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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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 000-31719
___________________________________________
POZEN INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1657552
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1414 Raleigh Rd, Suite 400, Chapel Hill, NC 27517
(Address of principal executive offices including zip code)
(919) 913-1030
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock Nasdaq
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 this
Form 10-K. [_]
The aggregate market value of POZEN Inc. Common Stock held by nonaffiliates of
POZEN Inc. on February 28, 2002 was approximately $127,320,016. As of February
28, 2002 there were outstanding 28,077,945 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the POZEN Inc. definitive proxy statement to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year are incorporated
by reference in Part III of this Form 10-K and certain documents are
incorporated by reference into Part IV.
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POZEN INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
Forward-Looking Information ...................................... 1
Item 1. Business ......................................................... 1
Item 2. Properties ....................................................... 13
Item 3. Legal Proceedings ................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders .............. 13
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters .................................. 14
Item 6. Selected Financial Data .......................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation ............................... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....... 28
Item 8. Financial Statements and Supplementary Data ...................... 28
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure ........................... 28
PART III
Item 10. Directors and Executive Officers of the Registrant ............... 28
Item 11. Executive Compensation ........................................... 29
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................................ 29
Item 13. Certain Relationships and Related Transactions ................... 29
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K .......................................... 29
Signatures ....................................................... 32
Index to Financial Statements and
Financial Statement Schedules .................................... 33
Forward-Looking Information
This report includes "forward-looking statements" within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, but are not limited to, statements
about our plans, objectives, representations and contentions and are not
historical facts and typically are identified by use of terms such as "may,"
"will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," "continue" and similar words, although some
forward-looking statements are expressed differently. You should be aware that
the forward-looking statements included herein represent management's current
judgment and expectations, but our actual results, events and performance could
differ materially from those in the forward-looking statements. The
forward-looking statements are subject to a number of risks and uncertainties
which are discussed below in the section entitled "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting the Company's Prospects." We do not intend to
update any of these factors or to publicly announce the results of any revisions
to these forward-looking statements.
PART I
Item 1. Business
- ------ --------
Overview
We are a pharmaceutical development company, which has built a portfolio of
product candidates through a combination of innovation and in-licensing. Our
initial focus is the multi-billion dollar global migraine market, where we
believe we have the largest portfolio of product candidates currently in
development. We have three product candidates with over $1 billion in market
potential. Our plans are to bring these product candidates to market through a
commercial partner.
MT 100 is being developed as an oral, first-line treatment for migraine
pain and associated symptoms. We have completed all planned Phase 3 pivotal
clinical trials for MT 100, which consistently demonstrated MT 100's
effectiveness in treating migraine pain. MT 300 is being developed to provide
long-lasting pain relief for severe migraine. MT 300 is currently in two Phase 3
pivotal trials comparing MT 300's efficacy with placebo. We expect to complete
both of these trials by the end of 2002. MT 400 is being developed as a
co-active acute migraine therapy. MT 400 is currently in Phase 2 development. We
have discontinued further development activities related to MT 500, our early
stage migraine product candidate in-licensed from Roche, based upon unexpected
Phase 1 trial results.
We plan to enter into collaborations with established pharmaceutical
companies to commercialize and manufacture our product candidates. We are in
active discussions with respect to the commercialization of MT 100, MT 300 and
MT 400. In addition, we intend to leverage our pharmaceutical product
development expertise by acquiring or in-licensing and developing commercially
attractive products in therapeutic areas outside of migraine.
Business Strategy
The principal elements of our business strategy are to:
Develop and commercialize our portfolio of migraine product candidates
A substantial portion of our efforts over the next few years will be
devoted to the further development, approval and commercialization of our
portfolio of migraine product candidates. We are conducting clinical trials and
other studies with our migraine product candidates in order to obtain marketing
approvals that will allow us to provide therapeutic alternatives for all
segments of migraine patients. We intend to form collaborations with established
pharmaceutical companies for the worldwide commercialization of our migraine
product candidates.
1
Form collaborations for the commercialization of our product candidates
We plan to establish collaborative relationships with pharmaceutical
companies for the commercialization of our product candidates. In general, we
intend to license our product candidates to pharmaceutical companies for
commercialization once we have established substantial evidence of safety and
efficacy, at which point we believe that we can obtain favorable economic terms.
Build a product pipeline through innovation, in-licensing and acquisition
We intend to build our product pipeline through innovation, in-licensing
and acquisition of select proprietary product candidates. We will focus
primarily on therapeutic areas with significant commercial potential in which
members of our management team have development expertise. These areas of
expertise include gastrointestinal disease, respiratory disease, infectious
disease and pain. We plan to develop novel products that exhibit distinct
advantages over currently marketed products, as well as innovative combinations
of products in convenient, therapeutically appropriate formulations.
One of the strategies we will use to gain access to product candidates is
to employ our license back option model under which the licensor has an option
to license back the product candidate at various stages of development and on
set terms and conditions. We believe that this model differs from a traditional
in-licensing arrangement in that it affords us improved access to commercially
attractive compounds.
Leverage development efforts through strategic outsourcing
While maintaining overall control of the planning, development and
regulatory processes, we seek to enter into strategic outsourcing relationships
to develop and commercialize our product candidates in a cost-effective manner.
We have contracted and plan to contract with third parties for product candidate
testing, development and manufacturing.
Products Under Development
Our product candidates are being developed for the treatment of migraine.
If approved for commercial sale, all of the products in our migraine portfolio
will be sold by prescription. The following chart sets forth information
regarding the status of our development programs:
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Product Candidate Indication Status
- -------------------------------------------------------------------------------------------------------------------
MT 100
Oral tablet First-line therapy to treat migraine All planned pivotal Phase 3 trials
pain and associated symptoms completed
- -------------------------------------------------------------------------------------------------------------------
MT 300
Injection New formulation of DHE to provide All planned pivotal Phase 3 trials ongoing
long-lasting pain relief for severe
migraine
- -------------------------------------------------------------------------------------------------------------------
MT 400
Oral tablet Co-active acute migraine therapy Phase 2 proof-of-concept trial completed;
combining the activity of a triptan with Phase 2 dose-ranging trials planned
that of a long-acting, non-steroidal,
anti-inflammatory drug
- -------------------------------------------------------------------------------------------------------------------
2
Migraine Market
Migraine is characterized by recurring attacks of headache, often
associated with visual, auditory or gastrointestinal disturbances. While the
precise mechanism of migraine is unknown, researchers believe migraine attacks
are caused by acute inflammation surrounding selected blood vessels in the head.
The average migraine sufferer experiences the first attack during the early teen
years, and the attacks generally continue throughout adulthood. We estimate that
global sales of prescription pharmaceuticals for the treatment of migraine will
approach $3.7 billion by 2005.
Not all migraine attacks are of the same severity. Consequently, a variety
of oral, injectable and intranasal therapies are used to treat different types
of migraine attacks. Many patients use a personal, individually developed,
step-care approach to treat their attacks. Attacks are often treated initially
with simple over-the-counter analgesics, particularly if the patient is unable
to determine if the attack is a migraine or some other type of headache. If
over-the-counter remedies are unsuccessful, patients often turn to more potent
prescription drugs, including narcotics, analgesic/narcotic drug combinations
and triptans.
Currently, we are aware of no narcotics approved specifically for the
treatment of migraine. However, narcotics are prescribed outside their approved
indications to treat severe migraine attacks due to their ability to mask
migraine headache pain. The use of narcotics for the treatment of migraine has
been limited because narcotics do not address the non-pain symptoms of migraine
such as nausea and vomiting and can cause side effects such as drowsiness,
dizziness and constipation, and because of their potential to cause addiction.
In addition, analgesics such as acetaminophen and aspirin are generally used to
treat only mild migraine attacks, and, similarly to narcotics, do not address
the non-pain symptoms of migraines such as nausea and vomiting.
Triptans are the family of drugs most commonly prescribed for the treatment
of migraine attacks. Triptans have demonstrated the ability to treat migraines
by constricting blood vessels in the brain. Although triptans can be effective
in treating migraine symptoms, they are often associated with significant side
effects and other disadvantages that include:
. the occurrence of cardiovascular related events, including chest
pain/discomfort, throat discomfort and warm/cold sensations;
. the potential for serious cardiovascular events, including death;
. difficulty in producing sustained pain relief with a single dose in a
majority of patients;
. the occurrence of nausea and dizziness during treatment; and
. the need for cardiovascular evaluations from physicians before initially
prescribing triptans to patients with cardiovascular disease risk
factors.
Despite these shortcomings, in 2001, according to IMS Health's Retail and
Provider Perspective, or IMS, total triptan sales in the U.S. were approximately
$1.6 billion. Imitrex(R), marketed by GlaxoSmithKline, is the leading triptan
product, with, according to IMS, total U.S. sales of approximately $1.1 billion
in 2001. There are currently three triptan formulations commercially available:
oral, intranasal and injectable. Oral triptans are often prescribed as a
first-line treatment for migraine pain. Intranasal triptans are often prescribed
for patients requiring faster relief than oral drugs can provide or for patients
who cannot take oral medications. For the most severe attacks, patients
sometimes use an injectable form of a triptan.
Because of the problems associated with triptans, narcotics and analgesics,
we believe that an opportunity exists in all migraine therapeutic segments for
products designed to deliver an improved onset and duration of relief with
reduced side effects, especially those related to cardiovascular events.
3
MT 100
Overview
MT 100 is being developed as an oral first-line therapy for the treatment
of migraine pain and associated symptoms. Oral products are currently the most
prevalent form of migraine therapy. According to IMS, existing oral prescription
products accounted for approximately $1.3 billion in sales in the U.S. in 2001,
of which the Imitrex(R) oral dosage form accounted for approximately $786
million.
MT 100 is a proprietary formulation that combines metoclopramide
hydrochloride, a commercially available agent that relieves nausea and enhances
stomach emptying, and naproxen sodium, a commercially available
anti-inflammatory and analgesic agent. MT 100 is designed to release
metoclopramide hydrochloride initially, followed by naproxen sodium. The
metoclopramide is intended to accelerate the absorption of naproxen and to
reduce nausea, which can be associated with migraines. Results from our
pharmacokinetic study in normal volunteers, completed in 1999, indicated that
peak naproxen blood levels were approximately 15% higher and were achieved
approximately 30 minutes faster following administration of MT 100 than with
naproxen sodium alone.
Clinical Development
Prior to seeking marketing approval from the Food and Drug Administration,
or FDA, we must demonstrate the efficacy and safety of our product candidates.
To demonstrate efficacy of a combination product candidate like MT 100, which
combines two previously approved component products, we must demonstrate in
clinical trials that it is both superior to each of its individual components,
and more effective in treating all symptoms of migraine when compared to a
placebo. For MT 100, this means that we must show a statistically significant
increase in patients achieving sustained response, which is a clinical measure
used to evaluate both speed of onset and duration of migraine pain relief at two
hours and maintained throughout the next 22 hours. We must also show that MT 100
is superior to placebo for relief of nausea, sensitivity to light and
sensitivity to sound. Generally, the FDA requires two successful clinical trials
to demonstrate that the product candidate meets each of these standards for
approval. To this end and to demonstrate MT 100's effectiveness as compared to
other migraine therapies, we have completed a total of two Phase 2 clinical
trials and six Phase 3 clinical trials for MT 100 involving more than 7,500
patients, more than 3,400 of whom have received some form of MT 100. The Phase 3
clinical trials have consistently demonstrated MT 100's effectiveness in
treating migraine pain. Significantly, in a Phase 3 trial in which MT 100 was
compared to Imitrex(R) and placebo, MT 100 demonstrated comparable efficacy to
Imitrex(R) and a lower percentage of patients taking a single-tablet dose of MT
100 reported adverse events than patients taking Imitrex(R). Adverse events
included drowsiness, diarrhea, abdominal pain, dizziness, infection and
nervousness.
Our MT 100 trials have included:
. a Phase 3 long-term safety trial completed in December 2000 in which
over 600 patients completed at least 6 months of treatment with MT 100,
329 of whom completed one year of treatment;
. a Phase 3 trial including 546 patients completed in August 2000 in which
a single-tablet dose of MT 100 was shown to have comparable efficacy to,
and a lower percentage of patients reporting adverse events than, a 50
milligram dose of Imitrex(R), which is the most widely prescribed dose,
and further demonstrated statistically significant superiority over
placebo for sustained response and relief of nausea, sensitivity to
light and sensitivity to sound;
. a Phase 3 multiple dosing trial including 426 patients completed in May
2000 in which MT 100 showed statistically significant superiority over
placebo for sustained response and, within two hours after initial
dosing, for relief of nausea, sensitivity to light and sensitivity to
sound; and
4
. two Phase 3 clinical trials, a 1,064-patient trial completed in December
1999 and a 2,623-patient trial completed in November 2000, comparing MT
100 to its components in which the sustained response rate for patients
receiving MT 100 was statistically significantly greater than the rate
for patients receiving either naproxen sodium or metoclopramide
hydrochloride alone. Using the statistical analysis methodology
specified in the first trial's protocol, MT 100 showed statistically
significant superiority over only one of its two components. However, MT
100 showed statistically significant superiority over both components
when the results of this trial were analyzed using a statistical test
that was a refinement of the statistical analysis methodology originally
specified in the protocol. The results from the second trial, which was
designed based on discussions with the FDA and using this same refined
statistical analysis method, confirmed the results of the first trial.
We therefore believe that we have satisfied the FDA requirement for the
successful completion of two Phase 3 clinical trials comparing MT 100
with its components.
In addition, we recently completed a second Phase 3 clinical trial
including 1,010 patients designed both to compare the safety and efficacy of MT
100 with Imitrex(R), as well as to support a request for expanded labeling of MT
100. Data from this trial will be available in the first half of 2002.
In addition to the required clinical trial results, the FDA also requires
genotoxicity and carcinogenicity testing prior to new drug application, or NDA,
approval. The carcinogenicity studies, which are conducted with two species of
animals, typically require a two-year dosing period in rats and either a
six-month or two-year dosing period in certain mice species. Based primarily on
the long history of use of both of MT 100's components, particularly naproxen
sodium, as well as results from short-term genotoxicity studies that we
conducted, we requested that the FDA waive the carcinogenicity testing
requirement.
In January 2001, notwithstanding the short-term genotoxicity results, the
FDA notified us that it would still require carcinogenicity testing. As a
result, to satisfy the FDA required mouse carcinogenicity study, we commenced a
26-week oral carcinogenicity study in p53 transgenic mice in May 2001 and a
two-year rat carcinogenicity study with MT 100 in August 2001. The results from
the 26-week study indicated that MT 100 was not carcinogenic in p53 transgenic
mice. In recent discussions, the FDA indicated that it would accept the results
from the ongoing two-year rat study during the NDA review period for MT 100. We
expect to submit the NDA for MT 100 in the first half of 2003.
MT 300
Overview
MT 300 is being developed to provide long-lasting pain relief for patients
needing a convenient injectable therapy for severe migraine, with a reduced side
effect profile compared to existing injectable products. Currently, patients
often use an injectable form of a triptan or another drug such as DHE, which is
currently approved for use in the treatment of migraine and cluster headache
episodes, to alleviate the symptoms of the most severe migraine attacks quickly
and effectively. However, many patients are unable to tolerate the injections,
especially those sensitive to the vascular side effects associated with
injectable Imitrex(R). Nevertheless, according to IMS, injectable migraine
therapeutics represented approximately $214 million in 2001 U.S. sales.
MT 300 is a proprietary formulation of injectable DHE that is packaged in
an easy-to-use, pre-filled syringe. Published clinical trial results for
injectable DHE indicate that injectable DHE provides comparable efficacy to
injectable Imitrex(R) three hours after administration. Specifically, only 18%
of injectable DHE patients experienced headache recurrence within 24 hours as
compared to 45% of injectable Imitrex(R) patients. In addition, acute vascular
side effects were reported by only 2% of the patients receiving injectable DHE
compared to 23% of the patients receiving injectable Imitrex(R).
5
Clinical Development
On February 23, 2001, the FDA approved our request to submit MT 300 as a
505(b)(2) application, under which the FDA requires 12 months of stability data
on the final formulation, some short-term pre-clinical studies and two
placebo-controlled clinical trials. To date, we have completed the required
short-term pre-clinical trials and a Phase 2 placebo-controlled, dose-response
trial in which MT 300 demonstrated a statistically significant improvement in
the percentage of patients achieving four-hour response rates when compared to
placebo and demonstrated a statistically significant lower need for the use of
rescue medication. In September 2001, we initiated a 600-patient,
placebo-controlled, Phase 3 clinical trial of a single, subcutaneous dose of MT
300 in patients with moderate to severe migraine pain, and, in January 2002, we
initiated a second placebo-controlled Phase 3 trial with 400 patients. Given the
current timetable for completion of these Phase 3 clinical trials, we anticipate
submitting an NDA for MT 300 by the end of 2002.
MT 400
Overview
MT 400 is being developed as a co-active migraine therapy combining the
activity of a commercially approved triptan drug with that of a commercially
approved long-acting, non-steroidal, anti-inflammatory drug. We believe that the
effective treatment of migraine requires targeted, specific and complementary
co-active therapy to achieve maximum therapeutic benefit with the fewest side
effects. We believe that MT 400 will prove to offer a faster onset of action or
a longer duration of migraine symptom relief than use of either drug component
by itself. In addition, since lower doses of the triptan components could be
used in certain MT 400 formulations than in the triptan itself, we believe that
the potential risks of triptan-related side effects may also be reduced with MT
400.
MT 400 represents a commercially attractive opportunity to create multiple
products using different combinations of triptans and long acting,
non-steroidal, anti-inflammatory drugs. We believe that the resulting MT 400
products will be attractive to a partner due to the partner's potential to
increase its penetration in all segments of the migraine market and expand the
proprietary life of its existing triptan brands. Consequently, we expect to
complete a full development program necessary for U.S. and European regulatory
approval for MT 400. We will need to obtain the right to use the triptan that is
specified in our NDA for MT 400 if we want to commercialize MT 400 prior to the
expiration of the patent for that triptan. Patents for triptans begin to expire
in 2005 in Europe and 2008 in the U.S.
Clinical Development
In March 2001, we completed a 972-patient, Phase 2 double-blind,
placebo-controlled, single-dose clinical trial of MT 400 in which MT 400 showed
statistically significant superiority over placebo and its components on the
identified primary outcome measure of sustained pain response. In addition, MT
400 showed statistically significant superiority over placebo and its components
in the two-hour pain response and effectiveness in the relief of migraine
associated symptoms. MT 400 was also superior to the oral triptan comparator
included in the study as a positive control. With respect to the primary
endpoint, sustained pain response, the therapeutic gain with MT 400 was more
than twice the therapeutic gain seen with the triptan. Therapeutic gain is equal
to the percent of patients with response on active agent minus the percent of
patients with response on placebo control agent. We expect to commence
additional Phase 2 dose-ranging trials for MT 400 in 2002.
MT 500
Overview and Clinical Development
In September 1999, utilizing our license back option model, we obtained an
exclusive worldwide license for MT 500, a novel serotonin (5 HT2b) receptor
antagonist discovered by Roche. We completed a Phase 1 tolerance study of MT 500
in 2001. The results of this study indicate unexpected levels of metabolite in
the patients dosed with MT 500. In light of these results, we have discontinued
further development activities related to MT 500. The terms of the licensing
agreement provide for the unilateral termination of the agreement with no
further obligations to either party.
6
Product In-Licensing
In order to continue to expand our product pipeline, we intend to
complement our internal product innovations by in-licensing additional product
candidates. Our in-licensing strategy to obtain new product candidates will
include using our license back option model, which we believe should provide us
with improved access to promising compounds. Specifically, the major elements of
our license back option model are:
. We in-license a product candidate at the late preclinical or Phase 1
development stage.
. We grant the licensor an option to license back the product candidate
at various stages of development.
. We assume all development and funding responsibility.
. If the licensor exercises its option to license back the product
candidate, we receive certain milestone payments and a royalty on
sales of the product candidate.
. If the licensor foregoes its option, we have the right to license the
product candidate to another third party or commercialize the product
ourselves, with sublicense royalties in both cases being paid to the
original licensor.
. All financial terms are set when the original license agreement is
signed.
We believe that our license back option model offers advantages to both us
and the licensor and will be an effective tool in expanding our product
portfolio successfully. The advantages of this model for the licensor include:
. realization of value from product candidates whose development would
otherwise be delayed or never undertaken;
. delayed commitment of resources and capital until the product
candidate's technical risk and commercial potential are better
defined; and
. utilization of our product development and regulatory expertise.
We believe that the advantages of our license back option model for us
include:
. improving our access to attractive product candidates;
. limiting our financial exposure to product candidate development
expenses due to low upfront costs compared to traditional in-licensing
structures; and
. in-licensing product candidates with substantial preclinical
development risk removed.
Our success under this license back option model is dependent upon the
successful development of the product licensed and the extent to which the
milestone and royalty payments we receive from the licensor exceed our
development expenses associated with the product candidate.
Sales and Marketing
We currently have no sales or distribution capabilities. We currently
intend to commercialize our products through other pharmaceutical companies in
exchange for upfront and milestone payments, proceeds from the manufacturing of
drug substance and royalties from sales. In the future, we may retain the right
to co-promote our products.
Manufacturing
We currently have no manufacturing capability and we do not intend to
establish internal manufacturing capabilities. To date, we have entered into
arrangements with third-party manufacturers for the supply of formulated and
packaged MT 100, MT 300, MT 400 and MT 500 clinical trial materials. Use of
third-party manufacturing enables us to focus on our clinical development
strengths, minimize fixed costs and capital expenditures and gain access to
advanced manufacturing process capabilities and expertise. We also intend to
enter into agreements with third party manufacturers for the commercial scale
manufacturing of our products.
7
In January 2001, we entered into a Commercial Supply Agreement with
Catalytica Pharmaceuticals, Inc. under which Catalytica will supply us with all
MT 100 for commercial sale. We, or our commercial partner, are required to
purchase all commercial supply of MT 100 from Catalytica for the initial term of
the agreement and any extension thereof, unless Catalytica is unable to meet
our, or our commercial partner's, requirements. We have the right to terminate
the agreement under certain circumstances after the third anniversary of the
first commercial sale of MT 100.
In October 2001, we entered into a Commercial Supply Agreement with Lek
Pharmaceuticals Inc. under which Lek has agreed to provide us with DHE, which we
will formulate as MT 300. We agreed to purchase DHE exclusively from Lek, which
exclusivity is dependent upon Lek's ability to meet our supply requirements and
certain other conditions. Lek will supply to us solely and exclusively, under
certain circumstances. We will pay Lek, under certain circumstances, a fee in
addition to the agreed supply price for DHE, based on a percentage of MT 300
sales revenue. Either party may cancel the agreement under certain conditions.
In addition, Lek may terminate the agreement after a certain period of time,
under agreed transition, supply and know-how transfer provisions, if Lek decides
to permanently cease the manufacture of DHE.
We have agreements with various vendors to supply us with clinical supply
materials for our MT 100, MT 300, and MT 400 clinical trials. We believe our
current supplier agreements should be sufficient to complete both our ongoing
and planned clinical trials.
Competition
Not all migraine attacks are of the same severity. Consequently, a variety
of oral, injectable and intranasal therapies are used to treat different types
of migraine attacks. Attacks are often treated initially with simple
over-the-counter analgesics, particularly if the patient is unable to determine
if the attack is a migraine or some other type of headache. These analgesics
include Excedrin Migraine(R), which is approved for the pain associated with
migraine. If over-the-counter remedies are unsuccessful, patients often turn to
more potent prescription drugs, including triptans. According to IMS, in 2001,
total triptan sales in the U.S. were approximately $1.6 billion. Imitrex(R), a
triptan product marketed by GlaxoSmithKline, had total U.S. sales of
approximately $1.1 billion in 2001, according to IMS.
Narcotics such as codeine and drugs containing analgesic/narcotic
combinations, along with other non-narcotic pain medications, are also used for
the treatment of migraine. If approved, our migraine product candidates will
most likely compete with one or more of the existing migraine therapeutics, as
well as any therapies developed in the future.
The pharmaceutical and biopharmaceutical industries are intensely
competitive and are characterized by rapid technological progress. Certain
pharmaceutical and biopharmaceutical companies and academic and research
organizations currently engage in, or have engaged in, efforts related to the
discovery and development of new medicines for the treatment of migraine
symptoms. Significant levels of research in chemistry and biotechnology occur in
universities and other nonprofit research institutions. These entities have
become increasingly active in seeking patent protection and licensing revenues
for their research results. They also compete with us in recruiting skilled
scientific talent.
Our ability to compete successfully will be based on our ability to create
and maintain scientifically advanced technology, develop proprietary products,
attract and retain scientific personnel, obtain patent or other protection for
our products, obtain required regulatory approvals and manufacture and
successfully market our products either alone or through outside parties. Some
of our competitors have substantially greater financial, research and
development, manufacturing, marketing and human resources and greater experience
in product discovery, development, clinical trial management, FDA regulatory
review, manufacturing and marketing than we do.
8
Patents and Proprietary Information
We intend to actively seek, when appropriate, protection for our
products and proprietary technology by means of U.S. and foreign patents,
trademarks and contractual arrangements. In addition, we plan to rely upon trade
secrets and contractual agreements to protect certain of our proprietary
technology and products.
We own three issued U.S. patents and three pending U.S. patent
applications, and we presently have pending foreign patent applications or
issued foreign patents, relating to MT 100, MT 300 and MT 400. Applications have
been filed under the Patent Cooperation Treaty, or PCT, and are in the
international phase relating to MT 300 and MT 400. There can be no assurance
that our patent applications will issue as patents or, with respect to our
issued patents, that they will provide us with significant protection. The
following provides a general description of our patent portfolio and is not
intended to represent an assessment of claim limitations or claim scope.
MT 100
We have one issued U.S. patent with claims relating to dosage forms
that can be used in administering metoclopramide and a long-acting,
non-steroidal, anti-inflammatory drug (NSAID) to a patient with migraine
headache. There are also claims relating to a method of manufacturing a specific
type of dosage form. We have one issued Australian patent. We have one pending
U.S. patent application with claims relating to various pharmaceutical
compositions and treatment methods that can be used for migraine patients. In
addition, there are applications relating to MT 100 that are pending in Canada,
Europe and Japan. The expected expiration date of the issued U.S. and Australian
patents relating to MT 100 is November 12, 2016. Additional U.S. and foreign
patents, if issued, are expected to expire in a similar timeframe.
MT 300
With respect to MT 300, we presently have one pending U.S. application
and multiple pending foreign applications. These have claims relating to liquid
pharmaceutical compositions for treating migraine, which contain concentrated
dihydroergotamine. There are also claims relating to treating patients for
migraine using these compositions and to therapeutic packages that include the
compositions.
MT 400
We have two issued U.S. patents with claims relating to methods,
compositions and therapeutic packages involving the use of certain NSAIDs and
5-HT receptor agonists in treating patients with migraine. Outside of the U.S.,
we have an issued patent in Australia and applications relating to MT 400
pending in Canada, Europe and Japan. In addition, we have a pending U.S.
application with claims relating to dosage forms and methods of treatment
involving a 5-HT receptor agonist and a particular subset of NSAIDs and to the
use of MT 400 in the treatment of other types of headache. The expected
expiration date of the issued U.S. patents relating to MT 400 is August 14,
2017. Foreign patents, if issued, are expected to expire in a similar timeframe.
Other Intellectual Property
Much of the know-how of importance to us is dependent upon the
knowledge, experience and skills of key scientific and technical personnel. To
protect our rights to proprietary know-how and technology, we require employees,
consultants and advisors to enter into confidentiality agreements that prohibit
the disclosure of confidential information to anyone outside of the company.
There can be no assurance that these agreements will effectively prevent
disclosure of our confidential information. In the absence of effective patent
or other protection of intellectual property, our business may be adversely
affected by competitors who develop substantially equivalent or superior
technology or know-how.
The patent and other intellectual property positions of pharmaceutical
companies are highly uncertain and involve complex legal and factual questions.
We cannot assure you that:
. our patent rights will provide us with proprietary protection or
competitive advantages against our competitors;
9
. our patent rights will not be challenged, invalidated or
circumvented;
. others will not independently develop technologies similar to ours
or duplicate our technologies; or
. the patents issued to or licensed by us will not be infringed or
challenged.
Government Regulation
The FDA and comparable regulatory agencies in foreign countries impose
substantial requirements on the clinical development, manufacture and marketing
of pharmaceutical product candidates. These agencies and other federal, state
and local entities regulate research and development activities and the testing,
manufacture, quality control, safety, effectiveness, labeling, storage,
record-keeping, approval and promotion of our product candidates. All of our
product candidates will require regulatory approval before commercialization. In
particular, therapeutic product candidates for human use are subject to rigorous
preclinical and clinical testing and other requirements of the Federal Food,
Drug, and Cosmetic Act (FFDCA), implemented by the FDA, as well as similar
statutory and regulatory requirements of foreign countries. Obtaining these
marketing approvals and subsequently complying with ongoing statutory and
regulatory requirements is costly and time-consuming. Any failure by us or our
collaborators, licensors or licensees to obtain, or any delay in obtaining,
regulatory approvals or in complying with other requirements could adversely
affect the commercialization of product candidates then being developed by us
and our ability to receive product or royalty revenues.
The steps required before a new drug product candidate may be
distributed commercially in the U.S. generally include:
. conducting appropriate preclinical laboratory evaluations of the
product candidate's chemistry, formulation and stability and
preclinical studies in animals to assess the potential safety and
efficacy of the product candidate;
. submitting the results of these evaluations and tests to the FDA,
along with manufacturing information and analytical data, in an
investigational new drug application, or IND;
. initiating clinical trials under the IND after the resolution of
any safety or regulatory concerns of the FDA;
. obtaining approval of Institutional Review Boards, or IRBs, to
introduce the drug into humans in clinical studies;
. conducting adequate and well-controlled human clinical trials
that establish the safety and efficacy of the product candidate
for the intended use, typically in the following three
sequential, or slightly overlapping stages;
Phase 1: The product is initially introduced into human
subjects or patients and tested for safety, dose tolerance,
absorption, metabolism, distribution and excretion;
Phase 2: The product candidate is studied in patients to
identify possible adverse effects and safety risks, to
determine dosage tolerance and the optimal dosage, and to
collect some efficacy data;
Phase 3: The product candidate is studied in an expanded
patient population at multiple clinical study sites, to
confirm efficacy and safety at the optimized dose, by
measuring a primary endpoint established at the outset of
the study;
. submitting the results of preclinical studies, and clinical
trials as well as chemistry, manufacturing and control
information on the product candidate to the FDA in a New Drug
Application form, or NDA; and
. obtaining FDA approval of the NDA prior to any commercial sale or
shipment of the product candidate.
10
This process can take a number of years and require substantial
financial resources. The results of preclinical studies and initial clinical
trials are not necessarily predictive of the results from large-scale clinical
trials, and clinical trials may be subject to additional costs, delays or
modifications due to a number of factors, including the difficulty in obtaining
enough patients, clinical investigators, product candidate supply, or financial
support. The FDA may also require testing and surveillance programs to monitor
the effect of approved product candidates that have been commercialized, and the
agency has the power to prevent or limit further marketing of a product
candidate based on the results of these post-marketing programs. Upon approval,
a product candidate may be marketed only in those dosage forms and for those
indications approved in the NDA.
In addition to obtaining FDA approval for each indication to be treated
with each product candidate, each domestic product candidate manufacturing
establishment must register with the FDA, list its product with the FDA, comply
with the applicable FDA current Good Manufacturing Practices, or cGMP,
regulations, which include requirements relating to quality control and quality
assurance, as well as the corresponding maintenance of records and
documentation, and permit and pass manufacturing plant inspections by the FDA.
Moreover, the submission of applications for approval may require additional
time to complete manufacturing stability studies. Foreign establishments
manufacturing product for distribution in the U.S. also must list their product
candidates with the FDA and comply with cGMP regulations. They are also subject
to periodic inspection by the FDA or by local authorities under agreement with
the FDA.
Any product candidates manufactured or distributed by us pursuant to
FDA approvals are subject to extensive continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experiences with
the product candidate. In addition to continued compliance with standard
regulatory requirements, the FDA may also require post-marketing testing and
surveillance to monitor the safety and efficacy of the marketed product. Adverse
experiences with the product candidate must be reported to the FDA. Product
approvals may be withdrawn if compliance with regulatory requirements is not
maintained or if problems concerning safety or efficacy of the product are
discovered following approval.
The FFDCA also mandates that products be manufactured consistent with
cGMP regulations. In complying with the cGMP regulations, manufacturers must
continue to spend time, money and effort in production, record keeping, quality
control, and auditing to ensure that the marketed product meets applicable
specifications and other requirements. The FDA periodically inspects
manufacturing facilities to ensure compliance with cGMP regulations. Failure to
comply subjects the manufacturer to possible FDA action, such as warning
letters, suspension of manufacturing, seizure of the product, voluntary recall
of a product or injunctive action, as well as possible civil penalties. We
currently rely on, and intend to continue to rely on, third parties to
manufacture our compounds and product candidates. These third parties will be
required to comply with cGMP regulations.
Even after the FDA approval has been obtained, further studies,
including post-marketing studies, may be required. Results of post-marketing
studies may limit or expand the further marketing of the products. If we propose
any modifications to a product, including changes in indication, manufacturing
process, manufacturing facility or labeling, a supplement to our NDA may be
required to be submitted to the FDA.
Products manufactured in the U.S. for distribution abroad will be
subject to FDA regulations regarding export, as well as to the requirements of
the country to which they are shipped. These latter requirements are likely to
cover the conduct of clinical trials, the submission of marketing applications,
and all aspects of manufacturing and marketing. Such requirements can vary
significantly from country to country.
We are also subject to various federal, state and local laws, rules,
regulations and policies relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use of and
disposal of hazardous or potentially hazardous substances used in connection
with our research work. Although we believe that our safety procedures for
handling and disposing of such materials comply with current federal, state and
local laws, rules, regulations and policies, the risk of accidental injury or
contamination from these materials cannot be entirely eliminated.
The extent of government regulation which might result from future
legislation or administrative action cannot be accurately predicted. In this
regard, although the Food and Drug Administration Modernization Act of 1997
modified and created requirements and standards under the FFDCA with the intent
of facilitating product development and marketing, the FDA is still in the
process of developing regulations implementing the Food and Drug Administration
Modernization Act of 1997. Consequently, the actual effect of these developments
on our own business is uncertain and unpredictable.
11
Employees
As of February 28, 2002, we had a total of 28 full-time employees. All
of our current employees are based at our headquarters in Chapel Hill, North
Carolina. Of our 28 employees, 17 hold advanced degrees, including seven
Pharm.D. or Ph.D. degrees.
Executive Officers of the Company
Our executive officers and their ages as of December 31, 2001 are as
follows:
Name Age Position
- ---------------------------------------- ------- -------------------------------------------------------------
John R. Plachetka, Pharm.D. 48 Chairman, President and Chief Executive Officer
Kristina M. Adomonis 47 Senior Vice President, Business Development
John E. Barnhardt 52 Vice President, Finance and Administration
Matthew E. Czajkowski 52 Chief Financial Officer, Senior Vice President, Finance and
Administration
Andrew L. Finn, Pharm.D. 52 Executive Vice President, Product Development
John R. Plachetka, Pharm.D., is Chairman of the Board of Directors, a
co-founder and President and Chief Executive Officer of POZEN. Prior to founding
POZEN, Dr. Plachetka was Vice President of Development at Texas Biotechnology
Corporation from 1993 to 1995 and was President and Chief Executive Officer of
Clinical Research Foundation-America, a leading clinical research organization,
from 1990 to 1992. From 1981 to 1990, he was employed at Glaxo Inc. Dr.
Plachetka received his B.S. in Pharmacy from the University of Illinois College
of Pharmacy and his Doctor of Pharmacy from the University of Missouri-Kansas
City.
Kristina M. Adomonis joined POZEN in June 1999 as Senior Vice President
of Business Development. Prior to joining POZEN, Ms. Adomonis was Vice President
of Global Business Development & Licensing, OTC at Novartis Consumer Health from
1997 to 1999. From 1994 to 1997, she was Director of Business Development in
Glaxo Wellcome's U.S. operations. Prior to Glaxo, she served on the Canadian
Executive Committees of Burroughs Wellcome and Abbott Laboratories, where she
managed the Business Development Units of these two respective operations. She
joined the industry in 1980 with F. Hoffman-La Roche Ltd. Ms. Adomonis received
a B.S. in Chemistry from Tufts University and her M.B.A. from McGill University.
John E. Barnhardt joined POZEN in March 1997 as Vice President of
Finance and Administration. Prior to joining POZEN, Mr. Barnhardt was Chief
Financial Officer and Principal Accounting Officer of Medco Research, Inc. from
1993 to 1996 and Microwave Laboratories, Inc. from 1988 to 1993. Mr. Barnhardt
received a B.S. from North Carolina State University, and while employed at
Ernst & Young LLP, received his CPA certification.
Matthew E. Czajkowski joined POZEN in March 2000 as Chief Financial
Officer and Senior Vice President of Finance and Administration. Prior to
joining POZEN, Mr. Czajkowski was an investment banker. From 1997 through 1998,
he was a Managing Director of Mergers and Acquisitions at Societe Generale. From
1992 to 1997, he was a Managing Director in charge of Corporate Finance at Wheat
First Butcher Singer, Inc. From 1983 to 1991, he was employed with, and served
as a Vice President beginning in 1987 at Goldman, Sachs & Co. Mr. Czajkowski
received his B.A. from Harvard University and his M.B.A. from Harvard Business
School.
Andrew L. Finn, Pharm.D., joined POZEN in January 2000 as Executive
Vice President of Product Development. Prior to joining POZEN, Dr. Finn
co-founded enVision Sciences, a specialized clinical research and regulatory
services company, in 1996. From 1991 to 1996, he was Vice President of U.S.
Clinical Research and Biometrics for Solvay Pharmaceuticals. He joined Glaxo
Inc. in 1981 as Assistant Director of Anti-Infective Development. Dr. Finn
received his B.S. in Pharmacy from the University of North Carolina, Chapel Hill
and his Doctor of Pharmacy from the University of Michigan.
12
Item 2. Properties
- ------- ----------
Between July 1997 and March 2002, our corporate facilities were located
in the Quadrangle Office Park in Chapel Hill, North Carolina, occupying
approximately 7,200 square feet under a lease which expires in February 2003.
Beginning in March 2002, our corporate facilities are located in 17,000 square
feet in the Exchange Office Building in Chapel Hill, North Carolina under a
lease commencing in March 2002 and expiring in 2010. We have the option to renew
this lease for two additional terms of up to a total of eight years. We believe
that the Exchange Office Building facility is adequate for our current needs and
that suitable additional or alternative space will be available in the future on
commercially reasonable terms.
Item 3. Legal Proceedings
- ------- -----------------
The Company is not a party to any material legal proceedings.
On October 6, 2000, an action was filed against the Company alleging
that POZEN owed certain consideration and expenses in connection with the
issuance and sale of preferred stock in the twelve-month period following the
termination of the engagement of an investment banking firm to assist the
Company with the sale of preferred stock in a private placement. In January
2002, the Company settled these issues for amounts that will have no material
effect on the financial position or the results of operation of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
None.
13
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
- ------- ---------------------------------------------------------------------
(a) Market Price of and Dividends on the Registrant's Common Equity
The Company's common stock began trading on The Nasdaq National Market
under the symbol "POZN" on October 11, 2000. As of February 28, 2002, we
estimate that we had approximately 227 stockholders of record and approximately
1,380 beneficial holders of the common stock. The following table details the
high and low sales prices for the common stock as reported by The Nasdaq
National Market for the periods indicated.
Price Range
-----------
2000 Fiscal Year High Low
---------------- ---- ---
Fourth Quarter $21.875 $9.25
Price Range
-----------
2001 Fiscal Year High Low
---------------- ---- ---
First Quarter $19.25 $5.75
Second Quarter $15.50 $5.19
Third Quarter $11.48 $3.60
Fourth Quarter $ 7.30 $3.50
On February 28, 2002, the closing price for our common stock as
reported by The Nasdaq National Market was $5.51. We paid no cash dividends in
2001. We currently intend to retain all of our future earnings to finance the
growth and development of our business and do not anticipate paying any cash
dividends in the foreseeable future.
(b) Issuances of Unregistered Securities
On March 6, 2001 and May 25, 2001, we issued an aggregate of 49,385
shares of common stock pursuant to the exercise by two individuals of stock
purchase warrants issued to such individuals in 1997. The consideration received
by us was $49.39 in cash, or a price of $0.001 per share. No underwriting
discounts or commissions were paid in connection with the issuances of these
shares of common stock.
The above securities were offered and sold by us in reliance upon
exemptions from registration under Section 4(2) of the Securities Act of 1933.
We did not use any general advertisement or solicitation in connection with the
offer or sale of these securities and appropriate legends were affixed to the
certificates evidencing these securities.
14
Item 6. Summary of Selected Financial Data
- ------- ----------------------------------
The following tables set forth selected historical financial data of
the Company for the three years ended December 31, 2001 and the period from
September 26, 1996 (inception) through December 31, 2001. These tables should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements of the Company
included elsewhere herein. The report of Ernst & Young LLP, independent
auditors, covering the Company's financial statements for the three years ended
December 31, 2001, is also included elsewhere herein.
For the Year Ended December 31, Period from
------------------------------------------
September 26, 1996
(inception) through
1999 2000 2001 December 31, 2001
------------- ------------- ------------ -------------------
(in thousands, except per share data)
Statement of Operations Data:
Operating expenses:
General and administrative ........ $ 2,320 $ 4,822 $ 6,455 $ 16,182
Research and development .......... 9,458 19,399 18,627 58,175
------------- ------------- ------------ -------------------
Total operating expenses ............. 11,778 24,221 25,082 74,357
Interest income (expense), net ....... (367) 1,844 3,380 5,490
------------- ------------- ------------ -------------------
Net loss ............................. (12,145) (22,377) (21,702) (68,867)
Non-cash preferred stock charge ...... -- 27,617 -- 27,617
Preferred stock dividends ............ -- 934 -- 934
------------- ------------- ------------ -------------------
Net loss attributable to common
stockholders ....................... $ (12,145) $ (50,928) $ (21,702) $ (97,418)
============= ============= ============ ===================
Basic and diluted net loss per
common share ....................... $ (2.08) $ (4.95) $ (0.78)
============= ============= ============
Shares used in computing basic and
diluted net loss per common share . 5,845 10,294 27,955
============= ============= ============
Pro forma net loss per common
share--basic and diluted* .......... $ (1.01) $ (2.56)
============= =============
Pro forma weighted average common
shares outstanding--
basic and diluted* ................. 12,018 19,915
============= =============
December 31,
------------------------------------------
1999 2000 2001
------------- ------------- ------------
Balance Sheet Data:
Cash and cash equivalents ............ $ 4,171 $ 92,351 $ 73,959
Total assets ......................... 4,325 92,830 74,144
Total liabilities .................... 2,360 3,762 3,523
Accumulated deficit .................. (24,787) (48,099) (69,801)
Total stockholders' equity ........... 1,965 89,068 70,621
*Assumes conversion of all outstanding preferred stock into common
stock as of the date of the original issuance.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
- -------------
Overview
We are a pharmaceutical development company committed to building a
portfolio of products with significant commercial potential in select
therapeutic areas. Our initial focus is on developing products for migraine
therapy, a global market expected to exceed $2.6 billion in 2002.
MT 100, our proprietary formulation combining metoclopramide
hydrochloride and naproxen sodium, is being developed as an oral, first-line
treatment for migraine pain and associated symptoms. We have completed all
planned Phase 3 pivotal clinical trials for MT 100, which consistently
demonstrated MT 100's effectiveness in treating migraine pain. MT 300, our
injectable product candidate consisting of a new and improved formulation of
DHE, is being developed to provide long-lasting pain relief for severe migraine.
MT 300 is currently in two Phase 3 pivotal trials comparing MT 300's efficacy
with placebo. We expect to complete both of these trials by the end of the first
half of 2002. MT 400 is being developed as a co-active acute migraine therapy
combining the activity of a triptan with that of a long acting, non-steroidal,
anti-inflammatory drug in a single tablet. MT 400 is currently in Phase 2
development. We have discontinued further development activities related to MT
500, our early stage migraine product candidate in-licensed from Roche, based
upon unexpected Phase 1 trial results.
Specifically, our business activities have included:
. product candidate research and development;
. designing and funding clinical trials for our product candidates;
. regulatory and clinical affairs;
. intellectual property prosecution and expansion; and
. business development including product acquisition or
in-licensing.
Historically, we have financed our operations and internal growth
primarily through private placements of preferred stock and our initial public
offering rather than through collaborative or partnership agreements. Therefore,
we have no research funding or collaboration payments payable to us nor have we
received any payments that are refundable or subject to performance milestones.
We have incurred significant losses since our inception and we have
not generated any revenue. As of December 31, 2001, our accumulated deficit was
$69,801,055. Our historical operating losses have resulted principally from our
research and development activities, including Phase 3 clinical trial activities
for our product candidate MT 100 and Phase 2 clinical trial activities for our
product candidates MT 300 and MT 400, and general and administrative expenses.
We expect to continue to incur operating losses over the next several years as
we complete our development of MT 100 and apply for regulatory approval,
continue development of our other migraine therapeutic product candidates, and
acquire and develop product portfolios in other therapeutic areas. Our results
may vary depending on many factors, including:
. the progress of MT 100, MT 300 and MT 400 in the regulatory
process;
. the establishment of collaborations for the development and
commercialization of any of our migraine product candidates; and
. the acquisition or in-licensing of other therapeutic product
candidates.
16
Our ability to generate revenue is dependent upon our ability, alone
or with others, to successfully develop MT 100 or our other migraine product
candidates, obtain regulatory approvals and, alone or with others, successfully
manufacture and market our future products.
In October 2000, we received $78,265,552 in net proceeds from the sale
of 5,750,000 shares of our common stock in our initial public offering,
including the exercise of the underwriters' over-allotment option. All of our
outstanding preferred shares were converted into shares of our common stock upon
the completion of our initial public offering.
In connection with the grant of stock options to employees, we
recorded deferred compensation of approximately $6,328,000 in the years ended
December 31, 2000. The deferred compensation amounts were recorded as a
component of stockholders' equity and are being amortized as charges to
operations over the vesting period of the options using the straight-line
method. The vesting period of these options is generally three years.
Approximately $3,146,000 and $3,054,000 of deferred compensation expense was
charged to operations in the years ended December 31, 2001 and December 31,
2000, respectively. As of December 31, 2001, we anticipate charging to
operations additional amounts of amortization of deferred compensation of
approximately, $2,908,000 and $521,000 for the years ended December 31, 2002 and
2003, respectively.
Historical Results of Operations
Year ended December 31, 2001 compared to year ended December 31, 2000
Revenue: We generated no revenue during the year ended December 31,
2001 or the year ended December 31, 2000. In the future, we plan to generate
revenue from upfront and milestone payments related to collaborations for the
development and commercialization of product candidates and if any of our
product candidates are sold, from royalties from such sales.
Research and Development: Research and development expenses decreased
4.0% to $18,627,249 for the year ended December 31, 2001 from $19,398,904 for
the year ended December 31, 2000. This net decrease of $772,000 was due
primarily to a net decrease in direct product development costs of $1,268,000.
The costs related to the research and development of MT 100 decreased by
$5,386,000 in 2001, due primarily to decreased clinical trial activities. During
the year 2000, while conducting three Phase 3 clinical trials, expenditures
related to MT 100 were at their highest historical level. During the year 2001,
the research and development costs related to MT 300 and MT 400 increased by
$2,281,000 and $1,802,000, respectively, as a result of increased clinical trial
activities compared to the prior year. The costs associated with all other
product candidates increased $35,000. Other research and development costs
increased by $496,000, including an increase of $487,000 in personnel costs.
Total amortization of deferred stock compensation included in research and
development expenses was $1,406,000 for 2001 as compared to $1,397,000 for 2000.
We expect that research and development expenditures will increase in 2002 due
to the continuation or expansion of clinical trials, the expansion of
pharmaceutical development and toxicology study expenditures, and the
preparation of NDA's for MT 100 and MT 300. We have included in our research and
development expenses the personnel costs related to our research activities and
costs related to clinical trial preparations, monitoring expenses, and
regulatory matters.
General and Administrative: General and administrative expenses
increased 33.9% to $6,455,164 for the year ended December 31, 2001 from
$4,822,102 for the year ended December 31, 2000. This increase of $1,633,000
includes an increase of $724,000 in personnel and related benefits, an increase
of $677,000 in fees, services and other costs related to public disclosure and
investor communication activities, along with increases in other general
operating expenses that totaled $149,000. Total amortization of deferred
compensation included in general and administrative expenses was $1,740,000 for
2001 as compared to $1,657,000 for 2000. We expect that general and
administrative expenditures will continue to increase due to increasing fees and
expenses associated with the growth in our market research, business development
and commercialization efforts. We have included in our general and
administrative expenses the costs of administrative personnel and related
facility costs along with legal, accounting and professional fees, services, and
other costs related to public disclosure and investor communication activities.
17
Interest Income, net: Net interest income increased to $3,379,905 for
the year ended December 31, 2001 from $1,844,378 for the year ended December 31,
2000. Interest income increased due to increased levels of cash and cash
equivalents available for investing.
Year ended December 31, 2000 compared to year ended December 31, 1999
Revenue: We generated no revenue during the year ended December 31,
2000 or the year ended December 31, 1999.
Research and Development: Research and development expenses increased
105.1% to $19,398,904 for the year ended December 31, 2000 from $9,458,225 for
the year ended December 31, 1999. This increase of $9,941,000 was due primarily
to a $7,734,000 increase in clinical trial costs of MT 100. Costs associated
with MT 400 increased $568,000 due primarily to increased clinical trial
activities. The costs associated with MT 500 reflected a net increase of
$1,021,000 due to an increase of $2,021,000 in toxicology and pharmaceutical
development expenses being offset by a $1,000,000 decrease from the prior year's
$1,000,000 product licensing expense. MT 300 costs decreased $1,211,000
reflecting the directing of development efforts toward MT 100. Additional other
research and development costs increased $1,829,000 including an increase of
$1,429,000 in personnel costs, of which $962,000 represented increased
amortization of deferred stock compensation.
General and Administrative: General and administrative expenses
increased 107.9% to $4,822,102 for the year ended December 31, 2000 from
$2,319,939 for the year ended December 31, 1999. This increase of $2,502,000
resulted from increases of $1,789,000 in personnel and related benefits, of
which $1,479,000 represented increased amortization of deferred stock
compensation. Additionally, professional and consulting fees increased by
$429,000 and an increase of $284,000 was reflected in other costs related to our
expanded operational infrastructure.
Interest Income, net: Net interest income increased to $1,844,378 for
the year ended December 31, 2000 from a net interest expense of $367,282 for the
year ended December 31, 1999. Interest income increased $1,626,000 to $1,845,000
for the year ended December 31, 2000 from $219,000 for the year ended December
31, 1999 due to increased levels of cash and cash equivalents available for
investing. During the year ended December 31, 2000 there was nominal interest
expense while interest expense was $586,000 for the year ended December 31, 1999
related to a promissory note that was converted to preferred stock during the
period.
Income Taxes
As of December 31, 2001, we had federal and state net operating loss
carryforwards of approximately $57.6 million and research and development credit
carryforwards of approximately $3.7 million. These federal and state net
operating loss carryforwards and research and development credit carryforwards
begin to expire in 2012. The utilization of the loss carryforwards to reduce
future income taxes will depend on our ability to generate sufficient taxable
income prior to the expiration of the net loss carryforwards. In addition, the
maximum annual use of net loss carryforwards is limited in certain situations
where changes occur in our stock ownership.
Liquidity and Capital Resources
Since our inception, we have financed our operations and internal
growth primarily through private placements of preferred stock and our initial
public offering, resulting in aggregate net proceeds to us of $131,580,410. At
December 31, 2001, cash and cash equivalents totaled $73,958,724, a decrease of
$18,391,859 as compared to December 31, 2000. The decrease in cash and cash
equivalents resulted primarily from our operating activities.
Cash used by operations of $18,410,861 during the year ended December
31, 2001 represented a net loss of $21,702,508 offset by non-cash charges of
$3,286,279, an increase in prepaid and other assets of $244,209 and a decrease
in accounts payable and accrued liabilities of $238,841.
18
Cash used in investing activities of $90,643 during the year ended
December 31, 2001 reflected the purchase of equipment.
Cash provided by financing activities during the year ended December
31, 2001, totaled $109,645, reflecting the net proceeds from the exercise of
common stock options and warrants.
At December 31, 2000, cash and cash equivalents totaled $92,350,583,
an increase of $88,179,497 as compared to December 31, 1999. The increase in
cash and cash equivalents resulted primarily from our financing activities,
offset by the cash used in operating activities.
Cash used by operations of $18,139,520 during the year ended December
31, 2000 represented a net loss of $22,376,628 offset by non-cash charges of
$3,112,370, a decrease in prepaid and other assets of $276,825 and an increase
in accounts payable and accrued liabilities of $1,401,563. The increase in
accounts payable and accrued liabilities was primarily due to the increased
spending in our clinical activities.
Cash used in investing activities of $106,512 during the year ended
December 31, 2000 reflected the purchase of equipment.
Cash provided by financing activities during the year ended December
31, 2000, which totaled $106,425,529, was generated primarily by net proceeds of
$16,875,115 from the sales of the series E preferred stock in March 2000, net
proceeds of $10,742,000 from the sales of the series F preferred stock in August
2000, and net proceeds of $78,265,552 from our initial public offering in
October 2000.
We believe that our existing liquidity and capital resources,
including the proceeds from our initial public offering, will be sufficient to
complete our on-going and planned clinical trials reflected in the description
of our business, to conduct appropriate development studies, and to satisfy our
other anticipated cash needs for operating expenses for at least the next two
years.
Below is a summary of our contractual obligations for our operational
leases.
Year Amount
---- ------
2002 $ 199,939
2003 183,096
2004 369,747
2005 377,486
2006 385,311
2007-10 1,274,286
-----------------
Total $ 2,789,865
=================
We do not expect to make any material capital expenditures during the
next two years. In addition, we do not currently have any milestone or other
required material payment obligations during that period. However, we cannot be
certain that additional funding will not be required and, if required, will be
available on acceptable terms, or at all. Further, any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants.
Our forecast of the period of time through which our financial
resources will be adequate to support our operations is a forward-looking
statement that involves risks and uncertainties, and actual results could vary
as a result of a number of factors. Our future capital requirements will depend
on many factors, including:
. the number and progress of our clinical trials and other trials
and studies;
. our ability to negotiate favorable terms with various contractors
assisting in these trials and studies;
. our success in commercializing the products to which we have
rights; and
. costs incurred to enforce and defend our patent claims and other
intellectual rights.
19
Recent Accounting Pronouncements
On June 29, 2001, the FASB issued SFAS No. 141, Business Combinations
(SFAS 142) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142).
SFAS 141 eliminates the pooling-of-interests method of accounting for business
combinations, except for qualifying business combinations that were initiated
prior to July 1, 2001. SFAS 141 also includes new criteria to recognize
intangible assets separately from goodwill. The requirements of SFAS 141 are
effective for any business combination accounted for by the purchase method that
is completed after June 30, 2001. Under SFAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually, or more
frequently if impairment indicators arise, for impairment. Separate intangible
assets that are not deemed to have an indefinite life continue to be amortized
over their useful lives. The provisions of SFAS 142 requiring non-amortization
of goodwill and indefinite-lived intangible assets apply to goodwill and
indefinite-lived intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the Company is
required to adopt SFAS 142 on January 1, 2002; however, the adoption of SFAS 141
and SFAS 142 is not expected to have an impact on the Company's operating
results or stockholders' equity for the periods presented.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143 requires an entity to record a
liability for an obligation associated with the retirement of an asset at the
time that the liability is incurred by capitalizing the cost as part of the
carrying value of the related asset and depreciating it over the remaining
useful life of that asset. The standard is effective for the Company beginning
January 1, 2003, and its adoption is not expected to have an impact on the
Company's operating results or stockholders' equity.
In October 2001, the FSAB issued SFAS No. 144, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
("SFAS 144"). SFAS 144 addresses how and when to measure impairment on
long-lived assets and how to account for long-lived assets that an entity plans
to dispose of either through sale, abandonment, exchange, or distribution to
owners. The new provisions supersede SFAS 121, which addressed asset impairment,
and certain impairment, and certain provisions of APB Opinion 30 related to
reporting to the effects of the disposal of a business segment and requires
expected future operating losses from discontinued operations to be recorded in
the period in which the losses are incurred rather than the measurement date.
Under SFAS 144, more dispositions may qualify for discontinued operations
treatment in the income statement. The provisions of SFAS 144 became effective
for the Company January 1, 2002 and are not expected to have a material impact
on the Company's operating results or stockholders' equity.
Factors Affecting the Company's Prospects
We depend heavily on the success of our product candidate, MT 100, which may
never be approved for commercial use. If we are unable to develop, gain approval
of or commercialize MT 100, we may never be profitable.
Since our founding, we have invested a significant portion of our time
and financial resources in the development of MT 100 and anticipate that for the
foreseeable future our ability to achieve profitability will be dependent on its
successful development, approval and commercialization. Many factors could
negatively affect the success of our efforts to develop and commercialize MT
100, including:
. negative, inconclusive or otherwise unfavorable results from our
carcinogenicity studies or from any other studies or clinical trials;
. an inability to obtain, or delay in obtaining, regulatory approval for
the commercialization of MT 100;
. an inability to establish collaborative arrangements with third
parties for the manufacture and commercialization of MT 100, or any
disruption of any of these arrangements, if established;
20
. a failure to achieve market acceptance of MT 100;
. significant delays in our carcinogenicity studies;
. any demand by the FDA that we conduct additional clinical trials or
other studies and the expenses relating thereto; and
. significant increases in the costs of any additional carcinogenicity
studies.
We have incurred losses since inception and anticipate that we will continue to
incur losses for the foreseeable future. We do not have a current source of
product revenue and may never be profitable.
We have incurred losses in each year since our inception and we
currently have no source of product revenue. As of December 31, 2001, we had an
accumulated deficit of approximately $69.8 million. We expect to incur
significant and increasing operating losses and do not know when or if we will
generate product revenue.
We expect that the amount of our operating losses will fluctuate
significantly from quarter to quarter as a result of increases and decreases in
development efforts, the timing of payments that we may receive from others, and
other factors. Our ability to achieve profitability is dependent on a number of
factors, including our ability to:
. develop and obtain regulatory approvals for our product candidates;
. negotiate collaborative agreements under which we receive upfront and
milestone payments for our product candidates;
. successfully commercialize our product candidates, which may include
entering into collaborative agreements; and
. secure contract manufacturing and distribution services.
If we, or our collaborators, do not obtain and maintain required regulatory
approvals, we will be unable to commercialize our product candidates.
Our product candidates under development are subject to extensive
domestic and foreign regulation. The FDA regulates, among other things, the
development, testing, manufacture, safety, efficacy, record keeping, labeling,
storage, approval, advertisement, promotion, sale and distribution of
pharmaceutical products. If we market our products abroad, they are also subject
to extensive regulation by foreign governments. None of our product candidates,
including MT 100, have been approved for sale in the United States or any
foreign market. We will need to complete preclinical, toxicology, genotoxicity
and carcinogenicity studies, as well as clinical trials, on these product
candidates in support of NDA submissions to the FDA for approval to market the
product candidates. If we are unable to obtain and maintain FDA and foreign
governmental approvals for our product candidates, we will not be permitted to
sell them.
Approval of a product candidate may be conditioned upon certain
limitations and restrictions as to the drug's use, or upon the conduct of
further studies, and is subject to continuous review. The FDA may also require
us to conduct additional post-approval studies. These post-approval studies may
include carcinogenicity studies in animals or further human clinical trials. The
later discovery of previously unknown problems with the product, manufacturer or
manufacturing facility may result in criminal prosecution, civil penalties,
recall or seizure of products, or total or partial suspension of production, as
well as other regulatory action against our product candidates or us. If
approvals are withdrawn for a product, or if a product is seized or recalled, we
would be unable to sell that product and our revenues would suffer.
21
We and our contract manufacturers are required to comply with the
applicable FDA current Good Manufacturing Practices regulations, which include
requirements relating to quality control and quality assurance, as well as the
corresponding maintenance of records and documentation. Further, manufacturing
facilities must be approved by the FDA before they can be used to manufacture
our product candidates, and are subject to additional FDA inspection. We, or our
third-party manufacturers, may not be able to comply with cGMP regulations or
other FDA regulatory requirements, resulting in a delay or an inability to
manufacture the products.
Labeling and promotional activities are subject to scrutiny by the FDA
and state regulatory agencies and, in some circumstances, the Federal Trade
Commission. FDA enforcement policy prohibits the marketing of approved products
for unapproved, or off-label, uses. These regulations and the FDA's
interpretation of them may impair our ability to effectively market products for
which we gain approval. Failure to comply with these requirements can result in
regulatory enforcement action by the FDA. Further, we may not obtain the
labeling claims we believe are necessary or desirable for the promotion of our
product candidates.
We need to conduct preclinical, toxicology, genotoxicity and carcinogenicity
studies and clinical trials of all of our product candidates. Any unanticipated
costs or delays in these studies or trials, or the need to conduct additional
studies or trials, could reduce our revenues and profitability.
Generally, we must demonstrate the efficacy and safety of our product
candidates before approval to market can be obtained from the FDA. Our product
candidates are in various stages of clinical development. Depending upon the
stage at which a product candidate is in the development process, we will need
to complete preclinical, toxicology, genotoxicity and carcinogenicity studies,
as well as clinical trials, on these product candidates before we submit
marketing applications in the United States and abroad. These studies and trials
can be very costly and time-consuming. In addition, we rely on third parties to
perform significant aspects of our studies and clinical trials, introducing
additional sources of risk into our development programs. Results from
preclinical testing and early clinical trials are not necessarily predictive of
results obtained in later clinical trials involving large scale testing of
patients in comparison to control groups.
The completion of clinical trials depends upon many factors, including
the rate of enrollment of patients. If we are unable to recruit sufficient
clinical patients during the appropriate period, we may need to delay our
clinical trials and incur significant additional costs. In addition, the FDA or
Institutional Review Boards may require us to conduct additional trials or
delay, restrict or discontinue our clinical trials on various grounds, including
a finding that the subjects or patients are being exposed to an unacceptable
health risk. Even though we have completed all planned Phase 3 pivotal clinical
trials for MT 100 and even if we complete our current clinical trials for MT 100
and our other product candidates, we may be required to conduct additional
clinical trials and studies to support our NDA to the FDA. Once submitted, an
NDA would require FDA approval before we could distribute or commercialize the
product described in the application.
Even if we determine that data from our clinical trials, toxicology,
genotoxicity and carcinogenicity studies are positive, we cannot assure you that
the FDA, after completing its analysis, will not determine that the trials or
studies should have been conducted or analyzed differently, and thus reach a
different conclusion from that reached by us, or request that further trials,
studies or analyses be conducted. For example, the FDA may require data in
certain subpopulations, such as pediatric use, or may require long-term
carcinogenicity studies, prior to NDA approval, unless we can obtain a waiver to
delay such studies.
Our costs associated with our human clinical trials vary based on a
number of factors, including:
. the order and timing of clinical indications pursued;
. the extent of development and financial support from collaborative
parties, if any;
. the need to conduct additional clinical trials or studies;
22
. the number of patients required for enrollment;
. the difficulty of obtaining sufficient patient populations and
clinicians;
. the difficulty of obtaining clinical supplies of our product
candidates; and
. governmental and regulatory delays.
Even if we obtain positive preclinical or clinical study results
initially, future clinical trial results may not be similarly positive.
We depend on collaborations with third parties, which may reduce our product
revenues or restrict our ability to commercialize products.
Our ability to develop, manufacture, commercialize and obtain
regulatory approval of our existing and any future product candidates depends
upon our ability to enter into and maintain contractual and collaborative
arrangements with others. We have and intend in the future to retain contract
manufacturers and clinical trial investigators. In addition, the identification
of new compounds or product candidates for development may require us to enter
into licensing or other collaborative agreements with others, including
pharmaceutical companies and research institutions. We currently intend to
market and commercialize our products through others, which will require us to
enter into sales, marketing and distribution arrangements with third parties.
These arrangements may reduce our product revenues.
Our third-party contractual or collaborative arrangements may require
us to grant rights, including marketing rights, to one or more parties. These
arrangements may also contain covenants restricting our product development or
business efforts in the future, or other terms that are burdensome to us, and
may involve the acquisition of our equity securities. Collaborative agreements
for the acquisition of new compounds or product candidates may require us to pay
license fees, make milestone payments and/or pay royalties.
We cannot be sure that we will be able to maintain our existing or
future collaborative or contractual arrangements, or that we will be able to
enter into future arrangements with third parties on terms acceptable to us, or
at all. If we fail to maintain our existing arrangements or to establish new
arrangements when and as necessary, we could be required to undertake these
activities at our own expense, which would significantly increase our capital
requirements and may delay the development, manufacture and commercialization of
our product candidates.
We are subject to a number of risks associated with our dependence on
contractual and collaborative arrangements with others:
. We may not have day-to-day control over the activities of our
contractors or collaborators.
. Third parties may not fulfill their obligations to us.
. We may not realize the contemplated or expected benefits from
collaborative or other arrangements.
. Business combinations and changes in the contractual or collaborative
party's business strategy may adversely affect its willingness or
ability to complete its obligations to us.
. The contractor or collaborative party may have the right to terminate
its arrangements with us on limited or no notice and for reasons
outside of our control.
. The contractual or collaborative party may develop or have rights to
competing products or product candidates and withdraw support or cease
to perform work on our products.
. Disagreements may arise regarding breach of the arrangement, ownership
of proprietary rights, clinical results or regulatory approvals.
23
These factors could lead to delays in the development or
commercialization of our product candidates, and disagreements with our
contractors or collaborators could require or result in litigation or
arbitration, which would be time-consuming and expensive. Our ultimate success
may depend upon the success and performance on the part of these third parties.
If we fail to maintain these relationships or establish new relationships as
required, development and commercialization of our product candidates will be
delayed.
We currently depend and will in the future depend on third parties to
manufacture our product candidates. If these manufacturers fail to meet our
requirements or any regulatory requirements, the product development and
commercialization of our product candidates will be delayed.
We do not have, and have no plans to develop, the internal capability
to manufacture either clinical trial or commercial quantities of products that
we may develop or are under development. We rely upon third-party manufacturers
to supply us with our product candidates. We also need supply contracts to sell
our products commercially. There is no guarantee that manufacturers that enter
into commercial supply contracts with us will be financially viable entities
going forward. If we do not have the necessary commercial supply contracts, or
if our current manufacturer is unable to satisfy our requirements or meet any
regulatory requirements, and we are required to find an alternative source of
supply, there may be additional costs and delays in product development and
commercialization of our product candidates or we may be required to comply with
additional regulatory requirements.
If we are unable to build sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will not
be able to commercialize any of our drug candidates.
We currently intend to enter into agreements with third parties to
market and sell any of our product candidates approved by the FDA for commercial
sale. We may not be able to enter into marketing and sales agreements with
others on terms acceptable to us, if at all. To the extent that we enter into
marketing and sales agreements with others, our revenues, if any, will be
affected by the sales and marketing efforts of others. We may also retain the
right, where possible, to co-promote our products in conjunction with our
collaborative parties. If we are unable to enter into third-party sales and
marketing agreements, or if we are exercising our rights to co-promote a
product, then we will be required to develop internal marketing and sales
capabilities. We may not successfully establish marketing and sales capabilities
or have sufficient resources to do so.
If our competitors develop and commercialize products faster than we do or if
their products are superior to ours, our commercial opportunities will be
reduced or eliminated.
Our product candidates will have to compete with existing and any
newly developed migraine therapies. There are also likely to be numerous
competitors developing new products to treat migraine and the other diseases and
conditions for which we may seek to develop products in the future, which could
render our product candidates or technologies obsolete or non-competitive. Our
primary competitors will likely include large pharmaceutical companies,
biotechnology companies, universities and public and private research
institutions. We face, and will continue to face, intense competition from other
companies for securing collaborations with pharmaceutical companies,
establishing relationships with academic and research institutions, and
acquiring licenses to proprietary technology. These competitors, either alone or
with collaborative parties, may succeed with technologies or products that are
more effective than any of our current or future technologies or products. Many
of our actual or potential competitors, either alone or together with
collaborative parties, have substantially greater financial resources, and
almost all of our competitors have larger numbers of scientific and
administrative personnel than we do. Many of these competitors, either alone or
together with their collaborative parties, also have significantly greater
experience than we do in:
. developing product candidates;
. undertaking preclinical testing and human clinical trials;
. obtaining FDA and other regulatory approvals of product candidates;
and
. manufacturing and marketing products.
24
Accordingly, our actual or potential competitors may succeed in
obtaining patent protection, receiving FDA approval or commercializing products
before we do. Our competitors may also develop products or technologies that are
superior to those that we are developing, and render our product candidates or
technologies obsolete or non-competitive. If we cannot successfully compete with
new or existing products, our marketing and sales will suffer and we may not
ever be profitable.
If we are unable to protect our patents or proprietary rights, or if we are
unable to operate our business without infringing the patents and proprietary
rights of others, we may be unable to develop our product candidates or compete
effectively.
The pharmaceutical industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. Our success will depend, in part, on our ability, and the ability of
our licensors, to obtain and to keep protection for our products and
technologies under the patent laws of the United States and other countries, so
that we can stop others from using our inventions. Our success also will depend
on our ability to prevent others from using our trade secrets. In addition, we
must operate in a way that does not infringe, or violate, the patent, trade
secret and other intellectual property rights of other parties.
We cannot know how much protection, if any, our patents will provide
or whether our patent applications will issue as patents. The breadth of claims
that will be allowed in patent applications cannot be predicted and neither the
validity nor enforceability of claims in issued patents can be assured. If, for
any reason, we are unable to obtain and enforce valid claims covering our
products and technology, we may be unable to prevent competitors from using the
same or similar technology or to prevent competitors from marketing identical
products. In addition, due to the extensive time needed to develop and test our
products, any patents that we obtain may expire in a short time after
commercialization. This would reduce or eliminate any advantages that such
patents may give us.
We may need to license rights to third party patents and intellectual
property to continue the development and marketing of our product candidates. If
we are unable to acquire such rights on acceptable terms, our development
activities may be blocked and we may be unable to bring our product candidates
to market.
We may enter into litigation to defend ourselves against claims of
infringement, assert claims that a third party is infringing one or more of our
patents, protect our trade secrets or know-how, or determine the scope and
validity of other's patent or proprietary rights. As a result of such
litigation, our patent claims may be found to be invalid, unenforceable or not
of sufficient scope to cover the activities of an alleged infringer. If we are
found to infringe the patent rights of others, then we may be forced to pay
damages sufficient to irreparably harm the Company and/or be prevented from
continuing our product development and marketing activities. Regardless of its
eventual outcome, any lawsuit that we enter into may consume time and resources
that will impair our ability to develop and market our product candidates.
We have entered into confidentiality agreements with our employees,
consultants, advisors and collaborators. However, these parties may not honor
these agreements and, as a result, we may not be able to protect our rights to
unpatented trade secrets and know-how. Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets and know-how. Also, many of our scientific and
management personnel were previously employed by competing companies. As a
result, such companies may allege trade secret violations and similar claims
against us.
25
If we fail to acquire, develop and commercialize additional products or product
candidates, or fail to successfully promote or market approved products, we may
never achieve profitability.
As part of our business strategy, we plan to identify and acquire
product candidates or approved products in areas in which we possess particular
knowledge. Because we do not directly engage in basic research or drug
discovery, we must rely upon third parties to sell or license product
opportunities to us. Other companies, including some with substantially greater
financial, marketing and sales resources, are competing with us to acquire such
products. We may not be able to acquire rights to additional products on
acceptable terms, if at all. In addition, we may acquire new products with
different marketing strategies, distribution channels and bases of competition
than those of our current products. Therefore, we may not be able to compete
favorably in those product categories.
Any of our future products, including MT 100, may not be accepted by the market,
which would limit the commercial opportunities for our products.
Even if our product candidates perform successfully in clinical trials
and are approved by the FDA and other regulatory authorities, our future
products, including MT 100, may not achieve market acceptance and may not
generate the revenues that we anticipate. The degree of market acceptance will
depend upon a number of factors, including:
. the receipt and timing of regulatory approvals;
. the availability of third-party reimbursement;
. the indications for which the product is approved;
. the rate of adoption by health care providers;
. the rate of product acceptance by target patient populations;
. the price of the product relative to alternative therapies;
. the availability of alternative therapies;
. the extent of marketing efforts by us and third-party distributors and
agents;
. the publicity regarding our products or similar products; and
. the extent and severity of side effects as compared to alternative
therapies.
If we do not receive adequate third-party reimbursements for any of our future
products, our revenues and profitability will be reduced.
Our ability to commercialize our product candidates successfully will
depend, in part, on the extent to which reimbursement for the costs of such
products and related treatments will be available from government health
administration authorities, such as Medicare and Medicaid in the United States,
private health insurers and other organizations. Significant uncertainty exists
as to the reimbursement status of a newly approved health care product,
particularly for indications for which there is no current effective treatment
or for which medical care is typically not sought. Adequate third-party coverage
may not be available to enable us to maintain price levels sufficient to realize
an appropriate return on our investment in product research and development. If
adequate coverage and reimbursement levels are not provided by government and
third-party payors for use of our products, our products may fail to achieve
market acceptance.
Our future revenues, profitability and access to capital will be
affected by the continuing efforts of governmental and private third-party
payors to contain or reduce the costs of health care through various means. We
expect that a number of federal, state and foreign proposals will seek to
control the cost of drugs through governmental regulation. We are unsure of the
form that any health care reform legislation may take or what actions federal,
state, foreign and private payors may take in response to the proposed reforms.
Therefore, we cannot predict the effect of any implemented reform on our
business.
26
If product liability lawsuits are successfully brought against us, we may incur
substantial liabilities and may be required to limit commercialization of our
product candidates.
The testing and marketing of pharmaceutical products entails an
inherent risk of product liability. Product liability claims might be brought
against us by consumers, health care providers, pharmaceutical companies or
others selling our future products. If we cannot successfully defend ourselves
against such claims, we may incur substantial liabilities or be required to
limit the commercialization of our product candidates. We have obtained limited
product liability insurance coverage only for our human clinical trials.
However, insurance coverage is becoming increasingly expensive, and no assurance
can be given that we will be able to maintain insurance coverage at a reasonable
cost or in sufficient amounts to protect us against losses due to liability. We
may not be able to obtain commercially reasonable product liability insurance
for any products approved for marketing. If a plaintiff brings a successful
product liability claim against us in excess of our insurance coverage, if any,
we may incur substantial liabilities and our business may fail.
We may need substantial additional funding and may not have access to capital.
If we are unable to raise capital when needed, we may need to delay, reduce or
eliminate our product development or commercialization efforts.
We may need to raise additional funds to execute our business
strategy. We have incurred losses from operations since inception and we expect
to incur additional operating losses. In particular, we believe that we will
require additional capital to fund the acquisition of new product candidates.
Our actual capital requirements will depend upon numerous factors, including:
. the progress of our research and development programs;
. the progress of preclinical studies, clinical and other testing;
. the time and cost involved in obtaining regulatory approvals;
. the costs of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights;
. the effect of competing technological and market developments;
. the effect of changes and developments in our collaborative, licensing
and other relationships; and
. the terms and timing of any new collaborative, licensing and other
arrangements that we may establish.
We may be unable to raise sufficient funds to execute our business
strategy. In addition, we may not be able to find sufficient debt or equity
funding on acceptable terms. If we cannot, we may need to delay, reduce or
eliminate research and development programs. The sale by us of additional equity
securities or the expectation that we will sell additional equity securities may
have an adverse effect on the price of our common stock. In addition,
collaborative arrangements may require us to grant product development programs
or licenses to third parties for products that we might otherwise seek to
develop or commercialize ourselves.
27
We depend on key personnel and may not be able to retain these employees or
recruit additional qualified personnel, which would harm our research and
development efforts.
We are highly dependent on the efforts of our key management and
scientific personnel, especially John R. Plachetka, Pharm.D., our Chairman,
President and Chief Executive Officer. Dr. Plachetka signed an employment
agreement with us on April 1, 1999, as amended and restated on July 25, 2001,
for a three-year term with automatic one-year renewal terms. As of July 25,
2001, we also have entered into employment agreements with four of our other key
management personnel, each of which provides for a two-year term with automatic
one-year renewal terms. If we lose the services of Dr. Plachetka or the services
of any of our other key personnel, or fail to recruit key scientific personnel,
we may be unable to achieve our business objectives. There is intense
competition for qualified scientific personnel. Since our business is very
science-oriented, we need to continue to attract and retain such people. We may
not be able to continue to attract and retain the qualified personnel necessary
for developing our business. Furthermore, our future success will also depend in
part on the continued service of our other key management personnel.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Our proceeds from our initial public offering and private placements
have been invested in money market funds that invest primarily in short-term,
highly-rated investments, including U.S. Government securities, commercial paper
and certificates of deposit guaranteed by banks. Under our current policies, we
do not use interest rate derivative instruments to manage our exposure to
interest rate changes. Because of the short-term maturities of our investments,
we do not believe that a decrease in market rates would have a significant
negative impact on the value of our investment portfolio. Declines in interest
rates will, however, reduce our interest income while increases in interest
rates will increase our interest income.
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
POZEN's Financial Statements and notes thereto are included elsewhere
in this annual report on Form 10-K and incorporated herein by reference. See
Item 14 of Part IV.
Item 9. Changes In and Disagreements With Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
(a) Identification of Directors
Information with respect to the members of the Board of Directors of
the Company is set forth under the captions "Nominee for Election as Directors
for Terms of Three Years" and "Directors Continuing in Office" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A, which
information is incorporated herein by reference.
(b) Identification of Executive Officers
Information with respect to the executive officers of the Company is
set forth under the caption "Executive Officers of the Company" contained in
Part I, Item 1 of this report, which information is incorporated herein by
reference.
(c) Section 16(a) Beneficial Ownership Reporting Compliance.
Information with respect to the Section 16(a) compliance of the
directors and executive officers of the Company is set forth under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
28
Company's definitive proxy statement to be filed pursuant to Regulation 14A,
which information is incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
Information required by this Item is set forth under the caption
"Executive and Director Compensation" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14A, which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Information required by this Item is set forth under the captions
"Principal Stockholders" and "Stock Ownership of Directors, Nominees for
Director, and Executive Officers" in the Company's definitive proxy statement to
be filed pursuant to Regulation 14A, which information is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) Financial Statements and Schedules:
1. Financial Statements
The following financial statements and reports of independent auditors
are included herein:
Report of Independent Auditors ......................................... F-3
Balance Sheets ......................................................... F-4
Statements of Operations ............................................... F-5
Statements of Stockholders' Equity (Deficit) ........................... F-6
Statements of Cash Flows ............................................... F-8
Notes to Financial Statements .......................................... F-9
2. Financial Statement Schedules
Not applicable.
3. List of Exhibits
See below for a list of the exhibits incorporated by reference herein
or filed herewith.
(b) Reports on Form 8-K.
None.
(c) Exhibits Required by Item 601 of Regulation S-K.
29
The exhibits filed as a part of this Form 10-K are listed on the
Exhibit Index immediately preceding such Exhibits and include both exhibits
submitted with this Report as filed with the Securities and Exchange Commission
and those incorporated by reference to other filings.
Exhibit Number Description
- -------------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant. *
3.2 Amended and Restated Bylaws of the Registrant. *
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Certificate of Incorporation and Amended and Restated
Bylaws of the Registrant defining rights of the holders of Common
Stock of the Registrant.
10.1 Sublease Agreement between Quintiles, Inc. and the Registrant,
dated April 7, 1997. *
10.2 Stock Option Plan of the Registrant. *
10.3 First Amendment to Stock Option Plan dated February 14, 1997. *
10.4 Executive Employment Agreement with John R. Plachetka dated April
1, 1999. * ***
10.5 License Agreement dated September 24, 1999 between the Registrant
and F. Hoffman-La Roche Ltd. *
10.6 Investor Rights Agreement dated July 28, 1999 between the
Registrant and the holders of the Series D Preferred Stock. *
10.7 Investor Rights Agreement dated March 24, 2000 between the
Registrant and the holders of the Series E Preferred Stock. *
10.8 2000 Equity Compensation Plan *
10.9 Investor Rights Agreement dated August 28, 2000 between the
Registrant and the holders of the Series F Preferred Stock. *
10.10 Sublease Agreement between Intecardia, Inc. and the Registrant
dated as of September 1, 2000. *
10.11 Supply Agreement dated January 17, 2001 by and between the
Registrant and Catalytica Pharmaceuticals, Inc. (filed as Exhibit
10.1 to the Company's Form 10-Q filed May 14, 2001).
10.12 First Amendment to the Executive Employment Agreement with John
R. Plachetka, Pharm.D., dated as of April 25, 2001 (filed as
Exhibit 10.2 to the Company's Form 10-Q filed May 14, 2001). ***
10.13 Amended and Restated Executive Employment Agreement with John R.
Plachetka dated July 25, 2001 (filed as Exhibit 10.1 to the
Company's Form 10-Q filed October 31, 2001). ***
10.14 Executive Employment Agreement with Andrew L. Finn dated July 25,
2001 (filed as Exhibit 10.2 to the Company's Form 10-Q filed
October 31, 2001). ***
10.15 Executive Employment Agreement with Kristina M. Adomonis dated
July 25, 2001 (filed as Exhibit 10.3 to the Company's Form 10-Q
filed October 31, 2001). ***
30
10.16 Executive Employment Agreement with Matthew E. Czajkowski dated
July 25, 2001 (filed as Exhibit 10.4 to the Company's Form 10-Q
filed October 31, 2001). ***
10.17 Executive Employment Agreement with John E. Barnhardt dated July
25, 2001 (filed as Exhibit 10.5 to the Company's Form 10-Q filed
October 31, 2001). ***
10.18 POZEN Inc. 2001 Long Term Incentive Plan (adopted by Board of
Directors, subject to stockholder approval) (filed as Exhibit
10.6 to the Company's Form 10-Q filed October 31, 2001).
10.19 Certificate of Award dated August 1, 2001 issued to John R.
Plachetka pursuant to POZEN Inc. 2001 Long Term Incentive Plan
(granted subject to stockholder approval of the Plan) (filed as
Exhibit 10.7 to the Company's Form 10-Q filed October 31, 2001).
***
10.20 Commercial Supply Agreement dated October 2001 by and between
Registrant and Lek Pharmaceuticals Inc. +**
10.21 Lease Agreement between The Exchange at Meadowmont LLC and the
Registrant dated as of November 21, 2001. **
23.1 Consent of Ernst & Young LLP, Independent Auditors**
* Incorporated by reference to the same-numbered exhibit of the Company's
Registration statement on Form S-1, No. 333-35930.
** Filed herewith.
*** Compensation Related Contract.
+ Confidential treatment requested. Confidential materials omitted and
filed separately with the Securities and Exchange Commission.
31
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.
Registrant:
POZEN Inc.
Date: March 29, 2002 By: /s/ John R. Plachetka
---------------------
John R. Plachetka
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John R. Plachetka Chairman of the Board, President March 29, 2002
- ------------------------------------
John R. Plachetka and Chief Executive Officer
(Principal Executive Officer)
/s/ Matthew E. Czajkowski Senior Vice President, Finance March 29, 2002
- ------------------------------------
Matthew E. Czajkowski and Administration, and Chief
Financial Officer (Principal Financial
Officer)
/s/ John E. Barnhardt Vice President, Finance and March 29, 2002
- ------------------------------------
John E. Barnhardt Administration (Principal Accounting
Officer)
/s/ Jacques F. Rejeange Director March 29, 2002
- ------------------------------------
Jacques F. Rejeange
/s/ Bruce A. Tomason Director March 29, 2002
- ------------------------------------
Bruce A. Tomason
/s/ Peter J. Wise Director March 29, 2002
- ------------------------------------
Peter J. Wise
/s/ Ted G. Wood Director March 29, 2002
- ------------------------------------
Ted G. Wood
32
Audited Financial Statements
POZEN Inc.
(A Development Stage Company)
Years ended December 31, 2001, 2000 and 1999 and the period from
September 25, 1996 (inception) through December 31, 2001 with
Report of Independent Auditors
F-1
POZEN Inc.
(A Development Stage Company)
Audited Financial Statements
Years ended December 31, 2001, 2000 and 1999 and the period from
September 25, 1996 (inception) through December 31, 2001
Contents
Report of Independent Auditors ......................................... F-3
Audited Financial Statements
Balance Sheets ......................................................... F-4
Statements of Operations ............................................... F-5
Statements of Stockholders' Equity ..................................... F-6
Statements of Cash Flows ............................................... F-8
Notes to Financial Statements .......................................... F-9
F-2
Report of Independent Auditors
The Board of Directors
POZEN Inc.
We have audited the accompanying balance sheets of POZEN Inc. (a development
stage company) as of December 31, 2001 and 2000, and the related statements of
operations, stockholders' equity and cash flows for each of the three years
ended December 31, 2001 and for the period from September 25, 1996 (inception)
through December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of POZEN Inc. (a development stage
company) at December 31, 2001 and 2000 and the results of its operations and its
cash flows for each of the three years ended December 31, 2001 and for the
period from September 25, 1996 (inception) through December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Raleigh, North Carolina
January 11, 2002
F-3
POZEN Inc.
(A Development Stage Company)
Balance Sheets
December 31,
2001 2000
----------------------------------
Assets
Cash and cash equivalents $ 73,958,724 $ 92,350,583
Prepaid expenses 67,498 198,144
Accrued interest receivable 688 113,160
Other current assets 8,000 9,091
----------------------------------
Total current assets 74,034,910 92,670,978
Furniture and fixtures, net of accumulated depreciation of $82,055 and
$166,616 109,014 158,780
----------------------------------
Total assets $ 74,143,924 $ 92,829,758
==================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 194,138 $ 128,329
Accrued expenses 3,328,881 3,633,531
----------------------------------
Total current liabilities 3,523,019 3,761,860
Stockholders' equity:
Common stock, $0.001 par value, 90,000,000 shares authorized, issued and
outstanding, 27,969,435 and 27,732,213 shares at December 31,
2001 and 2000, respectively 27,969 27,732
Additional paid-in capital 143,512,559 143,330,124
Common stock warrants 310,808 426,048
Deferred compensation (3,429,376) (6,617,459)
Deficit accumulated during the development stage (69,801,055) (48,098,547)
----------------------------------
Total stockholders' equity 70,620,905 89,067,898
----------------------------------
Total liabilities and stockholders' equity $ 74,143,924 $ 92,829,758
==================================
See accompanying notes.
F-4
POZEN Inc.
(A Development Stage Company)
Statements of Operations
Period from
September 26,
1996 (inception)
through
Year ended December 31, December 31,
2001 2000 1999 2001
------------------------------------------------------------------------------
Operating expenses:
General and administrative $ 6,455,164 $ 4,822,102 $ 2,319,939 $ 16,182,191
Research and development 18,627,249 19,398,904 9,458,225 58,175,252
------------------------------------------------------------------------------
Total operating expenses 25,082,413 24,221,006 11,778,164 74,357,443
Interest income (expense), net 3,379,905 1,844,378 (367,282) 5,490,866
------------------------------------------------------------------------------
Net loss (21,702,508) (22,376,628) (12,145,446) (68,866,577)
Non-cash preferred stock charge - 27,617,105 - 27,617,105
Preferred stock dividends - 934,478 - 934,478
------------------------------------------------------------------------------
Loss attributable to common stockholders
$ (21,702,508) $ (50,928,211) $ (12,145,446) $ (97,418,160)
==============================================================================
Basic and diluted net loss per common
share $ (0.78) $ (4.95) $ (2.08)
===========================================================
Shares used in computing basic and
diluted net loss per common share 27,954,697 10,293,605 5,845,304
===========================================================
Pro forma net loss per common share -
basic and diluted $ (2.56) $ (1.01)
========================================
Pro forma weighted average common shares
outstanding - basic and diluted 19,915,147 12,017,944
========================================
See accompanying notes.
F-5
POZEN Inc.
(A Development Stage Company)
Statements of Stockholders' Equity
Series A Series B Series C Series D
Date of Preferred Preferred Preferred Preferred Common
Transaction Stock Stock Stock Stock Stock
------------------------------------------------------------------------------------
Issuance of 5,814,190 shares of September 1996
common stock at $0.001 per share $ - $ - $ - $ - $ 5,814
Issuance of 2,105,931 shares of December 1996
Series A preferred stock at $3.15
per share 2,106 - - - -
Issuance of 78,776 shares of Series December 1996
A preferred stock warrants for
financing activities - - - - -
Deferred compensation - - - - -
Amortization of deferred compensation - - - - -
Net loss - - - - -
-----------------------------------------------------------------
Balance at December 31, 1996 2,106 - - - 5,814
Proceeds from stockholders' receivables - - - - -
Issuance of 1,135,000 shares of December 1997
Series B preferred stock at $4.00
per share - 1,135 - - -
Issuance of 36,450 shares of Series B
preferred stock warrants for financing
activities - - - - -
Deferred compensation - - - - -
Amortization of deferred compensation - - - - -
Net loss - - - - -
-----------------------------------------------------------------
Balance at December 31, 1997 2,106 1,135 - - 5,814
Issuance of 4,377 shares of Series C
preferred stock at $4.00 per share March 1998 - 4 - - -
Issuance of 563,044 shares of Series C
preferred stock at $4.05 per share March 1998 - - 563 - -
Exercise of 29,977 stock options at
$0.19 per share - - - - 30
Issuance of 8,884 shares of Series C
preferred stock warrants for financial
activities March 1998 - - - - -
Deferred compensation - - - - -
Amortization of deferred compensation - - - - -
Net loss - - - - -
-----------------------------------------------------------------
Balance at December 31, 1998 2,106 1,139 563 - 5,844
Issuance of 2,593,750 shares of Series July and Sept. 1999
D preferred stock at $4.80 per share - - - 2,594 -
Exercise of 3,373 stock options at
$0.19 per share - - - - 4
Deferred compensation - - - - -
Amortization of deferred compensation - - - - -
Issuance of 200,000 shares of Series D July and Sept. 1999
preferred stock warrants for financing
activities - - - - -
Net loss - - - - -
-----------------------------------------------------------------
Balance at December 31, 1999 2,106 1,139 563 2,594 5,848
Exercise of common stock options - - - - 208
Deferred compensation - - - - -
Amortization of deferred compensation - - - - -
Preferred stock dividends - - - - -
Conversion of preferred stock into
common stock (2,106) (1,139) (563) (2,594) 15,488
Proceeds from sale of common stock in
initial public offering, net of
offering costs - - - - 5,000
Proceeds from sale of common stock - - - - 750
Exercise of common stock warrants - - - - 369
Dividends - - - - 69
Net loss - - - - -
-----------------------------------------------------------------
Balance at December 31, 2000 - - - - 27,732
Adjustment to deferred compensation for
forfeiture of common stock options - - - - -
Exercise of common stock options - - - - 187
Amortization of deferred compensation - - - - -
Exercise of common stock warrants - - - - 50
Net loss - - - - -
-----------------------------------------------------------------
Balance at December 31, 2001 $ - $ - $ - $ - $27,969
=================================================================
F-6
POZEN Inc.
(A Development Stage Company)
Statements of Stockholders' Equity (continued)
Deficit
Accumulated
Additional Preferred Receivable During the Total
Paid-In Stock From Deferred Development Stockholders'
Capital Warrants Stockholders Compensation Stage Equity
- -------------------------------------------------------------------------------------
$ (1,504) $ - $ (4,310) $ - $ - $ -
6,231,314 - (1,000,000) - - 5,233,420
- 242,000 - - - 242,000
190,385 - - (190,385) - -
- - - 28,267 - 28,267
- - - (101,334) (101,334)
- -------------------------------------------------------------------------------------
6,420,195 242,000 (1,004,310) (162,118) (101,334) 5,402,353
- - 1,004,310 - - 1,004,310
4,195,865 - - - - 4,197,000
- 139,000 - - 139,000
1,001,629 - - (1,001,629) -
- - - 214,272 214,272
- - - - (3,803,030) (3,803,030)
- -------------------------------------------------------------------------------------
11,617,689 381,000 - (949,475) (3,904,364) 7,153,905
17,508 - - - - 17,512
2,170,250 - - - - 2,170,813
5,525 - 5,555
- 35,000 35,000
362,489 - (362,489)
- - - 401,468 - 401,468
- - - - (8,737,631) (8,737,631)
- -------------------------------------------------------------------------------------
14,173,461 416,000 - (910,496) (12,641,995) 1,046,622
11,522,406 - - - - 11,525,000
621 - - - - 625
3,045,666 - - (3,045,666) - -
- - - 612,909 - 612,909
- 925,000 - - - 925,000
- - - - (12,145,446) (12,145,446)
- -------------------------------------------------------------------------------------
28,742,154 1,341,000 - (3,343,253) (24,787,441) 1,964,710
74,861 - - - - 75,069
6,328,492 - - (6,328,492) - -
- - - 3,054,286 - 3,054,286
- - - - (934,478) (934,478)
27,347,019 - - - - 27,356,105
67,798,052 - - - - 67,803,052
10,461,750 - - - - 10,462,500
1,805,682 (914,952) - - - 891,099
772,114 - - - - 772,183
- - - - (22,376,628) (22,376,628)
- -------------------------------------------------------------------------------------
143,330,124 426,048 - (6,617,459) (48,098,547) 89,067,898
(42,213) - - 42,213 - -
109,408 - - - - 109,595
- - - 3,145,870 - 3,145,870
115,240 (115,240) - - - 50
- - - - (21,702,508) (21,702,508)
- -------------------------------------------------------------------------------------
$143,512,559 $ 310,808 $ - $(3,429,376) $(69,801,055) $ 70,620,905
=====================================================================================
F-7
POZEN Inc.
(A Development Stage Company)
Statements of Cash Flows
September 26,
1996
(inception)
through
Year ended December 31, December 31,
2001 2000 1999 2001
--------------------------------------------------------------------
Operating activities
Net loss $ (21,702,508) $ (22,376,628) $(12,145,446) $ (68,866,577)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 115,640 58,083 43,815 282,256
Loss on disposal of equipment 24,769 - - 24,769
Amortization of deferred compensation 3,145,870 3,054,286 612,909 7,457,072
Noncash financing charge - - 450,000 450,000
Changes in operating assets and liabilities:
Prepaid expenses and accrued interest receivable 243,118 (277,287) (15,422) (68,186)
Other assets 1,091 462 (625) (8,000)
Accounts payable and accrued expenses (238,841) 1,401,563 293,826 3,523,019
----------------------------------------------------------------
Net cash used in operating activities (18,410,861) (18,139,521) (10,760,943) (57,205,647)
Investment activities
Purchase of equipment (90,643) (106,512) (54,676) (416,039)
----------------------------------------------------------------
Net cash used in investing activities (90,643) (106,512) (54,676) (416,039)
Financing activities
Proceeds from issuance of preferred stock - 27,617,105 9,000,000 48,651,850
Proceeds from issuance of common stock 109,645 78,970,720 625 79,086,545
Proceeds from stockholders' receivables - - - 1,004,310
Proceeds from notes payable - - 3,000,000 3,000,000
Payment of dividend - (162,295) - (162,295)
----------------------------------------------------------------
Net cash provided by financing activities 109,645 106,425,530 12,000,625 131,580,410
----------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (18,391,859) 88,179,497 1,185,006 73,958,724
Cash and cash equivalents at beginning of period 92,350,583 4,171,086 2,986,080 -
----------------------------------------------------------------
Cash and cash equivalents at end of period $ 73,958,724 $ 92,350,583 $ 4,171,086 $ 73,958,724
================================================================
Supplemental schedule of cash flow information
Cash paid for interest $ 2,162 $ 5,772 $ 136,318 $ 186,578
================================================================
Supplemental schedule of noncash investing and financing
activities
Conversion of notes payable to preferred stock $ - $ - $ 3,000,000 $ 3,000,000
================================================================
Preferred stock dividend $ - $ 772,183 $ - $ 772,183
================================================================
Forfeiture of common stock options $ 42,213 $ - $ - $ 42,213
================================================================
Conversion of preferred stock warrants to common stock $ 115,240 $ 914,952 $ - $ 1,030,192
================================================================
See accompanying notes
F-8
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements
1. Significant Accounting Policies
Development Stage Company
POZEN Inc. ("POZEN" or the "Company") was incorporated in the state of Delaware
on September 25, 1996. The Company is a pharmaceutical development company
committed to building a portfolio of products with significant commercial
potential in select therapeutic areas. The Company's initial focus is on
developing products for migraine therapy.
MT 100, a proprietary formulation combining metoclopramide hydrochloride and
naproxen sodium, is being developed as an oral, first-line treatment for
migraine pain and associated symptoms. The Company has completed all planned
Phase III pivotal clinical trials for MT 100, which consistently demonstrated MT
100's effectiveness in treating migraine pain. MT 300, its injectable product
candidate consisting of a new and improved formulation of dihydroergotamine
mesylate, or DHE, is being developed to provide long-lasting pain relief for
severe migraine. MT 300 is currently in two Phase III pivotal trials comparing
MT 300's efficacy with placebo. The Company expects to complete both of these
trials by the end of 2002. MT 400 is being developed as a co-active acute
migraine therapy combining the activity of a triptan with that of a long-acting,
non-steroidal, anti-inflammatory drug in a single tablet. MT 400 is currently in
Phase II development. The Company has discontinued further development
activities related to MT 500, its early stage migraine product candidate
in-licensed from Roche, based upon unexpected Phase I trial results.
The Company plans to enter into collaborations with established pharmaceutical
companies to commercialize and manufacture our product candidates. The Company
is in active discussions with respect to the commercialization of MT 100 and MT
400. In addition, the Company intends to leverage its pharmaceutical product
development expertise by acquiring or in-licensing and developing commercially
attractive products in therapeutic areas outside of migraine.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from the estimates and
assumptions used.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash is invested in
interest-bearing investment-grade securities.
Cash and cash equivalents include financial instruments that potentially subject
the Company to a concentration of credit risk. Cash and cash equivalents are
deposited with high credit quality financial institutions which invest primarily
in U.S. Government securities, highly rated commercial paper and certificates of
deposit guaranteed by banks which are members of the FDIC. The counterparties to
the agreements relating to the Company's investments consist primarily of the
U.S. Government and various major corporations with high credit standings.
F-9
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
Equipment
Equipment consists primarily of furniture and fixtures and is recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets ranging from five to seven years.
Research and Development Costs
Research and development costs are charged to operations as incurred.
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between financial reporting
and tax bases of assets and liabilities.
Net Loss Per Share
Basic and diluted net loss per common share amounts are presented in conformity
with Statement of Financial Accounting Standards No. ("SFAS") 128, "Earnings per
Share", for all periods presented.
In accordance with SFAS 128, basic and diluted net loss per common share amounts
have been computed using the weighted-average number of shares of common stock
outstanding during the period. Pro forma basic and diluted net loss per common
share amounts, as presented in the statements of operations, have been computed
for the years ended December 31, 2001, 2000 and 1999 as described below.
The following table presents the calculation of basic and diluted net loss per
common share for the years ended December 31:
2001 2000 1999
----------------------------------------------------------
Net loss attributable to common stockholders $ (21,702,508) $ (50,928,211) $ (12,145,446)
==========================================================
Basic and diluted:
Weighted-average shares used in computing basic and diluted
net loss per common share 27,954,697 10,293,605 5,845,304
==========================================================
Basic and diluted net loss per common share $ (0.78) $ (4.95) $ (2.08)
==========================================================
F-10
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
The Company's preferred stock and related warrants converted into common stock
and common stock warrants upon the closing of the Company's initial public
offering in October 2000. For informational purposes, the following pro forma
net loss per share data reflect the assumed conversion of the Company's
preferred stock into common stock at the later of issuance of the preferred
stock during, or at the beginning of, each of the years ended December 31:
2000 1999
-----------------------------------
Pro forma:
Shares used above 10,293,605 5,845,304
Proforma adjustment to reflect weighted-average effect of assumed
conversion of preferred stock 9,621,542 6,172,640
-----------------------------------
Total weighted-average shares of common stock outstanding proforma 19,915,147 12,017,944
===================================
Basic and diluted proforma net loss per share $ (2.56) $ (1.01)
===================================
During all periods presented, the Company had securities outstanding which could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted net loss per share, as their effect would have
been antidilutive. Such outstanding securities consist of the following at
December 31:
2001 2000 1999
--------------------------------------------------------
Convertible preferred stock - - 6,163,192
Outstanding common stock options 1,833,417 814,777 903,261
Outstanding warrants 68,931 418,307 246,516
--------------------------------------------------------
Total 1,902,348 1,233,084 7,312,969
========================================================
Stock-Based Compensation
The Company accounts for stock options issued to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under APB 25, no compensation expense is recognized for
stock or stock options issued with an exercise price equivalent to the fair
value of the Company's common stock. In general, stock options and other equity
instruments granted or issued to consultants and others who are not employees or
directors are accounted for in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). For companies that continue to account
for stock-based compensation arrangements under APB 25, SFAS 123 requires
disclosure of the pro forma effect on net income (loss) as if the fair
value-based method prescribed by SFAS 123 had been applied. The Company has
adopted the pro forma disclosure requirements of SFAS 123.
F-11
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
Segment Reporting
As of January 1, 1998, the Company adopted SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company has determined that it does not have any separately reportable
operating segments as of December 31, 2001.
Accounting for Derivative Investments and Hedging Activities
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Investments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes several
existing standards. SFAS 133, as amended by SFAS 137 and SFAS 138, was effective
January 1, 2001. The adoption of SFAS 133 had no impact on the Company's
financial statements.
Recently Issued Accounting Pronouncements
On June 29, 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 eliminates the pooling-of-interests method of accounting for business
combinations, except for qualifying business combinations that were initiated
prior to July 1, 2001. SFAS 141 also includes new criteria to recognize
intangible assets separately from goodwill. The requirements of SFAS 141 are
effective for any business combination accounted for by the purchase method that
is completed after June 30, 2001. Under SFAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually for
impairment, or more frequently if impairment indicators arise. Separate
intangible assets that are not deemed to have an indefinite life continue to be
amortized over their useful lives. The provisions of SFAS 142 requiring
non-amortization of goodwill and indefinite-lived intangible assets apply to
goodwill and indefinite-lived intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to July 1, 2001,
the Company is required to adopt SFAS 142 on January 1, 2002; however, the
adoption of SFAS 141 and SFAS 142 is not expected to have an impact on the
Company's operating results or stockholders' equity for the periods presented.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 requires an entity to record a liability for
an obligation associated with the retirement of an asset at the time the
liability is incurred by capitalizing the cost as part of the carrying value of
the related asset and depreciating it over the remaining useful life of that
asset. The standard is effective for the Company beginning January 1, 2003, and
its adoption is not expected to have an impact on the Company's operating
results or stockholders' equity.
In October 2001, the FSAB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived assets and for Long-Lived Assets to be Disposed Of" ("SFAS 144").
SFAS 144 addresses how and when to measure impairment on long-lived assets and
how to account for long-lived assets that an entity plans to dispose of either
through sale, abandonment, exchange, or distribution to owners. The new
provisions supersede SFAS 121, which addressed asset impairment and certain
provisions of APB Opinion 30 related to reporting the effects of the disposal of
a business segment and requires expected future operating losses from
discontinued operations to be recorded in the period in which the losses are
incurred rather than on the measurement date. Under SFAS 144, more dispositions
may qualify for discontinued operations treatment in the income statement. The
provisions of SFAS 144 became effective for the Company January 1, 2002 and are
not expected to have an impact on the Company's operating results or
stockholders' equity.
F-12
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. Stockholders' Equity
In December 1996, the Company completed a private placement of 2,105,931 shares
of its Series A Convertible Preferred Stock ("Series A") and received cash of
$5,475,420 and notes receivable of $1,000,000, net of offering costs. The notes
receivable were collected during 1997. In conjunction with the issuance of the
Series A, in January 1997, the Company issued warrants to purchase 78,776 shares
of Series A at a purchase price of $0.001 per share to certain key advisors for
their services related to financing activities. The warrants have been accounted
for as offering costs related to the issuance of the Series A at a value
calculated under the "Black-Scholes" formula at approximately $242,000.
In December 1997, the Company completed a private placement of 1,135,000 shares
of its Series B Convertible Preferred Stock ("Series B") and received cash of
$4,336,000, net of offering costs. At December 31, 1997, the Company issued
warrants to purchase 36,450 shares of Series B at a purchase price of $0.001 per
share to certain key advisors for their services related to financing
activities. The warrants have been accounted for as offering costs related to
the issuance of the Series B at a value calculated under the "Black-Scholes"
formula at approximately $139,000.
In March 1998, the Company issued an additional 4,377 shares of its Series B for
$17,512 of interest accrued on the funds received prior to the December 1997
Series B private placement.
On March 4, 1998, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock, par value $.001, from
10,000,000 shares to 20,000,000 shares.
In March 1998, the Company completed a private placement of 563,044 shares of
its Series C Convertible Preferred Stock ("Series C") and received cash of
$2,205,813, net of offering costs. In conjunction with the issuance of the
Series C, the Company issued warrants to purchase 8,884 shares of Series C at a
purchase price of $0.001 per share to certain key advisors for their services
related to financing activities. The warrants have been accounted for as
offering costs related to the issuance of Series C at a value calculated under
the "Black-Scholes" formula at approximately $35,000.
In July 1999, the Company amended its Certificate of Incorporation to increase
the number of authorized shares of common stock, par value $0.001 per share,
from 20,000,000 shares to 30,000,000 shares and the number of authorized shares
of preferred stock, par value $0.001 per share, from 10,000,000 shares to
20,000,000 shares.
In July 1999 the Company completed a private placement of 1,875,000 shares of
its Series D Convertible Preferred Stock ("Series D") and received cash of
$9,000,000. In September 1999, upon completion of the Series D private
placement, the previously issued Convertible Promissory Note ("Note") funded by
MEDGROWTH S.A. ("MEDGROWTH") in bridge financing, issued on March 1, 1999 for
$3,000,000, automatically converted into 625,000 shares of Series D at $4.80 per
share. The terms of the Note provided for automatic conversion into shares of
Series D on the same terms and conditions extended to other purchasers of Series
D, the conversion of the $450,000 loan origination fee into Series D or payable
in cash at the time of conversion and the issuance of 200,000 warrants to BB
Medtech AG, of which MEDGROWTH is a wholly owned subsidiary, to purchase 200,000
shares of Series D at a purchase price of $3.15 per share with a term of two
years for their services related to financing activities. Interest on the Note
was paid at a fixed rate of 11% annually. The warrants have been accounted for
as offering costs related to the issuance of the Series D at a value calculated
under the "Black-Scholes" formula at approximately $925,000. MEDGROWTH elected
to receive 93,750 shares of Series D in exchange for the Note's loan origination
fee in the amount of $450,000, which was expensed as a financing cost.
F-13
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. Stockholders' Equity (continued)
All outstanding shares of Series A, Series B, Series C and Series D and related
warrants were converted into 8,636,436 shares of the Company's common stock and
warrants for 437,228 shares of the Company's common stock upon the closing of
the Company's initial public offering (the "Offering") in October 2000.
In November 2000, common stock warrants valued at $925,000 were exercised for
269,800 shares of common stock and in December 2000, common stock warrants
valued at $250,952 were exercised for 99,424 shares of common stock.
On August 28, 2000 and September 14, 2000, the Board of Directors and the
stockholders, respectively, of the Company approved a 1.349-for-1 common stock
split to be effective prior to the effectiveness of the Offering. An amendment
to the Company's Certificate of Incorporation effecting the stock split was
filed with the State of Delaware on October 6, 2000. All common share and per
common share amounts for all periods presented in the accompanying financial
statements reflect the effect of this common stock split.
In March 2001, common stock warrants valued at $21,995 were exercised for 9,659
shares of common stock and in May 2001, common stock warrants valued at $93,244
were exercised for 39,726 shares of common stock.
In addition, the Board of Directors and stockholders approved an amendment to
the Certificate of Incorporation that took effect upon the completion of the
initial public offering, increasing the authorized capital stock to 90,000,000
shares of common stock and reducing the number of authorized preferred stock to
10,000,000, each with a par value of $0.001.
Shares Reserved for Future Issuance
At December 31, 2001, shares of common stock reserved for future issuance are as
follows:
Shares available for grant under stock option plans 2,171,409
Shares issuable pursuant to options granted under stock option plans 1,995,782
Shares issuable pursuant to outstanding warrants 51,647
------------
Total reserved 4,218,838
============
F-14
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. Redeemable Preferred Stock
On March 24, 2000, the Company completed a private placement of 2,589,927 shares
of Series E Convertible Preferred Stock ("Series E") and received cash of
$16,875,115, net of offering costs. The terms of the Series E provide for
similar rights as those provided to the Series A, Series B, Series C, and Series
D. The Series E holders were entitled to receive cumulative dividends at an
annual rate of 8% of the original purchase price payable in cash or shares of
Series E at the option of the holder. Dividends were payable when declared by
the Board of Directors and upon conversion, liquidation or redemption. The terms
of conversion decreased the conversion price from $6.95 to $5.73 since the
Company was unable to complete by September 15, 2000 a qualified public offering
or to effect a merger or acquisition of the Company that would entitle the
holders of the Series E to receive $10.43 or more per share. At the date of
issuance, the Company believed the per share price of $6.95 represented the fair
value of the preferred stock and was in excess of the deemed fair value of its
common stock. Subsequent to the commencement of the Company's initial public
offering process, the Company re-evaluated the deemed fair market value of its
common stock as of March 2000 and determined it to be $22.48 per share (on a
pre-split basis). Accordingly, the incremental fair value is deemed to be the
equivalent of a preferred stock dividend. The Company recorded the non-cash
preferred stock charge at the date of issuance by offsetting charges and credits
to additional paid-in capital of $16,875,115, without any effect on total
stockholders' equity. The non-cash charge was limited to the net proceeds
received from the Series E offering.
In conjunction with the issuance of the Series E, the Company issued warrants to
purchase 24,485 shares of Series E at an initial exercise price of $6.95 per
share to certain key advisors for their services related to financing
activities. These warrants have since been modified to provide for an additional
per share payment upon exercise, equal to the difference between the exercise
price otherwise applicable and the initial public offering price per share of
common stock. The warrants have been accounted for as offering costs related to
the issuance of Series E at a value calculated under the "Black Scholes" formula
at approximately $261,000.
On August 28, 2000, the Company completed a private placement of 1,597,285
shares of Series F Convertible Preferred Stock ("Series E") and received cash of
$10,742,000, net of offering costs. The terms of the Series F are substantially
similar to those of the Series E. The Company recorded a non-cash preferred
stock charge at the date of issuance by offsetting charges and credits to
additional paid-in capital of $10,742,000, without any effect on total
stockholders' equity.
All outstanding shares of Series E and Series F and related Series E warrants
were converted into 6,851,207 shares of the Company's common stock and warrants
exercisable for 33,030 shares of the Company's common stock upon the closing of
the Company's initial public offering in October 2000.
F-15
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. Accrued Expenses
Accrued expenses consist of the following at December 31:
2001 2000
--------------------------------------
Clinical trial contract costs $ 2,348,663 $ 2,793,848
Compensation costs 563,891 407,192
Other 416,327 432,491
--------------------------------------
$ 3,328,881 $ 3,633,531
======================================
5. Income Taxes
At December 31, 2001 and 2000, the Company had federal and state net operating
loss carryforwards of approximately $57.6 million and $39.4 million,
respectively, for income tax purposes. At December 31, 2001 and 2000, the
Company had research and development credit carryforwards of approximately $3.7
million and $1.9 million, respectively. The federal and state net operating loss
carryforwards and research and development credit carryforwards begin to expire
in 2012. For financial reporting purposes, a valuation allowance has been
recognized to offset the deferred tax assets related to the carryforwards. When,
and if recognized, the tax benefit for those items will be reflected in current
operations of the period in which the benefit is recorded as a reduction of
income tax expense. The utilization of the loss carryforwards to reduce future
income taxes will depend on the Company's ability to generate sufficient taxable
income prior to the expiration of the net operating loss carryforwards. In
addition, the maximum annual use of net operating loss carryforwards is limited
in certain situations where changes occur in stock ownership.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows at December 31:
2001 2000
------------------------------------
Deferred tax assets:
Net operating loss carryforward $ 23,043,000 $ 15,760,000
Research and development credits 3,715,000 1,923,000
Other 3,000 419,000
------------------------------------
Total deferred tax assets 26,761,000 18,102,000
Valuation allowance (26,761,000) (18,102,000)
------------------------------------
Net deferred tax asset $ - $ -
====================================
Valuation allowance increased by $8,659,000 and $8,377,000 as of December 31,
2001 and 2000, respectively.
F-16
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. Stock Option Plan
On November 20, 1996, the Company established a Stock Option Plan and authorized
the issuance of options for up to 1,605,310 shares of common stock to attract
and retain quality employees and to allow such employees to participate in the
growth of the Company. Awards may be made to participants in the form of
incentive and nonqualified stock options. Eligible participants under the Plan
include executive and key employees of the Company. The vesting periods range
from immediate vesting at issuance to three years or immediately upon a
significant change in ownership as defined by the plan document. The exercise
price for incentive stock options may not be less than 100% of the fair market
value of the common stock on the date of grant (110% with respect to incentive
stock options granted to optionees who are 10% or more stockholders of the
Company).
In May 2000, the Board of Directors adopted, and in June 2000 the stockholders
approved, the POZEN Inc. 2000 Equity Compensation Plan. The Plan became
effective upon the consummation of the Company's initial public offering in
October 2000 and provides for grants of incentive stock options, nonqualified
stock options, stock awards, performance units and other stock-based awards to
our employees, non-employee directors, advisors, and consultants. The Plan
authorizes up to 3,000,000 shares of our common stock for issuance under the
terms of the Plan. The maximum number of shares for which any individual may
receive grants in any calendar year is 1,000,000 shares. If options granted
under the Plan expire or are terminated for any reason without being exercised,
or if stock awards, performance units or other stock-based awards are forfeited
or otherwise terminate, the shares of common stock underlying the grants will
again be available for purposes of the Plan.
A summary of the Company's stock option activity, and related information is as
follows:
Weighted-Average
Number of Exercise
Shares Price
-----------------------------------
Balance at December 31, 1996 88,562 0.19
Options granted 470,127 0.19
Forfeited (10,118) 0.19
-----------------------------------
Balance at December 31, 1997 548,571 0.19
Options granted 194,593 0.33
Exercised (29,977) 0.19
Forfeited (104,923) 0.19
-----------------------------------
Balance at December 31, 1998 608,264 0.23
Options granted 612,221 1.12
Exercised (3,373) 0.19
Forfeited (105,222) 0.88
-----------------------------------
Balance at December 31, 1999 1,111,890 0.66
Options granted 486,762 2.87
Exercised (208,334) 0.36
Forfeited (6,745) 1.48
-----------------------------------
Balance at December 31, 2000 1,383,573 1.49
Options granted 808,591 9.45
Exercised (187,837) 0.58
Forfeited (8,545) 2.48
-----------------------------------
Balance at December 31, 2001 1,995,782 $ 4.79
===================================
F-17
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. Stock Option Plan (continued)
The options outstanding and exercisable at December 31, 2001 are as follows:
Options Outstanding Weighted-Average
- ------------------------------------------------------------
Remaining Contractual
Exercise Number Life Vested
Price Outstanding (In years) Options
- --------------------------------------------------------------------------------------------------------------------
$ 0.19 254,664 5.5 254,664
$ 0.44 60,818 6.8 60,818
$ 0.89 191,598 7.3 100,541
$ 1.48 332,304 7.9 165,328
$ 2.02 167,276 8.2 55,759
$ 3.40 76,893 8.4 25,631
$ 3.74 47,215 8.6 9,443
$ 4.25 36,423 8.8 12,140
$ 5.90 20,000 9.8 -
$ 6.60-6.75 302,639 9.3 -
$ 7.35-7.38 25,000 9.2 -
$ 8.50-8.75 130,000 9.2 -
$ 9.84 15,000 9.6 -
$10.89 65,000 9.5 -
$12.50 20,000 9.0 5,000
$13.19 200,952 9.1 -
$14.16 50,000 9.0 -
---------------------------- ----------------------------
1,995,782 689,324
============================ ============================
The following table summarizes the fair value of options granted:
Weighted-Average
Fair Value Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
Type of Option 2001 2000 1999 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Stock price = exercise price $ 5.90- $ 12.50 $ - $ 9.45 $ 12.50 $ -
$ 14.16
Stock price * exercise price $ 20.23- $ 4.05- $ 2.36 $ 1.12
$ 22.48 $20.23
* means more than
F-18
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. Stock Option Plan (continued)
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options.
During the years ended December 31, 2000 and 1999 in connection with the grant
of certain share options to employees, the Company recorded deferred
compensation of $6,328,492 and $3,045,666, respectively, representing the excess
of the fair value of the common stock on the date of grant over the exercise
price. Deferred compensation is included as a reduction of stockholders' equity
and is being amortized to expense according to the vesting method. During the
years ended December 31, 2001, 2000 and 1999 and from September 26, 1996
(inception) through December 31, 2001, the Company recorded amortization of
deferred compensation of $3,145,870, $3,054,286, $612,909, and $7,457,072,
respectively.
Pro forma net loss information is required to be disclosed by SFAS 123 and has
been determined as if the Company has accounted for its employee stock options
under the fair market value method of that statement. The fair value for these
options was estimated at the date of grant using the minimum value method with
the following weighted-average assumptions:
2001 2000 1999
-------------------------------------------------------
Expected dividend yield 0% 0% 0%
Risk-free interest rate range 3.5%-5.0% 5.3% - 6.6% 6.5%
Expected life 10 years 10 years 10 years
For periods following the Company's initial public offering, the "Black-Scholes"
method was used to calculate the fair value of options granted. This method
includes the above assumptions, as well as the estimated volatility of the
Company's common stock.
The minimum value option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date consistent with the provisions of SFAS 123, the
Company's net loss attributable to common stockholders would not have been
materially affected in 2000 and 1999. The Company's pro forma net loss
information for 2001 is as follows:
Net loss attributable to common stockholders - as reported $ (21,702,508)
=================
Net loss attributable to common stockholders - SFAS 123 pro forma $ (22,761,596)
=================
Net loss per common share - SFAS 123 pro forma $ (0.81)
=================
F-19
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
7. Leases
The Company leases its office space and certain equipment under cancelable and
noncancelable operating lease agreements. Rent expense incurred by the Company
was approximately $146,000, $123,000, $107,000, and $682,000 for the years ended
December 31, 2001, 2000 and 1999 and for the period September 25, 1996
(inception) through December 31, 2001, respectively. The following is a schedule
of future minimum lease payments for operating leases at December 31, 2001:
2002 $ 199,939
2003 183,096
2004 369,747
2005 377,486
2006 385,311
2007-10 1,274,286
---------------
$ 2,789,865
===============
8. License Agreement
In September 1999, the Company licensed the migraine prophylactic agent, MT 500,
from F. Hoffman-La Roche, Ltd and Syntex ("Roche"). The Company made a one-time
non-refundable payment of $1.0 million at the time it entered into the
agreement. The Company has charged the $1.0 million payment to research and
development expense. In exchange for the upfront payment, Roche granted the
Company a royalty-bearing, exclusive, worldwide license to develop and
commercialize MT 500. As noted in Note 1 above, the Company has discontinued
further development activities related to MT 500.
In January 2001, the Company entered into a Commercial Supply Agreement with
Catalytica Pharmaceuticals, Inc. under which Catalytica will supply the Company
with all MT 100 for commercial sale. The Company, or its commercial partner, are
required to purchase all commercial supply of MT 100 from Catalytica for the
initial term of the agreement and any extension thereof, unless Catalytica is
unable to meet the Company's, or its commercial partner's, requirement. The
Company has the right to terminate the agreement under certain circumstances
after the third anniversary of first commercial sale of MT 100.
In October 2001, the Company entered into a Commercial Supply Agreement with Lek
Pharmaceuticals Inc. under which Lek has agreed to provide the Company on an
exclusive basis with DHE, which the Company will formulate as MT 300. The
Company agreed to purchase DHE exclusively from Lek, which exclusivity is
dependent upon Lek's ability to meet the Company's supply requirements and
certain other conditions. Lek will supply to the Company solely and exclusively,
under certain circumstances. The Company will pay Lek a fee in addition to the
agreed supply price for DHE, based on a percentage of MT 300 sales revenue.
Either party may cancel the agreement under certain conditions. In addition, Lek
may terminate the agreement after a certain period of time if Lek decides to
permanently cease the manufacture of DHE.
F-20
POZEN Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
9. Retirement Savings Plan
In July 1997, the Company began a defined contribution 401(k) pension plan (the
"Plan") covering substantially all employees who are at least 21 years of age.
Based upon management's discretion, the Company may elect to make contributions
to the Plan. For the years ended December 31, 2000, 1999 and 1998 the Company
did not make any contribution to the Plan. For the year ended December 31, 2001,
and for the period September 25, 1996 (inception) through December 31, 2001, the
Company made a contribution of $92,277 to the plan.
10. Legal Proceedings
The Company is not a party to any material legal proceedings.
On October 6, 2000, an action was filed against the Company alleging that the
Company owed certain consideration and expenses in connection with the issuance
and sale of preferred stock in the twelve-month period following the termination
of the engagement of an investment banking firm to assist the Company with the
sale of preferred stock in a private placement. In January 2002, the Company
settled these issues for amounts that will have no material effect on the
financial position or the results of operation of the Company.
11. Summary of Operations by Quarters (Unaudited)
2001
---------------------------------------------------------------------------
1/st/ Quarter 2/nd/ Quarter 3/rd/ Quarter 4/th/ Quarter
---------------------------------------------------------------------------
Operating expenses $ 5,759,152 $ 5,381,743 $ 5,524,444 $ 8,417,074
Net loss (4,533,460) (4,408,918) (4,805,986) (7,954,144)
Net loss attributable to common stockholders (4,533,460) (4,408,918) (4,805,986) (7,954,144)
Net loss per share of common stock
Basic and diluted $ (0.16) $ (0.16) $ (0.17) $ (0.28)
Number of shares used in per share calculation
Basic and diluted 27,838,577 27,915,699 27,964,435 27,969,327
2000
---------------------------------------------------------------------------
1/st/ Quarter 2/nd/ Quarter 3/rd/ Quarter 4/th/ Quarter
---------------------------------------------------------------------------
Operating expenses $ 3,033,077 $ 6,313,961 $ 8,789,375 $ 6,084,593
Net loss (2,984,002) (6,058,224) (8,554,138) (4,780,264)
Net loss attributable to common stockholders (19,859,117) (6,448,799) (19,735,435) (4,884,860)
Net loss per share of common stock
Basic and diluted $ (3.43) $ (1.10) $ (3.35) $ (0.21)
Proforma (1.34) (0.34) (1.00) (0.19)
Number of shares used in per share calculation
Basic and diluted 5,791,616 5,872,699 5,887,246 23,622,858
Proforma 14,848,011 18,746,829 19,737,305 26,328,444
F-21
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant. *
3.2 Amended and Restated Bylaws of the Registrant. *
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Certificate of Incorporation and Amended and Restated
Bylaws of the Registrant defining rights of the holders of Common
Stock of the Registrant.
10.1 Sublease Agreement between Quintiles, Inc. and the Registrant,
dated April 7, 1997. *
10.2 Stock Option Plan of the Registrant. *
10.3 First Amendment to Stock Option Plan dated February 14, 1997. *
10.4 Executive Employment Agreement with John R. Plachetka dated April
1, 1999. * ***
10.5 License Agreement dated September 24, 1999 between the Registrant
and F. Hoffman-La Roche Ltd. *
10.6 Investor Rights Agreement dated July 28, 1999 between the
Registrant and the holders of the Series D Preferred Stock. *
10.7 Investor Rights Agreement dated March 24, 2000 between the
Registrant and the holders of the Series E Preferred Stock. *
10.8 2000 Equity Compensation Plan *
10.9 Investor Rights Agreement dated August 28, 2000 between the
Registrant and the holders of the Series F Preferred Stock. *
10.10 Sublease Agreement between Intecardia, Inc. and the Registrant
dated as of September 1, 2000. *
10.11 Supply Agreement dated January 17, 2001 by and between the
Registrant and Catalytica Pharmaceuticals, Inc. (filed as Exhibit
10.1 to the Company's Form 10-Q filed May 14, 2001).
10.12 First Amendment to the Executive Employment Agreement with John
R. Plachetka, Pharm.D., dated as of April 25, 2001 (filed as
Exhibit 10.2 to the Company's Form 10-Q filed May 14, 2001). ***
10.13 Amended and Restated Executive Employment Agreement with John R.
Plachetka dated July 25, 2001 (filed as Exhibit 10.1 to the
Company's Form 10-Q filed October 31, 2001). ***
10.14 Executive Employment Agreement with Andrew L. Finn dated July 25,
2001 (filed as Exhibit 10.2 to the Company's Form 10-Q filed
October 31, 2001). ***
10.15 Executive Employment Agreement with Kristina M. Adomonis dated
July 25, 2001 (filed as Exhibit 10.3 to the Company's Form 10-Q
filed October 31, 2001). ***
33
10.16 Executive Employment Agreement with Matthew E. Czajkowski dated
July 25, 2001 (filed as Exhibit 10.4 to the Company's Form 10-Q
filed October 31, 2001). ***
10.17 Executive Employment Agreement with John E. Barnhardt dated July
25, 2001 (filed as Exhibit 10.5 to the Company's Form 10-Q filed
October 31, 2001). ***
10.18 POZEN Inc. 2001 Long Term Incentive Plan (adopted by Board of
Directors, subject to stockholder approval) (filed as Exhibit
10.6 to the Company's Form 10-Q filed October 31, 2001).
10.19 Certificate of Award dated August 1, 2001 issued to John R.
Plachetka pursuant to POZEN Inc. 2001 Long Term Incentive Plan
(granted subject to stockholder approval of the Plan) (filed as
Exhibit 10.7 to the Company's Form 10-Q filed October 31, 2001).
***
10.20 Commercial Supply Agreement dated October, 2001 by and between
Registrant and Lek Pharmaceuticals Inc. + **
10.21 Lease Agreement between The Exchange at Meadowmont LLC and the
Registrant dated as of November 21, 2001. **
23.1 Consent of Ernst & Young LLP, Independent Auditors**
___________
* Incorporated by reference to the same-numbered exhibit of the
Company's Registration statement on Form S-1, No. 333-35930.
** Filed herewith.
*** Compensation related contract.
+ Confidential treatment requested. Confidential materials omitted
and filed separately with the Securities and Exchange Commission.
34