POZEN INC /NC - 10-Q Quarterly Report

Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

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

(State or other jurisdiction of

incorporation or organization)

62-1657552

(I.R.S. Employer

Identification No.)

1414 Raleigh Road

Suite 400

Chapel Hill, North Carolina 27517

(Address of principal executive offices, including zip code)

(919) 913-1030

(Registrant’s telephone number, including area code)

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. x Yes ¨ No

The number of shares outstanding of the registrant’s common stock as of July 25, 2002 was 28,096,562.

POZEN Inc.

(A Development Stage Company)

FORM 10-Q

For the Three and Six Months Ended June 30, 2002

INDEX

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Balance Sheets as of June 30, 2002 and December 31, 2001	1

	Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001 and Period From Inception (September 26, 1996) Through June 30, 2002	2

	Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 and Period From Inception (September 26, 1996) Through June 30, 2002	3

	Notes to Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	13

PART II.	OTHER INFORMATION

Item 4.	Submission of Matters to Vote of Security Holders	14

Item 6.	Exhibits and Reports on Form 8-K	14

Signature Page		15

Exhibit Index		16

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

POZEN Inc.

(A Development Stage Company)

BALANCE SHEETS

(Unaudited)

	June 30, 2002			December 31, 2001
ASSETS
Current assets:
Cash and cash equivalents	$	61,004,528		$	73,958,724
Prepaid expenses		126,081			67,498
Other current assets		8,000			8,688

Total current assets		61,138,609			74,034,910
Equipment, net of accumulated depreciation		431,599			109,014

Total assets	$	61,570,208		$	74,143,924

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	58,958		$	194,138
Accrued expenses		2,907,311			3,328,881

Total current liabilities		2,966,269			3,523,019
Common stock, $0.001 par value, 90,000,000 shares authorized; 28,077,945 and 27,969,435 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively		28,078			27,969
Additional paid-in capital		143,659,834			143,512,559
Common stock warrants		310,808			310,808
Deferred compensation		(1,948,704	)		(3,429,376	)
Deficit accumulated during the development stage		(83,446,077	)		(69,801,055	)

Total stockholders’ equity		58,603,939			70,620,905

Total liabilities and stockholders’ equity	$	61,570,208		$	74,143,924

See accompanying Notes to Financial Statements.

POZEN Inc.

(A Development Stage Company)

STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,						Period From Inception (September 26, 1996) Through June 30,
	2002			2001			2002			2001			2002
Operating expenses:
General and administrative	$	1,683,405		$	1,586,608		$	3,440,906		$	3,089,126		$	19,623,097
Research and development		5,223,281			3,795,135			10,802,725			8,051,769			68,977,977

Total operating expenses		6,906,686			5,381,743			14,243,631			11,140,895			88,601,074
Interest income, net		281,937			972,825			598,609			2,198,517			6,089,475

Net loss		(6,624,749	)		(4,408,918	)		(13,645,022	)		(8,942,378	)		(82,511,599	)

Non-cash preferred stock charge		—			—			—			—			27,617,105
Preferred stock dividends		—			—			—			—			934,478

Net loss attributable to common stockholders	$	(6,624,749	)	$	(4,408,918	)	$	(13,645,022	)	$	(8,942,378	)	$	(111,063,182	)

Basic and diluted net loss per common share	$	(0.24	)	$	(0.16	)	$	(0.49	)	$	(0.32	)

Shares used in computing basic and diluted net loss per common share		28,077,945			27,915,699			28,058,130			27,877,138

See accompanying Notes to Financial Statements.

POZEN Inc.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,						Period from Inception (September 26, 1996) Through June 30,
	2002			2001			2002
Operating activities
Net loss	$	(13,645,022	)	$	(8,942,378	)	$	(82,511,599	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		51,638			36,281			333,894
Loss on disposal of equipment		—			23,193			24,769
Amortization of deferred compensation		1,480,672			1,589,326			8,937,744
Noncash financing charge		—			—			450,000
Changes in operating assets and liabilities:
Prepaid expenses, accrued interest receivable, and other assets		(57,895	)		85,117			(134,081	)
Accounts payable and accrued expenses		(556,750	)		(1,859,452	)		2,966,269

Net cash used in operating activities		(12,727,357	)		(9,067,913	)		(69,933,004	)
Investment activities
Purchase of equipment		(374,223	)		(55,850	)		(790,262	)

Net cash used in investing activities		(374,223	)		(55,850	)		(790,262	)

Financing activities
Proceeds from issuance of preferred stock		—			—			48,651,850
Proceeds from issuance of common stock		147,384			107,444			79,233,929
Proceeds from notes payable		—			—			3,000,000
Proceeds from stockholders’ receivables		—			—			1,004,310
Payment of dividends		—			—			(162,295	)

Net cash provided by financing activities		147,384			107,444			131,727,794

Net (decrease) increase in cash and cash equivalents		(12,954,196	)		(9,016,319	)		61,004,528
Cash and cash equivalents at beginning of period		73,958,724			92,350,583			—

Cash and cash equivalents at end of period	$	61,004,528		$	83,334,264		$	61,004,528

Supplemental schedule of cash flow information
Cash paid for interest	$	—		$	—		$	186,576

Supplemental schedule of noncash investing and financing activities
Conversion of notes payable to preferred stock	$	—		$	—		$	3,000,000

Preferred stock dividend	$	—		$	—		$	772,183

Forfeiture of common stock options	$	—		$	—		$	42,213

Conversion of preferred stock warrants to common stock	$	—		$	—		$	1,030,192

See accompanying Notes to Financial Statements.

POZEN Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. Organization

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.

2. Summary of Significant Accounting Policies

Unaudited Interim Financial Statements—The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States and applicable Securities and Exchange Commission (“SEC”) regulations for interim financial information. These financial statements are unaudited and, in the opinion of management, include all adjustments necessary to present fairly the balance sheets, statements of operations, and statements of cash flows for the periods presented in accordance with accounting principles generally accepted in the United States. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to SEC rules and regulations. It is presumed that users of this interim financial information have read or have access to the audited financial statements and footnote disclosure for the preceding fiscal year contained in the Company’s Annual Report on Form 10-K. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

Stock-based Compensation—The Company accounts for non-cash stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees,” which states that no compensation expense is recognized for stock options or other stock-based awards that are granted to employees with an exercise price equal to or above the estimated fair value of the Company’s common stock on the grant date. In the event that stock options are granted with an exercise price below the estimated fair market value of the Company’s common stock at the grant date, the difference between the fair market value of the Company’s common stock and the exercise price of the stock option is recorded as deferred compensation.

In connection with the grant of stock options to employees, the Company recorded no deferred compensation in the six months ended June 30, 2002 or for the same period of 2001. Deferred compensation is recorded as a component of stockholders’ equity and is being amortized as charges to operations over the vesting period of the options using the straight-line method. The vesting period of the options is generally three or four years. The Company recorded amortization of deferred compensation of $1,480,672 and $1,589,326 for the six-month periods ended June 30, 2002 and 2001, respectively.

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 for the six months ended June 30, 2002 and 2001. Potentially dilutive securities, consisting of stock options and warrants, have been excluded from the diluted earnings per share calculations since their effect is antidilutive.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion of our financial condition and the results of operations should be read together with the financial statements, including the notes contained elsewhere in this Form 10-Q, and the financial statements, including the notes thereto, contained in our Annual Report on Form 10-K, as filed on April 1, 2002.

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 including those discussed herein under “Factors That May Affect Our Results.” We do not intend to update any of these factors or to publicly announce the results of any revisions to these forward-looking statements.

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 $2.8 billion in 2002.

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.

Our results include non-cash compensation expense as a result of the issuance of stock option grants. Compensation expense for options granted to employees represents the difference between the fair value of our common stock and the exercise price of the options at the date of grant. We account for stock-based employee compensation arrangements in accordance with the provisions of APB 25, “Accounting for Stock Issued to Employees,” and comply with the disclosure provisions of SFAS 123, “Accounting for Stock-Based Compensation.” Compensation for options granted to consultants has been determined in accordance with SFAS 123 as the fair value of the equity instruments issued. APB 25 has been applied in accounting for fixed and milestone-based stock options to employees and directors as allowed by SFAS 123. Any expense is being recorded over the respective vesting periods of the individual stock options and is reflected in the respective categories of expense in the statements of operations.

We have incurred significant losses since our inception and we have not generated any revenue. As of June 30, 2002, our accumulated deficit was $83,446,077. Our historical operating losses have resulted principally from our research and development activities, including Phase 3 clinical trial activities for our product candidates MT 100 and MT 300, Phase 2 clinical trial activities for our product candidate 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, MT 300 and MT 400, apply for regulatory approval, and acquire and develop product candidates 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 clinical and 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.

Our ability to generate revenue is dependent upon our ability, alone or with others, to successfully develop MT 100 and our other migraine product candidates, obtain regulatory approvals and, alone or with others, successfully manufacture and market our future products.

Three months ended June 30, 2002 compared to the three months ended June 30, 2001

Net loss per share: Net loss attributable to common stockholders for the quarter ended June 30, 2002 was $6,624,749, or $0.24 per share, and for the quarter ended June 30, 2001 was $4,408,918, or $0.16 per share.

Revenue: We generated no revenue during the quarter ended June 30, 2002 and the quarter ended June 30, 2001.

Research and development: Research and development expenses increased 37.6% to $5,223,281 for the second quarter of 2002, as compared to $3,795,135 for the same period of 2001. The $1,428,000 increase was due primarily to increased costs associated with the development of MT 300 and MT 400, offset by a decrease in development costs for MT 100 and the elimination of development costs for MT 500. MT 300 costs increased by $1,046,000, primarily due to Phase 3 clinical trial activities, as compared to the same period of 2001. MT 400 costs increased by $1,420,000, primarily due to increased costs associated with obtaining drug substance and increased toxicology activities, as compared to the same period of 2001. Costs associated with the development of MT 100 and MT 500 decreased $529,000 and $615,000, respectively. Additional research and development departmental costs increased $106,000, net of a $32,000 decrease in the amortization of deferred stock compensation. Total amortization of deferred stock compensation included in research and development expenses was $321,000 and $353,000, for the quarter ended June 30, 2002 and 2001, respectively. Research and development departmental expenses increased primarily due to higher personnel costs related to our research activities.

General and administrative: General and administrative expenses increased 6.1% to $1,683,405 for the second quarter of 2002, as compared to $1,586,608 for the same period of 2001. The $97,000 increase was due primarily to increased advertising, promotions and marketing expenses related to our business development activities, and other costs related to our corporate infrastructure. Total amortization of deferred compensation included in general and administrative expenses was $415,000 and $434,000 for the quarter ended June 30, 2002 and 2001, respectively. General and administrative expenses consisted primarily of the costs of administrative personnel, facility infrastructure, marketing expenses and public reporting.

Interest income: Interest income decreased to $281,937 for the second quarter of 2002, from $972,825 for the quarter ended June 30, 2001. Interest income decreased due to a decline in interest rates and decreased levels of cash and cash equivalents available for investing during the quarter ended June 30, 2002 as compared to the same period of 2001.

Six months ended June 30, 2002 compared to the six months ended June 30, 2001

Net loss per share: Net loss attributable to common stockholders for the six month period ended June 30, 2002 was $13,645,022, or $0.49 per share, as compared to $8,942,378, or $0.32 per share for the same period of 2001.

Revenue: We generated no revenue during the six-month periods ended June 30, 2002 and June 30, 2001.

Research and development: Research and development expenses increased 34.1% to $10,802,745 for the six-month period ended June 30, 2002, as compared to $8,051,769 for the same period of 2001. The $2,751,000 increase was due primarily to increased costs associated with the development of MT 300 and MT 400, offset by a decrease in development costs for MT 100 and the elimination of development costs for MT 500. MT 300 costs increased by $1,712,000, primarily due to increased Phase 3 clinical trial activities in the second quarter of 2002, as compared to the same period of 2001. MT 400 costs increased by $1,556,000, primarily due to increased cost associated with obtaining drug substance and increased toxicology activities, in the second quarter of 2002, as compared to the same period of 2001. Costs associated with the development of MT 100 and MT 500 decreased $152,000 and $593,000, respectively. Additional research and development departmental costs increased $228,000, net of a $71,000 decrease in the amortization of deferred stock compensation. Total amortization of deferred stock compensation included in research and development expenses was $647,000 and $718,000, for the six months ended June 30, 2002 and 2001, respectively. Research and development departmental expenses increased primarily due to higher personnel

costs related to our research activities.

General and administrative: General and administrative expenses increased 11.4% to $3,440,906 for the six-month period ended June 30, 2002 as compared to $3,089,126 for the same period of 2001. The $352,000 increase was due primarily to increased advertising, promotions and marketing expenses related to our business development activities, and costs related to our corporate infrastructure. Total amortization of deferred compensation included in general and administrative expenses was $834,000 and $871,000 for the six-month period ended June 30, 2002 and 2001, respectively. General and administrative expenses consisted primarily of the costs of administrative personnel, facility infrastructure, marketing expenses and public reporting.

Interest income: Interest income decreased to $598,609 for the six-month period ended June 30, 2002 from $2,198,517 for the same period of 2001. Interest income decreased due to a decline in interest rates and decreased levels of cash and cash equivalents available for investing during the six-month period ended June 30, 2002 as compared to the same period of 2001.

Income Taxes

As of June 30, 2002, we had federal and state net operating loss carryforwards of approximately $69.2 million and research and development credit carryforwards of approximately $4.3 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 $131,727,794. As of June 30, 2002, cash and cash equivalents totaled $61,004,528, a decrease of $12,954,196 as compared to December 31, 2001. The decrease in cash and cash equivalents resulted primarily from expenses associated with our operating activities.

Cash used in operations of $12,727,357 during the six months ended June 30, 2002 represented a net loss of $13,645,022 offset by non-cash charges of $1,532,310, an increase in prepaid and other assets of $57,895 and a decrease in accounts payable and accrued liabilities of $556,750.

Cash used in investing activities of $374,223 during the six months ended June 30, 2002 reflected the purchase of furniture, equipment and leasehold improvements. Since inception through June 30, 2002, approximately $790,262 was spent on furniture, equipment and leasehold improvements.

Cash provided by financing activities during the six months ended June 30, 2002, which totaled $147,384, was generated by the exercise of stock options.

Factors That May Affect Our Results

Our business is subject to certain risks and uncertainties. If any of these risks eventuate, our business, financial condition, cash flows and results of operations could be materially adversely affected.

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;

•

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 June 30, 2002, we had an accumulated deficit of approximately $83.4 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.

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 or delay 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 our other product candidates, we may be required to conduct additional clinical trials and studies to support our NDAs 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;

•

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 contractor’s or collaborator’s business strategy may adversely affect its willingness or ability to complete its obligations to us.

•

The contractor or collaborator may have the right to terminate its arrangements with us on limited or no notice and for reasons outside of our control.

•

The contractor or collaborator 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.

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.

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.

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.

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.

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 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 3. Quantitative and Qualitative Disclosure 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. However, declines in interest rates reduced our interest income during the six-month period ended June 30, 2002 as compared to the same period of 2001. Declines in interest rates will reduce our interest income while increases in interest rates will increase our interest income.

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders


(a)		The annual meeting of our stockholders was held on May 21, 2002. The holders of 19,696,272 of the 28,077,945 shares of our common stock outstanding on the record date were present at the meeting in person or by proxy.

(b)		At the meeting, Bruce A. Tomason was duly nominated and properly elected as a Director to serve until the 2005 annual meeting of stockholders or until his successor is elected and has qualified. The number of votes cast in favor and withheld for his nomination are indicated below:


For		Against/Withheld

19,694,482		1,790


(c)		At the meeting, Jacques F. Rejeange was duly nominated and properly elected as a Director to serve until the 2005 annual meeting of stockholders or until his successor is elected and has qualified. The number of votes cast in favor and withheld for his nomination are indicated below:


For		Against/Withheld

19,694,482		1,790


		The terms of office of John R. Plachetka, Ted G. Wood and Peter J. Wise as directors continued after the meeting.

(d)		At the meeting, a proposal to ratify the appointment of Ernst & Young LLP as our independent accountants for the fiscal year ending December 31, 2002 was approved. The number of votes cast for, against and to abstain on the proposal are indicated below:


For	Against	Against/Withheld
19,692,034	2,290	1,948


(e)		At the meeting, a proposal to approve the 2001 Long-Term Incentive Plan was approved. The number of votes cast for, against and to abstain on the proposal are indicated below:


For	Against	Abstentions
14,363,568	277,896	28,223

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

99.1

Certification by the Chief Executive Officer and Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.

(b) Reports on Form 8-K

We filed no reports on Form 8-K during the quarter ended June 30, 2002.

SIGNATURES

Pursuant to the requirements 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.

	POZEN INC. (Registrant)

August 2, 2002	By:	/s/ JOHN R. PLACHETKA
		John R. Plachetka President and Chief Executive Officer


August 2, 2002	By:	/s/ MATTHEW E. CZAJKOWSKI
		Matthew E. Czajkowski Chief Financial Officer (Principal Financial Officer)


August 2, 2002	By:	/s/ JOHN E. BARNHARDT
		John E. Barnhardt Vice President, Finance And Administration (Principal Accounting Officer)

EXHIBIT INDEX

Exhibit Number		Description

99.1		Certification by the Chief Executive Officer and Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents