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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-26929
ADOLOR CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 31-1429198
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
620 Pennsylvania Drive
Exton, Pennsylvania 19341
(Address of Principal Executive Offices and Zip Code)
484-595-1500
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: [X] Yes [_] No
Number of shares outstanding of the issuer's Common Stock, par value
$.0001 per share, as of October 28, 2002: 31,264,359 shares.
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ADOLOR CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets at September 30, 2002
and December 31,2001 1
Consolidated Statements of Operations for three months
ended September 30, 2002 and 2001, nine months ended
September 30, 2002 and 2001 and the period from
August 9, 1993 (inception) to September 30, 2002 2
Consolidated Statements of Cash Flows for nine months ended
September 30, 2002 and 2001 and the period from August 9,
1993 (inception) to September 30, 2002 3
Notes to Consolidated Financial Statements 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk 24
ITEM 4. Controls and Procedures 24
PART II.OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Certifications 27
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADOLOR CORPORATION
(A Development Stage Company)
Consolidated Balance Sheets
Unaudited
September 30, 2002 and December 31, 2001
September 30, 2002 December 31, 2001
------------------ ------------------
Assets
Current assets:
Cash and cash equivalents $ 52,729,060 $ 50,017,499
Short-term investments (Note 3) 110,998,326 106,426,917
Accounts receivable from collaboration
agreements (Note 4) 7,916,418 --
Prepaid expenses and other current
assets 4,438,936 4,234,509
----------- -----------
Total current assets 176,082,740 160,678,925
Equipment and leasehold improvements, net 3,756,604 3,420,576
Other assets 76,565 82,035
----------- -----------
Total assets $179,915,909 $164,181,536
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 44,044 $ 214,819
Accounts payable 3,296,928 2,294,545
Accrued expenses 17,029,168 8,434,747
Deferred licensing fees (Note 4) 4,192,980 26,316
---------- ----------
Total current liabilities 24,563,120 10,970,427
Deferred licensing fees (Note 4) 44,333,699 429,824
---------- ----------
Total liabilities 68,896,819 11,400,251
---------- ----------
Stockholders' equity:
Series A Junior Participating
preferred stock, $0.01 par value;
35,000 shares authorized, none issued
and outstanding -- --
Preferred stock, $0.01 par value;
1,000,000 shares authorized; none issued and
outstanding -- --
Common stock, par value $.0001 per
share; 99,000,000 shares authorized;
31,241,216 and 31,104,304 shares issued and
outstanding at September 30, 2002 and
December 31, 2001, respectively 3,124 3,110
Additional paid-in capital 258,790,514 259,043,017
Notes receivable for stock options (657,978) (818,046)
Deferred compensation (Note 5) (4,255,565) (11,527,697)
Unrealized gains on available for sale
securities 265,345 730,228
Deficit accumulated during the
development stage (143,126,350) (94,649,327)
----------- -----------
Total stockholders' equity 111,019,090 152,781,285
----------- -----------
Total liabilities and stockholders' equity $179,915,909 $164,181,536
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
1
ADOLOR CORPORATION
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
Three months ended September 30, 2002 and 2001, nine months ended
September 30, 2002 and 2001 and the period from August 9, 1993
(inception) to September 30, 2002
Period from
August 9, 1993
Three months ended Nine months ended (inception) to
September 30, September 30, September 30,
2002 2001 2002 2001 2002
---- ---- ---- ---- ----
Revenues:
Grant, contract, license
and milestone revenue (Note 4) $ 9,068,054 $ 31,441 $ 19,843,610 $ 593,657 $ 21,435,221
----------- ---------- ---------- ---------- ----------
Operating expenses incurred
during the development stage:
Research and development 23,382,744 11,427,093 54,762,445 26,644,648 130,729,531
Marketing, general and
administrative 6,954,832 4,487,824 17,029,181 10,645,928 48,492,160
---------- ---------- ---------- ---------- -----------
Total operating expenses 30,337,576 15,914,917 71,791,626 37,290,576 179,221,691
---------- ---------- ---------- ---------- -----------
Loss from operations (21,269,522) (15,883,476) (51,948,016) (36,696,919) (157,786,470)
Interest income 1,111,889 2,461,760 3,488,672 6,441,384 14,960,745
Interest expense (919) (432,900) (17,679) (513,014) (300,625)
---------- ----------- ---------- ---------- -----------
Net loss $(20,158,552) $(13,854,616) $(48,477,023) $(30,768,549) $(143,126,350)
========== ========== ========== ========== ===========
Basic and diluted net loss
per share: $ (0.65) $ (0.45) $ (1.55) $ (1.05)
=========== ========== ========== ==========
Shares used in computing basic
and diluted net loss per share: 31,238,774 31,090,517 31,197,046 29,366,144
The accompanying notes are an integral part of the consolidated financial
statements.
2
ADOLOR CORPORATION
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30, 2002 and 2001 and the
period from August 9, 1993 (inception) to September 30, 2002
Period from
August 9, 1993
Nine months ended (inception) to
September 30, September 30,
2002 2001 2002
---- ---- ----
Cash flows from operating activities:
Net loss $(48,477,023) $(30,768,549) $(143,126,350)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash compensation expense (Note 5) 6,582,806 4,400,567 17,956,825
Non-cash warrant value -- -- 60,000
Issuance of common stock for bonus awards and
employment agreement 218,231 -- 218,231
Depreciation and amortization expense 1,011,500 554,983 2,976,176
Issuance of common stock for technology license
agreements -- -- 6,250
Changes in assets and liabilities:
Prepaid expenses and other current assets (204,427) (520,913) (4,438,936)
Accounts receivable from collaboration
agreements (7,916,418) -- (7,916,418)
Other assets 5,470 (111,470) (76,565)
Accounts payable 1,002,383 (112,091) 3,296,928
Deferred licensing fees 48,070,539 (39,474) 48,526,679
Accrued expenses 8,594,421 4,787,643 17,029,168
---------- ---------- ----------
Net cash provided by (used in) operating
activities 8,887,482 (21,809,304) (65,488,012)
---------- ---------- -----------
Cash flows from investing activities:
Purchase of equipment and leasehold
improvements (1,347,528) (2,459,386) (6,719,440)
Purchase of short-term investments (79,017,854) (82,559,869) (290,929,648)
Maturities of short-term investments 73,981,562 53,412,080 180,196,667
---------- ---------- -----------
Net cash used in investing activities (6,383,820) (31,607,175) (117,452,421)
---------- ---------- -----------
Cash flows from financing activities:
Net proceeds from issuance of mandatorily
redeemable convertible preferred stock and
Series B warrants -- -- 78,501,909
Proceeds from Series D mandatorily redeemable
convertible preferred stock subscription -- -- 600,000
Net proceeds from issuance of restricted common
stock and exercise of common stock options 223,223 124,068 941,473
Proceeds from notes payable-related parties -- -- 1,000,000
Payment of notes payable (346,950) (450,851) (1,622,275)
Proceeds received on notes receivable 204,985 253,510 361,824
Interest receivable converted to principal on
notes (49,534) (69,339) (118,873)
Proceeds from notes payable 176,175 88,033 1,666,319
Net proceeds from IPO -- -- 95,376,469
Net proceeds from issuance of newly registered
shares of common stock -- 58,972,345 58,962,647
---------- ---------- -----------
Net cash provided by financing activities 207,899 58,917,766 235,669,493
---------- ---------- -----------
Net increase in cash and cash equivalents 2,711,561 5,501,287 52,729,060
Cash and cash equivalents at beginning of period 50,017,499 67,392,849 --
---------- ---------- ----------
Cash and cash equivalents at end of period $52,729,060 $72,894,136 $52,729,060
========== ========== ==========
Supplemental disclosure of cash flow
information:
Cash paid for interest 17,679 59,209 210,750
Supplemental disclosure of noncash transactions:
Unrealized gains (losses) on available for sale
securities (464,883) 735,733 265,345
Deferred compensation from issuance of common
stock, restricted common stock and common stock
options 118,326 150,000 23,993,767
Conversion of Series A through H preferred stock
for common stock -- -- 80,383,703
Conversion of stock subscription to Series D
mandatorily redeemable preferred stock -- -- 600,000
Conversion of bridge financing, including
accrued interest, to Series B mandatorily
redeemable preferred stock -- -- 1,019,787
The accompanying notes are an integral part of the consolidated financial
statements.
3
Adolor Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2002
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Adolor Corporation (together with its subsidiary, "Adolor" or the
"Company") is a development-stage biopharmaceutical company engaged in
the development of proprietary pharmaceutical products for the treatment
of pain products and products to mitigate certain of the side effects that
are caused by current pain treatments. The Company has small molecule
product candidates that are in various stages of development ranging from
discovery and preclinical studies to Phase 1 through Phase 3 clinical
trials. Adolor's lead product candidate, alvimopan, which is also known
as ADL 8-2698, is designed to selectively block the effects of narcotic
analgesics on the gastrointestinal tract. Alvimopan is in Phase 3
clinical trials for two indications, the management of postoperative
ileus and the management of opioid bowel dysfunction. In April 2002, the
Company entered into a collaboration agreement with Glaxo Group Limited
(Glaxo), an affiliate of GlaxoSmithKline plc, for the exclusive worldwide
development and commercialization of alvimopan for certain indications.
The accompanying consolidated financial statements include the results of
operations of the Company for the period from August 9, 1993 (inception)
to September 30, 2002.
The Company has not generated any product sales revenues and has not
achieved profitable operations. The Company's deficit accumulated during
the development stage through September 30, 2002 aggregated approximately
$143.1 million, and the Company's management expects to continue to incur
substantial losses in future periods. The Company's future operations are
dependent on the success of the Company's research, development and
licensing efforts and, ultimately, upon regulatory approval and market
acceptance of the Company's proposed future products. There is no
assurance that the Company will ever become profitable or that profitable
operations, if achieved, could be sustained on a continuing basis.
Excluding a non-refundable signing fee of $50.0 million in connection
with the collaboration agreement the Company entered into with Glaxo
(See Note 4), the Company reported a cash outflow of $45.4 million for
the nine months ended September 30, 2002 and the Company does not expect
to generate a positive cash flow from operations for the next several years,
if ever. Prior to exhausting our current cash and short term
investments, we will need to raise additional funds to finance our
operating activities. There are no assurances that the Company will be
successful in obtaining an adequate level of financing for the long-term
development and commercialization of its product candidates.
Principles of Consolidation
The consolidated financial statements include the accounts of Adolor
Corporation and its wholly owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
information at September 30, 2002 and for the periods ended September 30,
2002 and 2001, is unaudited but includes all adjustments (consisting only
of normal recurring adjustments) which, in the opinion of management, are
necessary to state fairly the financial information set forth in
accordance with accounting principals generally accepted in the United
States of America. The interim results are not necessarily indicative of
results to be expected for the full fiscal year. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2001
included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
4
Adolor Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2002
(Unaudited)
2. COMPREHENSIVE LOSS
In the Company's annual consolidated financial statements, comprehensive
loss is presented as a separate financial statement. For interim
consolidated financial statements, the Company is permitted to disclose
the information in the footnotes to the financial statements. The
disclosures are required for comparative purposes. The only comprehensive
income item the Company has is unrealized gains and losses on available
for sale securities.
The following reconciles net loss to comprehensive loss for the three and
nine months ended September 30, 2002 and 2001:
Three months ended September 30, Nine months ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net loss $(20,158,552) $(13,854,616) $(48,477,023) $(30,768,549)
Other comprehensive income:
Unrealized gains (losses) on
available for sale securities (104,982) 374,649 (464,883) 735,733
---------- ----------- ---------- -----------
Comprehensive loss $(20,263,534) $(13,479,967) $(48,941,906) $(30,032,816)
========== ========== ========== ==========
3. SHORT-TERM INVESTMENTS
Short-term investments consist of fixed income securities with original
maturities of greater than three months when acquired including U.S.
Treasury obligations and corporate securities and high-grade commercial
paper. At December 31, 2001 and September 30, 2002, all of the short-term
investments were deemed "available for sale" investments.
The following summarizes the "available for sale" investments at December
31, 2001 and September 30, 2002:
Gross Gross
unrealized unrealized
Cost gains losses Fair value
---- ----- ------ ----------
U.S. Government obligations & agencies $ 23,588,892 $ 27,972 $ 32,043 $ 23,584,821
Commercial paper 497,309 1,326 -- 498,635
Corporate bonds 81,610,488 740,458 7,485 82,343,461
----------- -------- ------- -----------
December 31, 2001 $105,696,689 $769,756 $ 39,528 $106,426,917
=========== ======= ======= ===========
U.S. Government obligations & agencies $ 11,569,551 $ 18,929 $ -- $ 11,588,480
Corporate bonds 99,163,430 309,917 63,501 99,409,846
----------- ------- ------ -----------
September 30, 2002 $110,732,981 $328,846 $63,501 $110,998,326
=========== ======= ====== ===========
At September 30, 2002, maturities of
investments were as follows:
Less than 1 year $ 85,109,039 $265,614 $57,781 $ 85,316,872
Due in 1-5 years 25,623,942 63,232 5,720 25,681,454
----------- ------- ------ -----------
September 30, 2002 $110,732,981 $328,846 $63,501 $110,998,326
=========== ======= ====== ===========
5
Adolor Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2002
(Unaudited)
4. COLLABORATION AGREEMENT
In April 2002, the Company entered into a collaboration agreement
with Glaxo for the exclusive worldwide development and commercialization
of alvimopan, which is also known as ADL 8-2698. The companies have
agreed to co-develop alvimopan for a number of indications, both acute
and chronic, which would potentially involve the use of alvimopan in
in-patient and out-patient settings. Under the terms of the collaboration
agreement, Glaxo paid the Company a non-refundable and non-creditable
signing fee of $50 million during the quarter ended June 30, 2002 and the
Company may receive regulatory milestone payments of up to $220 million
over the term of the agreement upon the successful achievement, if any, of
certain regulatory objectives. As a result of the application of Staff
Accounting Bulletin (SAB) 101, the $50 million signing fee is reflected in
deferred licensing fees and will be recognized as revenue through April 2014,
the estimated performance period. The milestone payments relate to
substantive achievements in the development lifecycle and, if achieved,
will be recognized as revenue as they are achieved.
In the United States, both companies will co-develop and intend to
co-promote alvimopan and share development expenses and commercial returns,
if any. The Company will lead the development, marketing, and co-promotion
activities for acute-care indications, and Glaxo will lead the
development, marketing, and co-promotion activities for chronic care
indications. Outside the United States, Glaxo will be responsible for the
development and commercialization of alvimopan, and the Company will
receive royalties on revenues, if any.
Under the terms of the collaboration agreement between Glaxo and the
Company for collaboration products being developed in the United States,
out-of-pocket costs and expenses from third parties for research and
development and marketing activities incurred by each company will be
combined and each company will pay its proportionate share of the total
of such costs. To the extent that a party incurs out-of-pocket costs and
expenses from third parties that are in excess of its proportionate share
of the total of such expenses, the other party will make a payment to the
party who incurred the cost for such excess amounts so long as the total
development cost for each such product is not in excess of an amount
approved by both companies. Such contract reimbursement amounts paid to
the Company will be recorded gross on the Company's consolidated statements
of operations pursuant to Emerging Issues Task Force (EITF) No. 99-19 and
01-14 as contract reimbursement revenue. Alternatively, any amounts owed to
Glaxo by the Company would be classified as research and development
expense or marketing expense, as the case may be, during the period incurred
in the Company's consolidated statements of operations. Although the
collaboration agreement was executed in April 2002, the cost sharing
arrangement described above is retroactive to January 1, 2002.
The Company recorded contract reimbursement revenue of $8,827,535
in the second quarter, which reflects reimbursement revenues of
$3,427,102 and $5,400,433 for the first and second quarters of 2002,
respectively, and $7,916,418 in the third quarter of 2002, which reflects
the outstanding balance of accounts receivable as of September 30, 2002.
Glaxo has certain rights to terminate the collaboration agreement, its
rights and obligations with respect to the acute-care indications, or its
rights and obligations for the chronic-care indications. Glaxo has the
right to terminate the collaboration agreement for breach of the
agreement by the Company or for safety related reasons as defined in the
collaboration agreement. Glaxo's rights to terminate the acute-care
indications or the chronic-care indications are generally triggered by
failure to achieve certain milestones within certain timeframes, adverse
product developments or adverse regulatory events.
5. DEFERRED COMPENSATION
The Company accounts for share option issuances to employees and
members of the Board of Directors in accordance with the provisions of
APB No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, deferred compensation is recorded to the extent
that the current estimated fair value of the underlying stock exceeds the
exercise price of the options on the date of grant. Such deferred
compensation is amortized on a straight-line basis over the respective
vesting periods of such option grants. Transactions with non-employees,
in which goods or services are the consideration received for the
issuance of equity instruments, are accounted for on a fair-value basis.
In September 2002, in addition to the quarterly amortization of deferred
compensation, the Company reduced deferred compensation and recorded
non-cash charges of approximately $2.9 million in connection with the
acceleration of the vesting of certain employee stock options issued in
prior periods.
6
Adolor Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2002
(Unaudited)
6. LICENSE AGREEMENT
In August 2002, we entered into an agreement with Eli Lilly and Company
under which we obtained an exclusive license to six issued U.S. patents,
related foreign equivalents and know-how relating to peripherally
selective opioid antagonists. We paid Lilly $4 million upon signing the
agreement. Under the agreement we will be obligated to pay Eli Lilly an
additional $4 million upon acceptance of the first application for
marketing authorization for alvimopan, if achieved. We will be subject to
additional clinical and regulatory milestone payments on achievement of
milestones, if any, identified in the agreement and royalty payments to
Lilly on sales, if any, of new products utilizing the licensed
technology.
7
ITEM 2. MANANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Various statements made in this Report on Form 10-Q and in our other
reports and public filings are forward-looking within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, but are not limited to, information about the
following:
- our product development efforts including results from
clinical trials;
- anticipated clinical trial initiation, completion dates
and trial results;
- anticipated regulatory filing dates for our product
candidates;
- the status and anticipated timing of regulatory
approval for our product candidates;
- anticipated operating losses and capital expenditures;
- our intentions regarding the establishment of
collaborations;
- estimates of the market opportunity and the
commercialization plans for our product candidates,
including our plans for the development of a sales and
marketing force; and
- our intention to rely on third parties for
manufacturing.
When used in this Report on Form 10-Q, the words "may", "will", "expect",
"anticipate", "intend", "plan", "believe", "seek", "estimate" and similar
expressions are generally intended to identify forward-looking
statements, but are not the exclusive expressions of forward-looking
statements. Readers are cautioned that such forward-looking statements
are only projections of future events and, because forward-looking
statements involve risks and uncertainties, there are important factors
that could cause our actual results and financial position to differ
materially from those expressed or implied by these forward-looking
statements, including, but not limited to those discussed elsewhere in
this Report, including in the Certain Risks Related to Our Business
section of this Report, and the risks discussed in our other Securities
and Exchange Commission, or Commission, filings including our
Registration Statement on Form S-3 declared effective on July 23, 2001 by
the Commission (File No. 333-64298) and our Report on Form 10-K for the
annual period ended December 31, 2001, filed on April 1, 2002. Given the
uncertainties affecting pharmaceutical companies in the development
stage, readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made and
which may turn out to be wrong due to inaccurate assumptions, unknown
risks, uncertainties or other factors. Furthermore, we undertake no
obligation to publicly update any forward-looking statements.
Overview
We are a therapeutic-based development stage biopharmaceutical company.
We discover, develop and plan to commercialize proprietary pharmaceutical
products for the treatment of pain and to mitigate certain of the side
effects that are caused by current pain treatments. Our lead product
candidate, alvimopan, is currently in three Phase 3 efficacy clinical
trials for the management of postoperative ileus and one Phase 3 clinical
trial for the management of opioid-induced bowel dysfunction. Our other
product candidates are in various stages of development ranging from
discovery and preclinical studies through early stage clinical trials.
We are a development stage pharmaceutical company and have not generated
any revenues from product sales. We have not been profitable and, since
our inception, we have incurred a cumulative net loss of approximately
$143.1 million through September 30, 2002. These losses have resulted
principally from costs incurred in research and development activities
and general and administrative expenses and we expect to continue to
incur substantial losses for at least the next several years.
Collaboration Agreement
In April 2002, we entered into a collaboration agreement with Glaxo Group
Limited (Glaxo), an affiliate of GlaxoSmithKline plc, for the exclusive
worldwide development and commercialization of alvimopan, which is also
known as ADL 8-2698. We and Glaxo have agreed to co-develop alvimopan for
a number of indications, both acute and chronic, which would potentially
involve the use of alvimopan in in-patient and out-patient settings. Under
the terms of the agreement, Glaxo paid us a non-refundable and
8
non-creditable signing fee of $50 million during the quarter ended June 30,
2002 and we may receive regulatory milestone payments of up to $220 million
over the term of the agreement upon the successful achievement, if any, of
certain regulatory objectives. As a result of the application of SAB 101,
the $50 million signing fee is reflected in deferred licensing fees and
will be recognized as revenue through April 2014, the estimated performance
period. The milestone payments relate to substantive achievements in the
development lifecycle and, if achieved, will be recognized as revenue as
they are achieved.
In the United States, we and Glaxo will co-develop and intend to
co-promote alvimopan and share development expenses and commercial
returns, if any. We will lead the development, marketing and
co-promotion activities for acute-care indications, and Glaxo will
lead the development, marketing and co-promotion activities for chronic
care indications. Outside the United States, Glaxo will be responsible
for the development and commercialization of alvimopan, and we will
receive royalties on revenues, if any.
Under the terms of our collaboration agreement with Glaxo for
collaboration products being developed in the United States, out-of-
pocket costs and expenses from third parties for research and development
and marketing activities incurred by each company will be combined, and
each company will pay its proportionate share of the total of such costs.
To the extent that a party incurs out-of-pocket costs and expenses from
third parties that are in excess of its proportionate share of the total
of such expenses, the other party will make a payment to the party who
incurred the cost for such excess amounts so long as the total
development cost for each such product is not in excess of an amount
approved by both companies. Such contract reimbursement amounts paid to
the Company will be recorded gross on our consolidated statement of
operations pursuant to EITF No. 99-19 and 01-14 as contract reimbursement
revenue. Alternatively, any amounts owed to Glaxo by us will be classified
as research and development expense or marketing expense, as the case may
be, during the period incurred in our consolidated statements of
operations. Although the collaboration agreement was executed in April
2002, the cost sharing arrangement described above is retroactive to
January 1, 2002. We recorded contract reimbursement revenue of
$8,827,535 in the second quarter, which reflects reimbursement revenues
of $3,427,102 and $5,400,433 for the first and second quarters of 2002,
respectively, and $7,916,418 in the third quarter of 2002, which reflects
the outstanding balance of accounts receivable as of September 30, 2002.
Glaxo has certain rights to terminate the collaboration agreement, its
rights and obligations with respect to the acute-care indications, or its
rights and obligations for the chronic-care indications. Glaxo has the
right to terminate the collaboration agreement for breach of the
agreement by the Company, or for safety related reasons as defined in the
collaboration agreement. Glaxo's rights to terminate the acute-care
indications or the chronic-care indications are generally triggered by
failure to achieve certain milestones within certain timeframes, adverse
product developments or adverse regulatory events.
In August 2002, we entered into an agreement with Eli Lilly and Company
under which we obtained an exclusive license to six issued U.S. patents,
related foreign equivalents and know-how relating to peripherally
selective opioid antagonists. We paid Lilly $4 million upon signing the
agreement. Under the agreement we will be obligated to pay Eli Lilly an
additional $4 million upon acceptance of the first application for
marketing authorization for alvimopan, if achieved. We will be subject to
additional clinical and regulatory milestone payments on achievement of
milestones, if any, identified in the agreement and royalty payments to
Lilly on sales, if any, of new products utilizing the licensed
technology.
In August 2002, we entered into an agreement with ViroPharma Incorporated
under which ViroPharma will provide clinical trial analysis, data
management and report writing services for a total of six alvimopan Phase
1 clinical studies. The total cost to us of the services is expected to
be approximately $350,000. One of the members of our Board of Directors,
Claude Nash, Ph.D., is the Chairman of ViroPharma. The members of our
Board of Directors other than Dr. Nash reviewed and approved the
agreement with ViroPharma.
Certain Risks Related to Our Business
As further described herein, our performance and financial results are
subject to risks and uncertainties including, but not limited to, the
following specific risks:
WE ARE HEAVILY DEPENDENT ON THE SUCCESSFUL CLINICAL TESTING, REGULATORY
APPROVAL AND COMMERCIALIZATION OF OUR LEAD PRODUCT CANDIDATE, ALVIMOPAN,
WHICH MAY NEVER BE APPROVED FOR COMMERCIAL USE. IF WE ARE UNABLE TO
COMMERCIALIZE ALVIMOPAN, OUR ABILITY TO GENERATE REVENUES WILL BE
IMPAIRED AND OUR BUSINESS WILL BE HARMED.
We have invested a significant portion of our time and financial
resources since our inception in the development of alvimopan, and we
anticipate that for the foreseeable future our potential to achieve
revenues will be dependent on its successful clinical testing, regulatory
approval and commercialization. Drug development is a highly uncertain
process. We or Glaxo, with which we are collaborating to develop
alvimopan, may suffer significant setbacks in advanced clinical trials of
alvimopan, even after
9
achieving potentially promising results in earlier clinical trials. Even
if the clinical trials of alvimopan are successful, prior to
commercialization of alvimopan in the United States, we will have to submit,
and the U.S. Food and Drug Administration, or FDA, will have to approve, a
New Drug Application, or NDA, for alvimopan. If our NDA, if any, for
alvimopan is not approved by the FDA, or if approval is delayed, our
ability to achieve revenues will be impaired and our stock price will be
materially and adversely affected. FDA approval is contingent on many
factors, including clinical test results and the evaluation of those results.
We have several Phase 3 clinical trials ongoing for alvimopan. We have
completed accrual in one of these Phase 3 clinical trials in patients with
opioid-induced bowel dysfunction (OBD) caused by chronic administration of
opioids. The results of this study are expected to be made available in the
near term. These results may not be positive. Even if these results are
positive, additional clinical trials will need to be conducted prior to filing
an NDA for use of alvimopan in OBD. Under our collaboration agreement with
Glaxo, Glaxo has overall responsibility for development of alvimopan for OBD.
If the results of the Phase 3 OBD study are not positive, it will negatively
affect the development plans for alvimopan for OBD and could negatively
affect Glaxo's commitment to development of alvimopan in OBD. We are
conducting and plan to conduct additional long-term animal toxicity
studies to support further development of alvimopan in OBD. Adverse
safety findings in these long-term animal toxicity studies could
adversely affect our prospects for alvimopan including its prospects for
use in postoperative ileus. We have three Phase 3 efficacy clinical
trials ongoing for use of alvimopan, in postoperative ileus, these
clinical trials are expected to complete accrual and be analyzed over the
next several quarters. The results from any one or all of these
clinical trials may be negative. Negative results from one or more of
these clinical trials will adversely affect our ability to obtain
regulatory approval for alvimopan. Even if we conclude that the results
from our preclinical studies and clinical trials are positive, the FDA
may not agree with us because the FDA may evaluate the results by
different methods or conclude that the test results are not clinically
meaningful or that there were human errors in the conduct of the clinical
trials or otherwise. These Phase 3 clinical trials use clinical drug
product manufactured by two different contract manufacturing facilities,
one of which is no longer in business. We may be delayed in our efforts
to obtain regulatory approval as a result of using material from two
different contract manufacturing facilities. To receive regulatory
approval for alvimopan, our contract manufacturers will be required to
obtain approval for their manufacturing facilities to manufacture
alvimopan. To achieve this approval, we will also be required to
submit, in an NDA, information and data regarding chemistry,
manufacturing and controls which satisfies the FDA that our contract
manufacturer is able to make alvimopan in accordance with extensive
regulatory requirements, commonly known as good manufacturing practices
(cGMPs). We may be unable to achieve FDA approval for our contract
manufacturing facility to manufacture alvimopan. We will be required
to submit extensive preclinical data in our NDA which satisfies the FDA
regulatory requirements. We may fail to meet the FDA's standards on any
one of these elements of the NDA.
Even if we believe we have met the FDA guidelines for submission of data
and information to the NDA, if any, there is a risk that the FDA will
require additional data and information that we are unable to provide.
These alvimopan clinical trials are testing whether alvimopan is able to
selectively block the effects of narcotic analgesics on the
gastrointestinal tract. As combination clinical trials, they are subject
to the risk that the use of alvimopan with narcotic analgesics may result
in unexpected toxicity, or increase the side effects associated with the
individual products to an unacceptable level, or interfere with the
efficacy of the narcotic analgesic. In addition, assessing clinical
trial results of alvimopan in combination with narcotic analgesics may
add to the complexity of determining the efficacy of alvimopan.
Glaxo has certain rights to terminate the collaboration agreement, its
rights and obligations with respect to the acute-care indications, or its
rights and obligations for the chronic-care indications. Glaxo has the
right to terminate the collaboration agreement for breach of the
agreement by us or for safety related reasons as defined in the
collaboration agreement. Glaxo's rights to terminate the acute-care
indications or the chronic-care indications are generally triggered by
failure to achieve certain milestones within certain timeframes, adverse
product developments or adverse regulatory events. If Glaxo terminates
the collaboration agreement our business will be adversely affected.
Factors that could negatively affect the success of our efforts to
develop and commercialize alvimopan and our performance and financial
results are described more fully in the risk factors that follow. These
risks include those associated with the conduct or results of non-clinical
studies and clinical trials, the regulatory approval process, the
manufacturing and the marketing and sale of alvimopan.
OUR STOCK PRICE MAY BE VOLATILE, AND YOUR INVESTMENT IN OUR STOCK COULD
DECLINE IN VALUE. WE MAY BECOME INVOLVED IN SECURITIES CLASS ACTION
LITIGATION.
The market price for our common stock has been highly volatile and may
continue to be highly volatile in the future. The market price for our
common stock is highly dependent on the results of our clinical trials,
in particular our Phase 3 clinical trials of alvimopan one of which has
completed accrual and results of which are expected to be announced in
the near term and three more that are expected to complete accrual over
the next several quarters. There can be no assurance that accrual will
be completed within the expected timeframe or that the results of any of
these Phase 3 clinical trials will be positive. Failure of these results
to be positive would adversely impact the market price of our common stock.
10
The following factors, in addition to the alvimopan risk factor above and
other risk factors described in this document, may have a significant
impact on the market price of our common stock:
- developments concerning our collaborations, including our
collaboration with Glaxo;
- announcements of technological innovations or new commercial
products by our competitors or us;
- developments concerning proprietary rights, including
patents;
- publicity regarding actual or potential medical results
relating to products under development by our competitors or
us;
- regulatory developments in the United States and foreign
countries;
- litigation;
- economic and other external factors or other disasters or
crises;
- period-to-period fluctuations in our financial results; and
- the general performance of the equity markets and in
particular, the biotechnology sector of the equity markets.
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has
often been brought against that company. We may become involved in this
type of litigation in the future. Litigation of this type is often
extremely expensive and diverts management's attention and resources.
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR A PERIOD LONGER THAN
ANTICIPATED, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS.
We believe our existing cash, cash equivalents and short-term investments
as of September 30, 2002 of approximately $163.7 million and anticipated
cash flow from existing collaborations will be sufficient to meet our
currently estimated operating and investing requirements into early 2004.
We have generated operating losses since we began operations in November
1994 and we will need additional funds that may not be available in the
future. We have no products that have generated any revenue, and as of
September 30, 2002, we have incurred a cumulative net loss of
approximately $143.1 million. Even if we succeed in developing a
commercial product, we expect to incur substantial losses for at least
the next several years and expect that these losses will increase as we
expand our research and development and sales and marketing activities.
If we fail to obtain the capital necessary to fund our operations, we
will be forced to curtail our operations and we will be unable to develop
products successfully. We do not know whether additional financing will
be available when needed, or that, if available, we will obtain financing
on terms favorable to our stockholders or to us. If adequate funds are
not available on acceptable terms, our ability to fund our operations,
products or technologies or otherwise respond to competitive pressures
could be significantly delayed or limited, and we may have to reduce or
cease our operations. If additional funds become available there can be
no assurance that we can predict the time and costs required to complete
development programs or that we will not substantially exceed our
budgets.
BECAUSE OUR PRODUCT CANDIDATES ARE IN DEVELOPMENT, THERE IS A HIGH RISK
THAT FURTHER DEVELOPMENT AND TESTING WILL DEMONSTRATE THAT OUR PRODUCT
CANDIDATES ARE NOT SUITABLE FOR COMMERCIALIZATION.
We have no products that have received regulatory approval for commercial
sale. All of our product candidates, including alvimopan, are in
development, and we face the substantial risks of failure inherent in
developing drugs based on new technologies. Our product candidates must
satisfy rigorous standards of safety and efficacy before the FDA and
foreign regulatory authorities will approve them for commercial use. To
satisfy these standards, we will need to conduct significant additional
research, animal testing, or preclinical testing, and human testing, or
clinical trials.
Preclinical testing and clinical development are long, expensive and
uncertain processes. Failure can occur at any stage of testing. Success
in preclinical testing and early clinical trials does not ensure that
later clinical trials will be successful. Based on results at any stage
of clinical trials, we may decide to discontinue development of our
product candidates.
WE MAY SUFFER SIGNIFICANT SETBACKS IN ADVANCED CLINICAL TRIALS, EVEN
AFTER PROMISING RESULTS IN EARLIER TRIALS.
We do not know whether our existing or any future clinical trials will
demonstrate sufficient safety and efficacy necessary to obtain the
requisite regulatory approvals or will result in marketable products.
Our failure to adequately demonstrate the safety
11
and efficacy of our product candidates will prevent receipt of FDA and
foreign regulatory approvals and, ultimately, commercialization of our
product candidates. Regulatory authorities may refuse or delay approval
as a result of many other factors, including changes in regulatory policy
during the period of product development and regulatory interpretations of
clinical benefit and clinical risk. Regulatory clearance that we may
receive for a product candidate will be limited to those diseases and
conditions for which we have demonstrated in clinical trials that the
product candidate is safe and efficacious. Preclinical and clinical
trials of our product candidates, including alvimopan, may not display
the safety and efficacy necessary to obtain regulatory approvals. Drug
development is a highly uncertain process. Pharmaceutical and
biotechnology companies have suffered significant setbacks in advanced
clinical trials, even after experiencing promising results in earlier
trials. Data obtained from non-clinical and clinical tests are
susceptible to varying interpretations which may delay, limit or prevent
regulatory approval.
Product candidates that appear to be promising at earlier stages of
development may not reach the market or be marketed successfully for a
number of reasons, including, but not limited to, the following:
- researchers may find during later preclinical testing or
clinical trials that the product candidate is ineffective or
has harmful side effects;
- variability in the number and types of patients available for
clinical trials;
- new information about the mechanisms by which a drug
candidate works may adversely affect its development;
- one or more competing products may be approved for the same
or a similar disease condition, raising the hurdles to
approval of the product candidate;
- the product candidate may fail to receive necessary
regulatory approval or clearance; or
..
- competitors may market equivalent or superior products.
IF WE ARE UNABLE TO CONTRACT WITH THIRD PARTIES TO MANUFACTURE OUR
PRODUCTS IN SUFFICIENT QUANTITIES, AT AN ACCEPTABLE COST AND IN
COMPLIANCE WITH REGULATORY REQUIREMENTS, WE MAY BE UNABLE TO MEET DEMAND
FOR OUR PRODUCTS AND LOSE POTENTIAL REVENUES.
Completion of our clinical trials and commercialization of our product
candidates require access to, or development of, facilities to
manufacture a sufficient supply of our product candidates. We have
depended and we continue to depend on our collaborators or third parties
for the manufacture of compounds for preclinical, clinical and commercial
purposes in their manufacturing facilities. These manufacturers are
required to adhere to FDA requirements commonly known as current Good
Manufacturing Practices (cGMPs). Under cGMPs, our manufacturers will be
required to manufacture our products and maintain records in a prescribed
manner with respect to manufacturing, testing and quality control
activities. We do not have control over compliance with these
regulations by those manufacturing our products. The failure of any
third party manufacturer to comply with applicable government regulations
could substantially harm and delay or prevent regulatory approval and
marketing of alvimopan. If these third party manufacturers fail to
perform in compliance with these regulations, we may be compelled to
delay our development efforts. Our products may be in competition with
other products for access to facilities of third parties and our
collaborators and suitable alternatives may be unavailable.
Consequently, our products may be subject to delays in manufacture if
collaborators or outside contractors give other products greater priority
than our products. For this and other reasons, our collaborators or
third parties may not be able to manufacture these products in a cost-
effective or timely manner. If the manufacture of these products does
not occur in a timely manner, the clinical trial development of our
product candidates or their submission for regulatory approval could be
delayed, and our ability to deliver products, if any are approved, on a
timely basis could be impaired or precluded. We may not be able to enter
into necessary third-party manufacturing arrangements on acceptable
terms, if at all. Our dependence upon others for the manufacture of our
products may adversely affect our future profit margin and our ability to
commercialize products, if any are approved, on a timely and competitive
basis. We do not intend to develop or acquire facilities for the
manufacture of product candidates for clinical trials or commercial
purposes in the foreseeable future.
WE HAVE LIMITED EXPERIENCE IN CONDUCTING AND MANAGING THE CLINICAL TRIALS
NECESSARY TO OBTAIN REGULATORY APPROVAL.
We have limited experience in managing clinical trials, and delays or
terminations of clinical trials we are conducting or may undertake in the
future could impair our development of product candidates. Delay or
termination of any clinical trials could result from a number of factors,
including adverse events, stringent enrollment requirements, slow rate of
enrollment, size of patient population, competition with other clinical
trials for eligible patients, geographical considerations and others. We
contract
12
with third parties to conduct our clinical trials. We are
subject to the risk that these third parties fail to perform their
obligations properly and in compliance with applicable FDA regulations.
THE CONCEPT OF DEVELOPING PERIPHERALLY RESTRICTED OPIOID ANALGESICS AND
NARCOTIC ANTAGONIST DRUGS IS RELATIVELY NEW AND MAY NOT LEAD TO
COMMERCIALLY SUCCESSFUL DRUGS.
Since there are no products on the market comparable to our product
candidates, we do not have any historical or comparative sales data to
rely upon to indicate that peripherally restricted opioid analgesic or
narcotic antagonist drugs will achieve commercial success in the
marketplace. Market acceptance of our product candidates will depend on
a number of factors, including:
- perceptions by members of the health care community,
including physicians, of the safety and efficacy of our
product candidates;
- cost-effectiveness of our product candidates relative to
competing products;
- the availability of government or third-party payor
reimbursement for our product candidates; and
- the effectiveness of marketing and distribution efforts by us
and our licensees and distributors.
Other products that are currently sold for pain management are already
recognized as safe and effective and have a history of successful sales
in the United States and elsewhere. Our new products, if any, will be
competing with drugs that have been approved by the FDA and have
demonstrated commercial success in the United States and elsewhere.
THIRD PARTIES ARE CONDUCTING OR WILL CONDUCT MANY OF OUR PRODUCT
DEVELOPMENT ACTIVITIES AND ALMOST ALL OF OUR MANUFACTURING AND MARKETING
ACTIVITIES. IF THESE THIRD PARTIES FAIL TO PERFORM THESE FUNCTIONS
SATISFACTORILY AND IN COMPLIANCE WITH REGULATORY REQUIREMENTS, OUR
PRODUCT DEVELOPMENT COULD BE DELAYED.
We rely, to a significant extent, on third parties to direct our
research, to jointly conduct some research and preclinical testing
functions and to manufacture certain of our product candidates. If any
of these third parties breaches or terminates their agreement with us or
otherwise fails to conduct their activities successfully and in a timely
manner, their actions could delay or terminate the preclinical or
clinical development or commercialization of the affected product
candidates or research programs. We cannot control the amount and timing
of resources these third parties devote to our programs or product
candidates. The failure of any third party to comply with any
governmental regulations would substantially harm our development and
marketing efforts and delay or prevent regulatory approval of our product
candidates. If these third parties fail to perform their obligations
properly and in compliance with applicable regulations, we may be
compelled to delay our development efforts, and our business could be
harmed.
BECAUSE WE ARE NOT CERTAIN WE WILL OBTAIN NECESSARY REGULATORY APPROVALS
TO MARKET OUR PRODUCTS IN THE UNITED STATES AND FOREIGN JURISDICTIONS, WE
CANNOT PREDICT WHETHER OR WHEN WE WILL BE PERMITTED TO COMMERCIALIZE ANY
OF OUR PRODUCTS.
The pharmaceutical industry is subject to stringent regulation by a wide
range of authorities. We cannot predict whether we will obtain
regulatory clearance for any product candidate we develop. We cannot
market a pharmaceutical product in the United States until it has
completed rigorous preclinical testing and clinical trials and the FDA's
extensive regulatory clearance process. Satisfaction of regulatory
requirements typically takes many years, is dependent upon the type,
complexity and novelty of the product and requires the expenditure of
substantial resources for research and development, testing,
manufacturing, quality control, labeling and promotion of drugs for human
use. Since neither the FDA nor international regulatory authorities have
approved peripherally restricted opioid analgesics or peripherally
restricted narcotic antagonist drugs for marketing, we do not know
whether our research and clinical approaches to developing new products
for the pain management market will lead to drugs that the FDA will
consider safe and effective for indicated uses.
Before receiving FDA approval to market a product, we must demonstrate
that the product candidate is safe and effective on the patient
population that will be treated. If we fail to comply with applicable
FDA or other regulatory requirements, we could be subject to criminal
prosecution, civil penalties, recall or seizure of products, total or
partial suspension of production or injunction, as well as other
regulatory actions against our product candidates or us. In addition,
the federal Controlled Substances Act imposes significant restrictions,
licensing and regulatory requirements on the manufacturing, distribution
and dispensing of controlled substances. Therefore, we must determine
whether the federal Drug Enforcement Agency would consider any product to
be a controlled substance. We believe that it is unlikely that any of
our product candidates other than those acting on the central nervous
system will be subject to regulation as controlled substances. Outside
the United States, our ability to market a
13
product is contingent upon receiving a marketing authorization from the
appropriate regulatory authorities. This foreign regulatory approval
process includes all of the risks associated with FDA clearance described
above.
WE MAY NOT OBTAIN FDA APPROVAL TO CONDUCT CLINICAL TRIALS THAT ARE
NECESSARY TO SATISFY REGULATORY REQUIREMENTS.
Clinical trials are subject to oversight by institutional review boards
and the FDA and:
- must conform with the FDA's good clinical practice
regulations;
- must meet requirements for institutional review board
oversight;
- must meet requirements for informed consent;
- are subject to continuing FDA oversight; and
- may require large numbers of test subjects.
Before commencing clinical trials in humans, we must submit and receive
approval from the FDA of an Investigational New Drug, or IND,
application. We, or the FDA, may suspend clinical trials at any time if
the subjects participating in the trials are exposed to unacceptable
health risks or if the FDA finds deficiencies in the IND application or
the conduct of the trials.
OUR BUSINESS COULD SUFFER IF WE CANNOT ATTRACT, RETAIN AND MOTIVATE
SKILLED PERSONNEL AND CULTIVATE KEY ACADEMIC COLLABORATIONS.
We are a small company, and our success depends on our continued ability
to attract, retain and motivate highly qualified management and
scientific personnel and on our ability to develop and maintain important
relationships with leading academic institutions and scientists.
Competition for personnel and academic collaborations is intense. In
particular, our product development programs depend on our ability to
attract and retain highly skilled chemists, biologists and clinical
development personnel. If we lose the services of any of these personnel
it could impede significantly the achievement of our research and
development objectives. Failure to negotiate additional acceptable
collaborations with academic institutions and scientists, or lack of
success with respect to our existing academic collaborations, may delay
our product development programs. In addition, we will need to hire
additional personnel and develop additional academic collaborations as we
continue to expand our research and development activities. We do not
know if we will be able to attract, retain or motivate personnel or
maintain relationships.
IF WE DO NOT REALIZE VALUE FROM OUR RETAINED COMMERCIALIZATION RIGHTS, WE
MAY NOT ACHIEVE OUR COMMERCIAL OBJECTIVES OR PROFITABILITY.
If we do not effectively exploit the commercialization rights we have
retained, we may not achieve profitability. In most of our corporate
collaborations, we have retained various commercialization rights for the
development and marketing of pharmaceutical products, including rights
for specific pharmaceutical indications or in specified geographical
regions. We may take advantage of these currently retained rights
directly or through collaborations with others. The value of these
rights, if any, will largely derive from our ability, directly or with
collaborators, to develop and commercialize drugs, the success of which
is also uncertain. The exploitation of retained commercialization rights
requires:
- sufficient capital;
- significant technological, product development, manufacturing
and regulatory expertise and resources; and
- marketing and sales personnel.
We may not be able to develop or obtain these resources in sufficient
quantity or at a sufficient quality level to achieve our objectives. We
will need to rely on third parties for many of these resources. Our
failure to establish and maintain relationships to obtain these services
cost-effectively could materially reduce or eliminate our ability to
realize value from our retained commercialization rights.
IF COMPETITORS DEVELOP AND MARKET PRODUCTS THAT ARE MORE EFFECTIVE, HAVE
FEWER SIDE EFFECTS, ARE LESS EXPENSIVE THAN OUR PRODUCT CANDIDATES OR
OFFER OTHER ADVANTAGES, THAT WILL REDUCE OUR COMMERCIAL OPPORTUNITIES.
Other companies have product candidates in clinical trials to treat the
conditions for which we are seeking to discover and develop product
candidates. These competing potential drugs may result in effective,
commercially successful products. Even if our collaborators or we are
successful in developing effective drugs, our products may not compete
effectively with these
14
products or other successful products. Our competitors may succeed in
developing products either that are more effective than those that we may
develop, alone or with our collaborators, or that they market before we
market any products we develop.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies that currently have drug and target discovery
efforts and universities and public and private research institutions.
In addition, companies pursuing research in different but related fields
represent substantial competition. Many of the organizations competing
with us have substantially greater capital resources, larger research and
development staffs and facilities, greater experience in drug development
and in obtaining regulatory approvals and greater manufacturing and
marketing capabilities than we do. These organizations also compete with
us to:
- attract qualified personnel;
- attract parties for acquisitions, joint ventures or other
collaborations; and
- license proprietary technology that is competitive with our
technology.
The successful entrance by our competitors into partnering arrangements
or license agreements with academic research institutions will preclude
us from pursuing those specific opportunities. Since each of these
opportunities is unique, we may not be able to find an acceptable
substitute.
COMPANIES AND UNIVERSITIES THAT HAVE LICENSED PRODUCT CANDIDATES TO US
FOR CLINICAL DEVELOPMENT AND MARKETING ARE SOPHISTICATED COMPETITORS THAT
COULD DEVELOP SIMILAR PRODUCTS TO COMPETE WITH PRODUCTS WE HOPE TO
DEVELOP.
Licensing product candidates from other companies, universities, or
individuals does not prevent them from developing non-identical but
competitive products for their own commercial purposes, nor from pursuing
patent protection in areas that are competitive with us. The individuals
who created these technologies are sophisticated scientists and business
people who may continue to do research and development and seek patent
protection in the same areas that led to the discovery of the product
candidates that they licensed to us. The development and
commercialization of successful new drugs from our research program is
likely to attract additional research by our licensors and by other
investigators who have experience in developing products for the pain
management market. By virtue of the previous research that led to the
discovery of the drugs or product candidates that they licensed to us,
these companies, universities, or individuals may be able to develop and
market competitive products in less time than might be required to
develop a product with which they have no prior experience.
IF WE BREACH OUR LICENSING AGREEMENTS, WE WILL LOSE SIGNIFICANT BENEFITS
AND MAY BE EXPOSED TO LIABILITY FOR DAMAGES.
We may breach the agreements under which we license commercialization or
development rights and may thereby lose license rights that are
important. We license rights to products and technology that are
relevant to our business, including among others our exclusive worldwide
license to alvimopan from Roberts Laboratories, Inc. and our license
agreements with Eli Lilly and Company to license intellectual property
rights relating to peripherally selective opioid antagonists. We are
subject to various obligations with respect to these agreements, including
development responsibilities, royalty and other payments and regulatory
obligations. If we fail to comply with these requirements or otherwise
breach a license agreement or contract, the licensor or other contracting
party may have the right to terminate the license or contract in whole or
in part or change the exclusive nature of the arrangement. In such event
we would not only lose all or part of the benefit of the arrangement but
also may be exposed to potential liabilities for breach in the form of
damages or other penalties.
OUR AGREEMENTS WITH OUR COLLABORATORS MAY NOT GENERATE AS MUCH REVENUE AS
WE ANTICIPATE. IF CONFLICTS ARISE BETWEEN OUR COLLABORATORS OR ADVISORS
AND US, THEY MAY ACT IN THEIR SELF-INTEREST.
In April 2002, we and Glaxo entered into a collaboration agreement for
the exclusive worldwide development and commercialization of alvimopan
for the management of postoperative ileus and opioid bowel dysfunction.
In addition, we and Glaxo agreed in the collaboration agreement to co-
develop alvimopan for a number of other indications, both acute and
chronic, which would potentially involve the use of alvimopan in outpatient
settings. In the United States, we and Glaxo will co-develop and
intend to co-promote alvimopan and share development expenses and commercial
returns, if any. We have responsibility for the development, marketing and
co-promotion strategy for acute-care indications, which will be targeted to
hospitals and surgeons. Glaxo has responsibility for the development,
marketing and co-promotion for chronic-care indications targeted to
community-based physicians. We and Glaxo are required to use commercially
reasonable efforts to develop the indications for which we and they are
respectively responsible. Upon the occurrence of certain events set forth
in the collaboration agreement, either party may terminate the collaboration
agreement with respect to the collaboration products impacted by such
events. We depend on Glaxo to provide us with substantial assistance and
additional expertise in the commercialization of alvimopan. Any
15
failure of Glaxo to diligently promote alvimopan could lead to our loss of
revenues from product sales and milestones due under our collaboration
agreement with Glaxo and would delay our achievement, if any, of
profitability. In the near term, our success will depend upon the
success of our collaboration with Glaxo to commercialize and further
develop alvimopan.
Glaxo has certain rights to terminate the collaboration agreement, its
rights and obligations with respect to the acute-care indications, or its
rights and obligations for the chronic-care indications. Glaxo has the
right to terminate the collaboration agreement for breach of the
agreement by us or for safety related reasons as defined in the
collaboration agreement. Glaxo's rights to terminate the acute-care
indications or the chronic-care indications are generally triggered by
failure to achieve certain milestones within certain timeframes, adverse
product developments or adverse regulatory events. If Glaxo terminates
the collaboration agreement, our business will be adversely affected.
In April 2000, we granted Santen Pharmaceutical Co., Ltd. an exclusive
license to develop and commercialize ADL 2-1294 for the treatment of
ophthalmic pain in all countries other than South Korea and North Korea.
Assuming defined clinical and regulatory milestones are met and sales are
achieved, Santen has full control and authority over the development,
registration and commercialization of its product candidate, subject to
its obligation to use reasonable efforts to develop, obtain regulatory
approval and market the product candidate taking into account the
prospects for the product candidate. As a result, we have no control
over the further development of this product candidate. Under our
agreement with Santen, Santen has the right in some circumstances to co-
promote products it develops, pursuant to the license we granted it with
other partners. Santen may terminate its agreement at its discretion on
a country-by-country basis or on a product-by-product basis upon written
notice to us if it determines that circumstances do not warrant further
development of the product.
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. In
addition, we have entered into, and may in the future enter into,
collaborative arrangements, including our arrangements with Glaxo and
Santen, for the marketing, sales and distribution of our product
candidates, which require, or may require, us to share profits or
revenues. We may be unable to enter into additional collaborative
licensing or other arrangements that we need to develop and commercialize
our product 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, including Glaxo and Santen, 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. 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.
Our corporate collaborators, including Glaxo, may determine not to
proceed with one or more of our drug discovery and development programs.
If one or more of our corporate collaborators reduces or terminates
funding, we will have to devote additional internal resources to product
development or scale back or terminate some development programs or seek
alternative corporate collaborators.
Our quarterly operating results may fluctuate significantly depending on
the initiation of new corporate collaboration agreements or the
termination of existing corporate collaboration agreements.
IT IS DIFFICULT AND COSTLY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS,
AND WE CANNOT ENSURE THEIR PROTECTION; WE MAY BE SUED BY OTHERS FOR
INFRINGING THEIR INTELLECTUAL PROPERTY RIGHT.
Our commercial success will depend in part on obtaining patent protection
on our products and successfully defending these patents against third
party challenges. The patent positions of pharmaceutical and
biotechnology companies can be highly uncertain and involve complex legal
and factual questions. No consistent policy regarding the breadth of
claims allowed in biotechnology patents has emerged to date.
Accordingly, we cannot predict the breadth of claims allowed in our
patents or those of our collaborators.
Others have filed and in the future are likely to file patent
applications covering products and technologies that are similar,
identical or competitive to ours. The patent office has informed us that
others may have patent applications that may overlap with a patent
application that we have in-licensed covering certain receptors. We
cannot assure you that any patent application owned by a third party will
not have priority over patent applications filed or in-licensed by us,
nor that we or our licensor will not be involved in interference
proceedings before the United States Patent and Trademark Office. Any
legal action against our collaborators or us claiming damages and seeking
to enjoin commercial activities relating to the affected products and
processes
16
could subject us to potential liability for damages and require
our collaborators or us to obtain a license to continue to manufacture or
market the affected products and processes. We cannot predict whether we
or our collaborators would prevail in any of these actions or that any
license required under any of these patents would be made available on
commercially acceptable terms, if at all. There has been, and we believe
that there will continue to be, significant litigation in the industry
regarding patent and other intellectual property rights. If we become
involved in litigation, it could consume a substantial portion of our
managerial and financial resources.
Although no third party has asserted a claim of infringement against us,
others may hold proprietary rights that will prevent our product
candidates from being marketed. We are aware of an issued patent that
has expired for non-payment of a maintenance fee and that relates to
methods of treatment of symptoms associated with the cold and flu. It is
possible that the patent could be reinstated and that a claim could be
asserted that certain ophthalmic uses of our ADL 2-1294 product candidate
infringe this issued patent. Based on our investigations to date,
including discussions with outside legal counsel, we do not believe that
we infringe any valid and enforceable claims of the patent, although we
have not received an opinion of patent counsel to that effect. If this
patent is reinstated and is found to contain claims infringed by the use
of our ADL 2-1294 product candidate and such claim is are ultimately
found valid and enforceable, we may not be able to obtain a license at a
reasonable cost, or at all. In that event, we would have to use an
alternative method of delivery for ophthalmic products based on ADL 2-
1294, which could materially reduce or eliminate the commercial viability
of our ADL 2-l294 for ophthalmic uses.
We rely on trade secrets to protect technology in cases when we believe
patent protection is not appropriate or obtainable. However, trade
secrets are difficult to protect. While we require employees, academic
collaborators and consultants to enter into confidentiality agreements,
we may not be able to protect adequately our trade secrets or other
proprietary information. Our research collaborators and scientific
advisors have rights to publish data and information in which we have
rights. If we cannot maintain the confidentiality of our technology and
other confidential information in connection with our collaborations, our
ability to receive patent protection or protect our proprietary
information may be imperiled.
Others may hold proprietary rights that will prevent our product
candidates from being marketed. We are a party to various license
agreements that give us rights to use specified technologies in our
research and development processes. If we are not able to continue to
license this technology on commercially reasonable terms, our product
development and research may be delayed. In addition, we generally do
not control the prosecution of in-licensed technology, and accordingly
are unable to exercise the same degree of control over this intellectual
property as we exercise over our internally developed technology. For
example, the University of California, San Diego is prosecuting the
patent for additional claims regarding the use of ADL 2-1294 for the
treatment of inflammatory pain.
IF WE ARE UNABLE TO CREATE SALES, MARKETING AND DISTRIBUTION CAPABILITIES
OR ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PERFORM THESE FUNCTIONS,
WE WILL NOT BE ABLE TO COMMERCIALIZE PRODUCTS.
We currently have no sales, distribution capability and limited marketing
capabilities. In order to commercialize products, if any are approved,
we must internally develop sales, marketing and distribution capabilities
or make arrangements with third parties to perform these services. If we
obtain FDA approval, we intend to market some products directly and rely
on relationships with one or more pharmaceutical companies with
established distribution systems and direct sales forces to market other
products. To market any of our products directly, we must develop a
marketing and sales force with technical expertise and with supporting
distribution capabilities. We may not be able to establish in-house
sales and distribution capabilities or relationships with third parties.
To the extent that we enter into co-promotion or other licensing
arrangements, our product revenues are likely to be lower than if we
directly marketed and sold our products, and any revenues we receive will
depend upon the efforts of third parties, which efforts may not be
successful.
OUR ABILITY TO GENERATE REVENUES WILL BE DIMINISHED IF WE FAIL TO OBTAIN
ACCEPTABLE PRICES OR AN ADEQUATE LEVEL OF REIMBURSEMENT FOR OUR PRODUCTS
FROM THIRD-PARTY PAYORS.
The continuing efforts of government and third-party payors to contain or
reduce the costs of health care through various means will limit our
commercial opportunity. For example, in some foreign markets, pricing
and profitability of prescription pharmaceuticals are subject to
government control. In the United States, we expect that there will
continue to be a number of federal and state proposals to implement
similar government control. In addition, increasing emphasis on managed
care in the United States will continue to put pressure on the pricing of
pharmaceutical products. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. Cost
control initiatives could decrease the price that any of our
collaborators or we would receive for any products in the future and may
impede patients' ability to obtain insurance. Further, cost control
initiatives could adversely affect our collaborators' ability to
commercialize our products, and our ability to realize royalties from
this commercialization.
17
Our ability to commercialize pharmaceutical products, alone or with
collaborators, may depend in part on the extent to which reimbursement
for the products will be available from:
- government and health administration authorities;
- private health insurers; and
- other third-party payors.
IF WE ENGAGE IN AN ACQUISITION OR BUSINESS COMBINATION, WE WILL INCUR A
VARIETY OF RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS OPERATIONS OR
OUR STOCKHOLDERS.
From time to time we have considered, and we will continue to consider in
the future, if and when any appropriate opportunities become available,
strategic business initiatives intended to further the development of our
business. These initiatives may include acquiring businesses,
technologies or products or entering into a business combination with
another company. If we do pursue such a strategy, we could, among other
things:
- issue equity securities that would dilute our stockholders'
percentage ownership;
- incur substantial debt that may place strains on our
operations;
- spend substantial operational, financial and management
resources in integrating new businesses, technologies and
products;
- assume substantial actual or contingent liabilities; or
- merge with or otherwise enter into a business combination
with, another company in which our stockholders would receive
cash or shares of the other company or a combination of both
on terms that our stockholders may not deem desirable.
We are not in a position to predict what, if any, collaborations,
alliances or transactions may result or how, when or if they will have a
material effect on us or the development of our business.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY
INCUR SUBSTANTIAL LIABILITIES AND MAY HAVE TO LIMIT OR CEASE
COMMERCIALIZATION OF OUR PRODUCTS.
The testing and marketing of medical products entail an inherent risk of
product liability. If we cannot successfully defend ourselves against
product liability claims, we may incur substantial liabilities or be
required to limit or cease commercialization of our products. Our
inability to obtain sufficient product liability insurance at an
acceptable cost to protect against potential product liability claims
could prevent or inhibit the commercialization of pharmaceutical products
we develop, alone or with corporate collaborators. We currently carry
clinical trial insurance but do not carry product liability insurance.
Our corporate collaborators or we may not be able to obtain insurance at
a reasonable cost, if at all. While under various circumstances our
corporate collaborators will indemnify us against losses, indemnification
may not be available or adequate should any claim arise.
IF WE USE BIOLOGICAL AND HAZARDOUS MATERIALS IN A MANNER THAT CAUSES
INJURY OR VIOLATES LAWS, WE MAY BE LIABLE FOR DAMAGES.
Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials,
chemicals and various radioactive compounds. We cannot completely
eliminate the risk of accidental contamination or injury from the use,
storage, handling or disposal of these materials. In the event of
contamination or injury, we could be held liable for damages that result,
and any liability could exceed our resources. We are subject to federal,
state and local laws and regulations governing the use, storage, handling
and disposal of these materials and specified waste products. The cost
of compliance with these laws and regulations could be significant.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
MAY MAKE AN ACQUISITION OF US, WHICH MAY BE BENEFICIAL TO OUR
STOCKHOLDERS, MORE DIFFICULT.
Provisions of our amended and restated certificate of incorporation and
restated by-laws, as well as provisions of Delaware law, could make it
more difficult for a third party to acquire us, even if doing so would
benefit our stockholders
Our amended and restated certificate of incorporation provides for our
Board of Directors to be divided into three classes, with the term of one
such class expiring each year, and we have eliminated the ability of our
stockholders to consent in writing to the taking of any action pursuant
to Section 228 of the Delaware General Corporation Law.
18
In addition, we adopted a shareholder rights plan designed to encourage
parties seeking to acquire us to negotiate with and seek the approval of
our Board of Directors.
In addition, under our collaboration agreement with Glaxo, Glaxo has
certain limitations on its ability to acquire our securities.
Critical Accounting Policies and Estimates
During 2001, the staff of the United States Securities and Exchange
Commission released cautionary advice regarding critical accounting
policies and practices. The release defines critical policies and
practices as items that are most important to the portrayal of a
company's financial condition and results, and require management's most
difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effects of matters that are inherently
uncertain. As we progress in our development and move closer to product
approval and commercial operation, we may face additional issues which
require increased levels of management estimation and complex judgment.
The following are practices that could be considered to fall within the
realm of this cautionary advice:
Stock Compensation - Our practice of applying APB Opinion No. 25 to
account for our stock option plan rather than SFAS No. 123. If we adopted
the changes required by SFAS No. 123, the loss for the year ended
December 31, 2001 would have increased by approximately $800,000.
Clinical Trial Expense Recognition - We enter into contracts with third
party vendors to perform clinical trials and to manufacture product
candidates. We recognize expenses related to the contracts based on the
percentage of completion method to match the period in which they are
incurring. These contracts can be terminated by either party. The
percentage of completion is based upon our estimates of the percentage of
the contract completed to date compared to the total contract. Factors
considered may include patient enrollment to date or patient visits,
among others.
Collaborative Arrangement Revenues - We defer and recognize up-front non-
refundable fees over the performance period in situations where
continuing involvement exists. Substantive milestone fees are recorded
when the event related to the milestone is achieved. Reimbursement of
third party costs reimbursable under the terms of collaborative
agreements are recorded as revenue in the period the revenue is earned
and the expense incurred.
Liquidity and Capital Resources
We have experienced negative operating cash flows since our inception,
except for the second quarter of 2002, and we have funded our operations
primarily from the proceeds received from the sale of our common stock,
our mandatorily redeemable convertible preferred stock and license
payments. Cash, cash equivalents and short-term investments were
approximately $163.7 million at September 30, 2002, and approximately
$156.4 million at December 31, 2001, representing 91.1% and 95.3% of our
total assets, respectively. We invest excess cash in highly liquid
investment-grade marketable securities, including corporate and United
States government agency bonds.
We believe that our current financial resources and sources of liquidity
are adequate to fund operations into early 2004 based on a level of
research and development, marketing and administrative activities
necessary to achieve our short-term objectives.
The following is a summary of selected cash flow information for the nine
months ended September 30, 2002 and 2001:
Nine Months Ended September 30,
2002 2001
---- ----
Net loss $(48,477,023) $(30,768,549)
Adjustments for non-cash operating
items 7,812,537 4,955,550
---------- ----------
Net cash operating loss (40,664,486) (25,812,999)
Net change in assets and liabilities 49,551,968 4,003,695
---------- ----------
Net cash provided by (used in)
operating activities 8,887,482 (21,809,304)
---------- ----------
Net cash used in investing
activities (6,383,820) (31,607,175)
---------- ----------
Net cash provided by financing
activities 207,899 58,917,766
---------- ----------
19
Net Cash Provided By (Used In) Operating Activities
Operating Cash Inflows
Our operating cash inflows for 2002 have primarily been derived from a
non-recurring, non-refundable and non-creditable signing fee of $50.0
million with Glaxo, a reimbursement of approximately $8.8 million for
shared costs with Glaxo, grant and license revenues, and interest income
on cash equivalents and short-term investments.
Operating Cash Outflows
Our operating cash outflows for 2002 have continued to be primarily used
for research and development expenditures associated with our product
candidates, in particular including the costs of manufacturing the
clinical trial materials for alvimopan, and for the compensation of our
employees.
Operating Cash Flow Requirements Outlook
We expect to continue to use cash, cash equivalents and short-term
investments to fund operating activities. Research and development
expenditures, including clinical trial expenditures, are expected to
increase as we continue to develop product candidates. We expect that our
operating expenses will also increase in future periods as a result of
the manufacturing scale-up and in preparation for potential
commercialization of our product candidates, assuming the success of our
clinical trials and that we receive the necessary regulatory approvals.
In our collaboration agreement with Glaxo, we share proportionately with
Glaxo, these third party development and promotional expenses. We may
also receive milestone payments if the milestone events are achieved.
We paid Roberts Laboratories, Inc., which merged with Shire
Pharmaceutical, plc, a total of $600,000 through September 30, 2002 for
the exclusive worldwide license to alvimopan. Our license agreement with
Roberts requires us to make payments to Roberts if and when two milestone
events are achieved. Roberts licensed the rights to alvimopan from Eli
Lilly and Company, and Eli Lilly consented to the assignment by Roberts
to us of Roberts' rights and obligations. Under the agreement with Eli
Lilly, we will make a milestone payment to Eli Lilly if and when we
receive FDA approval to sell alvimopan. We will be required to pay
royalties to Eli Lilly and Roberts on any sales of alvimopan.
In August 2002, we paid Eli Lilly and Company a total of $4.0 million for
an exclusive license to six issued U.S. patents, related foreign
equivalents and know-how relating to peripherally selective opioid
antagonists. Under the agreement we will be obligated to pay Eli Lilly
an additional $4.0 million upon acceptance of the first application for
marketing authorization for alvimopan, if achieved. We will be subject
to additional clinical and regulatory milestone payments on achievements
of milestones, if any, identified in the agreement and royalty payments
to Eli Lilly on sales, if any, of new products utilizing the licensed
technology.
The potential initiation of commercial activities will require the hiring
of additional staff. Preparation for sales and marketing activities will
require hiring and training of a sales and marketing staff. As of
September 30, 2002, we may be required to pay up to $6.0 million upon
the occurrence of certain future clinical and regulatory events under
various agreements in addition to the $4.0 million we may be required to
pay Eli Lilly upon acceptance of the first application for marketing
authorization for alvimopan. We also intend to hire additional research
and development, clinical and administrative staff.
Net Cash Used In Investing Activities
Our capital expenditures for the nine months ended September 30, 2002 and
2001, were $1,347,528 and $2,459,386 respectively and were primarily for
the purchase of laboratory equipment, furniture and fixtures, office
equipment and leasehold improvements in order to further expand our
product development capabilities.
Investing Requirements Outlook
We expect to require additional investments in leasehold improvements and
laboratory and office equipment to support the continued expansion of our
development and potential commercialization activities.
Net Cash Used In Financing Activities
During the first nine months of 2002 and 2001, we received $223,223 and
$124,068, respectively, from stock option exercises.
20
We received additional financing for the payment of insurance premiums of
$176,175 and $88,033 in the nine months ended September 30, 2002 and 2001,
respectively. In addition, $346,950 and $450,851 was used to repay
insurance loan obligations during the nine months ended September 30,
2002 and 2001, respectively. Payments on notes receivable for purchase of
stock options was $204,985 and $253,510 for the nine months ended
September 30, 2002 and 2001, respectively. Additionally, interest
converted to principal on these notes was $49,534 and $69,339 for the
nine months ended September 30, 2002 and 2001, respectively.
Financing Requirements Outlook
We do not expect sales, if any, to generate cash flow in excess of
operating expenses for at least the next several years, if at all. We
expect to continue to use cash, cash equivalents and short-term
investments to fund operating and investing activities. We believe that
our existing cash, cash equivalents and short-term investments of
approximately $163.7 million as of September 30, 2002 will be sufficient
to meet our currently estimated operating and investing requirements into
early 2004. Prior to exhausting our current cash, we will need to raise
additional funds to finance our operating activities. If we do not raise
additional cash we may be required to curtail or limit certain marketing
support and research and development activities. A curtailment of certain
activities would delay development of certain of our products. We may
seek to obtain additional funds through equity or debt financings, or
strategic alliances with third parties either alone or in combination
with equity. These financings could result in substantial dilution to the
holders of our Common Stock. Any such required financing may not be
available in amounts or on terms acceptable to us.
The extent and timing of proceeds from future exercises of stock options,
if any, are primarily dependent upon the market price of our common
stock, as well as the exercise prices and expiration dates of the stock
options.
Results of Operations
This section should be read in conjunction with the more detailed
discussion under "Liquidity and Capital Resources."
Three Months Ended September 30, 2002 and 2001
Grant, contract, license and milestone revenues. Our grant and license
revenues were $9,068,054 and $31,441 for the three months ended September
30, 2002 and 2001, respectively. Revenues recognized for the three months
ended September 30, 2002 consisted of: (a) $7,916,418 for the
reimbursement of shared expenses with Glaxo in connection with a
collaboration agreement executed in April 2002; (b) $1,041,668 which
represents the quarterly amortization of the $50,000,000 signing fee
received from Glaxo; (c) $6,579 which is a portion of the $500,000
license fee received from Santen on signing an agreement with Santen in
April 2000 and (d) $103,389 from a portion of the Small Business
Innovation Research (SBIR) grants awarded to us by the National
Institutes of Health (NIH) in September 2001. Revenues recognized for the
three months ended September 30, 2001 consisted of: $6,579 which was a
portion of the $500,000 license fee received from an affiliate of
GlaxoSmithKline on signing an agreement with that affiliate in July 1999,
$6,579 which represents the quarterly amortization of the $500,000
license fee received from Santen Pharmaceutical Co., Ltd. on signing that
agreement in April 2000 and a patent cost reimbursement from Santen of
$18,283. The license fee revenues related to Santen are being recognized
over the remaining life of the patents that were licensed in those
collaborations.
In connection with the collaboration agreement with Glaxo for the
development of products in the United States, we recorded in the third
quarter as contract reimbursement revenue the expected reimbursement of
the excess of the out-of-pocket research and development and marketing
expenses that we incurred over our proportionate share of the total of
such expenses incurred by both companies. The contract reimbursement
revenue covered the period from July 1, 2002 to September 30, 2002. The
amounts attributable to the quarter ended September 30, 2002 and the
allocation of the amounts between research and development and marketing
expenses are as follows:
Three months ended Nine months ended
Contract reimbursement revenue September 30, 2002 September 30, 2002
- ------------------------------ ------------------ ------------------
Research and development $7,716,782 $15,948,024
Marketing 199,636 795,929
--------- ----------
Total $7,916,418 $16,743,953
--------- ----------
This $7,916,418 has been recorded as an account receivable, and although
we expect to collect this receivable, it is subject to review,
verification and payment by Glaxo. In September 2002, we received
$8,827,535 from Glaxo for reimbursement of shared research and
development and marketing expenses for the first half of 2002.
21
Research and development expenses. Our research and development expenses
consist primarily of salaries and other personnel-related expense, costs
of clinical trials, costs to manufacture product candidates, stock-based
compensation and other research expense. Research and development
expenses increased to approximately $23.4 million for the three months
ended September 30, 2002 from approximately $11.4 million for the three
months ended September 30, 2001. This increase was primarily due to the
higher costs of developing our product candidates as well as higher
personnel costs resulting from increased staffing levels and a license
fee payment of $4.0 million to Eli Lilly and Company. In the three months
ended September 30, 2002, the costs of conducting Phase 1, Phase 2 and
Phase 3 clinical trials and the costs of manufacturing the clinical trial
materials for alvimopan increased by approximately $7.7 million compared
to the same period in 2001. Personnel costs increased by approximately
$0.8 million in the three months ended September 30, 2002 compared to the
same period in 2001. Offsetting these increases was a decrease of
approximately $0.6 million in other expenses, including database
services, office rent and regulatory in the three months ended September
30, 2002 compared to the same period in 2001.
Marketing, general and administrative expenses. Our marketing, general
and administrative expenses increased to approximately $7.0 million for
the three months ended September 30, 2002 from approximately $4.5 million
for the three months ended September 30, 2001, an increase of
approximately $2.5 million. The increase was primarily due to
approximately $3.6 million of higher payroll expenses related to non-cash
charges of approximately $2.6 million in connection with the acceleration
of the vesting of certain stock options and compensation expense of
approximately $0.8 million as a result of payments to be made under an
employment agreement and a separation agreement as well as additional
personnel expenses, a decrease of approximately $0.9 million in marketing
expenses, a decrease in consulting fees of approximately $0.3 million and
a minor increase in other expenses including insurance, office rent and
office expense.
Net interest income (expense). Our interest income decreased to
approximately $1.1 million for the three months ended September 30, 2002
from approximately $2.5 million for the same period in 2001. Our interest
income decreased because of a reduction in our cash balance resulting
from increased operating expenses and lower interest rates in the third
quarter of 2002. Our interest expense represents interest incurred on the
financing of insurance premiums.
Net loss. Our net loss for the three months ended September 30, 2002 and
2001 was approximately $20.2 million and $13.9 million, respectively.
The increase in net loss reflects higher costs associated with the
expansion of Phase 3 clinical development, higher costs of clinical trial
materials for alvimopan and non-cash charges in connection with the
acceleration of the vesting of certain stock options. We expect to
continue to incur substantial losses in future periods.
Nine Months Ended September 30, 2002 and 2001
Grant, contract, license and milestone revenues. Our grant and license
revenues were $19,843,610 and $593,657 for the nine months ended
September 30, 2002 and 2001, respectively. Revenues recognized for the
nine months ended September 30, 2002 consisted of: (a) $16,743,953 for
the reimbursement of shared expenses with Glaxo; (b) $1,909,724 which is
a portion of the $50,000,000 signing fee received from Glaxo; (c) a
patent agreement fee of $200,000 from Toray Industries, Inc.; (d) a
milestone payment of $250,000 from Santen; (e) $19,737 which is a portion
of the $500,000 license fee received from Santen on signing an agreement
with Santen in April 2000 and (f) $720,196 from a portion of the Small
Business Innovation Research (SBIR) grants awarded to us by the National
Institutes of Health (NIH) in September 2001. Revenues recognized for the
nine months ended September 30, 2001 consisted of a milestone payment of
$500,000 from an affiliate of GlaxoSmithKline, $19,737 which was a
portion of the $500,000 license fee received from the same affiliate of
GlaxoSmithKline on signing an agreement with that affiliate in July 1999,
and $19,737 which is a portion of the $500,000 license fee received from
Santen on signing that agreement in April 2000 and a patent cost
reimbursement from Santen of $54,183. The license fee revenues related to
Santen are being recognized over the remaining life of the patents that
were licensed in those collaborations.
In connection with the collaboration agreement with Glaxo for the
development of products in the United States, we recorded in the third
quarter as contract reimbursement revenue the expected reimbursement of
the excess of the out-of-pocket research and development and marketing
expenses that we incurred over our proportionate share of the total of
such expenses incurred by both companies. The contract reimbursement
revenue covered the period from January 1, 2002 to September 30, 2002.
The amounts attributable to the quarter ended September 30, 2002 and the
allocation of the amounts between research and development and marketing
expenses are as follows:
Three months ended Nine months ended
Contract reimbursement revenue September 30, 2002 September 30, 2002
- ------------------------------ ------------------ ------------------
Research and development $7,716,782 $15,948,024
Marketing 199,636 795,929
--------- ----------
Total $7,916,418 $16,743,953
--------- ----------
22
This $7,916,418 has been recorded as an account receivable, and although
we expect to collect this receivable, it is subject to review,
verification and payment by Glaxo. In September 2002, we received
$8,827,535 from Glaxo for reimbursement of shared research and
development and marketing expenses for the first half of 2002.
Research and development expenses. Our research and development expenses
consist primarily of salaries and other personnel-related expense, costs
of clinical trials, costs to manufacture drug candidates, stock-based
compensation and other research expense. Research and development
expenses increased to approximately $54.8 million for the nine months
ended September 30, 2002 from approximately $26.6 million for the nine
months ended September 30, 2001. This increase was primarily due to the
higher costs of developing our product candidates, higher personnel costs
resulting from increased staffing levels and a license fee payment of
$4.0 million to Eli Lilly and Company. In the nine months ended September
30, 2002, the costs of conducting Phase 1, Phase 2 and Phase 3 clinical
trials and the costs of manufacturing the clinical trial materials for
alvimopan increased by approximately $20.7 million compared to the same
period in 2001. Personnel costs increased by approximately $2.7 million
in the nine months ended September 30, 2002 compared to the same period
in 2001. Approximately $0.9 million was an increase in other expenses,
including consulting, travel and depreciation, in the nine months ended
September 30, 2002 compared to the same period in 2001.
Marketing, general and administrative expenses. Our marketing, general
and administrative expenses increased to approximately $17.0 million for
the nine months ended September 30, 2002 from approximately $10.6 million
in the nine months ended September 30, 2001, an increase of approximately
$6.4 million. The increase was primarily due to approximately $4.6
million of higher payroll expenses related to non-cash charges of
approximately $2.6 million in connection with the acceleration of the
vesting of certain stock options and compensation expense of
approximately $0.8 million as a result of payments to be made under an
employment agreement and a separation agreement as well as additional
personnel expenses, approximately $0.8 million increase of corporate legal
fees, a decrease of approximately $0.5 million in marketing expenses,
approximately $1.3 million increase for consulting fees associated with
the collaboration agreement with Glaxo and a minor increase in other
expenses including office expense and taxes.
Net interest income (expense). Our interest income decreased to
approximately $3.5 million for the nine months ended September 30, 2002
from approximately $6.4 million for the same period in 2001. Even though
we received a $50.0 million signing fee from Glaxo in April 2002, our
interest income decreased because of a reduction in our cash balance
resulting from increased operating expenses and lower interest rates in
the first nine months of 2002. Our interest expense represents interest
incurred on the financing of insurance premiums.
Net loss. Our net loss for the nine months ended September 30, 2002 and
2001 was approximately $48.5 million and $30.8 million, respectively. The
increase in net loss reflects higher costs associated with the expansion
of Phase 3 clinical development, higher costs of clinical trial materials
for alvimopan and non-cash charges in connection with the acceleration of
the vesting of certain stock options. We expect to continue to incur
substantial losses in future periods.
Recently Issued Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No.
146 addresses significant issues regarding the recognition, measurement,
and reporting of costs associated with exit and disposal activities,
including restructuring activities. SFAS No. 146 also addresses
recognition of certain costs related to terminating a contract that is
not a capital lease, costs to consolidate facilities or relocate
employees, and termination of benefits provided to employees that are
involuntarily terminated under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The
Company has not yet determined the impact on its financial position or
results of operations from adopting SFAS No. 146.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A substantial portion of our assets are investment grade debt
instruments, such as direct obligations of the U.S. Treasury and
corporate securities, including commercial paper and corporate debt
instruments. The market value of such investments fluctuates with current
market interest rates. In general, as rates increase, the market value of
a debt instrument would be expected to decrease. The opposite is also
true. To minimize such market risk, we have in the past and, to the
extent possible, will continue in the future to hold such debt
instruments to maturity, at which time the debt instruments will be
redeemed at their stated or face value. Due to the short duration and
nature of these instruments, we do not believe that we have a material
exposure to interest rate risk related to our investment portfolio. Our
cash, cash equivalents and investment portfolio at September 30, 2002 was
$163.7 million and the weighted average interest rate of that portfolio
was approximately 2.75%.
ITEM 4. CONTROLS AND PROCEDURES
For the period ending September 30, 2002 (the "Evaluation Date"), we
carried out an evaluation, under the supervision and with the
participation of our management, including our President and Chief
Executive Officer and our Senior Vice President and Chief Financial
Officer (the principal finance and accounting officer), of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rules 13a-14 and 15d-14 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based upon this
evaluation, our President and Chief Executive Officer and our Senior Vice
President and Chief Financial Officer concluded that, as of September 30,
2002, our disclosure controls and procedures were adequate to ensure that
information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of
the Commission.
Additionally, our President and Chief Executive Officer and Senior Vice
President and Chief Financial Officer determined, as of September 30,
2002, that there were no significant changes in our internal controls or
in other factors that could significantly affect our internal controls
subsequent to the date of their evaluation.
24
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K:
(a) The following exhibits are filed as part of this Report on Form 10-Q:
10.1 License Agreement between Adolor Corporation and Eli Lilly
and Company dated August 8, 2002.*
10.2 Adolor Corporation Executive Severance Pay Program .**
- ----------
* Confidential treatment requested.
** A management contract or compensatory plan or agreement.
(b) We filed the following Current Reports on Form 8-K during the quarter
ended September 30, 2002:
(1) We filed a Current Report on Form 8-K on September 30, 2002 to
report, pursuant to Item 5, that John J. Farrar, Ph.D. had
resigned as a member of the Board of Directors of the Company
effective as of September 30, 2002.
(2) We filed a Current Report on Form 8-K on August 13, 2002 to
report, pursuant to Item 9, that Certifications of our Chief
Executive Officer and Chief Financial Officer relating to our
Report on Form 10-Q for the quarterly period ended June 30, 2002
required pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, were attached.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADOLOR CORPORATION
Date: November 1, 2002 By: /s/ Bruce A. Peacock
--------------------
Bruce A. Peacock
President and Chief Executive Officer
By: /s/ Peter J. Schied
-------------------
Peter J. Schied
Senior Vice President and
Chief Financial Officer
26
CERTIFICATION
I, Bruce A. Peacock, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Adolor
Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002
/s/ Bruce A. Peacock
- --------------------
Bruce A. Peacock
Chief Executive Officer
27
CERTIFICATION
I, Peter J. Schied, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Adolor
Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002
/s/ Peter J. Schied
- -------------------
Peter J. Schied
Chief Financial Officer
28
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES OXLEY ACT OF 2002
In connection with the Quarterly Report of Adolor Corporation (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Bruce A. Peacock, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of
the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Bruce A. Peacock
- --------------------
Bruce A. Peacock
Chief Executive Officer
November 1, 2002
29
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES OXLEY ACT OF 2002
In connection with the Quarterly Report of Adolor Corporation (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Peter J. Schied, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of
the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Peter J. Schied
- -------------------
Peter J. Schied
Chief Financial Officer
November 1, 2002
30