lilly.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Incorporated by reference from the Company's 1998 Annual Report to
Stockholders (the "1998 Annual Report") under the headings "Supplemental
Stockholder Information -- Price Range of Common Stock" and "Supplemental
Stockholder Information -- Dividend Policy."
The Company did not sell any equity securities during the quarter
ended December 31, 1998 that were not registered under the Securities Act of
1933, as amended.
Item 6. Selected Financial Data.
Incorporated by reference from the 1998 Annual Report under the
heading "Sepracor Inc. Selected Financial Data."
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Incorporated by reference from the 1998 Annual Report under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Incorporated by reference from the 1998 Annual Report under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Item 8. Financial Statements and Supplementary Data.
The financial statements filed as part of this Annual Report on Form
10-K are incorporated by reference from the 1998 Annual Report under the
headings
-34-
"Consolidated Financial Statements and Notes Thereto" and are listed under Item
14 below.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
There have been no disagreements on accounting and financial
disclosure matters.
PART III
Items 10-13.
The information required for Part III in this Annual Report on Form
10-K is incorporated by reference from the Company's definitive proxy statement
for the Company's 1999 Annual Meeting of Stockholders. Such information will be
contained in the sections of such proxy statement captioned "Stock Ownership of
Certain Beneficial Owners and Management", "Proposal 1 -- Election of
Directors", "Board and Committee Meetings", "Compensation for Directors",
"Compensation of Executive Officers", "Certain Relationships and Related
Transactions", "Employment Agreements" and "Section 16(a) Beneficial Ownership
Reporting Compliance." Information regarding executive officers of the Company
is also furnished in Part I of this Annual Report on Form 10-K under the heading
"Executive Officers of the Registrant."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are included or incorporated by reference
from the 1998 Annual Report.
1. The following financial statements (and related notes) of the Company
are incorporated by reference from the 1998 Annual Report:
Page*
-----
Report of Independent Accountants 30*
Consolidated Balance Sheets at December 31, 1998 and 1997 31*
-35-
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 32*
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 1998, 1997 and 1996 33*
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 34*
Notes to the Consolidated Financial Statements 35*
-----------
* Refers to page number of the 1998 Annual Report. The financial
statements (and related notes) are incorporated by reference from the
1998 Annual Report.
2. The schedule listed below and the Report of Independent Accountants
on financial statement schedule are filed as part of this Annual
Report on Form 10-K:
Report of Independent Accountants on Financial
Statement Schedule S-1
Report of Independent Accountants on Financial
Statement Schedule S-2
Schedule II -- Valuation and Qualifying Accounts S-3
All other schedules are omitted as the information required
is inapplicable or the information is presented in the consolidated
financial statements or the related notes.
3. The Exhibits listed in the Exhibit Index immediately preceding the
Exhibits filed as a part of this Annual Report on Form 10-K.
(b) The following current reports on Form 8-K were filed by the
Company during the last quarter of the year ended December 31, 1998.
(1) Current Report on Form 8-K filed with the Securities and Exchange
Commission (the "SEC") on November 5, 1998 relating to the call for
redemption of the Company's 7% Convertible Subordinated Debentures
due 2002.
-36-
(2) Current Report on Form 8-K filed with the SEC on December 10,
1998, relating to the signing of a licensing agreement with Eli Lilly
and Company.
(3) Current Report on Form 8-K filed with the SEC on December 17,
1998, relating to the pricing of the Company's 7% Convertible
Subordinated Debentures due 2005.
The following trademarks are mentioned in this Annual Report on Form
10-K:
Sepracor, ICE and Xopenex are trademarks of Sepracor. BioSepra,
HyperD, HyperDiffusion and UpScale Process are trademarks of BioSepra. HemaSure
and LeukoNet are trademarks of HemaSure. This Annual Report on Form 10-K also
contains trademarks of other companies.
-37-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SEPRACOR INC.
By: /s/ Timothy J. Barberich
-------------------------------------
Timothy J. Barberich
President and Chief Executive Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Timothy J. Barberich President, Chief Executive Officer March 31, 1999
- -------------------------- and Director (Principal Executive
Timothy J. Barberich Officer)
/s/ David P. Southwell Executive Vice President and March 31, 1999
- -------------------------- Chief Financial Officer
David P. Southwell (Principal Financial Officer)
/s/ Robert F. Scumaci Senior Vice President, Finance March 31, 1999
- -------------------------- and Administration and
Robert F. Scumaci Treasurer
(Principal Accounting Officer)
/s/ James G. Andress Director March 31, 1999
- --------------------------
James G. Andress
/s/ Digby W. Barrios Director March 31, 1999
- --------------------------
Digby W. Barrios
/s/ Robert J. Cresci Director March 31, 1999
- --------------------------
Robert J. Cresci
/s/ Robert F. Johnston Director March 31, 1999
- --------------------------
Robert F. Johnston
/s/ Keith Mansford Director March 31, 1999
- --------------------------
Keith Mansford
/s/ James F. Mrazek Director March 31, 1999
- --------------------------
James F. Mrazek
/s/ Alan A. Steigrod Director March 31, 1999
- --------------------------
Alan A. Steigrod
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Sepracor Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 19, 1999, except as to the information in Note W for which the
date is February 25, 1999 appearing on page 44 of the 1998 Annual Report to
Stockholders of Sepracor Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, based upon our audits and the
reports of other auditors, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 19, 1999, except as to the information in
Note W for which the date is February 25, 1999
S-1
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Shareholders of BioSepra Inc. and subsidiaries:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of BioSepra Inc. and subsidiaries and have
issued our report thereon dated February 2, 1999. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in Item 14(a)2 herein is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein, in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 2, 1999
S-2
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Charged to Other End of
of Period Expenses Accounts Deductions (1) Period
--------- ---------- ---------- -------------- ----------
Year ended December 31, 1998
Accounts Receivable Reserves $369,010 $ 1,388 $-- $(264,438) $105,960
Year ended December 31, 1997
Accounts Receivable Reserves $233,010 $150,000 $-- $ (14,000) $369,010
Year ended December 31, 1996
Accounts Receivable Reserves $132,334 $172,000 $-- $ (71,324) $233,010
(1) Collections and bad debt write-offs. Also includes $70,324 as a result of
Sepracor merging its wholly owned subsidiary, SepraChem Inc., into ChiRex Inc.
in 1996.
S-3
Exhibit Index
-------------
Exhibit No. Description Page
----------- ----------- ----
3.1(7) -- Restated Certificate of Incorporation of the
Registrant, as amended.
3.2(1) -- Amended and Restated By-Laws of the Registrant.
4.1(1) -- Specimen Certificate for shares of Common
Stock, $.10 par value, of the Registrant.
4.2(5) -- Form of 6 1/4% Convertible Subordinated
Debenture due 2005.
4.3(5) -- Global 6 1/4% Convertible Subordinated Debenture
payable to Cede & Co. due 2005.
4.4 -- Global 7% Convertible Subordinated Debenture
payable to Cede & Co. due 2005.
10.1(1) -- Second Amended and Restated Registration
Rights Agreement dated as of June 28, 1991, by
and among the Registrant and the persons
listed on Schedule I thereto.
(*)10.2 -- The Registrant's 1991 Restated Stock Option Plan,
as amended and restated.
(*)10.3 -- The Registrant's 1991 Director Stock Option Plan,
as amended and restated.
(*)10.4(4) -- The Registrant's 1996 Employee Stock Purchase
Plan, as amended and restated.
(*)10.5(5) -- The Registrant's 1997 Stock Option Plan.
(*)10.6 -- The Registrant's 1998 Employee Stock Purchase
Plan.
Exhibit No. Description Page
----------- ----------- ----
10.7(3) -- Lease as to Marlboro Industrial Park, dated
December 12, 1995, between Valerie A. Colbert,
Trustee of Second Marlboro Development Trust
under Declaration of Trust dated September 15,
1972, and the Registrant (the "Marlboro
Lease").
10.8(5) -- First Amendment to Marlboro Lease, dated
February 1, 1997, and Second Amendment to
Marlboro Lease, dated July 1, 1997.
10.9 -- Stock Purchase Agreement dated June 1,
1993, between the Registrant and Marion
Merrill Dow.
10.10 -- Technology Transfer and License Agreement
dated as of January 1, 1994, between the
Registrant and BioSepra Inc.
10.11 -- Technology Transfer and License Agreement
dated as of January 1, 1994, between the
Registrant and HemaSure Inc.
10.12 -- Technology Transfer and License Agreement,
effective January 1, 1995, between the
Registrant and SepraChem Inc.
10.13 -- Series A Convertible Preferred Stock
Purchase Agreement, dated September 30, 1994,
by and among the Registrant and OFD Partners,
L.P.
(*)10.14(2) -- Letter Agreement, dated September 30, 1993,
between the Company and David S. Barlow.
(*)10.15(2) -- Letter Agreement, dated June 10, 1994, between
the Registrant and David Southwell.
(*)10.16(4) -- Letter Agreement, dated February 23, 1996,
between the Registrant and Paul D. Rubin.
Exhibit No. Description Page
----------- ----------- ----
(*)10.17(4) -- Letter Agreement, dated February 23, 1995,
between the Registrant and Robert F. Scumaci.
(*)10.18(4) -- Consulting Agreement between the Registrant and
Mr. Steigrod, dated September 1, 1996.
(*)10.19(5) -- Consulting Agreement Amendment, dated as
of January 1, 1997, between the Registrant and
Alan A. Steigrod.
(*)10.20(5) -- Consulting Agreement between the Registrant and
Digby W. Barrios, dated October 1, 1995.
10.21(5) -- Promissory Note from David Barlow to the
Registrant, dated July 1, 1997 to December 31,
1997, and Letter Extension from the Registrant
dated December 18, 1997.
10.22(5) -- Promissory Note from Paul D. Rubin to the
Registrant, dated January 22, 1998.
10.23(2) -- Series B Preferred Stock Purchase Agreement
dated March 14, 1995, between the Registrant
and Beckman Instruments, Inc.
10.24(2) -- Intellectual Property Security Agreement by
and between Fleet Bank of Massachusetts, N.A.
and the Registrant, dated December 28, 1994.
10.25(4) -- Confirmation of and Amendment to Intellectual
Property Security Agreement between Fleet
National Bank and the Registrant, dated February
1997.
10.26(4) -- Deposit Pledge Agreement, dated December 31, 1996,
between the Registrant and Fleet National Bank.
Exhibit No. Description Page
----------- ----------- ----
10.27(5) -- Put Agreement, dated as of December 30, 1997,
between the Registrant and Fleet National Bank.
10.28(4) -- Amended and Restated Revolving Credit and
Security Agreement among Fleet National Bank,
the Registrant and Sepracor Securities
Corporation, dated December 31, 1996.
10.29(4) -- Amended and Restated Promissory Note, dated
December 31, 1996, between the Registrant,
Sepracor Securities Corporation and Fleet
National Bank.
10.30(4) -- Guaranty Agreement, dated December 31,
1996, between the Registrant and Fleet
National Bank for BioSepra Inc.
10.31(5)+ -- Agreement, dated as of December 5, 1997, by
and between the Registrant and Schering-Plough
Ltd.
10.32(5)+ -- License Agreement, dated January 30, 1998,
by and between the Registrant and Janssen
Pharmaceutica N.V.
10.33(6)+ -- Norcisapride Development and License
Agreement, dated as of July 20, 1998, between
Janssen Pharmaceutica N.V. and the Registrant.
10.34+ -- Exclusive License Agreement by and between Eli
Lilly and Company and the Registrant
10.35(5) -- Indenture, dated as of February 10, 1998,
between the Registrant and The Chase Manhattan
Bank, as trustee, relating to the 6 1/4%
Convertible Subordinated Debentures due 2005.
Exhibit No. Description Page
----------- ----------- ----
10.36(5) -- Registration Rights Agreement, dated as of
February 5, 1998, by and among the Registrant,
Morgan Stanley & Co. Incorporated, Lehman
Brothers Inc., Smith Barney Inc. and Vector
Securities International, Inc.
10.37 -- Indenture, dated as of December 15, 1998,
between the Registrant and The Chase Manhattan
Bank, as trustee, relating to the 7%
Convertible Subordinated Debentures due 2005
10.38 -- Registration Rights Agreement, dated as of
December 10, 1998, by and among the Registrant,
Morgan Stanley & Co. Incorporated and Salomon
Smith Barney, Inc.
13 -- 1998 Annual Report to Stockholders (which
shall be deemed filed only with respect to
those portions specifically incorporated by
reference herein).
21 -- Subsidiaries of the Company.
23.1 -- Consent of PricewaterhouseCoopers LLP.
23.2 -- Consent of Arthur Andersen LLP.
27 -- Financial Data Schedule.
99 -- Report of Arthur Andersen LLP.
- ----------
(*) Management contract or compensatory plan or arrangement filed as an
exhibit to this Form pursuant to Item 14(c) of Form 10-K.
(+) Confidential treatment as to certain portions.
(1) Incorporated herein by reference from the Registrant's Registration
Statement on Form S-1 (File No. 33-41653).
(2) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
(3) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.
(4) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
(5) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
(6) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
(7) Incorporated by reference from the Registrant's Registration
Statement on Form S-8, filed on July 6, 1998, relating to the 1991
Director Stock Option Plan.