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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
OR
[_] Transition report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 0-21699
VIROPHARMA INCORPORATED
(Exact name of registrant as specified in our charter)
Delaware 94-2347624
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
405 Eagleview Boulevard 19341
(Zip Code)
Exton, Pennsylvania
(Address of principal executive offices)
Registrant's telephone number, including area code: 610-458-7300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.002
6% Convertible Subordinated Notes due 2007
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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 [_]
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 approximate aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $372,289,871 as of March 1,
2001, based upon the closing sale price per share of the Common Stock as
quoted on the Nasdaq National Market. This amount excludes 3,244,390 shares of
the registrant's voting stock held by directors, officers and stockholders
with representatives on the board of directors whose ownership exceeds ten
percent of the registrant's Common Stock outstanding at March 1, 2001.
Exclusion of shares held by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to direct or cause
the direction of the management or policies of the registrant, or that such
person is controlled by or under common control with the registrant.
The number of shares of the registrant's Common Stock outstanding as of
March 1, 2001 was 16,210,474.
DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement for the registrant's 2001 Annual
Meeting of Stockholders to be held on June 11, 2001 are incorporated by
reference in Part III of this Annual Report on Form 10-K.
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VIROPHARMA INCORPORATED
FORM 10-K ANNUAL REPORT
For Fiscal Year Ended December 31, 2000
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 1
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Market for the Registrant's Common Equity and Related
Item 5. Stockholder Matters 27
Item 6. Selected Financial Data 28
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations 29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 32
Item 8. Financial Statements and Supplementary Data 32
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure 32
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners and Management 33
Item 13. Certain Relationships and Related Transactions 33
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
Item 14. 8-K 34
Index to Financial Statements and Schedules F-1
"ViroPharma", "ViroPharma" plus the design and "Picovir" are trademarks and
service marks of ViroPharma. We have obtained trademark registration in the
United States for the marks in connection with certain services. We have
pending applications to register the trademarks and service marks, in the
United States and in various countries throughout the world. All other brand
names or trademarks appearing in this Annual Report on Form 10-K are the
property of others.
PART I
Business
ITEM 1. BUSINESS
We are a pharmaceutical company dedicated to the commercialization,
development and discovery of new antiviral medicines. We have focused our
current product development and discovery activities on a number of
ribonucleic acid, or RNA, virus diseases, including:
. viral respiratory infection, or VRI, often referred to as the common
cold;
. hepatitis C; and
. respiratory syncytial virus disease, or RSV disease.
In March 2001, we announced the preliminary analysis of data from our two
pivotal clinical studies of Picovir(TM) (pleconaril) in adult patients
suffering from viral respiratory infection (VRI) due to picornaviruses. In
April 2000, we reported our preliminary analysis of data from three Phase III
clinical studies of pleconaril, one in VRI in adults and one each in viral
meningitis in adults and children.
We commenced a Phase II clinical program with our hepatitis C product
candidate in collaboration with American Home Products Corporation in November
2000, and a Phase I clinical program with our RSV product candidate in October
2000. We have additional proprietary compounds in research for the treatment
of hepatitis C and RSV disease.
We believe that our antiviral drug discovery and development technologies
and expertise have potential applicability to a broad range of diseases caused
by RNA viruses. RNA viruses are responsible for the majority of human viral
diseases, causing illnesses ranging from acute and chronic ailments to fatal
infections.
We were incorporated in Delaware in September 1994 and commenced operations
in December 1994. Our executive offices and research facility are located at
405 Eagleview Boulevard, Exton, PA 19341, our telephone number is 610-458-7300
and our website is at www.viropharma.com.
Diseases Caused By Viruses
Viruses are intracellular parasites that require a living host cell within
which to reproduce. Infection by viruses, and their ensuing replication, can
lead to disease. Viral epidemics, pandemics, acute outbreaks and chronic viral
diseases continue to cause an enormous amount of human suffering and death.
There are three fundamental classes of viruses:
. deoxyribonucleic acid, or DNA, viruses, which use DNA as their
genetic material and replicate their DNA in a manner similar to human
cells;
. retroviruses, which reproduce by first converting their RNA into DNA
in infected cells, then converting this DNA back into RNA; and
. RNA viruses, which have the unique ability to directly reproduce
their RNA to create new RNA virus offspring through a process known
as RNA replication. This ability to directly replicate RNA
distinguishes RNA viruses from DNA viruses, retroviruses and human
cells.
DNA viruses cause diseases such as herpes, hepatitis B and papillomas
(warts). The retrovirus HIV, or human immunodeficiency virus, causes AIDS. RNA
viruses, however, are responsible for the majority of human viral diseases,
causing a multitude of illnesses ranging from acute and chronic ailments to
fatal infections. The following is a list of selected diseases caused by RNA
viruses:
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RNA Virus Diseases
Bronchiolitis Hemorrhagic conjunctivitis RSV disease
Bronchitis Hemorrhagic fevers Rubella
Dengue fever Hepatitis A, D and E Tick fevers
Diarrhea diseases Hepatitis C Viral meningitis
Ebola fever Influenza Viral pharyngitis
Encephalitis Measles Viral respiratory infection
Hand-foot-and-mouth disease Myocarditis Yellow fever
Hantavirus pulmonary
syndrome Neonatal enteroviral disease
Otitis media Rabies
We have focused our current product development and discovery activities on
the italicized diseases.
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Product Pipeline
We are focusing our current product discovery and development activities on
a number of RNA virus diseases affecting children and adults, including VRI,
hepatitis C and RSV disease. The following chart sets forth these target
disease indications and the status of our product candidates:
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Disease Indication Product Candidate Development Status
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Viral respiratory infec- Picovir(TM) (pleconaril)
tion Two Phase III trials in adults completed
One Phase II safety study in pediatrics ongoing
One Phase II family prophylaxis study ongoing
Initial Phase III trial in adults completed
Two Phase II trials in adolescents/adults completed
Phase II trial in adolescents/adults with asthma completed
Phase II challenge study completed
High risk picornavirus Picovir(TM)
diseases Open label compassionate use ongoing
Hepatitis C VP 50406 Phase II trials ongoing
RSV disease VP 14637 Phase I trials ongoing
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Picovir(TM) (pleconaril)
We currently are developing our most advanced product candidate, Picovir(TM)
(pleconaril), for the treatment of common diseases caused by picornaviruses.
Picornaviruses are a large, very prevalent group of RNA viruses that are
responsible for a significant portion of human disease caused by RNA viruses.
Picornaviruses, particularly enteroviruses and rhinoviruses, are the
predominant cause of VRI, myocarditis, encephalitis, viral meningitis, and
neonatal enteroviral disease, as well as viral exacerbations of underlying
conditions in individuals with asthma and chronic obstructive pulmonary
disease. Immunocompromised patients, including transplant patients, also are
extremely susceptible to severe disease caused by picornavirus infections.
Picovir(TM) is a proprietary, orally-administered small molecule inhibitor
of picornaviruses that was discovered by scientists who founded or are
currently with ViroPharma. In preclinical studies, Picovir(TM) has been
demonstrated to inhibit picornavirus replication in vitro by a novel, virus-
specific mode of action. Picovir(TM) works by inhibiting the function of the
viral protein coat, also known as the viral capsid, which is essential for
virus infectivity and transmission. Preclinical studies have shown that
Picovir(TM) integrates within the picornavirus capsid at a specific site that
is common to a majority of picornaviruses and disrupts several stages of the
virus infection cycle.
We have developed liquid, solid, suspension and intranasal formulations of
Picovir(TM). The solid formulation was used in our recently completed pivotal
studies of Picovir(TM) for the treatment of VRI in adults. The suspension
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formulation is being used in our VRI trials for children. The liquid
formulation is being used in our compassionate use program.
Viral Respiratory Infection.
In March 2001, we announced the preliminary analysis of data from our two
pivotal clinical studies of Picovir(TM) (pleconaril) in adult patients
suffering from VRI due to picornaviruses. Symptoms of VRI include nasal
discharge (rhinorrhea), nasal obstruction and congestion, sneezing, sore or
"scratchy" throat, cough and shortness of breath. In these studies:
. patients were randomized to receive 400 mg of pleconaril or placebo
three times daily for five days;
. in the combined enrollment of 2,096 patients, 65% of patients had a
VRI caused by a picornavirus, the leading cause of the common cold;
. the primary endpoint in these studies was time to complete resolution
of rhinorrhea and reduction in all other evaluated disease symptoms
to absent or mild for 48 hours; and
. the primary analysis population in these studies was patients with a
VRI caused by a picornavirus, as determined by research assays based
on PCR (polymerase chain reaction) technology.
The results from our preliminary analysis of data from these studies were as
follows:
. In the primary analysis population in both studies picornavirus-
infected patients treated with pleconaril experienced a statistically
significant reduction in the primary endpoint when compared to
placebo (6.2 days versus 7.7 days, p = 0.001; and 6.6 days versus 7.2
days, p = 0.037, respectively).
. In all randomized patients in both studies, pleconaril treated
patients experienced a reduction in the primary endpoint when
compared to placebo. In one study, the reduction was statistically
significant (6.2 days versus 7.1 days, p = 0.015; and 6.4 days versus
6.9 days, p = 0.201, respectively).
. In a combined analysis of both studies, picornavirus-infected and all
randomized patients treated with pleconaril experienced statistically
significant reductions in the primary endpoint when compared to
placebo (for picornavirus-infected patients: 6.3 days versus 7.3
days, p = <0.001; for all randomized patients: 6.3 days versus 7.0
days, p = 0.009).
. Pleconaril-treated patients in the primary analysis population
experienced clinically meaningful and statistically significant
reductions in several secondary endpoints, including a reduction in
viral shedding early in the treatment period, a decrease in symptom
severity and a reduction in the time to a patient's assessment of
having "no cold."
We also are conducting a Phase II safety study with pleconaril in the
pediatric population, and a Phase II family prophylaxis study. Currently,
there are no antiviral pharmaceuticals for the treatment of VRI.
In April 2000, we reported our preliminary analysis of data from our initial
Phase III clinical trial for pleconaril for the treatment of VRI.
Specifically, we reported that:
. the time to resolution of illness, as measured by the primary
endpoint (absence of runny nose and reduction of other symptoms), was
reduced from 9.4 days to 7.7 days (p = 0.07) in picornavirus-infected
patients receiving pleconaril compared to placebo-treated patients;
. a greater treatment benefit was seen in picornavirus-infected
patients receiving pleconaril who did not take concomitant cold
medications, where illness duration was reduced from 9.0 days to 6.75
days (p = 0.033);
. objective assessments of VRI illness in all picornavirus-infected
patients, such as mucus production as measured by facial tissue use
(p = 0.03) and sleep disturbance (p = 0.029), were substantially
reduced;
. reductions in cold medication use, middle ear pressure and virus
shedding were also seen in these patients; and
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. in all randomized patients, generally less pronounced treatment
benefits were seen in this study.
Viral Meningitis.
In April 2000, we reported our preliminary analysis of data from two
separate Phase III clinical trials for viral meningitis, the first in
adolescents and adults and the second in pediatric patients. In both studies,
time to complete resolution of headache was the primary endpoint.
Specifically, we reported that:
. in the adult study, a significant effect of pleconaril was not
observed in the primary endpoint for all randomized patients with
confirmed picornavirus infection;
. in adult patients with the most severe disease, the time to complete
resolution of headache, the primary endpoint in the study, was
reduced by 3 days (10 days in the placebo group to 7 days in the
pleconaril-treated group, p = 0.039);
. the time to return to work or school also was reduced by 3 days in
these patients (10 days in the placebo group to 7 days in the
pleconaril-treated group, p = 0.015); and
. in the pediatric study, we reported that the duration of illness
observed was considerably shorter than noted in the previous study of
this patient group. Many children showed resolution of headache
symptoms following lumbar puncture on study day one. As a result, a
significant effect of pleconaril was not observed.
We intend to focus our near-term clinical development efforts and resources
for pleconaril on the viral respiratory infection disease indication. As a
result of this near-term clinical focus, we do not currently intend to conduct
further clinical studies of pleconaril for the treatment of viral meningitis.
High Risk Patients.
Since August 1996, we have made Picovir(TM) (pleconaril) available on an
open label basis for patients with life-threatening or seriously disabling
diseases caused by picornaviruses. As of January 1, 2001, a total of 269
patients have been treated for a variety of life-threatening illnesses,
including chronic meningoencephalitis in patients with immune deficiency,
myocarditis, neonatal enteroviral disease, poliomyelitis syndromes,
enterovirus infections after bone marrow transplantation, rhinovirus
pneumonia, encephalitis, post-polio syndrome, chronic fatigue, enteroviral
infection in patients with immune deficiency and enteroviral gastroenteritis
in patients with immune deficiency. Many of these high risk patients receiving
a short course of Picovir(TM) treatment have experienced a sustained clinical
benefit and clearance of the virus. Although data from the compassionate use
of Picovir(TM) in these patients will be included in our New Drug Application
for VRI, these data are typically not sufficient to support an independent
label indication.
Hepatitis C
In November 2000, we commenced Phase II clinical studies on product
candidate VP50406 for the treatment of hepatitis C due to the hepatitis C
virus, commonly known as HCV. VP50406 is a proprietary, orally bioavailable
small molecule that has been demonstrated to inhibit RNA replication of HCV in
vitro. This compound is the lead compound in a chemical series discovered and
developed by ViroPharma. We are conducting these Phase II studies as part of
our collaboration with American Home Products Corporation under a
collaboration and license agreement that we entered into with American Home
Products Corporation in December 1999. As part of that collaboration, we also
are continuing with the development of several additional potent, selective
and chemically distinct compounds that inhibit several key HCV-encoded
activities that are essential to viral RNA replication.
HCV is recognized as a major cause of chronic hepatitis worldwide.
Approximately 85% of persons infected with HCV develop chronic hepatitis, of
which 20% progress to liver cirrhosis. Chronic HCV infection can also lead to
the development of hepatocellular carcinoma and liver failure.
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RSV Diseases
In October 2000, we initiated Phase I clinical trials with product candidate
VP14637 for the treatment of disease caused by respiratory syncytial virus, or
RSV. These initial trails are designed to evaluate the safety and
pharmacokinetic profile of the compound in healthy human volunteers. VP14637
is a proprietary, small molecule that has been demonstrated to inhibit RSV
replication in vitro. This compound is the lead compound in a chemical series
discovered and developed by ViroPharma. We also are continuing discovery and
development activities of additional compounds that have selective activity
against RSV.
RSV is a major viral respiratory tract pathogen that often causes pneumonia
and bronchiolitis. Infants and young children with underlying conditions such
as prematurity, congenital heart disease, bronchopulmonary dysplasia and
various congenital or acquired immunodeficiency syndromes (such as asthma or
immunodeficiency resulting from bone marrow transplants) are at greatest risk
of serious RSV morbidity and mortality. RSV is also a major cause of morbidity
and mortality in the elderly. Certain patient groups are particularly at risk
for suffering from serious and life-threatening complications arising from RSV
infections. These groups include:
. Bone marrow transplant patients;
. Chronic obstructed pulmonary disease patients (including bronchitis
and emphysema); and
. Asthmatic patients.
Treating RNA Virus Diseases
The RNA Virus Replication Process
Important to the successful discovery and development of antiviral
pharmaceuticals is the ability to analyze the virus in a laboratory setting
and to dissect the molecular and biochemical events critical to virus
replication. The manipulation of RNA viruses and, in particular, the virus's
RNA genome, requires special techniques and skills. Historically, technical
limitations have hampered investigation of RNA virus replication.
Consequently, the scientific community's understanding of the molecular events
of RNA virus replication is incomplete. However, significant recent
advancements in biological and molecular technologies related to the
manipulation of RNA and RNA viruses have enabled us to pursue the discovery
and development of effective treatments for RNA virus diseases.
We believe that the process of viral RNA uncoating and replication
represents an attractive target for the therapeutic intervention in disease
caused by RNA viruses. For RNA viruses to cause disease, they must replicate.
Inhibiting RNA virus replication can prevent, limit or stop disease. In
addition to thwarting disease, the direct inhibition of viral RNA uncoating
and replication should reduce generation of drug-resistant virus offspring and
decrease virus transmission from infected individuals to healthy persons. RNA
replication is a complicated process involving several viral proteins that
must act together in a coordinated fashion. Due to the nature of this process,
changes or mutations in these proteins are not readily tolerated.
Consequently, viral proteins required for RNA replication are not only
specific to the virus, they are among the least variable proteins of the
virus. This is in contrast to the highly variable viral surface proteins
generally involved in immune responses to virus infections. This invariability
of the viral proteins responsible for viral RNA replication represents an
important attribute in their selection as molecular targets for antiviral
product discovery and development.
The ViroPharma Approach
While the RNA uncoating and replication process is common among all RNA
viruses, the detailed molecular and biochemical mechanisms involved currently
are not fully understood. However, we have used our experience in RNA
virology, RNA virus uncoating and RNA replication, along with recent advances
in biological, molecular and informatics technologies, to gain an
understanding of several aspects of the RNA virus uncoating and replication
process. ViroPharma scientists have elucidated fundamental processes involved
in virus uncoating and have used this knowledge to design compounds to inhibit
these processes. These scientists have
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also succeeded in discovering essential virus enzyme activities that are
critical to RNA replication. They have further characterized RNA virus
replication activities and have used the resulting information to develop
novel drug screening assays. Our assays are optimized for high sensitivity and
specificity and are validated for reproducibility. These assays are automated
using state-of-the-art robotics technologies to facilitate the high throughput
screening of large chemical libraries. Using our novel assays, we have
discovered proprietary small molecule compounds that inhibit the targeted
virus-specific activities.
Once active compounds are identified, we advance such compounds to clinical
product candidates through a process of chemical optimization. This process
involves the rapid generation of an expanded chemical analog series based on
the initial active compounds and utilizes an array of technologies including
computer-assisted pharmacophore modeling and drug design techniques, two-
dimensional and three-dimensional structure and substructure chemical database
searches and conventional medicinal chemistry, combinatorial chemistry and
automated high capacity chemical synthetic methods. We then evaluate analog
series in various biochemical and biological assays that assess compound
selectivity, potency, bioavailability and safety. Importantly, we chemically
optimize active compounds for these four key parameters in parallel, not
sequentially. We believe that our combination of chemical and biological
technologies and our parallel compound optimization process allows us to
accelerate product discovery and development. The generation of large numbers
of specific chemical analogs by our scientists also enables us to rapidly
expand our valuable chemical library in a manner that is biased toward
inhibitors of enzymes and activities essential to RNA virus replication. We
believe that this library provides a significant advantage in our efforts to
discover novel inhibitors for additional RNA virus diseases.
Manufacturing
We currently do not have commercial manufacturing capabilities, and do not
intend to develop such capabilities for any product in the near future. Our
commercialization plans are to rely on the infrastructure of third parties for
the manufacture and distribution of Picovir(TM) (pleconaril) and our other
product candidates.
Picovir(TM) drug substance is prepared from readily available materials
using reliable processes. Both Picovir(TM) and the technology used to
manufacture it are proprietary and covered by the patents and patent
applications licensed to us by Sanofi-Synthelabo. We have entered into
agreements with PCAS for process development and to manufacture supplies of
bulk Picovir(TM) used in our clinical trials to date. We also entered into an
agreement with an alternative supplier to manufacture pilot batches of
Picovir(TM). We believe that the terms of each of these agreements are
comparable to the terms of similar agreements for similar products entered
into by third parties.
Under development agreements with Patheon, Inc., we have developed liquid,
solid, suspension and intranasal formulations of Picovir(TM). The tablet
formulation was used in our recently completed Phase III studies of
Picovir(TM) for treatment of VRI in adults. We are using a suspension
formulation in our pediatric trials of Picovir(TM) and a liquid formulation in
our compassionate use program. We anticipate that our current supply of
Picovir(TM) drug substance and drug product, together with the bulk drug
substance and drug product that we will receive from our suppliers, will be
sufficient to complete our formulation development activities and our ongoing
clinical trials.
We currently are negotiating commercial supply agreements for Picovir(TM)
drug substance with primary and alternative bulk drug manufacturers, with
micronizers and with final product manufacturers that we have identified to
date. It is not yet clear what the final terms of these agreements will be,
although we expect that they will be comparable to the terms of similar
agreements for similar products entered into by third parties. There can be no
assurance that we will be successful in entering into commercial supply
agreements for Picovir(TM) drug substance and products, or that any such
manufacturing arrangements will be available on terms acceptable to us.
We require in our manufacturing and processing agreements that all third-
party contract manufacturers and processors produce Picovir(TM) drug substance
and product in accordance with the FDA's current Good
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Manufacturing Practices. We maintain confidentiality agreements with potential
and existing manufacturers in order to protect our proprietary rights related
to Picovir(TM).
For the preparation of compounds other than Picovir(TM) for preclinical
research and for the manufacture of limited quantities of drug substances for
clinical development, we use both in-house capabilities, and contract with
third-party manufacturers. We intend to rely solely on third-party
manufacturers to manufacture larger quantities of drug substance for clinical
development and to manufacture final drug products for both clinical
development and commercial sale.
Marketing and Sales
Under our agreement with Sanofi-Synthelabo, we have the exclusive right to
market and sell Picovir(TM) for all picornavirus indications in the United
States and Canada. We are continuing our market research on the multiple
disease indications for which we are developing Picovir(TM). Our marketing
plans include a focus on medical education, including the use of thought
leaders in peer-to-peer presentations at appropriate medical meetings. In
addition, we have an extensive medical and scientific publications plan in
place.
We currently do not have a sales staff. To penetrate the VRI marketplace, we
intend to identify a strategic partner to help us market Picovir(TM) for the
treatment of VRI to the primary care marketplace. We expect to hire an
internal sales force to assist a strategic partner in marketing Picovir(TM).
The success and commercialization of our other potential products will be
dependent, in part, upon our ability to enter into additional collaborative
agreements for other potential products. There can be no assurance that we
will be successful in developing a sales force, entering into collaborative
arrangements, penetrating the markets for any proposed products or achieving
market acceptance of our products. There can be no assurance that any such
marketing arrangements will be available on terms acceptable to us, if at all,
that such third parties would perform adequately their obligations as
expected, or that any revenue would be derived from such arrangements.
Strategic Relationships
Sanofi-Synthelabo
Picovir(TM) was discovered by scientists at Sterling Winthrop, Inc., now
Sanofi-Synthelabo, several of whom are now ViroPharma employees. In our
agreement with Sanofi-Synthelabo, originally entered into in December 1995 and
amended and restated in February 2001, we received exclusive rights under
patents owned by Sanofi-Synthelabo to develop and market all products relating
to Picovir(TM) and related compounds for use in picornavirus disease
indications in the United States and Canada, as well as a right of first
refusal for any other indications in the United States and Canada. Our rights
include rights to use all of Sanofi-Synthelabo's patents, know-how and
trademarks relating to Picovir(TM) for those indications in the United States
and Canada, as well as rights to a series of patents and patent applications
covering compounds that are either related to Picovir(TM) or that have other
antiviral activity. Picovir(TM), which is currently in clinical trials, is
covered by one of the licensed United States patents, which expires in 2012,
and one of the licensed Canadian patent applications. We will be dependent on
Sanofi-Synthelabo to prosecute and maintain certain of these patents and
patent applications and may be dependent on Sanofi-Synthelabo to protect such
patent rights. We have the right to sublicense our rights under the agreement,
which under certain circumstances requires Sanofi-Synthelabo's consent, such
consent not to be unreasonably withheld.
Under our agreement with Sanofi-Synthelabo, until the expiration or
termination of the agreement, we must make royalty payments on any sales of
products developed under the agreement in the United States and Canada, which
royalty payments will be reduced upon the expiration of the last patent on
Picovir(TM) or any related drug. We are entitled to royalties from Sanofi-
Synthelabo on sales of products by Sanofi-Synthelabo outside the United States
and Canada. The royalty rates applicable to our sales of Picovir(TM) in the
United States and Canada, and the royalty rate applicable to Sanofi-
Synthelabo's sales of Picovir(TM) in the rest of the world, will accrue at
lower rates after selection of a co-promotion partner under the terms of our
amended and restated agreement. No further
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milestone payments are due to Sanofi-Synthelabo, and we are not required to
fund the cost of development in Europe, under the amended and restated
agreement. Sanofi-Synthelabo will make a milestone payment to us upon
submission of Picovir(TM) for regulatory approval in Japan.
Our patent licenses under the amended and restated agreement with Sanofi-
Synthelabo terminate on the later of expiration of the last patent licensed to
us under the agreement or ten years following our first sale of a product
containing a compound licensed to us under the agreement in the United States
or Canada, or earlier under certain circumstances. Our right to use the
trademarks continue beyond patent expiry. In the event that our rights to use
Sanofi-Synthelabo's patents and trademarks terminate, under certain
circumstances the agreement may restrict our ability to market Picovir(TM) and
compete with Sanofi-Synthelabo. In addition, Sanofi-Synthelabo has the right
to terminate the agreement if we are subject to a change of control that would
materially and adversely affect the development, manufacturing and marketing
of the products under the agreement. The term automatically renews for
successive five-year terms unless either party gives six months' prior written
notice of termination. We also have the right to manufacture, or contract with
third parties to manufacture, any drug product derived from the Picovir(TM)
drug substance. In connection with the expansion of our patent rights under
the amendment and restatement of our agreement in February 2001, we issued to
Sanofi 750,000 shares of our common stock.
American Home Products Corporation
In December 1999, we entered into a collaboration and license agreement with
American Home Products Corporation to jointly develop products for use in
treating hepatitis C due to the hepatitis C virus in humans. Under the
agreement, we licensed to American Home Products worldwide rights under
patents and know-how owned by us or created under the agreement. We have the
right to co-promote these products in the United States and Canada and
American Home Products will promote the products elsewhere in the world.
During the initial research phase of the agreement, the two parties will work
exclusively with each other on the development of small molecule compounds
directed against certain HCV targets. For the entire term of the agreement the
two parties will work exclusively with each other on any promising compounds.
Under the agreement, American Home Products has the right to manufacture any
commercial products developed under the agreement.
American Home Products paid us $5.0 million on the effective date of the
agreement, and is obligated to make milestone payments to us, and purchase
additional shares of our common stock at a premium to the market price, upon
the achievement of certain development milestones. American Home Products has
purchased an aggregate of 200,993 shares of our Common Stock through February
16, 2001 for $6,000,000 upon the achievement of two milestones. The remaining
milestone events generally include successful completion of steps in the
clinical development of an HCV product and the submission for, and receipt of,
marketing approval for the product in the United States and abroad. These
milestones, however, may never be attained. American Home Products Corporation
will provide significant financial support for the development of an HCV
therapeutic compound.
Until the expiration or termination of the agreement, any profits from the
sale of products developed under the agreement and sold in the United States
and Canada will be shared equally between us and American Home Products,
subject to adjustment under certain circumstances. For sales of these products
outside the United States and Canada, American Home Products will make royalty
payments to us. These royalty payments will be reduced upon the expiration of
the last of our patents covering those products.
The collaborative research component of our agreement with American Home
Products has an initial term of three years after the effective date of the
agreement, unless extended by mutual agreement. Our agreement with American
Home Products terminates, country-by-country, in the United States and Canada,
if the parties are no longer co-promoting any product developed under the
agreement, and outside the United States and Canada, when American Home
Products is no longer obligated to pay us royalties on sales of products
developed under the agreement.
8
Battelle Memorial Institute
In November 1999, we entered into a product development and
commercialization agreement with Battelle Memorial Institute in connection
with our RSV program. Under this agreement, we received, subject to certain
conditions, certain exclusive rights to use patents and know-how owned or
controlled by Battelle or developed under the agreement covering Battelle's
hand-held, inhalation device for the delivery of compounds to treat RSV.
We will pay Battelle for development activities that it will perform on our
behalf on a fee-for-service basis. Battelle also is entitled to milestone
payments upon achievement of certain events relating to clinical development
and regulatory approval. We will pay Battelle royalties on net sales of
products, subject to certain minimum amounts due. Royalties will be reduced
for sales in any country in which no issued patent protects the Battelle
device. We will be responsible for the costs of all commercial supplies of the
device.
Patents and Proprietary Technology
We believe that patent protection and trade secret protection are important
to our business and that our future will depend, in part, on our ability to
maintain our technology licenses, maintain trade secret protection, obtain
patents and operate without infringing the proprietary rights of others both
in the United States and abroad. We currently have received three issued
United States patents covering compounds, compositions and methods for
treating hepatitis C, one issued United States patent covering methods for
treating pestivirus disease (a disease caused by viruses related to HCV) and
four issued United States patents for compounds, compositions or methods for
treating influenza. We have three pending United States patent applications
covering compounds and methods for treating RSV diseases and influenza, and
intermediates and processes of making anti-RSV compounds. We have four United
States patent applications covering compounds and methods for treating
hepatitis C and related virus diseases, as well as compounds active against
pestivirus diseases. We have two pending United States patent applications
covering technology and methods for identifying inhibitors of HCV. We also
have filed patent applications under the Patent Cooperation Treaty, or PCT.
These patent applications cover compounds and methods for treating hepatitis C
and related virus diseases, pestivirus diseases, RSV diseases and influenza
and technology, compositions and methods for identifying inhibitors of HCV. We
intend to seek patent protection on these inventions in countries having
significant market potential around the world on the basis of our PCT filings.
As patent applications in the United States are maintained in secrecy until
patents issue and as publication of discoveries in the scientific or patent
literature often lags behind the actual discoveries, we cannot be certain that
we or our licensors were the first to make the inventions covered by each of
these pending patent applications or that we or our licensors were the first
to file patent applications for such inventions. Furthermore, the patent
positions of biotechnology and pharmaceutical companies are highly uncertain
and involve complex legal and factual questions, and, therefore, the breadth
of claims allowed in biotechnology and pharmaceutical patents or their
enforceability cannot be predicted. We cannot be sure that any patents will
issue from any of these patent applications or, should any patents issue, that
we will be provided with adequate protection against potentially competitive
products. Furthermore, we cannot be sure that should patents issue, they will
be of commercial value to us, or that private parties, including competitors,
will not successfully challenge these patents or circumvent our patent
position in the United States or abroad. In the absence of adequate patent
protection, our business may be adversely affected by competitors who develop
comparable technology or products.
Pursuant to the terms of the Uruguay Round Agreements Act, patents filed on
or after June 8, 1995 have a term of twenty years from the date of filing,
irrespective of the period of time it may take for the patent to ultimately
issue. This may shorten the period of patent protection afforded to our
products as patent applications in the biopharmaceutical sector often take
considerable time to issue. Under the Drug Price Competition and Patent Term
Restoration Act of 1984, a sponsor may obtain marketing exclusivity for a
period of time following Food and Drug Administration approval of certain drug
applications, regardless of patent status, if the drug is a new chemical
entity or if new clinical studies were used to support the marketing
application for the drug. Pursuant to the FDA Modernization Act of 1997, this
period of exclusivity can be extended if the applicant
9
performs certain studies in pediatric patients. This marketing exclusivity
prevents a third party from obtaining FDA approval for a similar or identical
drug under an Abbreviated New Drug Application or a "505(b)(2)" New Drug
Application.
The Drug Price Competition and Patent Term Restoration Act of 1984 also
allows a patent owner to obtain an extension of applicable patent terms for a
period equal to one-half the period of time elapsed between the filing of an
Investigational New Drug Application and the filing of the corresponding New
Drug Application plus the period of time between the filing of the New Drug
Application and FDA approval, with a five year maximum patent extension. We
cannot be sure that we will be able to take advantage of either the patent
term extension or marketing exclusivity provisions of this law.
In order to protect the confidentiality of our technology, including trade
secrets and know-how and other proprietary technical and business information,
we require all of our employees, consultants, advisors and collaborators to
enter into confidentiality agreements that prohibit the use or disclosure of
confidential information. The agreements also oblige our employees,
consultants, advisors and collaborators to assign to us ideas, developments,
discoveries and inventions made by such persons in connection with their work
with us. We cannot be sure that these agreements will maintain
confidentiality, will prevent disclosure, or will protect our proprietary
information or intellectual property, or that others will not independently
develop substantially equivalent proprietary information or intellectual
property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with those being developed by us. Therefore, our product candidates may give
rise to claims that they infringe the patents or proprietary rights of other
parties existing now and in the future. Furthermore, to the extent that we, or
our consultants or research collaborators, use intellectual property owned by
others in work performed for us, disputes may also arise as to the rights in
such intellectual property or in related or resulting know-how and inventions.
An adverse claim could subject us to significant liabilities to such other
parties and/or require disputed rights to be licensed from such other parties.
A license required under any such patents or proprietary rights may not be
available to us, or may not be available on acceptable terms. If we do not
obtain such licenses, we may encounter delays in product market introductions,
or may find that we are prevented from the development, manufacture or sale of
products requiring such licenses. In addition, we could incur substantial
costs in defending ourselves in legal proceedings instituted before the United
States Patent and Trademark Office or in a suit brought against us by a
private party based on such patents or proprietary rights, or in a suit by us
asserting our patent or proprietary rights against another party, even if the
outcome is not adverse to us.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements on the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, distribution, record keeping, approval and
promotion of our products. All of our products will require regulatory
approval before commercialization. In particular, therapeutic products for
human use are subject to rigorous preclinical and clinical testing and other
requirements of the Federal Food, Drug, and Cosmetic Act, 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 approval or in complying with other
requirements, could adversely affect the commercialization of products then
being developed by us and our ability to receive product or royalty revenues.
10
The steps required before a new drug product may be distributed commercially
in the United States generally include:
. conducting appropriate preclinical laboratory evaluations of the
product's chemistry, formulation and stability, and animal studies to
assess the potential safety and efficacy of the product;
. 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;
. making the Investigational New Drug Application effective after the
resolution of any safety or regulatory concerns of 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 drug product candidate for
the intended use, typically in the following three sequential, or
slightly overlapping stages:
. Phase I: The drug is initially introduced into healthy human
subjects or patients and tested for safety, dose tolerance,
absorption, metabolism, distribution and excretion;
. Phase II: The drug is studied in patients to identify possible
adverse effects and safety risks, to determine dose tolerance and
the optimal dosage, and to collect initial efficacy data;
. Phase III: The drug 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 preliminary research, preclinical studies,
and clinical studies as well as chemistry, manufacturing and controls
information on the drug to the FDA in a New Drug Application, or NDA;
and
. obtaining FDA approval of the New Drug Application prior to any
commercial sale or shipment of the drug product.
This process can take a number of years and typically requires 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 all 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, drug supply, or financial
support, or because of unforeseen adverse effects. The FDA has issued
regulations intended to accelerate the approval process for the development,
evaluation and marketing of new therapeutic products intended to treat life-
threatening or severely debilitating diseases, especially where no alternative
therapies exist. If applicable, these provisions may shorten the traditional
product development process in the United States. Similarly, products that
represent a substantial improvement over existing therapies may be eligible
for priority review with a target review and approval time of six months.
Nonetheless, even if a product is eligible for these programs, or for priority
review, approval may be denied or delayed by FDA or additional trials may be
required. As a condition of approval FDA also can require further testing of
the product and monitoring of the effect of commercialized products, and the
agency has the power to prevent or limit further marketing of a product based
on the results of these post-marketing programs. Upon approval, a drug product
may be marketed only in those dosage forms and for those indications approved
in the New Drug Application, although information may be distributed about
off-label indications in certain circumstances and physicians are permitted to
prescribe drugs for such off-label uses.
In addition to obtaining FDA approval for each indication to be treated with
each product, each domestic drug product manufacturing establishment must
register with the FDA, list its drug products with the FDA, comply with
current Good Manufacturing Practices and pass inspections by the FDA.
Moreover, the submission of applications for approval may require additional
time to complete manufacturing stability studies. Foreign establishments
manufacturing drug products for distribution in the United States also must
list their products with the FDA and comply with current Good Manufacturing
Practices. They also are subject to periodic inspection by the FDA or by local
authorities under agreement with the FDA.
11
Any products manufactured or distributed by us pursuant to FDA approvals are
subject to extensive continuing regulation by the FDA, including record-
keeping requirements and a requirement to analyze and report adverse
experiences with the drug. In addition to continued compliance with standard
regulatory requirements, the FDA also may require post-marketing testing and
surveillance to monitor the safety and efficacy of the marketed product.
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 Federal Food, Drug, and Cosmetic Act also mandates that drug products be
manufactured consistent with current Good Manufacturing Practices. In
complying with the FDA's regulations on current Good Manufacturing Practices,
manufacturers must continue to spend time, money and effort in production,
recordkeeping, quality control, and auditing to ensure that the marketed
product meets applicable specifications and other requirements. The FDA
periodically inspects drug product manufacturing facilities to ensure
compliance with current Good Manufacturing Practices. 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 products. Such third parties will be required to
comply with current Good Manufacturing Practices.
Even after FDA approval has been obtained, and often as a condition to
expedited approval, 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 the product,
including changes in indication, manufacturing process, manufacturing facility
or labeling, we may need to submit a New Drug Application supplement to the
FDA.
Products manufactured in the United States 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 product manufacture and marketing. Such
requirements can vary significantly from country to country. As part of our
strategic relationships our collaborators may be responsible for the foreign
regulatory approval process of our products, although we may be legally liable
for noncompliance.
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 and
disposal of hazardous or potentially hazardous substances, including
radioactive compounds and infectious disease agents, 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 Federal Food, Drug,
and Cosmetic Act 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 business is
uncertain and unpredictable.
Moreover, we anticipate that Congress, state legislatures and the private
sector will continue to review and assess controls on health care spending.
Any such proposed or actual changes could cause us or our collaborators to
limit or eliminate spending on development projects and may otherwise affect
us. We cannot predict the likelihood, nature, or extent of adverse
governmental regulation that might result from future legislative or
administrative action, either in the United States or abroad. Additionally, in
both domestic and foreign markets, sales of our proposed products will depend,
in part, upon the availability of reimbursement from third-party
12
payors, such as government health administration authorities, managed care
providers, private health insurers and other organizations. Significant
uncertainty often exists as to the reimbursement status of newly approved
health care products. In addition, third-party payors are increasingly
challenging the price and cost effectiveness of medical products and services.
There can be no assurance that our proposed products will be considered cost-
effective or that adequate third-party reimbursement will be available to
enable us to maintain price levels sufficient to realize an appropriate return
on our investment in product research and development.
Competition
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 antiviral medicines. 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.
Antiviral therapeutics for certain RNA virus diseases are currently
available. For example:
. zenamivir and oseltamivir phosphate are used to treat influenza due
to influenza A and B viruses;
. amantadine and rimantadine are used to treat influenza A virus
infections;
. ribavirin is used to treat serious respiratory disease caused by RSV;
and
. interferon, alone or in combination with ribavirin, is used to treat
hepatitis C.
In addition, several immunoglobulin products are used to treat or prevent
some RNA virus diseases. We believe, however, that based on the
characteristics of existing treatments, there is a clear need for new agents
with superior therapeutic efficacy to treat these viral diseases.
In addition to approved products, other companies are developing treatments
for RNA virus diseases, including compounds in clinical development for
influenza, rhinovirus, RSV and HCV infections. Moreover, there are compounds
in preclinical studies for influenza, rhinovirus, RSV and HCV infections. 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.
Human Resources
As of January 31, 2001, we had 149 full-time employees, including 25 persons
with Ph.D. or M.D. degrees. 106 of these employees are engaged in research and
development activities at our laboratory facility in Exton, Pennsylvania. A
significant number of our management and professional employees have had prior
experience with pharmaceutical, biotechnology or medical products companies.
None of our employees is covered by collective bargaining agreements. We
believe that our relations with our employees are good.
13
Risk Factors
Our disclosure and analysis in this report contains some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," and other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to present or anticipated scientific progress,
development and regulatory approval of potential pharmaceutical products,
future revenues, capital expenditures, research and development expenditures,
future financings and collaborations, personnel, manufacturing requirements
and capabilities, and other statements regarding matters that are not
historical facts or statements of current condition.
Any or all of our forward-looking statements in this report may turn out to
be wrong. They can be affected by inaccurate assumptions we might make or by
known or unknown risks and uncertainties. Many factors mentioned in the
discussion below will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future
results may vary materially. The risks described below are not the only ones
facing our company. Additional risks not presently known to us or that we
currently deem immaterial may also impair our business operations. We do not
intend to update our forward-looking statements to reflect future events or
developments.
We depend heavily on the success of our lead product candidate, Picovir(TM)
(pleconaril), which is still in clinical trials and may never be approved for
commercial use. If we are unable to commercialize Picovir(TM), our business
and results of operations will be harmed.
We have invested a significant portion of our time and financial resources
since our inception in the development of Picovir(TM) (pleconaril) and
anticipate that for the foreseeable future our ability to achieve
profitability will be solely dependent on its successful commercialization. In
March 2001, we announced the preliminary analysis of the results from two
Phase III clinical trials of Picovir(TM) for viral respiratory infection due
to picornaviruses in adults. If we are unable to file a new drug application,
or NDA, to the U.S. Food and Drug Administration, or FDA, for Picovir(TM)
based on these results, or if our NDA for Picovir(TM) is not approved by FDA,
our stock price and results of operations will be materially and adversely
affected. Many factors could negatively affect the success of our efforts to
develop and commercialize Picovir(TM), including:
. significant delays in completing clinical trials for indications
other than adult VRI and analyzing the results of those trials;
. significant increases in the costs of our clinical trials;
. negative, inconclusive or otherwise unfavorable results from our
clinical trials;
. an inability to obtain, or delay in obtaining, regulatory approval
for the commercialization of Picovir(TM);
. an inability to obtain, or delay in obtaining, regulatory approval
for the use of the name Picovir(TM) as the brand name for pleconaril;
. an inability to enter into, or a delay in entering into, agreements
with third parties for the manufacture Picovir(TM) in commercial
quantities on acceptable terms, or at all; and
. an inability to manufacture acceptable validation batches of
Picovir(TM), or to manufacture Picovir(TM) in commercial quantities
at acceptable cost;
. a failure to achieve market acceptance of Picovir(TM).
If we are unable to commercialize Picovir(TM), our business and results of
operations will be harmed.
14
We have incurred losses since inception and anticipate that we will incur
continued losses for the foreseeable future. We do not have a current source
of product revenue and may never be profitable.
We are a development stage company with no current source of product
revenue. We have incurred losses in each year since our inception in 1994. As
of December 31, 2000, we had an accumulated deficit of approximately $119.7
million. We do not know when or if we will achieve product revenue. We expect
to incur such losses at an increasing rate over at least the next several
years, primarily due to expected increases in our research and development
expenses, further clinical trials of our most advanced product candidate,
Picovir(TM), and milestone payments that may be payable under the terms of our
agreement with Battelle Memorial Institute in connection with our RSV program.
Also, we expect to incur expenses related to our marketing and market research
activities for Picovir(TM), our development of a marketing and sales staff and
building the requisite infrastructure, and further research and development
related to other product candidates. 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, successfully commercialize
those product candidates, which may include entering into collaborative
agreements for product development and commercialization, and secure contract
manufacturing and distribution and logistics services. We do not know when or
if we will complete our product development efforts, receive regulatory
approval of any of our product candidates or successfully commercialize any
approved products. As a result, we are unable to predict the extent of any
future losses or the time required to achieve profitability, if at all.
Our long term success depends upon our ability to develop additional drug
product candidates. If our drug discovery and development programs are not
successful, our business and results of operations will be harmed.
We are performing clinical research on product candidates for the treatment
of hepatitis C and RSV diseases. We also are optimizing back-up candidates and
seeking to discover additional product candidates for the treatment of these
and other RNA virus diseases. Drug discovery and research for RNA virus
diseases is a new and challenging area. We cannot be certain that our efforts
in this regard will lead to commercially viable products. Moreover, we have
not submitted Investigational New Drug Applications, or INDs, for those
products not yet in clinical development, which are required before we can
begin clinical trials on the products in the United States. We are not sure
that FDA will permit us to proceed with ongoing clinical trials for our
hepatitis C and RSV product candidates, or that we will submit INDs for
additional products for the treatment of hepatitis C and RSV. We may abandon
further development efforts before the products complete or enter clinical
trials. We do not know what the final cost to manufacture these products in
commercial quantities will be, or the dose required to treat patients and
consequently, what the total cost of goods for a treatment regimen will be. We
do not know whether any of these early-stage development products ultimately
will be shown to be safe and effective. Moreover, governmental authorities may
enact new legislation or regulations that could limit or restrict our
development efforts. If we are unable to successfully discover new product
candidates or develop our early-stage product candidates, our business and
results of operations will be harmed.
None of our product candidates is approved for commercial use. If our product
candidates do not receive regulatory approval, or if we are unable to maintain
regulatory compliance, we will be limited in our ability to commercialize
these products, and our business and results of operations will be harmed.
We have not received regulatory approval to commercialize Picovir(TM) or any
of our other product candidates. We need to submit a marketing application to
FDA for Picovir(TM), and we will need to complete preclinical and clinical
testing of each of our other product candidates before submitting marketing
applications. Negative, inconclusive or inconsistent clinical trial results
could prevent regulatory approval, increase the cost and timing of regulatory
approval or cause us to perform additional studies or to file for a narrower
indication than we currently plan. FDA recently enacted new regulations
requiring the development and submission of pediatric use data for new drug
products. Our failure to obtain this data, or to obtain a deferral of, or
exemption from, this requirement could adversely affect our chances of
receiving regulatory approval, or could result in regulatory or legal
enforcement actions.
15
The development of any of our product candidates is subject to many risks,
including the risk that:
. the product candidate is found to be ineffective or unsafe;
. the clinical test results for a product candidate delay or prevent
regulatory approval;
. the product candidate cannot be developed into a commercially viable
product;
. the product candidate is difficult or costly to manufacture;
. the product candidate later is discovered to cause adverse effects
that prevent widespread use, require withdrawal from the market, or
serve as the basis for product liability claims;
. third party competitors hold proprietary rights that preclude us from
marketing the product; and
. third party competitors market a more clinically effective or more
cost-effective product.
Even if we believe that clinical data demonstrate the safety and efficacy of
our product, regulators may disagree with us, which could delay, limit or
prevent the approval of our product candidates. As a result, we may not obtain
the labeling claims we believe are necessary or desirable for the promotion of
those products. In addition, regulatory approval may take longer than we
expect as a result of a number of factors, including failure to qualify for
priority review of our application. All statutes and regulations governing the
approval of our product candidates are subject to change in the future. These
changes may increase the time or cost of regulatory approval, limit approval,
or prevent it completely.
Even if we receive regulatory approval for our product candidates, the later
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions, including withdrawal of the product from
the market. 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 may be subject to continuous review. After approval of a
product, we will have significant ongoing regulatory compliance obligations,
and if we fail to comply with these requirements, we could be subject to
penalties, including:
. warning letters;
. fines;
. product recalls;
. withdrawal of regulatory approval;
. operating restrictions;
. disgorgement of profits;
. injunctions; and
. criminal prosecution.
If we are unable to commercialize our products as anticipated, our business
and results of operations will be harmed.
Our license with Sanofi-Synthelabo makes Sanofi-Synthelabo responsible for
seeking regulatory approval for and marketing Picovir(TM) outside the United
States and Canada. If Sanofi-Synthelabo fails to diligently and successfully
pursue these activities, our business and results of operations may be harmed.
We will need to conduct clinical studies of all of our product candidates.
These studies are costly, time consuming and unpredictable. Any unanticipated
costs or delays in our clinical studies could harm our business, financial
condition and results of operations.
While we recently completed two Phase III trials for treatment of VRI due to
picornaviruses in adults with our lead candidate, Picovir(TM), we expect to
conduct more studies with Picovir(TM) in additional patient populations and in
other indications. We also have other product candidates for treatment of
hepatitis C and RSV disease in
16
clinical development. We must complete significant research and development,
laboratory testing, and clinical testing 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 party contract research organizations to perform significant aspects of
our studies and clinical trials, introducing additional sources of risk into
our program.
The rate of completion of clinical trials depends upon many factors,
including the rate of enrollment of patients. The acute nature of our disease
targets, the fact that some of these diseases have peak incidence rates during
certain times of the year, and the difficulties in anticipating where disease
outbreaks will occur, may affect patient enrollment in our clinical trials. If
we are unable to accrue sufficient clinical patients during the appropriate
period, we may need to delay our clinical trials and incur significant
additional costs. In addition FDA or Institutional Review Boards may require
us to 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. We may desire or be required to conduct additional
clinical trials of Picovir(TM) prior to commercialization. In addition, we may
be unable to submit a New Drug Application to the FDA within the timeframe we
currently expect. Once submitted, a New Drug Application must be approved by
FDA before we can commercialize the product described in the application.
The cost of human clinical trials varies dramatically based on a number of
factors, including:
. the order and timing of clinical indications pursued;
. the extent of development and financial support from corporate
collaborators;
. the number of patients required for enrollment;
. the difficulty of obtaining clinical supplies of the product
candidate; and
. the difficulty in obtaining sufficient patient populations and
clinicians.
All statutes and regulations governing the conduct of clinical trials are
subject to change in the future, which could affect the cost of our clinical
trials. Any unanticipated costs or delays in our clinical studies could harm
our business, financial condition and results of operations.
Even if we obtain positive preclinical or clinical trial results in initial
studies, future clinical trial results may not be similarly positive. As a
result, ongoing and contemplated clinical testing, if permitted by
governmental authorities, may not demonstrate that a product candidate is safe
and effective in the patient population and for the disease indications for
which we believe it will be commercially advantageous to market the product.
The failure of our clinical trials to demonstrate the safety and efficacy of
our desired indications could harm our business, financial condition and
results of operations.
We do not have any marketing or sales experience and will need to develop
marketing and sales capabilities to successfully commercialize our product
candidates. If we are unable to do so, our business and results of operations
will be harmed.
We currently are developing a marketing staff and do not have a sales staff.
We will need both to successfully commercialize any of our product candidates,
including Picovir(TM). We intend to develop our own marketing and sales
staffs, and enter into a co-promotion partnership, to market Picovir(TM) for
the treatment of VRI. The development of a marketing and sales capability will
require significant expenditures, management resources and time. We may be
unable to build such a sales force, the cost of establishing such a sales
force may exceed any product revenues, or our marketing and sales efforts may
be unsuccessful. We may not be able to find a suitable sales and marketing
partner for VRI. If we are unable to successfully establish a sales and
marketing capability in a timely manner or find suitable sales and marketing
partners, our business and results of operations will be harmed. Even if we
are able to develop a sales force or find a suitable marketing partner, we may
not successfully penetrate the markets for any of our proposed products.
17
We currently depend and will in the future depend on third parties to
manufacture our products and product candidates, including Picovir(TM). If
these manufacturers fail to meet our requirements and the requirements of
regulatory authorities, our business, financial condition and results of
operations will be harmed.
We do not have the internal capability to manufacture commercial quantities
of pharmaceutical products following the FDA's current Good Manufacturing
Practices. We currently are negotiating commercial supply and processing
agreements for Picovir(TM) drug substance with primary and alternative
manufacturers, with a micronizer and with a final product manufacturer that we
have identified to date. It is not yet clear what the final terms of these
agreements will be, although we expect that they will be comparable to the
terms of similar agreements for similar products. There can be no assurance
that we will be successful in entering into commercial supply and processing
agreements for Picovir(TM) drug substance and products, or that any such
manufacturing arrangements will be available on terms acceptable to us.
If we are unable to enter into supply and processing contracts with any of
these manufacturers or processors, there may be additional cost and delay in
the commercialization of Picovir(TM). Moreover, other than the production of
pilot and validation batches, no manufacturer has delivered commercial
quantities of Picovir(TM) bulk drug substance or drug product to us yet, and
we cannot be certain that they will be able to deliver such commercial
quantities on a timely basis. As a result, even if we are able to enter into
supply and processing contracts with any of these manufacturers or processors,
but such manufacturers or processors are unable to satisfy our requirements,
there may be additional cost and delay in the commercialization of
Picovir(TM). If we are required to find an additional or alternative source of
supply, there may be additional cost and delay in the commercialization of
Picovir(TM). Additionally, the FDA inspects all commercial manufacturing sites
before approving an NDA for a drug manufactured at those sites. If any of our
manufacturers or processors fails to pass this FDA inspection, the approval
and eventual commercialization may be delayed.
In addition to the oral solid formulation of Picovir(TM) used in our
recently completed Phase III trials in adult VRI, we are using an oral
suspension formulation in our clinical trials of Picovir(TM) for the treatment
of VRI in children. We are using a liquid formulation of Picovir(TM) in our
compassionate use program. We have also developed an intranasal formulation of
Picovir(TM). A delay in manufacturing validation batches, or a failure to
negotiate agreements with manufacturers, will delay the development and
commercialization of these additional formulations and could harm our
business, financial condition and results of operations. The intranasal
formulation of Picovir(TM) has not been used in any of our clinical trials to
date.
Any contract manufacturers that we use must adhere to the FDA's regulations
on current Good Manufacturing Practices, which are enforced by the FDA through
its facilities inspection program. These facilities must pass a plant
inspection before the FDA will issue an approval of the product. The
manufacture of product at these facilities will be subject to strict quality
control, testing and recordkeeping requirements. Moreover, while we may choose
to manufacture products in the future, we have no experience in the
manufacture of pharmaceutical products for clinical trials or commercial
purposes. If we decide to manufacture products, we would be subject to the
regulatory requirements described above. In addition, we would require
substantial additional capital and would be subject to delays or difficulties
encountered in manufacturing pharmaceutical products. No matter who
manufacturers the product, we will be subject to continuing obligations
regarding the submission of safety reports and other post-market information.
If we encounter delays or difficulties with contract manufacturers,
packagers or distributors, market introduction and subsequent sales of our
products could be delayed. If we change the source or location of supply or
modify the manufacturing process, regulatory authorities will require us to
demonstrate that the product produced by the new source or from the modified
process is equivalent to the product used in any clinical trials that we had
conducted.
18
We may not be able to enter into alternative supply arrangements at
commercially acceptable rates, if at all. Moreover, the manufacturers utilized
by us may not provide quantities of product sufficient to meet our
specifications or our delivery, cost and other requirements.
We license patented technology and other proprietary rights from Sanofi-
Synthelabo, including rights to Picovir(TM). If Sanofi-Synthelabo does not
protect our rights under our license agreement with it or does not reasonably
consent to our sublicense of rights to Picovir(TM), or if this license
agreement is terminated, our business and results of operations would be
harmed.
We have licensed from Sanofi-Synthelabo the exclusive United States and
Canadian rights to certain antiviral agents for use in picornavirus
indications, which are the subject of patents and related Canadian patent
applications owned by Sanofi-Synthelabo, certain of which cover both
Picovir(TM) and technology used to manufacture Picovir(TM). We depend on
Sanofi-Synthelabo to prosecute and maintain certain of these patents and
patent applications and protect such patent rights. Failure by Sanofi-
Synthelabo to prosecute or maintain such patents or patent applications and
protect such patent rights could harm our business. Under certain
circumstances, our ability to sublicense our rights under this license
agreement is subject to Sanofi-Synthelabo's consent, which is not to be
unreasonably withheld. Under our license agreement, Sanofi-Synthelabo also has
exclusive rights to market and sell products covered by these patents and
patent applications in countries other than the United States and Canada,
although we would receive royalties from Sanofi-Synthelabo on such sales. If
Sanofi-Synthelabo does not successfully market and sell products outside of
the United States and Canada, our business and future results of operations
may be harmed. If our license agreement with Sanofi-Synthelabo is terminated,
our business and results of operations would be harmed.
We depend on collaborations with third parties, which may reduce our product
revenues or restrict our ability to commercialize products.
We have entered into, and may in the future enter into, sales and marketing,
distribution, manufacturing, development, licensing and other strategic
arrangements with third parties. For example, in December 1999, we entered
into an agreement with American Home Products Corporation to develop jointly
products for use in treating the effects of hepatitis C virus in humans. Under
this Agreement, we licensed to them worldwide rights under patents and know-
how owned by us or created under the agreement. In November 1999, we entered
into a product development and commercialization agreement with Battelle
Memorial Institute in connection with our RSV program. We are currently
engaged in additional discussions relating to other arrangements. We cannot be
sure that we will be able to enter into any such arrangements with third
parties on terms acceptable to us or at all. Third party arrangements may
require us to grant certain rights to third parties, including exclusive
marketing rights to one or more products, or may have other terms that are
burdensome to us, and may involve the acquisition of our equity securities.
Our ultimate success may depend upon the success of our collaborators. We
have obtained, and intend to obtain in the future, licensed rights to certain
proprietary technologies and compounds from other entities, individuals and
research institutions, for which we may be obligated to pay license fees, make
milestone payments and pay royalties. We may be unable to enter into
collaborative licensing or other arrangements that we need to develop and
commercialize our drug candidates. Moreover, we may not realize the
contemplated benefits from such collaborative licensing or other arrangements.
These arrangements may place responsibility on our collaborative partners for
preclinical testing, human clinical trials, the preparation and submission of
applications for regulatory approval, or for marketing, sales and distribution
support for product commercialization. We cannot be certain that any of these
parties will fulfill their obligations in a manner consistent with our best
interests. These arrangements may also require us to transfer certain material
rights or issue our equity securities to corporate partners, licensees and
others. Any license or sublicense of our commercial rights may reduce our
product revenue. Moreover, we may not derive any revenues or profits from
these arrangements. In addition, our current strategic arrangements may not
continue and we may be unable to enter into future collaborations.
Collaborators may also pursue alternative technologies or drug candidates,
either on their own or in collaboration with others, that are in direct
competition with us.
19
We depend on patents and proprietary rights, which may offer only limited
protection against potential infringement. If we are unable to protect our
patents and proprietary rights, our business, financial condition and results
of operations will be harmed.
The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and
processes. Our success depends, in part, on our ability to develop and
maintain a strong patent position for our products and technologies both in
the United States and in other countries. Litigation or other legal
proceedings may be necessary to defend against claims of infringement, to
enforce our patents, or to protect our trade secrets, and could result in
substantial cost to us and diversion of our efforts. We intend to file
applications as appropriate for patents covering the composition of matter of
our drug candidates, the proprietary processes for producing such
compositions, and the uses of our drug candidates. We own eight issued United
States patents and have nine pending United States patent applications. We
also have filed international patent applications in order to pursue patent
protection in major foreign countries.
We also rely on trade secrets, know-how and continuing technological
advancements to protect our proprietary technology. We have entered into
confidentiality agreements with our employees, consultants, advisors and
collaborators. However, these parties may not honor these agreements and we
may not be able to successfully 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.
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.
To facilitate development of our proprietary technology base, we may need to
obtain licenses to patents or other proprietary rights from other parties. If
we are unable to obtain such licenses, our product development efforts may be
delayed.
We may collaborate with universities and governmental research organizations
which, as a result, may acquire certain rights to any inventions or technical
information derived from such collaboration.
We may incur substantial costs in asserting any patent rights and in
defending suits against us related to intellectual property rights. Such
disputes could substantially delay our product development or
commercialization activities. The United States Patent and Trademark Office or
a private party could institute an interference proceeding relating to our
patents or patent applications. An opposition or revocation proceeding could
be instituted in the patent offices of foreign jurisdictions. An adverse
decision in any such proceeding could result in the loss of our rights to a
patent or invention.
Any of our future products, including Picovir(TM), may not be accepted by the
market, which would harm our business and results of operations.
Even if approved by the FDA and other regulatory authorities, our product
candidates may not achieve market acceptance and we may not receive revenues
from these products as anticipated. 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; and
. the establishment and demonstration in the medical community of the
clinical safety, efficacy and cost-effectiveness of drug candidates,
as well as their advantages over existing technologies and
therapeutics, if any.
We may not be able to successfully manufacture and market our products even
if they perform successfully in clinical trials. Furthermore, physicians or
the medical community in general may not accept and utilize any of our
products.
20
We may not receive third party reimbursement for any of our future products,
which may harm our results of operations.
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 a
number of federal, state and foreign proposals 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.
Our ability to commercialize our products successfully will depend, in part,
on the extent to which reimbursement for the cost 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 newly approved health care products, particularly
for indications for which there is no current effective treatment or for which
medical care typically is 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 and our results of operations will be harmed.
We 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 research and development programs or our commercialization efforts,
which would harm our business.
We will need to raise substantial additional funds to continue our business
activities and fund our debt service obligations. We have incurred losses from
operations since inception and we expect to incur additional operating losses
at an increasing rate over at least the next several years. We expect this
increase to result from further research and development activities, further
clinical trials, development of marketing and sales capabilities and building
the requisite infrastructure, and milestone payments related to our RSV
product candidates. We believe that we may require additional capital by 2003.
However, our actual capital requirements will depend upon numerous factors,
including:
. the development of commercialization activities and arrangements;
. the progress of our research and development programs;
. the progress of preclinical and clinical testing;
. the time and cost involved in obtaining regulatory approvals;
. the cost 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 existing collaborative,
licensing and other relationships; and
. the terms of any new collaborative, licensing and other arrangements
that we may establish.
We may be unable to raise sufficient funds to complete our development,
marketing and sales activities for Picovir(TM) or any of our other product
candidates. Potential funding sources include:
. public and private securities offerings;
. debt financing, such as bank loans; and
. collaborative, licensing and other arrangements with third parties.
21
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 face intense competition, which could harm our business and results of
operations.
There are many entities, both public and private, including well-known,
large pharmaceutical companies, chemical companies, biotechnology companies
and research institutions, engaged in developing pharmaceuticals for
applications similar to those targeted by us. Developments by these or other
entities may render our products under development non-competitive or
obsolete. Many of these companies have substantially greater resources and
experience than we have. Accordingly, our competitors may succeed in obtaining
regulatory approval for products more rapidly and more effectively than we do.
Competitors may succeed in developing products that are more effective and
less costly than any that we develop and also may prove to be more successful
in the manufacture and marketing of products.
We may not be able to keep pace with technological changes in the
biopharmaceutical industry, which may prevent us from commercializing our
product candidates.
Our business is characterized by extensive research efforts and rapid
technological progress. New developments in molecular biology, medicinal
chemistry and other fields of biology and chemistry are expected to continue
at a rapid pace in both industry and academia. Research and discoveries by
others may render some or all of our programs or drug candidates non-
competitive or obsolete.
Our business strategy is based, in part, upon the application of our
technology platform to discover and develop pharmaceutical products for the
treatment of infectious human diseases. This strategy is subject to the risks
inherent in the development of new products using new and emerging
technologies and approaches. There are no approved drugs on the market for the
treatment of certain of the disease indications being targeted by us.
Unforeseen problems may develop with our technologies or applications. We
may not be able to successfully address technological challenges that we
encounter in our research and development programs and may not ultimately
develop commercially feasible products.
We depend on key personnel and may not be able to retain these employees or
recruit additional qualified personnel, which would harm our business.
Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical and managerial personnel. Our
anticipated growth and expansion into new areas and activities will require
additional expertise and the addition of new qualified personnel. For example,
we intend to recruit sales and marketing personnel to support the
commercialization of Picovir(TM). We will face intense competition in
recruiting these persons. We may not be able to attract and retain qualified
personnel to develop our sales and marketing forces. There is intense
competition for qualified personnel in the pharmaceutical field. Therefore, we
may not be able to attract and retain the qualified personnel necessary for
the development of our business. Furthermore, we have not entered into non-
competition agreements with our key employees. The loss of the services of
existing personnel, as well as the failure to recruit additional key
scientific, technical and managerial personnel in a timely manner would harm
our research and development programs and our business. We do not maintain key
man life insurance on any of our employees.
We may be subject to product liability claims, which may harm our business,
financial condition and results of operations regardless of the outcome.
The administration of drugs to humans, whether in clinical trials or after
marketing clearance is obtained, can result in product liability claims.
Product liability claims can be expensive, difficult to defend and may result
22
in large judgments or settlements against us. In addition, third party
collaborators and licensees may not protect us from product liability claims.
Although we maintain product liability insurance, claims could exceed the
coverage obtained. A successful product liability claim in excess of our
insurance coverage could harm our business, financial condition and results of
operations. In addition, any successful claim may prevent us from obtaining
adequate product liability insurance in the future on commercially desirable
terms. Even if a claim is not successful, defending such a claim may be time-
consuming and expensive.
The rights that have been and may in the future be granted to holders of our
common or preferred stock may adversely affect the rights of other
stockholders and may discourage a takeover.
Pursuant to our certificate of incorporation, our board of directors has the
authority, without further action by the holders of our common stock, to issue
5,000,000 shares of preferred stock from time to time in such series and with
such preferences and rights as it may designate. As of March 1, 2001, we have
issued 2,300,000 shares of series A convertible participating preferred stock
and we have reserved for issuance 200,000 shares of series A junior
participating preferred stock. Thus, we may issue an additional 2,500,000
shares of preferred stock. The preferences and rights of any such additional
preferred stock may be superior to those of the holders of our common stock.
For example, the holders of preferred stock may be given a preference in
payment upon our liquidation, or for the payment or accumulation of dividends
before any distributions are made to the holders of our common stock.
On May 5, 1999, we completed the sale of 2,300,000 shares of series A
convertible participating preferred stock to PSV, LP (formerly Perseus-Soros
BioPharmaceutical Fund, L.P.). This preferred stock is convertible into shares
of common stock on a one-for-one basis (subject to adjustment) by PSV at any
time and by us under certain conditions. There is a 5% annual dividend,
payable quarterly, associated with this preferred stock. We may choose to
permanently defer payment of any dividend, in which case the dividend is added
to the liquidation value and increases the conversion ratio of the preferred
stock into common stock. Holders of the preferred stock have liquidation
rights equal to their original investment, subject to adjustment. Such holders
also have preemptive rights with respect to proposed private placements of our
common stock or other equity securities for cash, other than issuances under
our equity compensation or stock option plans and issuances pursuant to our
stockholder rights plan, at a price below $6.20 per share (with adjustment for
any stock dividend, stock split or other subdivision of stock, or any
combination or reclassification of stock).
In September 1998, our board of directors adopted a plan that grants each
holder of our common stock the right to purchase shares of our series A junior
participating preferred stock. This plan is designed to help insure that all
our stockholders receive fair value for their shares of common stock in the
event of a proposed takeover of ViroPharma, and to guard against the use of
partial tender offers or other coercive tactics to gain control of ViroPharma
without offering fair value to the holders of our common stock. The plan is
likely to discourage a merger or tender offer involving our securities that is
not approved by our board of directors by increasing the cost of effecting any
such transaction and, accordingly, could have an adverse impact on holders of
our stock who might want to vote in favor of such a merger or participate in
such a tender offer.
While we have no present intention to authorize or issue any additional
series of preferred stock, any such authorization or issuance, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could also have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock. The
preferred stock may have other rights, including economic rights senior to
those of our common stock, and, as a result, an issuance of additional
preferred stock could adversely affect the market value of our common stock.
23
We have significant indebtedness and we may not be able to meet our
obligations.
We are highly leveraged and have significant debt service requirements. In
March 2000, we issued $180,000,000 of convertible subordinated notes due in
March 2007. This increased indebtedness will impact us by:
. significantly increasing our interest expense and related debt
service costs; and
. making it more difficult to obtain additional financing.
Currently, we are not generating sufficient cash flow from operations to
satisfy the annual debt service payments that will be required as a result of
the consummation of this offering. This may require us to use a portion of the
proceeds of this offering to pay interest or borrow additional funds or sell
additional equity to meet our debt service obligations. If we are unable to
satisfy our debt service requirements, substantial liquidity problems could
result, which would negatively impact our future prospects.
Our ability to meet our debt service obligations and to reduce our total
indebtedness depends on our future operating performance and on economic,
financial, competitive, regulatory and other factors affecting our operations.
Many of these factors are beyond our control and our future operating
performance could be adversely affected by some or all of these factors. We
historically have been unable to generate sufficient cash flow from operations
to meet our operating needs and have relied on equity, debt and capital lease
financings to fund our operations.
We are subject to environmental risks which may adversely affect our business.
Our research and development processes involve the controlled use of
hazardous, infectious and radioactive materials. We are subject to stringent
federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacture, storage, air emission, effluent discharge,
handling and disposal of certain materials and wastes. We may be required to
incur significant costs to comply with environmental laws, rules, regulations
and policies. In addition, our business may be adversely affected by current
or future environmental laws, rules, regulations and policies or by any
releases or discharges of materials that could be hazardous.
We utilize radioactive and other materials that could be hazardous to human
health, safety or the environment. We store these materials and various wastes
resulting from their use at our facility pending ultimate use and disposal.
Although we believe that our safety procedures for handling and disposing of
such materials comply with federal, state and local laws, rules, regulations
and policies, the risk of accidental injury or contamination from these
materials cannot be entirely eliminated. If such an accident occurs, we could
be held liable for any resulting damages, and any such liability could exceed
our resources. We do not maintain a separate insurance policy for these types
of risks.
ITEM 2. PROPERTIES
Our corporate facilities located in Exton, Pennsylvania currently occupy
approximately 70,900 square feet. We are expanding by 15,600 square feet and
we expect to have this expansion completed in the first half of 2002. The
lease, which will expire in 2008, has two 5-year renewal options, monthly base
rent and additional provisions for allocation of direct expense charges for
utilities, maintenance, insurance and property taxes.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
Executive Officers of the Registrant
The following is a list of our executive officers, including their ages, as of
December 31, 2000:
Name Age Position
---- --- --------
Michel de Rosen.............. 50 President and Chief Executive Officer
Marc S. Collett, Ph.D. ...... 49 Vice President, Discovery Research
Ellen C. Cooper, M.D. ....... 50 Vice President, Clinical and Regulatory
Affairs
Thomas F. Doyle.............. 40 Vice President, General Counsel and Secretary
Martin J. Driscoll........... 41 Vice President, Commercial Operations and
Business Development
Jeffrey R. Hincks, Ph.D. .... 43 Vice President, Preclinical Development
Mark A. McKinlay, Ph.D. ..... 49 Vice President, Research & Development
Vincent J. Milano............ 37 Vice President, Chief Financial Officer and
Treasurer
Michel de Rosen has served as President and Chief Executive Officer of the
company since August 2000, and as a director since May 2000. Prior joining
ViroPharma, Mr. de Rosen held several key positions in Rhone-Poulenc Pharma
and Rhone-Poulenc Rorer (now Aventis), including Chairman and Chief Executive
Officer until December 1999. Mr. de Rosen began his career at the French
Ministry of Finance and has served in several leading government positions
with the French Ministry and the French Secretary of Defense. Michel holds an
MBA from the Ecole des Hautes Etudes Commerciales in France.
Marc S. Collett, Ph.D., a co-founder of ViroPharma, has served as Vice
President, Discovery Research of ViroPharma since our commencement of
operations in December 1994. From 1993 until 1994, he served as Senior
Director, Viral Therapeutics at PathoGenesis Corporation, a biotechnology
company. Prior to joining PathoGenesis Corporation, Dr. Collett served as
Director, Virology & Antibody Engineering and Director, Biochemical Virology
at MedImmune, Inc., a biotechnology company, where he was employed from 1988
to 1993. Dr. Collett received his Ph.D. from the University of Michigan.
Ellen C. Cooper, M.D., has served as Vice President of Clinical and
Regulatory Affairs of ViroPharma since August 2000. Prior to joining the
company, Dr. Cooper was a pharmaceutical consultant providing guidance in drug
development, clinical trials design and analysis, and regulatory issues to a
variety of pharmaceutical companies, including ViroPharma. From 1996 to 1998,
she worked in the Office of AIDS Research at the National Institutes for
Health. From 1993 to 1996, she served as Vice President and Director, Clinical
Research and Information, at the American Foundation for AIDS Research in New
York City. From 1991 to 1993, Dr. Cooper served as Vice President and Director
of the Institute of Clinical Immunology and Infectious Disease for Syntex
Research. Earlier in her career, Dr. Cooper spent almost ten years in various
positions of increasing responsibility with the U.S. Food and Drug
Administration. During her tenure at FDA, she served as the Founding Director
of the Division of Antiviral Drug Products in the Center for Drug Evaluation
and Research. Dr. Cooper has also served as Director of Clinical Research and
Information for the American Foundation for AIDS Research, and worked in the
Office of AIDS Research at the National Institutes of Health.
Thomas F. Doyle has served as Vice President, General Counsel of ViroPharma
since November 1997, as Secretary since February 1997 and as Executive
Director, Counsel since joining ViroPharma in November 1996. From 1990 until
1996, Mr. Doyle was a corporate attorney with the law firm of Pepper, Hamilton
LLP. Mr. Doyle received his J.D. from Temple University School of Law. Prior
to attending Temple University, Mr. Doyle was a certified public accountant.
Mr. Doyle received his B.S. in accounting from Mt. St. Mary's College.
Martin J. Driscoll has served as Vice President of Commercial Operations and
Business Development of ViroPharma since November 2000. From 1983 to November
2000, Mr. Driscoll served Schering-Plough Corporation, including its
subsidiary, Key Pharmaceuticals, in several leading sales and marketing
positions. From January 1998 to November 2000, Mr. Driscoll was the vice
president of sales and marketing for Schering Primary Care, a unit of Schering
Laboratories. Earlier in his career, Mr. Driscoll was the director of managed
25
care affairs for the Western Region of Schering Laboratories, where he was
involved in managing the company's relationships with leading managed care
accounts including CIGNA, Kaiser and Blue Cross.
Jeffrey R. Hincks, Ph.D. has served as Vice President, Preclinical
Development since January 2000 and as Director, Preclinical Development since
joining ViroPharma in January 1998. From 1994 until December 1997, he served
as Principal Research Investigator, Preclinical Development at Sanofi
Pharmaceutical Research Division. Prior to joining Sanofi, from 1990 to 1994,
Dr. Hincks served as a Senior Scientist in Preclinical Development and
Toxicology at Sterling Winthrop Incorporated, a pharmaceutical company. Dr.
Hincks received his Ph.D. from Utah State University.
Mark A. McKinlay, Ph.D., a co-founder of ViroPharma, has served as Vice
President, Research & Development since our commencement of operations in
December 1994, and served as Secretary from December 1994 until February 1997.
From 1989 through 1994, Dr. McKinlay served in several positions, including
Senior Director, at Sterling Winthrop Pharmaceuticals Research Division, a
division of Sterling Winthrop Incorporated, a pharmaceutical company. Dr.
McKinlay received his Ph.D. from Renssalear Polytechnic Institute.
Vincent J. Milano has served as Vice President, Chief Financial Officer of
ViroPharma since November 1997, as Vice President, Finance & Administration
since February 1997, as Treasurer since July 1996, and as Executive Director,
Finance & Administration from April 1996 until February 1997. From 1985 until
1996, Mr. Milano was with KPMG LLP, independent certified public accountants,
where he was Senior Manager since 1991. Mr. Milano is a certified public
accountant. Mr. Milano received his B.S. in accounting from Rider College.
26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company's Common Stock is traded on the National Market segment of The
Nasdaq Stock Market under the symbol "VPHM." We commenced trading on The
Nasdaq Stock Market on November 19, 1996. The following table sets forth the
high and low sale prices as quoted on The Nasdaq Stock Market for each quarter
of 1999 and 2000 and through March 1, 2001.
High Low
-------- ------
Year ended December 31, 1999
First Quarter............................................ $ 13.00 $ 5.00
Second Quarter........................................... $ 9.31 $ 6.13
Third Quarter............................................ $ 29.44 $ 7.68
Fourth Quarter........................................... $ 47.00 $18.50
Year ended December 31, 2000
First Quarter............................................ $111.625 $28.88
Second Quarter........................................... $ 75.50 $10.75
Third Quarter............................................ $ 34.88 $15.31
Fourth Quarter........................................... $ 26.25 $13.50
First Quarter 2001 (through March 1, 2000)............... $ 28.75 $12.75
Holders and Dividends
There were approximately 430 record holders of the Company's Common Stock as
of March 1, 2001. We have never declared or paid any cash dividends on our
common stock. There is a 5% annual dividend, payable quarterly, associated
with our series A convertible participating preferred stock. We may choose to
permanently defer any quarterly payment, in which case the amount of payment
is added to the liquidation value and increases the conversion ratio of the
preferred stock into common stock. Alternatively, we may choose to pay the
dividend in cash. We paid a cash dividend for the quarters ended March 31,
June 30, September 30 and December 31, 2000 in the amount of $181,838 per
quarter on our series A convertible participating preferred stock. Any future
determination to pay dividends will be at the discretion of our board of
directors and will be dependent on then existing conditions, including our
financial condition, results of operations, contractual restrictions, capital
requirements, business and other factors our board of directors deems
relevant. In addition, our business loan agreements restrict our ability to
declare and pay cash dividends. We are obligated to pay any cash dividends
paid to common stockholders to the holders of our series A convertible
participating preferred stock on an as converted basis.
Recent Sales of Unregistered Securities
On October 2, 2000 and October 23, 2000, we sold to American Home Products
Corporation 96,059 shares and 104,934 shares, respectively, of ViroPharma's
common stock as a result of progress made under the companies' hepatitis C
virus collaboration. We believe that these transactions were exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended,
because the transactions did not involve a public offering.
27
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the caption "Balance Sheet
Data" as of December 31, 1996, 1997, 1998, 1999 and 2000, and under the
caption "Statement of Operations Data" for the years ended December 31, 1996,
1997, 1998, 1999 and 2000 are derived from financial statements of the Company
which have been audited by KPMG LLP, independent certified public accountants.
The data set forth below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
Financial Statements and the Notes thereto and the other financial information
included elsewhere in this Report. We are considered a "development stage
company" as described in Note 1 of the Company's Financial Statements.
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1996 1997 1998 1999 2000
------------ ------------- ------------- ------------- -------------
Statement of Operations
Data:
License fee and
milestones revenue..... $ 1,000,000 $ 1,500,000 $ 1,500,000 $ -- $ 2,000,000
Grant revenue........... 436,081 -- -- -- --
------------ ------------- ------------- ------------- -------------
Total revenues.......... 1,436,081 1,500,000 1,500,000 -- 2,000,000
------------ ------------- ------------- ------------- -------------
Operating expenses:
Research and
development............ 6,694,703 10,928,976 25,130,232 26,055,884 37,410,189
General and
administrative......... 1,421,524 3,341,081 4,375,800 4,986,452 8,616,559
------------ ------------- ------------- ------------- -------------
Total operating
expenses............... 8,116,227 14,270,057 29,506,032 31,042,336 46,026,748
Interest income......... 327,039 1,400,602 1,771,564 1,708,212 11,990,551
Interest expense........ 41,897 80,428 167,648 165,914 9,781,177
------------ ------------- ------------- ------------- -------------
Net loss................ $ (6,395,004) $ (11,449,883) $ (26,402,116) $ (29,500,038) $ (41,817,374)
============ ============= ============= ============= =============
Net loss allocable to
common stockholders.... $(7,992,345) $(11,449,883) $(26,402,116) $(34,574,571) $(42,544,726)
============ ============= ============= ============= =============
Net loss per share
allocable to common
stockholders:
Basic................. $ (3.89) $ (1.13) $ (2.30) $ (2.84) $ (2.80)
Diluted............... (3.44) (1.13) (2.30) $ (2.84) $ (2.80)
Shares used in computing
net loss per share
allocable to common
stockholders:
Basic................. 2,053,114 10,092,590 11,485,589 12,181,853 15,210,964
Diluted............... 2,323,760 10,092,590 11,485,589 12,181,853 15,210,964
============ ============= ============= ============= =============
December 31,
------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------- ------------- ------------- -------------
Balance Sheet Data:
Cash, cash equivalents
and short-term
investments............ $ 22,547,679 $ 43,368,462 $ 20,011,782 $ 66,852,920 $ 203,335,180
Working capital......... 20,001,703 37,209,028 11,490,395 58,691,259 196,279,631
Total assets............ 23,452,879 46,275,480 23,657,401 72,085,866 222,438,830
Long term obligations... -- 416,667 1,822,917 525,000 180,325,000
Long-term capital
leases................. 104,571 53,186 2,807 -- --
Total stockholders'
equity ................ 20,605,161 39,150,871 12,836,031 58,291,236 23,986,548
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Our disclosure and analysis in this report contains some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," and other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to present or anticipated scientific or regulatory
progress, development of potential pharmaceutical products, future revenues,
capital expenditures, research and development expenditures, future financings
and collaborations, personnel, manufacturing requirements and capabilities,
and other statements regarding matters that are not historical facts or
statements of current condition.
Any or all of our forward-looking statements in this report may turn out to
be wrong. They can be affected by inaccurate assumptions we might make or by
known or unknown risks and uncertainties. Many factors, including those
mentioned in the discussion below and those described in the "Risk Factors"
discussion in this annual report, will be important in determining future
results. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially. We do not intend to update our forward-
looking statements to reflect future events or developments.
Since inception, we have devoted substantially all of our resources to our
research and product development programs. ViroPharma has generated no
revenues from product sales and has been dependent upon funding primarily from
equity and debt financing. We do not expect any revenues from product sales
for at least the next twelve months. We have not been profitable since
inception and have incurred a cumulative net loss of $119,738,374 through
December 31, 2000. Losses have resulted principally from costs incurred in
research and development activities and general and administrative expenses.
We expect to incur additional operating losses over at least the next several
years. We expect such losses to increase over historical levels, primarily due
to expected increases in our research and development expenses, and further
clinical trials of our most advanced drug candidate, Picovir(TM). Also, we
expect to incur expenses related to our marketing and market research
activities for Picovir(TM), our development of a marketing and sales staff and
further research and development related to our hepatitis C and respiratory
syncytial virus (RSV) disease product candidates. Our ability to achieve
profitability is dependent on developing and obtaining regulatory approvals
for our product candidates, successfully commercializing such product
candidates (which may include entering into collaborative agreements for
product development and commercialization), and securing contract
manufacturing services and distribution and logistics services.
Liquidity and Capital Resources
We commenced operations in December 1994. We are a development stage company
and to date have not generated revenues from product sales. The cash flows
used in operations are primarily for research and development activities and
the supporting general and administrative expenses. Through December 31, 2000,
we have used approximately $106.3 million in operating activities. We invest
our cash in short-term investments. Through December 31, 2000, we have used
approximately $209.0 million in investing activities, including $201.7 million
in short-term investments and $7.3 million in equipment purchases and new
construction. Through December 31, 2000, we have financed our operations
primarily through public offerings of common stock, a convertible subordinated
notes offering, private placements of redeemable preferred stock, two bank
loans, equipment lease lines and a milestone advance totaling approximately
$316.2 million. At December 31, 2000, we had cash and cash equivalents and
short-term investments aggregating approximately $203.3 million.
We lease our corporate and research and development facilities under an
operating lease expiring in 2008. We also have the right, under certain
circumstances, to purchase the facility. We have exercised our right to
29
expand our current facility by 15,600 square feet. We expect to incur an
estimated $3 million of capital expenditures in connection with this
expansion. We expect that we will incur these expenses in the second half of
2001. In addition, we expect that rent expense in future years will increase
approximately $200,000 per year, commencing in early 2002. We have financed
substantially all of our equipment under two bank loans and two master lease
agreements. The first bank loan, which we entered into in February 1997, is
for $600,000, is payable in equal monthly installments over 72 months and has
a 9.06% interest rate. The second bank loan, which we entered into in December
1998, is for $500,000, is payable in equal monthly installments over 60 months
and has a 7.25% interest rate. In addition, we paid off a $1 million loan to
Boehringer Ingelheim in August 2000. We also have paid off both of the lease
agreements. As of March 1, 2001, aggregate outstanding borrowings under these
bank loans were approximately $492,000.
We amended and restated our Agreement with Sanofi-Synthelabo in February
2001. Under this agreement, we are required to make royalty payments on any
sales in the United States and Canada of products developed under the
agreement, which royalty payments will be reduced upon the expiration of the
last patent on Picovir(TM) or any related drug.
We currently are negotiating commercial supply agreements for Picovir(TM)
with drug substance and final product manufacturers and with drug micronizers,
and we expect that we may pay up to approximately $6,000,000 during 2001 under
these arrangements.
We have incurred losses from operations since inception. We expect to incur
additional operating losses over at least the next several years. We expect to
incur such losses at an increasing rate over at least the next several years
primarily due to expected increases in our research and development expenses,
and further clinical trials and clinical development of our most advanced
product candidate, Picovir(TM). We expect to increase spending over historical
levels during 2001 as we conduct additional clinical trials and supporting
studies for the potential expansion of the use of Picovir(TM). Also, we expect
to incur significant expenses for Picovir(TM) marketing and market research
activities, our development of a marketing and sales staff and building the
requisite infrastructure. In addition, we anticipate that our investments in
further research and development related to our hepatitis C and RSV disease
product candidates will increase over historical levels. We expect to increase
spending over historical levels for at least the next six months for our
hepatitis C and RSV disease product candidates in connection with an
anticipated exploratory clinical trial with VP50406 for the treatment of
hepatitis C and the safety studies with VP14637 for the treatment of RSV
disease. We expect our spending in the general and administrative areas to
increase modestly during 2001.
We expect that we will need to raise additional funds to continue our
business activities, fund debt service and to further expand our facilities.
We have convertible notes payable in the amount of $180,000,000. These notes
bear interest at 6% per annum and become due in March 2007. We may need
additional financing to complete all clinical studies, to develop our
marketing and sales staffs for Picovir(TM) and to build the requisite
infrastructure. We expect that we will need additional financing for the
development and required testing of our hepatitis C and RSV disease compounds,
and for any other product candidates. To obtain this financing, we intend to
access the public or private equity or debt markets or enter into additional
arrangements with corporate collaborators to whom we may issue shares of our
stock. For example, in connection with our collaboration and license
agreement, American Home Products Corporation will purchase our common stock
at a market value premium at the time of completion of certain product
development stages. If we raise additional capital by issuing equity
securities, the terms and prices for these financings may be much more
favorable to the new investors than the terms obtained by our existing
stockholders. These financings also may dilute the ownership of existing
stockholders. 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. Additional financing,
however, may not be available on acceptable terms from any source. If
sufficient additional financing is not available, we may need to delay, reduce
or eliminate current research and development programs or other aspects of our
business.
30
Results of Operations
Years ended December 31, 2000 and 1999
We earned license fee and milestone revenue from our hepatitis C
collaboration with American Home Products of $2,000,000 for the year ended
December 31, 2000. We earned no revenues for the year ended December 31, 1999.
Research and development expenses increased to $37,410,189 for the year
ended December 31, 2000 from $26,055,884 for the year ended December 31, 1999.
The increase was principally due to the completion of three phase 3 clinical
trials of Picovir(TM), conduct of phase 1 clinical trials, the initiation of
an exploratory clinical trial of VP50406 for the treatment of hepatitis C and
the initiation of phase 1 clinical trials of VP14637 for the treatment of RSV
disease. Also, in connection with our agreement with American Home Products
for hepatitis C, we are due $3,979,408 for research and development expenses
incurred by us on behalf of the collaboration which has been recorded with a
corresponding reduction to our research and development expenses for the year
ended December 31, 2000. The amount due is arrived at using the contractual
percentages and amounts for cost sharing and certain activities.
General and administrative expenses were $8,616,559 in the year ended
December 31, 2000 compared to $4,986,452 for the same period of 1999. The
increase was principally due to an increase in employee related expenses, pre-
marketing expenses related to Picovir(TM) and business development related
activities. Interest expense and interest income increased substantially in
the year ended December 31, 2000 compared to the same period in 1999. The
increases are due to the investing of proceeds from the issuance of $180
million convertible subordinated debentures issued in March of 2000 which pay
6% interest per annum. Currently the weighted average interest rate that we
are earning on our investments is 6.1%.
The net loss increased to $41,817,374 for the year ended December 31, 2000
from $29,500,038 for the year ended December 31, 1999.
Years ended December 31, 1999 and 1998
We earned no revenues for the year ended December 31, 1999. We earned
milestone revenue of $1,500,000 for the year ended December 31, 1998.
Our research and development expenses for the year ended December 31, 1999
were $26,055,884 compared to $25,130,232 for the same period in 1998. Research
and development expenses for both periods reflected costs associated with the
conduct of clinical trials of Picovir(TM), our most advanced drug candidate.
In 1999, Picovir(TM) was being studied in three phase 3 clinical trials, two
in viral meningitis and one in viral respiratory infection. This compares to
1998 in which the company was conducting phase 2 clinical trials with
Picovir(TM) for both viral meningitis and viral respiratory infection, with
fewer patients enrolled in these studies compared to the phase 3 clinical
studies. The increase in 1999 was also the result of the advancement of drug
candidates for the treatment of hepatitis C (HCV) and respiratory syncytial
virus (RSV) diseases. We recorded $1,200,000 as a reduction to research and
development expenses in the year ended December 31, 1998 for an adjustment to
a milestone payable to Sanofi-Synthelabo and the reimbursement that we
received from Sanofi-Synthelabo for a license fee that we had previously paid
to them. Such amounts were originally recorded as research and development
expenses in prior periods.
General and administrative expenses increased to $4,986,452 for the year
ended December 31, 1999 compared to $4,375,800 for the same period of 1998.
The increase in 1999 is the result of market research and medical education
programs for Picovir(TM) and additional employee-related expenses.
The net loss increased to $29,500,038 for the year ended December 31, 1999
from $26,402,116 for the year ended December 31, 1998.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our holdings of financial instruments are comprised of a mix of government
securities and commercial paper. All such instruments are classified as
securities available for sale. Our debt security portfolio represents funds
held temporarily pending use in our business and operations. We manage these
funds accordingly. We seek reasonable assuredness of the safety of principal
and market liquidity by investing in rated fixed income securities while at
the same time seeking to achieve a favorable rate of return. Our market risk
exposure consists principally of exposure to changes in interest rates. Our
holdings are also exposed to the risks of changes in the credit quality of
issuers. We typically invest in the shorter-end of the maturity spectrum. The
principal amount and weighted average interest rate of our investment
portfolio at December 31, 2000 was $202,374,825 and approximately 6.1%,
respectively.
The Company has $180 million of convertible subordinated notes due 2007. The
notes are convertible into shares of the Company's common stock at a price of
$109.15 per share, subject to certain adjustments. The notes bear interest at
a rate of 6% per annum, payable semi-annually in arrears, and can be redeemed
by the Company, at certain premiums over the principal amount, at any time on
or after March 6, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the company required by this item are attached
to this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and regarding compliance
with Section 16 of the Securities Exchange Act of 1934 required by this Item
will be set forth in the Company's Proxy Statement, to be filed within 120
days after the end of the fiscal year covered by this Annual Report on Form
10-K, and is incorporated by reference to the Company's Proxy Statement.
The information concerning the Company's executive officers required by this
Item is incorporated by reference herein to the section of this Report in Part
I, Item 4 entitled "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in the Company's
Proxy Statement, to be filed within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, and is incorporated by reference
to the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth in the Company's
Proxy Statement, to be filed within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, and is incorporated by reference
to the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth in the Company's
Proxy Statement, to be filed within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, and is incorporated by reference
to the Company's Proxy Statement.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) Financial Statements. The Financial Statements listed in the
accompanying Index to Financial Statements appearing on page F-1 are filed
as part of this Annual Report on Form 10-K.
(2) Financial Statement Schedules. All schedules are omitted because they
are not applicable, or not required, or because the required information is
included in the Financial Statements or notes thereto.
(3) Exhibits. The following is a list of Exhibits filed as part of this
Annual Report on Form 10-K. Where so indicated by footnote, Exhibits which
were previously filed are incorporated by reference. For Exhibits
incorporated by reference, the location of the Exhibit in the previous
filing is indicated in parentheses.
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company,
as amended by a Certificate of Amendment of Amended and Restated
Certificate of Incorporation dated May 18, 1999, as further
amended by a Certificate of Amendment of Amended and Restated
Certificate of Incorporation dated May 24, 2000. (15) (Exhibit
3.1)
3.2 Certificate of Designation establishing and designating the Series
A Junior Participating Preferred Shares. (8) (Exhibit 3.2)
3.3 Amended and Restated By-Laws of the Company. (10) (Exhibit 3.3)
3.4 Certificate of Designation establishing and designating the Series
A Convertible Participating Preferred Stock.(9) (Exhibit 3.4)
4.1 Rights Agreement, dated as of September 10, 1998, between
ViroPharma Incorporated and StockTrans, Inc., as Rights Agent. (4)
(Exhibit 4.1)
4.2 Amendment No. 1 to Rights Agreement. (9) (Exhibit 4.2)
4.3 Indenture dated as of March 1, 2000 of ViroPharma Incorporated to
Summit Bank as Trustee (including the form of note). (12) (Exhibit
4.3)
10.1++ ViroPharma Incorporated Stock Option Plan. (15) (Exhibit 10.1)
10.2+ Agreement dated December 22, 1995 between the Company and Sanofi.
(1) (Exhibit 10.6)
10.3 Form of Employment Agreement. (1) (Exhibit 10.8)
10.4 Form of Indemnification Agreement. (1) (Exhibit 10.9)
10.5 Restricted Stock Purchase Agreement dated as of January 17, 1996,
by and between the Company and Frank Baldino, Jr. (1) (Exhibit
10.11)
10.6 Series B Convertible Preferred Stock Purchase Agreement dated as
of June 16, 1995 among the Company and each of the entities on the
"Schedule of Purchasers" attached thereto as Schedule A. (1)
(Exhibit 10.12)
10.7 Series C Convertible Preferred Stock Purchase Agreement dated as
of May 30, 1996 among the Company and each of the individuals and
entities on the "Schedule of Purchasers" attached thereto as
Schedule A. (1) (Exhibit 10.13)
10.8 Amended and Restated Investors' Rights Agreement, dated as of May
30, 1996, by and among the Company and the persons identified on
Schedule A, Schedule B and the Schedule of Founders thereto. (1)
(Exhibit 10.16)
10.9 Amendment to Restricted Stock Purchase Agreement dated as of
January 17, 1996, among the Company and Frank Baldino, Jr., dated
as of January 17, 1996. (1) (Exhibit 10.18)
10.10 Development Agreement dated as of April 16, 1997, by and among
SELOC AG, SICOR, S.A. and the Company. (2) (Exhibit 10.19)
10.11 First Amendment to Agreement dated as of February 21, 1997 by and
between Sanofi and the Company. (2) (Exhibit 10.20)
10.12 Lease, dated July 21, 1997, between the Company and The Hankin
Group. (2) (Exhibit 10.23)
34
Exhibit No. Description
----------- -----------
10.13 Purchase Option Agreement, dated July 21, 1997, between the
Company and The Hankin Group. (2) (Exhibit 10.24)
10.14 Escrow Agreement, dated July 21, 1997, among the Company, The
Hankin Group and Manito Abstract Company, Inc. (2) (Exhibit 10.25)
10.15 Promissory Note of Vincent J. Milano and Christie A. Milano, dated
August 20, 1997. (3)
(Exhibit 10.29)
10.16 Consulting Agreement dated November 13, 1997 between the Company
and David J. Williams. (5)
(Exhibit 10.26)
10.17 Promissory Note of Michael Kelly and Joan C. Kelly, dated February
18, 1998. (6) (Exhibit 10.27)
10.18 Addendum to Development Agreement dated as of March 1, 1998
between the Company and SELOC France. (7) (Exhibit 10.28)
10.19 Investment Agreement among ViroPharma Incorporated and Perseus-
Soros Biopharmaceutical Fund, L.P. dated May 5, 1999. (9) (Exhibit
10.21)
10.20 ViroPharma Incorporated Common Stock Purchase Warrant (9) (Exhibit
10.22)
10.21 Letter Agreement dated June 7, 1999 between the Company and
Perseus-Soros BioPharmaceutical Fund, L.P. (10) (Exhibit 10.23)
10.22+ Product Development and Commercialization Agreement dated November
19, 1999 between Battelle Memorial Institute and ViroPharma
Incorporated. (11) (Exhibit 10.24)
10.23+ Collaboration and License Agreement dated December 9, 1999 between
American Home Products Corporation, acting through its Wyeth-
Ayerst Laboratories Division, and ViroPharma Incorporated. (11)
(Exhibit 10.25)
10.24+ Stock Purchase Agreement dated December 9, 1999 between American
Home Products Corporation and ViroPharma Incorporated. (11)
(Exhibit 10.26)
10.25+ Purchase Agreement dated February 24, 2000 by and among ViroPharma
Incorporated, Morgan Stanley & Co. Incorporated and US Bancorp
Piper Jaffray Inc. (12) (Exhibit 10.27)
10.26 Registration Rights Agreement dated as of March 1, 2000 by and
among ViroPharma Incorporated, Morgan Stanley & Co. Incorporated
and US Bancorp Piper Jaffray Inc. (12) (Exhibit 10.28)
10.27++ 2000 Employee Stock Purchase Plan. (13)
10.28 Restricted Stock Agreement dated August 21, 2000 between
ViroPharma Incorporated and Michel de Rosen. (16) (Exhibit 10.30)
10.29 Severance Agreement dated August 21, 2000 between ViroPharma
Incorporated and Michel de Rosen. (16) (Exhibit 10.31)
10.30 Promissory Note of Michel de Rosen dated August 21, 2000. (16)
(Exhibit 10.32)
10.31 Severance Agreement dated August 21, 2000 between ViroPharma
Incorporated and Claude Nash. (16) (Exhibit 10.33)
25.1 Form of T-1 Statement of Eligibility of Trustee for Indenture
Under the Trust Indenture Act of 1939. (14) (Exhibit 25.1)
11* Statement of Computation of Loss Per Share.
12.1* Schedule of Ratio of Earnings to Fixed Charges.
23* Consent of KPMG LLP.
24* Power of Attorney (included on signature page).
- --------
* Filed herewith.
+ Portions of this exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to an application for confidential
treatment filed with the Commission pursuant to Rule 406 under the
Securities Act of 1933, as amended.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to Registration Statement on Form S-1 (File No. 333-
12407), as amended, initially filed on September 20, 1996.
(2) Filed as an Exhibit to Registration Statement on Form S-1 (File No. 333-
30005), as amended, initially filed on June 25, 1997.
35
(3) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended
September 30, 1997.
(4) Filed as an Exhibit to the Company's Current Report on Form 8-K filed with
the Commission on September 21, 1998.
(5) Filed as an Exhibit to Registrant's Form 10-K for the year ended December
31, 1997.
(6) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended March
31, 1998.
(7) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended June
30, 1998.
(8) Filed as an Exhibit to Registrant's Form 10-K for the year ended December
31, 1998.
(9) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended March
31, 1999.
(10) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended June
30, 1999.
(11) Filed as an Exhibit to Registrant's Form 10-K for the year ended December
31, 1999.
(12) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended March
31, 2000.
(13) Filed as an Annex to the Company's Proxy Statement filed with the
Commission on April 14, 2000.
(14) Filed as an Exhibit to Registration Statement on Form S-3 (File No. 333-
37960), as amended, initially filed on May 26, 2000.
(15) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended June
30, 2000.
(16) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended
September 30, 2000.
Copies of the exhibits are available to stockholders from Thomas F. Doyle,
Vice President, General Counsel and Secretary, ViroPharma Incorporated, 405
Eagleview Boulevard, Exton, Pennsylvania 19341. There will be a fee to cover
the Company's expenses in furnishing the exhibits.
(b) Reports on Form 8-K
We filed the following Current Reports on Form 8-K during the quarter ended
December 31, 2000:
We filed a Current Report on Form 8-K dated October 10, 2000 to report,
pursuant to item 5, that we sold to American Home Products Corporation 96,059
shares of our common stock for $3,000,000 as a result of progress made under
the companies' hepatitis C virus collaboration.
We filed a Current Report on Form 8-K dated October 17, 2000 to report,
pursuant to item 5, that we initiated human clinical trials with a new
antiviral compound for the treatment of respiratory syncytial virus disease.
We filed a Current Report on Form 8-K dated October 25, 2000 to report,
pursuant to item 5, that we sold to American Home Products Corporation an
additional 104,934 shares of our common stock for $3,000,000 as a result of
further progress made under the companies' hepatitis C virus collaboration.
We filed a Current Report on Form 8-K dated October 30, 2000 to report,
pursuant to item 5, our financial results for the third quarter ended
September 30, 2000.
We filed a Current Report on Form 8-K dated November 15, 2000 to report,
pursuant to item 5, the appointment of Martin J. Driscoll as vice president,
commercial operations and business development.
We filed a Current Report on Form 8-K dated November 28, 2000 to report,
pursuant to item 5, a set of "Frequently Asked Questions" describing
information that experience has demonstrated to be often requested by analysts
and investors, and the answers to these questions.
36
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 our behalf by the undersigned, thereunto duly authorized.
VIROPHARMA INCORPORATED
/s/ Vincent J. Milano
By: _________________________________
Vincent J. Milano
Vice President, Chief Financial
Officer
and Treasurer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Michel de Rosen and Vincent J. Milano
as his or her attorney-in-fact, with the full power of substitution, for him
or her in any and all capacities, to sign any amendments to this Report, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute or substitutes,
may do or cause to be done by virtue hereof.
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:
Name Capacity Date
---- -------- ----
/s/ Michel de Rosen President, Chief Executive March 28, 2001
______________________________________ Officer (Principal
Michel de Rosen Executive Officer)
/s/ Vincent J. Milano Vice President, Chief March 28, 2001
______________________________________ Financial Officer and
Vincent J. Milano Treasurer (Principal
Financial and Accounting
Officer)
/s/ Claude H. Nash Chairman of the Board March 28, 2001
______________________________________
Claude H. Nash
/s/ Frank Baldino, Jr., Ph.D. Director March 28, 2001
______________________________________
Frank Baldino, Jr., Ph.D.
/s/ Paul A. Brooke Director March 28, 2001
______________________________________
Paul A. Brooke
/s/ Michel de Rosen Director March 28, 2001
______________________________________
Michel de Rosen
/s/ Robert J. Glaser Director March 28, 2001
______________________________________
Robert J. Glaser
/s/ Howard Pien Director March 28, 2001
______________________________________
Howard Pien
/s/ Dennis Purcell Director March 28, 2001
______________________________________
Dennis Purcell
/s/ David J. Williams Director March 28, 2001
______________________________________
David J. Williams
37
ViroPharma Incorporated
(A Development Stage Company)
Index to Financial Statements
Page
--------
Independent Auditors' Report.......................................... F-2
Balance Sheets at December 31, 1999 and 2000.......................... F-3
Statements of Operations and Comprehensive Loss for the years ended
December 31, 1998, 1999 and 2000, and the period December 5, 1994
(Inception) to December 31, 2000..................................... F-4, F-5
Statements of Stockholders' Equity (Deficit) for the period December
5, 1994 (Inception) to December 31, 1997, and the years ended
December 31, 1998, 1999, and 2000.................................... F-6
Statements of Cash Flows for the years ended December 31, 1998, 1999
and 2000, and the period December 5, 1994 (Inception) to December 31,
2000................................................................. F-7
Notes to Financial Statements......................................... F-8
F-1
Independent Auditors' Report
The Stockholders and Board of Directors
ViroPharma Incorporated:
We have audited the accompanying balance sheets of ViroPharma Incorporated (a
Development Stage Company) as of December 31, 1999 and 2000, and the related
statements of operations, comprehensive loss, stockholders' equity (deficit)
and cash flows for each of the years in the three-year period ended December
31, 2000 and for the period December 5, 1994 (Inception) to December 31, 2000.
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 of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ViroPharma Incorporated (a
Development Stage Company) as of December 31, 1999 and 2000, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2000 and for the period December 5, 1994 (Inception)
to December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Princeton, New Jersey
February 8, 2001, except as to note 14,
which is as of February 27, 2001
F-2
ViroPharma Incorporated
(A Development Stage Company)
Balance Sheets
December 31, 1999 and 2000
December 31,
-------------------------
1999 2000
----------- ------------
Assets
Current assets:
Cash and cash equivalents......................... $ 6,984,707 $ 960,355
Short-term investments............................ 59,868,213 202,374,825
Notes receivable from officers--current........... 39,205 111,895
Due from partner.................................. -- 3,979,408
Other current assets.............................. 1,068,764 3,980,430
----------- ------------
Total current assets............................ 67,960,889 211,406,913
Equipment and leasehold improvements, net........... 3,469,927 5,055,935
Restricted investments.............................. 550,000 550,000
Notes receivable from officers--noncurrent.......... 23,151 332,930
Debt issue costs, net............................... -- 5,047,153
Other assets........................................ 81,899 45,899
----------- ------------
Total assets.................................... $72,085,866 $222,438,830
=========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................. $ 1,187,234 $ 3,546,643
Loans payable--current............................ 1,200,000 200,000
Deferred revenue--current......................... 1,000,000 1,000,000
Obligation under capital lease--current........... 2,807 --
Accrued expenses and other current liabilities.... 5,879,589 10,380,639
----------- ------------
Total current liabilities....................... 9,269,630 15,127,282
Loans payable--noncurrent........................... 525,000 325,000
Deferred revenue--noncurrent........................ 4,000,000 3,000,000
Convertible subordinated notes...................... -- 180,000,000
----------- ------------
13,794,630 198,452,282
----------- ------------
Commitments
Stockholders' equity:
Preferred stock, par value $.001 per share.
5,000,000 shares authorized; Series A convertible
participating preferred stock; 2,300,000 issued
and outstanding at December 31, 1999 and 2000
(liquidation value $14,547,031).................. 2,300 2,300
Series A junior participating preferred stock;
200,000 shares designated; no shares issued and
outstanding...................................... -- --
Common stock, par value $.002 per share.
Authorized 100,000,000 shares; issued and
outstanding 15,066,612 at December 31, 1999 and
15,450,349 at December 31, 2000.................. 30,133 30,900
Additional paid-in capital........................ 136,259,509 143,452,825
Deferred compensation............................. (44,580) (990,234)
Unrealized gains (losses) on available for sale
securities....................................... (35,126) 1,229,131
Deficit accumulated during the development stage.. (77,921,000) (119,738,374)
----------- ------------
Total stockholders' equity...................... 58,291,236 23,986,548
Total liabilities and stockholders' equity...... $72,085,866 $222,438,830
=========== ============
See accompanying notes to financial statements.
F-3
ViroPharma Incorporated
(A Development Stage Company)
Statements of Operations
Years ended December 31, 1998, 1999 and 2000,
and the period December 5, 1994 (Inception) to December 31, 2000
Period
December 5, 1994
Year ended December 31, (Inception)
---------------------------------------- to December 31,
1998 1999 2000 2000
------------ ------------ ------------ ----------------
Revenues:
License fee and
milestones revenue... $ 1,500,000 $ -- $ 2,000,000 $ 6,000,000
Grant revenue......... -- -- -- 526,894
------------ ------------ ------------ -------------
Total revenues...... 1,500,000 -- 2,000,000 6,526,894
------------ ------------ ------------ -------------
Operating expenses
incurred in the
development stage:
Research and
development.......... 25,130,232 26,055,884 37,410,189 109,225,869
General and
administrative....... 4,375,800 4,986,452 8,616,559 24,076,033
------------ ------------ ------------ -------------
Total operating
expenses........... 29,506,032 31,042,336 46,026,748 133,301,902
------------ ------------ ------------ -------------
Loss from
operations......... (28,006,032) (31,042,336) (44,026,748) (126,775,008)
Interest income......... 1,771,564 1,708,212 11,990,551 17,368,197
Interest expense........ 167,648 165,914 9,781,177 10,331,563
------------ ------------ ------------ -------------
Net loss............ $(26,402,116) $(29,500,038) $(41,817,374) $(119,738,374)
============ ============ ============ =============
Preferred stock
dividends, including
beneficial conversion
component -- 934,533 727,352
Beneficial conversion
feature of preferred
stock.................. -- 4,140,000 --
------------ ------------ ------------
Net loss allocable to
common stockholders.... $(26,402,116) $(34,574,571) $(42,544,726)
============ ============ ============
Basic and diluted net
loss per share
allocable to common
stockholders: $ (2.30) $ (2.84) $ (2.80)
============ ============ ============
Shares used in computing
basic and diluted net
loss per share
allocable to common
stockholders:.......... 11,485,589 12,181,853 15,210,964
============ ============ ============
See accompanying notes to financial statements.
F-4
ViroPharma Incorporated
(A Development Stage Company)
Statements of Comprehensive Loss
Years ended December 31, 1998, 1999 and 2000,
and the period December 5, 1994 (Inception) to December 31, 2000
Period
December 5, 1994
Year ended December 31, (Inception)
---------------------------------------- to December 31,
1998 1999 2000 2000
------------ ------------ ------------ ----------------
Net Loss................ $(26,402,116) $(29,500,038) $(41,817,374) $(119,738,374)
Other comprehensive
income (loss):
Unrealized holding
gains (losses)
arising during
period............... 107,562 (35,126) 1,229,131 1,662,746
Less: reclassification
adjustment for gains
included in net
loss................. 276,126 107,562 (35,126) 433,615
------------ ------------ ------------ -------------
Unrealized gains
(losses) on available
for sale securities.... (168,564) (142,688) 1,264,257 1,229,131
------------ ------------ ------------ -------------
Comprehensive loss...... $(26,570,680) $(29,642,726) $(40,553,117) $(118,509,243)
============ ============ ============ =============
See accompanying notes to financial statements.
F-5
ViroPharma Incorporated
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
Period December 5, 1994 (Inception) to December 31, 1997,
and years ended December 31, 1998, 1999 and 2000
Preferred Stock Common Stock Unrealized Deficit
---------------- ------------------ Notes gains (losses) Accumulated
Number Number Additional Receivable on available during the
of of paid-in on common Deferred for sale development
Shares Amount Shares Amount capital stock compensation securities stage
--------- ------ ---------- ------- ------------ ---------- ------------ -------------- -------------
Balance, December
5, 1994
(Inception)...... -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock to
founders....... -- -- 828,750 1,657 79,593 (1,625) (79,625) -- --
Proceeds from
notes
receivable..... -- -- -- -- -- 1,625 -- -- --
Deferred
compensation
resulting from
grant of
options........ -- -- -- -- 753,461 -- (753,461) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 381,365 -- --
Unrealized gains
on available
for sale
securities..... -- -- -- -- -- -- -- 276,126 --
Issuance costs
of Series A, B
and C preferred
stock.......... -- -- -- -- (74,012) -- -- -- --
Exercise of
common stock
grant and
options........ -- -- 87,870 176 14,025 -- -- -- --
Value attributed
to issuance of
warrants....... -- -- -- -- 125,856 -- -- -- --
Accretion of
redemption
value
attributable to
mandatorily
redeemable
convertible
preferred
stock.......... -- -- -- -- (1,616,445) -- -- -- --
Conversion of
preferred stock
to common stock
............... -- -- 5,588,191 11,177 16,253,022 -- -- -- --
Initial issuance
of common
stock, net of
issuance
costs.......... -- -- 2,587,500 5,175 16,246,502 -- -- -- --
Follow-on
issuance of
common stock,
net of issuance
costs.......... -- -- 2,300,000 4,600 29,510,475 -- -- -- --
Cashless
exercise of
warrants....... -- -- 71,795 143 (143) -- -- -- --
Consulting
expense related
to option
grants......... -- -- -- -- 30,050 -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (22,018,846)
--------- ------ ---------- ------- ------------ ------ ---------- ---------- -------------
Balance, December
31, 1997......... -- -- 11,464,106 22,928 61,322,384 -- (451,721) 276,126 (22,018,846)
Amortization of
deferred
compensation... -- -- -- -- -- -- 204,120 -- --
Unrealized loss
on available
for sale
securities..... -- -- -- -- -- -- -- (168,564) --
Exercise of
common stock
options and
warrants....... -- -- 52,688 106 23,613 -- -- -- --
Value attributed
to issuance of
warrants....... -- -- -- -- 15,936 -- -- -- --
Consulting
expense related
to option
grants......... -- -- -- -- 12,065 -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (26,402,116)
--------- ------ ---------- ------- ------------ ------ ---------- ---------- -------------
Balance, December
31, 1998......... -- -- 11,516,794 23,034 61,373,998 -- (247,601) 107,562 (48,420,962)
Amortization of
deferred
compensation... -- -- -- -- -- -- 203,021 -- --
Unrealized loss
on available
for sale
securities..... -- -- -- -- -- -- -- (142,688) --
Exercise of
common stock
options........ -- -- 99,818 199 292,051 -- -- -- --
Value attributed
to issuance of
warrants....... -- -- -- -- 11,959 -- -- -- --
Issuance of
preferred
stock, net of
issuance
costs.......... 2,300,000 2,300 -- -- 13,308,600 -- -- -- --
Issuance of
common stock,
net of issuance
costs.......... -- -- 3,450,000 6,900 61,449,741 -- -- -- --
Consulting
expense related
to option
grants......... -- -- -- -- 4,860 -- -- -- --
Preferred
dividends...... -- -- -- -- (181,700) -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (29,500,038)
--------- ------ ---------- ------- ------------ ------ ---------- ---------- -------------
Balance, December
31, 1999......... 2,300,000 2,300 15,066,612 30,133 136,259,509 -- (44,580) (35,126) (77,921,000)
Amortization of
deferred
compensation... -- -- -- -- -- -- 110,597 -- --
Unrealized gain
on available
for sale
securities..... -- -- -- -- -- -- -- 1,264,257 --
Exercise of
common stock
options........ -- -- 132,744 265 864,919 -- -- -- --
Issuance of
common stock to
partner........ -- -- 200,993 402 5,999,598 -- -- -- --
Issuance of
restricted
stock.......... -- -- 50,000 100 1,056,151 -- (1,056,251) -- --
Preferred
dividends...... -- -- -- -- (727,352) -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (41,817,374)
--------- ------ ---------- ------- ------------ ------ ---------- ---------- -------------
Balance, December
31, 2000......... 2,300,000 $2,300 15,450,349 $30,900 $143,452,825 -- $ (990,234) $1,229,131 $(119,738,374)
========= ====== ========== ======= ============ ====== ========== ========== =============
Total
Stockholders'
equity
(deficit)
-------------
Balance, December
5, 1994
(Inception)...... $ --
Issuance of
common stock to
founders....... --
Proceeds from
notes
receivable..... 1,625
Deferred
compensation
resulting from
grant of
options........ --
Amortization of
deferred
compensation... 381,365
Unrealized gains
on available
for sale
securities..... 276,126
Issuance costs
of Series A, B
and C preferred
stock.......... (74,012)
Exercise of
common stock
grant and
options........ 14,201
Value attributed
to issuance of
warrants....... 125,856
Accretion of
redemption
value
attributable to
mandatorily
redeemable
convertible
preferred
stock.......... (1,616,445)
Conversion of
preferred stock
to common stock
............... 16,264,199
Initial issuance
of common
stock, net of
issuance
costs.......... 16,251,677
Follow-on
issuance of
common stock,
net of issuance
costs.......... 29,515,075
Cashless
exercise of
warrants....... --
Consulting
expense related
to option
grants......... 30,050
Net loss........ (22,018,846)
-------------
Balance, December
31, 1997......... 39,150,871
Amortization of
deferred
compensation... 204,120
Unrealized loss
on available
for sale
securities..... (168,564)
Exercise of
common stock
options and
warrants....... 23,719
Value attributed
to issuance of
warrants....... 15,936
Consulting
expense related
to option
grants......... 12,065
Net loss........ (26,402,116)
-------------
Balance, December
31, 1998......... 12,836,031
Amortization of
deferred
compensation... 203,021
Unrealized loss
on available
for sale
securities..... (142,688)
Exercise of
common stock
options........ 292,250
Value attributed
to issuance of
warrants....... 11,959
Issuance of
preferred
stock, net of
issuance
costs.......... 13,310,900
Issuance of
common stock,
net of issuance
costs.......... 61,456,641
Consulting
expense related
to option
grants......... 4,860
Preferred
dividends...... (181,700)
Net loss........ (29,500,038)
-------------
Balance, December
31, 1999......... 58,291,236
Amortization of
deferred
compensation... 110,597
Unrealized gain
on available
for sale
securities..... 1,264,257
Exercise of
common stock
options........ 865,184
Issuance of
common stock to
partner........ 6,000,000
Issuance of
restricted
stock.......... --
Preferred
dividends...... (727,352)
Net loss........ (41,817,374)
-------------
Balance, December
31, 2000......... $23,986,548
=============
See accompanying notes to financial statements.
F-6
ViroPharma Incorporated
(A Development Stage Company)
Statements of Cash Flows
Years ended December 31, 1998, 1999 and 2000,
and the period December 5, 1994 (Inception) to December 31, 2000
Period
December 5,
1994
Year ended December 31, (Inception) to
---------------------------------------- December 31,
1998 1999 2000 2000
------------ ------------ ------------ --------------
Cash flows from
operating activities:
Net loss.............. $(26,402,116) $(29,500,038) $(41,817,374) $(119,738,374)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Non-cash compensation
expense.............. 204,120 203,021 110,597 899,103
Non-cash warrant
value................ 15,936 11,959 -- 153,751
Non-cash consulting
expense.............. 12,065 4,860 -- 46,975
Non-cash interest
expense.............. -- -- 678,263 678,263
Depreciation and
amortization
expense.............. 428,165 556,639 886,534 2,217,638
Changes in assets and
liabilities:
Other current
assets............... 26,577 (633,710) (2,911,666) (3,980,430)
Notes receivable from
officers............. 16,232 39,205 (382,469) (444,825)
Due from partner...... -- -- (3,979,408) (3,979,408)
Other assets.......... -- -- 36,000 (45,899)
Accounts payable...... 522,786 (255,522) 2,359,409 3,546,643
Deferred revenue...... -- 5,000,000 (1,000,000) 4,000,000
Accrued expenses and
other current
liabilities.......... 2,835,462 (1,529,172) 4,501,050 10,380,639
------------ ------------ ------------ -------------
Net cash used in
operating
activities......... (22,340,773) (26,102,758) (41,519,064) (106,265,924)
------------ ------------ ------------ -------------
Cash flows from
investing activities:
Purchase of equipment
and leasehold
improvements......... (959,575) (1,549,461) (2,472,542) (7,273,573)
Purchase of short-
term investments..... (26,206,929) (72,515,626) (292,478,827) (478,664,311)
Sales of short-term
investments.......... -- -- -- 9,680,414
Maturities of short-
term investments..... 46,017,397 31,439,825 151,236,472 267,288,203
------------ ------------ ------------ -------------
Net cash provided by
(used in) investing
activities......... 18,850,893 (42,625,262) (143,714,897) (208,969,267)
------------ ------------ ------------ -------------
Cash flows from
financing activities:
Net proceeds from
issuance of
preferred stock...... -- 13,310,900 -- 27,242,143
Net proceeds from
issuance of common
stock................ 23,719 61,748,891 6,865,184 114,418,746
Preferred stock cash
dividends............ -- (181,700) (727,352) (909,052)
Proceeds from loans
payable and
milestone advance.... 500,000 -- -- 2,100,000
Payment of loans
payable.............. (100,000) (191,667) (1,200,000) (1,575,000)
Proceeds received on
notes receivable..... -- -- -- 1,625
Gross proceeds from
notes payable........ -- -- 180,000,000 180,692,500
Issuance costs on
notes payable........ -- -- (5,725,416) (5,725,416)
Payment of notes
payable.............. -- -- -- (50,000)
Obligation under
capital lease........ (61,487) (50,379) (2,807) --
------------ ------------ ------------ -------------
Net cash provided by
financing
activities......... 362,232 74,636,045 179,209,609 316,195,546
------------ ------------ ------------ -------------
Net increase (decrease)
in cash and cash
equivalents........... (3,127,648) 5,908,025 (6,024,352) 960,355
Cash and cash
equivalents at
beginning of period... 4,204,330 1,076,682 6,984,707 --
------------ ------------ ------------ -------------
Cash and cash
equivalents at end of
period................ $ 1,076,682 $ 6,984,707 $ 960,355 $ 960,355
============ ============ ============ =============
Supplemental disclosure
of noncash
transactions:
Conversion of Note
Payable to Series A
and Series B
Preferred Stock...... -- -- -- $ 642,500
Conversion of
mandatorily
redeemable
convertible
preferred stock to
common shares -- -- -- 16,264,199
Notes issued for
828,750 common
shares............... -- -- -- 1,625
Deferred
compensation......... -- -- $ 1,056,251 1,889,337
Accretion of
redemption value
attributable to
mandatorily
redeemable
convertible
preferred stock -- -- -- 1,616,445
Conversion of
milestone advance to
loan payable......... $ 1,000,000 -- -- 1,000,000
Unrealized gains
(losses) on
available for sale
securities........... (168,564) $ (142,688) 1,264,257 1,229,131
Supplemental disclosure
of interest paid...... 66,712 68,956 5,694,164 5,989,550
See accompanying notes to financial statements.
F-7
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
December 31, 1999 and 2000
1. Organization and Business Activities
ViroPharma Incorporated (a development stage Company) (the "Company")
commenced operations on December 5, 1994. The Company is a development stage
pharmaceutical company engaged in the discovery and development of new
antiviral medicines.
The Company is devoting substantially all of its efforts towards conducting
drug discovery and development, raising capital, conducting clinical trials,
pursuing regulatory approval for products under development, recruiting
personnel and building infrastructure. In the course of such activities, the
Company has sustained operating losses and expects such losses to continue for
the foreseeable future. The Company has not generated any significant revenues
or product sales and has not achieved profitable operations or positive cash
flow from operations. The Company's deficit accumulated during the development
stage aggregated $119,738,374 through December 31, 2000. There is no assurance
that profitable operations, if ever achieved, could be sustained on a
continuing basis.
The Company plans to continue to finance its operations with a combination
of stock issuances, debt issuances, license payments, payments from strategic
research and development arrangements and, in the longer term, revenues from
product sales. There are no assurances, however, that the Company will be
successful in obtaining an adequate level of financing needed for the long-
term development and commercialization of its planned products.
2. Basis of Accounting and Summary of Significant Accounting Policies
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
cash and cash equivalents are held in United States (U.S.) financial
institutions.
Short-term investments
Short-term investments consist primarily of debt securities backed by the
U.S. government and commercial paper. The Company's entire short-term
investment portfolio is currently classified as available for sale and is
stated at fair value as determined by quoted market values. All short-term
investments, including securities with maturities in excess of one year, are
classified as current, as management can sell them any time at their option.
Changes in the net unrealized holding gains and losses are included as a
separate component of stockholders' equity and comprehensive loss. For
purposes of determining gross realized gains and losses, the cost of short-
term investments sold is based upon specific identification. The Company has
not experienced any significant realized gains or losses on its investments
through December 31, 2000.
Concentration of credit risk
The Company invests its excess cash and short-term investments in accordance
with a policy objective that seeks to ensure both liquidity and safety of
principal. The policy limits investments to certain types of instruments
issued by the U.S. government and institutions with strong investment grade
credit ratings and places restrictions in their terms and concentrations by
type and issuer.
F-8
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
Equipment and leasehold improvements
Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization is computed on a straight-line basis over the useful lives of the
assets or the lease term, whichever is shorter, ranging from two to ten years.
The Company leases certain of its equipment and facilities under operating
leases. Operating lease payments are charged to operations over the related
period that such leased equipment is utilized in service.
Assets and liabilities related to capital leases are recorded at the present
value of the future minimum rental payments using interest rates appropriate
at the inception of the lease. Capital lease amortization is included with
depreciation and amortization expense.
Expenditures for repairs and maintenance are expensed as incurred.
Research and development
Research and product development costs are expensed as incurred.
Reimbursements of research and development costs under cost sharing
collaborations are recorded as a reduction of research and development
expenses.
Licensed technology
Costs incurred in obtaining the license rights to technology in the research
and development stage are expensed as incurred and in accordance with the
specific contractual terms of such license agreements.
Accounting for income taxes
Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits which are not expected to be
realized. The effect on deferred income tax assets and liabilities of a change
in tax rates is recognized in the period that such tax rate changes are
enacted.
Revenue recognition--collaborative research, contract and license agreements
Contract revenues are earned and recognized according to the provisions of
each agreement. Contract milestone payments are recognized as revenues upon
the completion of the milestone event or requirement. Payments, if any,
received in advance of performance under a contract are deferred and
recognized as revenue when earned. Up-front licensing fees where the Company
has continuing involvement are deferred and amortized over the estimated
performance period.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
F-9
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
Stock-based compensation
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts are amortized over the respective vesting periods of the
option grant. The Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities to provide
pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-value based method
defined in SFAS No. 123 had been applied.
Financial Instruments
The Company's financial instruments, principally cash and cash equivalents,
short-term investments, accounts payable, and accrued expenses, are carried at
cost, which approximates fair value due to the short-term nature of these
instruments. The Company's loans payable are carried at cost as the debt bears
interest at rates approximating current market rates. At December 31, 2000,
the market value of the Company's convertible subordinated notes was
approximately $55,134,000, based on quoted market prices.
Segment information
The Company is managed and operated as one business. The entire business is
managed by a single management team that reports to the chief executive
officer. The Company does not operate separate lines of business or separate
business entities with respect to any of its product candidates. Accordingly,
the Company does not prepare discrete financial information with respect to
separate product areas or by location and does not have separately reportable
segments as defined by SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information".
Net loss per share
Basic earnings per share ("EPS") is calculated by dividing earnings (loss)
allocable to common stockholders by the weighted average shares of common
stock outstanding. Net loss allocable to common stockholders includes
preferred stock dividends and beneficial conversion features of preferred
stock. Diluted EPS would also include the effect of dilution to earnings of
convertible securities, stock options and warrants. As of December 31, 2000,
the Company has certain convertible preferred stock, options and warrants
which have not been used in the calculation of diluted net loss per share
allocable to common stockholders because to do so would be anti-dilutive. As
such, the numerator and denominator used in computing both basic and diluted
net loss per share allocable to common stockholders are equal.
Comprehensive Loss
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
reporting and presentation of comprehensive loss and its components in a full
set of financial statements. Comprehensive loss consists of net loss and net
unrealized gains (losses) on securities and is presented in the statements of
comprehensive loss. The Statement requires only additional disclosures in the
financial statements; it does not affect the Company's financial position or
results of operations.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
F-10
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
3. Short-Term Investments
Short-term investments consist of fixed income securities with original
maturities of greater than three months including U.S. treasury instruments of
agencies of the U.S. Government and high-grade commercial paper. At December
31, 1999 and 2000, all of the short-term investments were deemed as "available
for sale" investments.
The following summarizes the "available for sale" investments at December
31, 1999 and 2000:
Gross Gross
unrealized unrealized
Cost gains losses Fair value
------------ ---------- ---------- ------------
Commercial paper........ 59,903,339 153,371 188,497 59,868,213
------------ ---------- -------- ------------
December 31, 1999..... $ 59,903,339 $ 153,371 $188,497 $ 59,868,213
============ ========== ======== ============
Certificate of deposit.. 10,000,000 -- -- 10,000,000
Obligations of the U.S.
Government and agencies
of the U.S. ........... 130,811,274 1,080,926 1,100 131,891,100
Commercial paper........ 60,334,420 188,810 39,505 60,483,725
------------ ---------- -------- ------------
December 31, 2000..... $201,145,694 $1,269,736 $ 40,605 $202,374,825
============ ========== ======== ============
At December 31, 2000, maturities of investments were as follows:
Less than 1 year........ 175,270,694 1,072,326 40,485 176,302,535
Due in 1-2 years........ 25,875,000 197,410 120 26,072,290
------------ ---------- -------- ------------
December 31, 2000..... $201,145,694 $1,269,736 $ 40,605 $202,374,825
============ ========== ======== ============
4. Equipment and Leasehold Improvements
Equipment, leasehold improvements and construction in progress consist of
the following at December 31, 1999 and 2000:
1999 2000
---------- ----------
Computers and equipment............................ $2,751,717 $4,817,381
Leasehold improvements............................. 1,931,626 2,338,504
---------- ----------
4,683,343 7,155,885
Less accumulated depreciation and amortization..... 1,213,416 2,099,950
---------- ----------
$3,469,927 $5,055,935
========== ==========
Included in equipment and leasehold improvements at December 31, 1999 are
assets totaling approximately $150,000 held under capital lease. There are no
assets held under capital lease at December 31, 2000. Included in leasehold
improvements at December 31, 1999 is $923,900 related to construction in
progress. At December 31, 2000, the Company had no construction in progress.
F-11
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at
December 31, 1999 and 2000:
December 31,
----------------------
1999 2000
---------- -----------
Preferred stock dividends payable................. 181,700 --
Clinical development and research................. 3,407,567 6,157,875
Payroll and payroll taxes payable................. 1,583,871 585,201
Interest payable.................................. -- 3,600,000
Other current liabilities......................... 706,451 37,563
---------- -----------
$5,879,589 $10,380,639
========== ===========
6. Loans Payable and Convertible Subordinated Notes
The Company entered into two loan agreements with a bank, one for $600,000
and one for $500,000, of which $725,000 was outstanding at December 31, 1999,
and $525,000 was outstanding at December 31, 2000. The terms of the loans
extend through February and December 2003, respectively, with principal and
interest due monthly. The interest rates are approximately 9% and 7.25%,
respectively, and are secured by certain equipment and certificates of deposit
aggregating $550,000.
In October 1997, the Company received a $1,000,000 payment as an advance on
a future milestone in connection with a collaborative drug discovery and
development agreement with Boehringer Ingelheim Pharmaceuticals Inc. The
agreement expired in August 1998. Such amount was repaid in August 2000.
The Company made a private offering of $180 million of convertible
subordinated notes due 2007, which closed on March 8, 2000. Gross proceeds
from the issuance of convertible subordinated notes were $180,000,000. Debt
issuance costs of $5,725,416 have been capitalized and are being amortized
over the term of the notes. The notes are convertible into shares of the
Company's common stock at a price of $109.15 per share, subject to certain
adjustments. The notes bear interest at a rate of 6% per annum, payable semi-
annually in arrears, and can be redeemed by the Company, at certain premiums
over the principal amount, at any time on or after March 6, 2003. The notes
are subordinated in right of payment to all senior indebtedness of the
Company. The notes may be required to be repaid on the occurrence of certain
fundamental changes, as defined.
7. License and Research Agreements
In December 1995, the Company entered into a license agreement with Sanofi-
Synthelabo for its most advanced drug candidate, Picovir(TM) (see note 14).
In December 1999, the Company entered into a licensing agreement with the
Wyeth-Ayerst Laboratories Division of American Home Products for the
discovery, development and commercialization of hepatitis C drugs. In
connection with the signing of the agreement, the Company received $5,000,000
from American Home Products. This amount is non-refundable and a portion of it
was recorded as deferred revenue at December 31, 1999. This deferred revenue
is being recognized as revenue as certain activities are performed by the
Company over the expected term of the agreement. $1,000,000 of this amount was
recognized as revenue in 2000, and $4,000,000 is recorded as deferred revenue
at December 31, 2000. If drug candidates are successfully commercialized, the
Company has the right to co-promote the products and share equally in the net
profits in the United States and Canada. The Company is entitled to milestone
payments upon the achievement of certain development milestones and royalties
for product sales, if any, outside of the United States and Canada.
F-12
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
7. License and Research Agreements, continued
In connection with the collaboration, both parties perform certain research
and development activities and share in the costs of those activities. As of
December 31, 2000, the Company is due from Wyeth-Ayerst $3,979,408 for
research and development expenses incurred by the Company on behalf of the
collaboration. The receivable, which represents the net amount due for all of
2000, is recorded with a corresponding reduction to research and development
expenses. The amount due is arrived at using the contractual percentages and
amounts for cost sharing and certain activities.
In October 2000, the company sold an aggregate of 200,993 shares of common
stock to American Home Products Corporation for aggregate proceeds of $6
million. The sales of common stock were as a result of progress made under the
companies' hepatitis C virus collaboration. In connection with our
collaboration and license agreement, American Home Products is required to
purchase predetermined dollar amounts of additional shares of our common stock
at a market value premium at the time of completion of certain product
development stages.
The Company has entered into various licensing, research and other
agreements. Under these agreements, the Company is working in collaboration
with various other parties. Should any discoveries be made under such
arrangements, the Company would be required to negotiate the licensing of the
technology for the development of the respective discoveries. There are no
significant funding commitments under any other agreement other than Sanofi.
8. Common Stock and Common Stock Options
On October 21, 1999, the Company completed a follow-on public offering of
common stock. The Company sold 3,450,000 shares (including 450,000 shares
exercised by the underwriters for overallotment). Net proceeds approximated
$61,450,000.
In 1995, the Company adopted a Stock Option Plan, and amended and restated
the Stock Option Plan in 1998 and 2000 (as amended and restated, the "Plan"),
to provide eligible individuals with an opportunity to acquire or increase an
equity interest in the Company and to encourage such individuals to continue
in the employment of the Company. Stock options are granted at the fair market
value of the stock on the day immediately preceding the date of grant. Stock
options are exercisable for a period not to exceed ten years from the date of
grant. Vesting of the stock options occurs, generally 25% per year, over four
years. In May 2000, the stockholders of the Company approved amendments to the
Company's employee stock option plan. The amendments include increasing the
number of shares eligible to grant under the plan by 750,000 shares and
eliminating the discretion and authority of the Company's board of directors
to re-price outstanding stock options or grant stock options at an exercise
price that is less that the fair market value at the date of grant. There are
2,750,000 shares reserved under the Plan.
Also, the stockholders of the Company approved the 2000 employee stock
purchase plan. A total of 300,000 shares are available under this plan. Under
this plan, employees may purchase common stock through payroll deductions in
semi-annual offerings at a price equal to the lower of 85% of the closing
price on the applicable offering commencement date or 85% of the closing price
on the applicable offering termination date. The plan qualifies under Section
423 of the Internal Revenue Code.
F-13
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
8. Common Stock and Common Stock Options, continued
Stock option activity for the three years ended December 31, 2000 is as
follows:
Weighted-
average Weighted-
remaining average
Exercise contractual exercise
price per Share life price
share options (years) Per share
-------------- --------- ----------- ---------
Balance, December 31, 1997..... .10-22.50 755,011
-------------- ---------
Granted....................... 9.94-23.50 330,700
Exercised..................... .10-8.75 (35,065)
Canceled...................... 2.16-8.75 (500)
---------
Balance, December 31, 1998..... .10-23.50 1,050,146
-------------- ---------
Granted....................... 6.50-27.9375 385,100
Exercised..................... .10-20.375 (99,818)
Canceled...................... .45-20.375 (60,763)
---------
Balance, December 31, 1999..... .10-27.9375 1,274,665
-------------- ---------
Granted....................... 12.00-81.75 911,332
Exercised..................... .20-23.50 (132,744)
Canceled...................... 6.50-37.125 (25,224)
---------
Balance, December 31, 2000..... .10-81.75 2,028,029
============== =========
Options outstanding as of
December 31, 2000:............ .10-.20 148,114 4.63 $ .16
.45 204 5.41 .45
2.16 57,597 5.51 2.16
5.25 19,165 5.84 5.25
6.50 21,000 8.20 6.50
7.4375-7.9375 4,875 8.40 7.62
8.01-8.74 20,000 8.36 8.38
8.75-9.50 174,007 6.01 8.75
9.875-14.875 491,508 8.36 11.74
15.125-22.50 764,159 8.56 19.65
23.50-28.00 12,000 8.72 25.35
37.125-42.00 296,600 9.01 37.14
72.00 8,300 9.12 72.00
81.75 10,500 9.20 81.75
-------------- ---------
Balance, December 31, 2000..... .10-81.75 2,028,029 7.96 $17.59
============== =========
Options exercisable as of
December 31, 2000:............ .10-.20 148,114 $ 0.16
.45 204 0.45
2.16 57,597 2.16
5.25 19,165 5.25
6.50 5,250 6.50
7.4375-7.9375 375 7.44
8.375 6,666 8.38
8.75-9.50 127,882 8.75
9.875-14.75 93,034 11.53
15.125-22.50 191,913 17.79
23.50-27.9375 2,500 25.72
-------------- ---------
Options exercisable at December
31, 2000:..................... $ .10-27.9375 652,700 $ 9.21
============== =========
F-14
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
8. Common Stock and Common Stock Options, continued
At December 31, 2000, there were 417,475 shares available for grant under
the Plan. In January 2001, the Company granted 203,050 options to its
employees. Such options were granted at exercise prices equal to the fair
market value at the grant date.
During 1996, various executive officers and certain employees of the Company
were granted options to acquire 270,644 shares of common stock at exercise
prices ranging from $.20 to $2.16 per share. The exercise price of the options
was equal to the fair market value of the Common Stock on the date of grant,
as determined by the Board of Directors. However, for financial statement
purposes, the difference between a deemed value in the range of $2.35 to $5.25
per share and the respective exercise prices at the grant dates has been
recorded as deferred compensation ($753,461) and is being amortized over the
four-year vesting period. Compensation expense for the aforementioned options
aggregated $188,195 for the year ended December 31, 1998, $203,021 for the
year ended December 31, 1999, and $44,580 for the year ended December 31,
2000.
The per share weighted-average fair value of stock options granted during
1998, 1999 and 2000 was $14.82, $11.61, and $25.37 per share, respectively, on
the date of grant. Such fair values were determined using the Black-Scholes
option-pricing model and are based on the following weighted-average
assumptions: an expected dividend yield of 0% and a risk-free interest rate of
5.0%, for 1998, 6.45% for 1999 and 5.1% for 2000, volatility of 79% for 1998,
135% for 1999, and 213.08% for 2000 and an expected option life of ten years
for 1998, 1999 and 2000.
The Company applies APB Opinion No. 25 in accounting for its stock option
plan. Had the Company determined compensation cost for options granted based
on the fair value at the grant date under SFAS No. 123, the Company's net loss
and net loss per share would have been increased to the pro forma amounts
under SFAS No. 123 indicated below:
1998 1999 2000
------------ ------------ ------------
Net loss allocable to common
stockholders:
As reported.................. $(26,402,116) $(34,574,571) $(42,544,726)
Pro forma under SFAS No.
123......................... $(28,511,508) $(37,626,511) $(49,596,779)
============ ============ ============
Net loss per share allocable to
common stockholders:
Basic and diluted:
As reported.................. $ (2.30) $ (2.84) $ (2.80)
Pro forma under SFAS No.
123......................... $ (2.48) $ (3.09) $ (3.26)
============ ============ ============
Pro forma net loss allocable to common stockholders reflects only options
granted in 1995 through 2000. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net loss allocable to common stockholders amounts presented above
because compensation cost is incurred under SFAS No. 123 over the respective
vesting period of such options, and options granted by the Company prior to
January 1, 1995 are not reflected in the pro forma net loss allocable to
common stockholders figures above.
In August 2000, the Company issued 50,000 shares of restricted common stock
to an executive officer of the Company. These shares vest ratably over 48
months. The fair value of such stock at the issuance date aggregated
$1,056,251 which amount was recorded as deferred compensation and will be
amortized to operations over the vesting period.
F-15
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
9. Preferred Stock
The Company adopted a Stockholders' Rights Plan (the "Plan") in September
1998. In connection with the Plan, the Company designated from its Preferred
Stock, par value $.001 per share, Series A Junior Participating Preferred
Stock, par value $.001 per share (the "Series A Preferred Shares"), and
reserved 200,000 Series A Preferred Shares for issuance under the Plan. The
Company declared a dividend distribution of one right for each outstanding
share of common stock. The rights entitle stockholders to purchase one one-
hundredth of a share of Series A Junior Participating Preferred Stock. The
rights expire in 2008. Each holder of a right, other than the acquiring
person, would be entitled to purchase $250 worth of common stock of the
Company for each right at the exercise price of $125 per right, which would
effectively enable such rights holders to purchase common stock at one-half of
the then current price. At December 31, 2000, the rights were neither
exercisable nor traded separately from the company's common stock, and become
exercisable only if a person or group becomes the beneficial owner of 20% or
more of the Company's common stock or announces a tender offer which would
result in ownership of 20% or more of the Company's common stock.
On May 5, 1999, the Company completed the sale of 2,300,000 shares of Series
A Convertible Participating Preferred Stock ("preferred stock"). Net proceeds
approximated $13,300,000. In addition, the Company issued warrants to purchase
595,000 shares of common stock at $9.53 per share to the purchasers of the
preferred stock. The warrants expire on May 5, 2004. The preferred stock is
convertible into shares of common stock on a one-for-one basis (subject to
adjustment) at any time by the holder and under certain conditions by the
Company. There is a 5% dividend per annum associated with the preferred stock
in which the Company may choose to permanently defer cash payment of the
dividend. In such case, the dividend is added to the liquidation value of the
preferred stock and the preferred stock's conversion ratio is increased. The
holders of the preferred stock have voting rights equivalent to the common
stockholders. In addition, the holders of the preferred stock have liquidation
rights equal to their original investment, subject to adjustment. As a result
of the difference in the price paid per share of preferred stock and the fair
market value per share of the underlying common stock at the date of the
closing of the transaction, the Company has reflected the amount of the
beneficial conversion feature in the statement of operations for the year
ended December 31, 1999. The beneficial conversion feature aggregated
$4,140,000 and is included in the net loss allocable to common stockholders.
The Company deferred the June 30 and September 30, 1999 dividend and, as a
result, the difference between the conversion price per share of preferred
stock and the fair market value per share of the underlying common stock at
June 30 and September 30, 1999 has been reflected as a beneficial conversion
feature in the statement of operations for the year ended December 31, 1999.
The fair market values were determined using the closing prices as quoted on
Nasdaq. The beneficial conversion feature related to the quarterly preferred
stock dividends aggregated $465,802 and is included in the net loss allocable
to common stockholders for the year ended December 31, 1999. At December 31,
2000, the preferred stock is convertible into 2,346,295 shares of common
stock.
Our board of directors has the authority, without action by the holders of
common stock, to issue up to 5,000,000 shares of preferred stock from time to
time in such series and with such preference and rights as it may designate.
10. Income Taxes
As of December 31, 2000, the Company has approximately $38,200,000 of
Federal and $38,000,000 of state net operating loss carryforwards available to
offset future taxable income. The federal and state net operating loss
carryforwards will begin expiring in the year 2009 and 2005, respectively, if
not utilized. In addition, the utilization of the state net operating loss
carryforwards is subject to a $2 million annual limitation.
Based on "change in ownership" provisions of the Tax Reform Act of 1986, net
operating loss carryforwards may be subject to annual limitations that could
reduce the Company's ability to utilize these carryforwards in the future.
F-16
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
10. Income Taxes, continued
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1999 and 2000 are shown below. Due to the uncertainty of
the Company's ability to realize the benefit of the deferred tax assets, the
net deferred tax assets are fully offset by a valuation allowance at December
31, 1999 and 2000. The change in the valuation allowance for 1999 and 2000 was
an increase of $11,901,661 and $16,704,042, respectively.
December 31,
--------------------------
1999 2000
------------ ------------
Deferred tax assets:
Net operating loss carryforwards................. $ 8,483,527 $ 14,092,203
Capitalized research and development costs....... 22,539,989 32,759,991
Income recorded for tax but not recorded on
books........................................... -- 1,200,000
------------ ------------
Total gross deferred tax assets................ 31,023,516 48,052,194
------------ ------------
Deferred tax liability:
Other............................................ -- (324,636)
------------ ------------
Net deferred tax assets........................ 31,023,516 47,727,558
------------ ------------
Valuation allowance................................ (31,023,516) (47,727,558)
------------ ------------
Net deferred taxes............................. -- --
============ ============
11. 401(k) Profit Sharing Plan
In 1998, the Company adopted a new 401(k) Profit Sharing Plan (the "401(k)
Plan") available to all employees meeting certain eligibility criteria. The
401(k) Plan permits participants to contribute up to 15% of their compensation
not to exceed the limits established by the Internal Revenue Code. All
contributions made by participants vest immediately in the participant's
account. The Company contributed $47,768, $61,306, and $91,394 to the 401(k)
Plan in 1998, 1999 and 2000, respectively.
12. Commitments
In March 1998, the Company entered into a lease for laboratory and office
space. The term of the lease is ten years with two five-year renewal options.
The Company also has the right, under certain circumstances, to purchase the
facility.
The Company's future minimum lease payments under the aforementioned lease
and other operating leases related to equipment for years subsequent to
December 31, 2000 are as follows:
Year ending Operating
December 31, leases
------------ ----------
2001........................................................... $ 988,527
2002........................................................... 991,134
2003........................................................... 980,214
2004........................................................... 980,214
2005........................................................... 965,796
Thereafter..................................................... 2,767,626
----------
Total minimum lease payments................................. $7,673,511
==========
Rent expense for the years ended December 31, 1998, 1999, and 2000
aggregated $760,000, $851,000, and $967,000, respectively.
F-17
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
13. Quarterly Financial Information (unaudited)
This table summarizes the unaudited financial results of operations for 2000
and 1999 for the quarters ending:
March 31, June 30, September 30, December 31,
---------- ----------- ------------- ------------
2000
Revenues.................. 1,250,000 250,000 250,000 250,000
Net loss.................. (6,769,928) (5,389,244) (12,724,643) (16,933,559)
Net loss allocable to
common stockholders...... (6,951,766) (5,571,082) (12,906,481) (17,115,397)
Basic and diluted net loss
per share allocable to
common stockholders...... (0.46) (0.37) (0.85) (1.11)
1999
Revenues.................. -- -- -- --
Net loss.................. (5,664,627) (6,104,776) (6,887,076) (10,843,559)
Net loss allocable to
common stockholders...... (5,664,627) (10,244,776) (7,639,909) (11,025,259)
Basic and diluted net loss
per share allocable to
common stockholders...... (0.49) (0.89) (0.66) (0.79)
14. Subsequent Event
On February 27, 2001, the Company revised its agreement with Sanofi-
Synthelabo for Picovir(TM), the Company's most advanced drug candidate. The
original agreement signed in 1995 provided the Company with exclusive rights
to develop and commercialize the product in the United States and Canada.
Under the revised agreement, the Company expanded its intellectual property
position, eliminated obligations for future milestone payments, reduced
royalty rate obligations to Sanofi-Synthelabo on future sales of products, if
any, under certain conditions, in exchange for a reduction of royalty rate
obligations by Sanofi-Synthelabo to the Company on future sales of products,
if any, under certain conditions, outside of the United States and Canada and
the issuance of 750,000 shares of the Company's common stock. In connection
with the issuance of 750,000 shares of common stock, the Company will record a
non-cash charge of $16,500,000 in the first quarter of 2001.
F-18
EXHIBIT INDEX
Exhibit Description
------- -----------
11 Statement of Computation of Loss Per Share.
12.1 Schedule of Ratio of Earnings to Fixed Charges.
23 Consent of KPMG LLP.
24 Power of Attorney (included on signature page).