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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1996
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ to _______
Commission File No. 0-18728
INTERNEURON PHARMACEUTICALS, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 043047911
- -------- ---------
(State or other jurisdiction of (I.R.S. Employer
Identification incorporation or organization) Number)
One Ledgemont Center, 99 Hayden Avenue, Lexington, MA 02173
- ----------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 861-8444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
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 twelve (12) months (or for such shorter period that the registrant
was required to file such report(s)), and (2) has been subject to the filing
requirements for the past ninety (90) days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock (excluding preferred stock
convertible into and having voting rights on certain matters equivalent to
622,222 shares of common stock) held by non-affiliates of the registrant was
approximately $477,000,000, based on the last sales price of the Common Stock as
of December 13, 1996.
As of December 13, 1996, 41,017,875 shares of Common Stock, $.001 par value, of
the registrant were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
See Part III hereof with respect to incorporation by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 and the Exhibit Index hereto.
PART I
Statements in this Form 10-K that are not descriptions of historical
facts are forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those set forth under "Risk
Factors" and including, in particular, risks relating to the commercialization
of Redux, such as marketing, safety, regulatory, patent, product liability,
supply and other risks; uncertainties relating to clinical trials; the early
stage of products under development; risks relating to product launches and
managing growth; government regulation, patent risks, dependence on third
parties and competition.
Item 1. Business.
(a) General Development Of Business
Interneuron Pharmaceuticals, Inc. (the "Company") is a diversified
biopharmaceutical company engaged in the development and commercialization of a
portfolio of products and product candidates primarily for neurological and
behavioral disorders, including obesity, stroke, anxiety and insomnia. The
Company focuses primarily on developing products that mimic or affect
neurotransmitters, which are chemicals that carry messages between nerve cells
of the central nervous system ("CNS") and the peripheral nervous system. The
Company is also developing products and technologies, generally outside the CNS
field, through four subsidiaries (the "Subsidiaries"): Intercardia, Inc.
("Intercardia") focuses on cardiovascular disease; Progenitor, Inc.
("Progenitor") focuses on functional genomics using developmental biology;
Transcell Technologies, Inc. ("Transcell") focuses on carbohydrate-based drug
discovery; and InterNutria, Inc. ("InterNutria") focuses on dietary supplement
products.
Unless the context indicates otherwise, "Interneuron" refers to
Interneuron Pharmaceuticals, Inc., the "Company" refers to Interneuron and its
subsidiaries, Intercardia refers to Intercardia, Inc. and its subsidiaries, and
"Common Stock" refers to the common stock, $.001 par value, of Interneuron.
The Company was originally incorporated in New York in October 1988 and
in March 1990 was reincorporated in Delaware. The Company's executive offices
are located at One Ledgemont Center, 99 Hayden Avenue, Suite 340, Lexington,
Massachusetts 02173. The Company's telephone number is (617) 861-8444, and its
fax number is (617) 861-3830.
(b) Financial Information About Industry Segments
The Company operates in only one business segment.
(c) Narrative Description Of Business
- -----------------------------
Redux(TM) is a trademark of Les Laboratoires Servier, licensed to the
Company and American Home Products Corp. ("AHP"). Melzone(TM), PMS Escape(TM),
Boston Sports Supplement(TM), and Transphores(TM) are trademarks of the Company.
All other trademarks or trade names referred to in this report are the property
of their respective owners.
2
PRINCIPAL PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
INTERNEURON:
COMMERCIAL
PRODUCT INDICATION/USE STATUS* RIGHTS
- ------- -------------- ------- ------
Redux Obesity FDA approval U.S. rights only; sublicensed
(dexfenfluramine) in April 1996; to AHP; Interneuron
launched by retains co-promotion and
AHP in June 1996 manufacturing rights
and co-promoted by
Interneuron
Citicoline Stroke Second Phase 3 U.S. and Canada
trial initiated
June 1996
Pagoclone Anxiety/Panic Phase 2/3 trial Worldwide, except for
disorders initiated France, where Rhone-
November 1996 Poulenc Rorer Pharmaceuticals,
Inc. ("RPR") retains rights
Melzone Dietary Supplement Regional test launch Worldwide
(low-dose for restful sleep initiated in December
melatonin) 1996
3
SUBSIDIARIES
INTERCARDIA:
POTENTIAL COMMERCIAL
PRODUCT INDICATION STATUS* RIGHTS
- ------- ---------- ------- ------
Bucindolol Congestive Phase 3 Worldwide; twice-daily
heart failure formulation licensed
in U.S. to Astra Merck
Inc. ("Astra Merck")
Antioxidant Diseases Preclinical Worldwide
small molecules associated with
excess oxygen
free radicals
PROGENITOR:
RESEARCH AND
DEVELOPMENT POTENTIAL PRODUCT/ COMMERCIAL
PROGRAMS APPLICATION STATUS* RIGHTS
- -------- ----------- ------- ------
Novel growth factors B219 leptin receptor genes Research Worldwide
and receptors and protein variants: drug
development targets for
blood disorders,
reproduction and obesity
del-1 blood vessel gene Research Worldwide
and del-1 protein: cancer
therapy, diagnosis and
imaging
BFU-e red blood cell growth Research Worldwide; licensed
activity for blood and certain uses to Novo Nordisk
immune system disorders
Nonviral gene delivery Nonviral gene vector: Preclinical Worldwide; licensed 11
systems treatment of solid tumors, potential constructs to Chiron
immunization Corporation ("Chiron"),
certain rights retained by
Progenitor
Stem cells Developmentally-early Research Worldwide
endothelial cells:
cardiovascular diseases,
cell and gene therapies,
functional genomic research
* "See Government Regulation"
4
TRANSCELL:
POTENTIAL COMMERCIAL
APPLICATION CORE TECHNOLOGY STATUS * RIGHTS
- ----------- --------------- -------- ------
Drug discovery Combinatorial Research Worldwide
carbohydrate
chemistry method
for synthesis and
library development
of oligosaccharides
and glycoconjugates
Transphores Compounds for Preclinical Worldwide
trans-membrane Research
drug transport
Novel non-viral Preclinical Worldwide
compounds for Research
transporting
DNA across cell
membrane
INTERNUTRIA:
COMMERCIAL
USE PRODUCT STATUS RIGHTS
- --- ------- ------ ------
Dietary supplement PMS Escape Regional Worldwide
for pre-menstrual test launch
syndrome initiated in
March 1996
Dietary supplement Boston Sports Regional Worldwide
for enhancement of Supplement test launch
athletic performance anticipated fiscal
and reduction of 1997
fatigue
* "See Government Regulation"
5
INTERNEURON PRODUCTS
Redux:
General: On April 29, 1996, the Company's first pharmaceutical product,
Redux (dexfenfluramine hydrochloride capsules) C-IV received clearance by the
Food and Drug Administration ("FDA") for marketing as a twice daily prescription
therapy to treat obesity. The approved indication is for the management of
obesity, including weight loss and maintenance of weight loss in patients on a
reduced calorie diet who have a body mass index ("BMI") of greater than or equal
to 30 kg/m2 or greater than or equal to 27 kg/m2 in the presence of other risk
factors, such as hypertension, diabetes and elevated cholesterol. Under license
and co- promotion agreements, Redux is being marketed in the U.S. by
Wyeth-Ayerst Laboratories ("Wyeth-Ayerst"), a division of AHP, and co-promoted
by the Company. BMI, a relationship between height and weight, is a widely-used
measure of obesity. For an individual with a height of five feet five inches, a
BMI of 30 corresponds to a weight of approximately 170 pounds and a BMI of 27
corresponds to a weight of approximately 162 pounds. These amounts exceed "ideal
body weight" of a person of such height by approximately 36% and 22%,
respectively.
The Company's revenues relating to Redux are derived from: (1)
royalties paid by AHP to the Company based on the net sales of Redux capsules by
AHP to distributors; (2) profit sharing between the Company and AHP on Redux
sales by the Company's sales force and financial support of the Company's sales
force provided by AHP; and (3) sales of Redux capsules to AHP.
Royalties: The Company's license agreement with AHP provides for
royalties to the Company consisting of (i) "base" royalties equal to 11.5% of
AHP's net sales, (an amount equal to the royalty required to be paid by the
Company to Les Laboratoires Servier ("Servier"), a French pharmaceutical company
from which the Company obtained U.S. rights to Redux to treat abnormal
carbohydrate craving and obesity), and (ii) "additional" royalties based on net
sales of Redux by AHP. The percentage of "additional" royalties varies depending
upon (x) the status of Redux as a scheduled or descheduled drug and (y) whether
or not the Company supplies the finished dosage formulation of Redux to AHP.
Redux is currently scheduled as a controlled substance, and the Company
manufactures the finished dosage formulation of the drug. The Company recognizes
royalty revenue and associated expense in the fiscal quarter when AHP reports to
Interneuron AHP's shipments to distributors. Accordingly, such revenue is
expected to be reported by the Company in the quarter following actual shipments
by AHP. See "Agreements - Redux Agreements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The following sets forth the currently applicable additional annual
royalties on net sales payable to the Company on an annual basis, based on (i)
the status of dexfenfluramine as a scheduled drug and (ii) the Company supplying
Redux to AHP:
First $50,000,000 5.0%
Next $100,000,000 8.0%
Over $150,000,000 10.0%
In the event the drug is descheduled, the following sets forth the
"additional" annual royalties that would then be applicable, assuming the
Company continues to supply Redux to AHP (instead of the "additional" royalties
set forth above):
First $150,000,000 8.0%
Next $50,000,000 10.0%
Over $200,000,000 11.0%
Royalty rates are subject to a 50% reduction if generic drug
competition exceeds a 10% market share in two consecutive quarters. See
"Agreements - Redux Agreements" and "Proprietary Rights - Redux."
Co-promotion, profit sharing and sales force support: Under a
three-year co-promotion agreement entered into in June 1996 with Wyeth-Ayerst
Laboratories, a division of AHP ("Wyeth-Ayerst"), and to supplement AHP's
marketing efforts, the Company has developed an approximately 30- person sales
force that is promoting Redux to selected diabetologists, endocrinologists,
bariatricians, nutritionists and weight management specialists, subject to
certain restrictions, in return for a percentage of resulting revenues less
certain expenses. Under the agreement, total payments to the Company in
connection with sales force support and profit sharing will not exceed
$10,000,000 per year. Although a portion of the Company's co-promotion costs
related to the sales force will be funded by AHP for approximately two years
from launch, the Company is incurring substantial additional costs relating to
its sales force and in connection with the promotion of Redux. See "Agreements -
Redux Agreements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
6
Manufacturing: The Company has a manufacturing agreement with
Boehringer Ingelheim Pharmaceuticals, Inc. ("Boehringer") under which Boehringer
manufactures finished dosage formulation of Redux capsules on behalf of the
Company for sale to AHP. The Company recognizes revenue from the sale of these
capsules upon acceptance by AHP, typically 45 days after shipment. The Company
is using significant amounts of working capital relating to Redux inventories
and accounts receivable. See "Manufacturing and Marketing.
Regulatory Approval, Labeling and Safety Risks: Marketing clearance of
Redux by the FDA followed a meeting of the Endocrinologic and Metabolic Advisory
Committee (the "Advisory Committee") of the FDA on November 16, 1995 at which
the Advisory Committee recommended, by a vote of 6 to 5, the approval of Redux
to treat obesity. The Advisory Committee also recommended, and the Company
agreed, that Phase 4, or post-marketing, studies be conducted and that certain
labeling guidelines be implemented. Included in the FDA-approved labeling for
Redux are references to certain risks that may be associated with
dexfenfluramine and which were highlighted during the FDA's review of the drug.
One issue relates to whether there is an association between appetite
suppressants, including dexfenfluramine, and the development of primary
pulmonary hypertension ("PPH"), a rare but serious lung disorder estimated to
occur in the general population at one to two cases per million adults per year.
An epidemiologic study conducted in Europe known as IPPHS (International Primary
Pulmonary Hypertension Study) examined risk factors for PPH and showed that
among other factors, weight reduction drugs, including dexfenfluramine, and
obesity itself were associated with a higher risk of PPH. In the final report of
IPPHS, published in the New England Journal of Medicine (August 29, 1996), the
authors re-classified and included certain previously excluded cases of PPH,
resulting in an increase in the estimated yearly occurrence of PPH for patients
taking appetite suppressants for greater than three months duration to be
between 23 and 46 cases per million patients per year. The revised labeling for
Redux discloses this revised estimate.
The FDA-approved labeling for Redux also includes discussion as to
whether dexfenfluramine is associated with certain neurochemical changes in the
brain. Certain studies conducted by third parties related to this issue purport
to show that very high doses of dexfenfluramine cause prolonged serotonin
depletion in certain animals, which some researchers believe is an indication of
neurotoxicity. The Company has presented data relating to the lack of
neurocognitive effects in patients taking Redux to the FDA and believes that, as
demonstrated in human trials, these animal studies are clinically irrelevant to
humans because of pharmacokinetic differences between animals and humans and
because of the high dosages used in the animal studies. The Company and
Wyeth-Ayerst have agreed with the FDA to conduct a Phase 4, or post marketing,
study of Redux. The Company expects that the Phase 4 study may be a double-
blind, placebo-controlled trial involving approximately 200 patients to further
evaluate long-term neurocognitive function, using standard neuro-psychological
tests, in patients taking Redux. Approximately 50% of the costs of the Phase 4
study, which is expected to be conducted over an approximately two to three year
period, is expected to be paid by AHP. See "Risk Factors - Risks Relating to
Redux."
Descheduling Petition: An earlier meeting of a joint committee of the
Advisory Committee and the Drug Abuse Advisory Committee of the FDA resulted in
a recommendation to remove, or deschedule, fenfluramine and its isomers,
including dexfenfluramine, from Schedule IV of the Controlled Substances Act.
Controls imposed upon Schedule IV substances include record-keeping procedures
for dispensing pharmacists and procedural mandates for prescribing physicians.
Although the Company's petition to deschedule fenfluramine and dexfenfluramine
is under review by several federal agencies, the Company is unable to predict
whether or when the descheduling of dexfenfluramine will occur. In addition to
marketing factors which may be influenced by dexfenfluramine's status as a
controlled substance, descheduling has and will continue to affect the timing or
availability of certain milestone and equity payments which may be received by
the Company under its agreements with AHP, as well as the royalty rate. Certain
states will deschedule the drug automatically upon federal descheduling while
other states have varying procedures for descheduling. See "Risk Factors - Risks
Relating to Redux."
Competition: Redux may be subject to substantial competition. AHP also
sells fenfluramine (under the brand name Pondimin). Although the combination is
not approved by the FDA, fenfluramine is often prescribed in combination with
phentermine to treat obesity. AHP also has an anti-obesity compound that the
Company believes is in Phase 2 clinical trials. In addition, an affiliate of
BASF AG has filed a New Drug Application ("NDA") for sibutramine, a serotonin
and noradrenaline re-uptake inhibitor, to treat obesity. Although an FDA
advisory committee recommended against approval of sibutramine, it has been
reported that the FDA subsequently issued an approvable letter for the drug.
Further, an affiliate of Roche Holdings Ltd. is developing Orlistat, a drug to
block fat absorption for which an
7
NDA was recently filed with the FDA, and Neurogen Corporation is conducting
Phase 1 safety studies of its anti-obesity drug, NGD-95-1, under co-development
with Pfizer Inc. The Company is also aware of other drugs and technologies
relating to the treatment of obesity which are in earlier stages of development.
See "Competition" and "Risk Factors - Risks Relating to Redux."
Proprietary Rights: Under the Servier Agreements, the Company has an
exclusive license to sell dexfenfluramine in the U.S. under a patent covering
the use of dexfenfluramine to treat abnormal carbohydrate craving, which has
been sublicensed by the Company to AHP. This use patent expires in 2000,
although the Company has applied for an extension of the expiration date by an
amount of time relating to the FDA regulatory review process (but in any event
no longer than five additional years). However, there can be no assurance of
receipt of such extension on a timely basis or at all or as to the period of any
such extension. Upon expiration of the patent, generic drugs claiming the same
use previously covered by the patent may become available. Fenfluramine is
already available in the United States for the treatment of obesity. See
"Competition", "Patents and Proprietary Rights" and "Government Regulation."
Citicoline:
Cytidyl diphosphocholine ("citicoline") is under development by the
Company as a potential treatment for ischemic stroke. An ischemic stroke occurs
when brain tissue dies or is severely damaged as the result of interrupted blood
flow caused by a clogged artery which deprives an area of the brain (the
"infarct") of blood and oxygen. This loss of blood flow and oxygen causes among
other events, a breakdown of brain cell membranes and puts the surrounding
tissue (the "penumbra") at risk for death, resulting in an extension of the size
of infarct probably from the release and oxidation of such compounds as free
fatty acids. This release is likely caused in part by the inappropriate release
of glutamate and other neurotransmitters.
Citicoline appears to have multiple mechanisms of action in diminishing
the effects of stroke. Citicoline is believed to remove fatty acids, which would
otherwise yield toxic oxidation products, by incorporating them into membrane
constituents. Citicoline is also believed to promote the formation of additional
membrane elements needed by damaged neurons to restore functional activity by
raising blood levels of choline and cytidine, substrates believed to be
essential for the formation of the nerve cell membrane. Citicoline is thereby
believed to help stabilize the cell membrane and, as a result, decrease edema,
or brain swelling, caused when blood flow to brain cells is stopped, and
reestablish normal neurochemical function in the brain. Finally citicoline also
increases levels of acetylcholine, a neurotransmitter believed to be associated
with learning and memory functions.
During fiscal 1996, the Company completed its first Phase 3 clinical
trial in the U.S. to treat patients suffering from ischemic stroke. The results
of the double blind placebo control, dose-ranging trial were presented at the
48th Annual Meeting of the American Academy of Neurology on March 28, 1996, and
indicated a statistically significant improvement in the recovery of patients
suffering from ischemic stroke who were treated with certain doses of citicoline
compared with patients who received placebo.
In the trial, 259 patients with ischemic stroke were enrolled within 24
hours following the onset of symptoms. The average time from onset of symptoms
to initiation of treatment was approximately 14 hours. Patients were randomly
assigned to receive placebo or one of three oral doses of citicoline (500
milligrams, 1000 milligrams or 2000 milligrams daily) for six weeks and were
monitored for an additional six weeks. The primary efficacy outcome in the study
was improved neurologic function, as assessed by the Barthel Index, which
utilizes a 100-point rating scale. It was found that 53% of patients who
received 500 milligrams daily of citicoline achieved a score of 95 or greater on
the Barthel Index, indicative of complete or near-complete recovery from stroke,
compared with 33% of placebo-treated patients (p less than 0.04). This
significantly greater improvement can also be expressed as the probability that
for every 100 stroke patients treated with 500 milligrams of citicoline within
24 hours of symptom onset, at least 20 more would achieve complete or
near-complete recovery than if treated with placebo.
Patients in both the 500 milligram or 2000 milligram groups exhibited
significantly greater (p less than 0.05) improvement on the Barthel Index at
week 12 than placebo-treated patients. Data showed that the rate of improvement
was significantly faster for these treatment groups than for the placebo group
(p less than 0.02), with patients receiving 500 or 2000 milligrams per day
achieving complete or near-complete recovery two weeks faster than
placebo-treated patients.
8
In addition, patients in the 500 milligram and 2000 milligram groups exhibited
significantly greater improvement in mental function (p less than 0.04), as
measured by the NIH Stroke or Rankin scales which grade the cognitive state of
patients.
Results of this study also showed that patients who received 500
milligrams of citicoline daily were more than twice as likely to manifest
minimal or no disability at 12 weeks following stroke as patients who received
placebo, as measured by the NIH Stroke Scale. The NIH Stroke Scale analysis
showed that 34% of all citicoline-treated patients compared to 16% of
placebo-treated patients achieved complete or near-complete normalization of
function, as indicated by scores 0 to 1, at 12 weeks following stroke (p less
than 0.04). In addition, global neurologic status, assessed by another
well-known measurement, the Rankin Scale, was significantly improved (p less
than 0.04) with citicoline treatment compared to placebo. There was no
significant difference in the incidence of death among the four treatment groups
in the trial. The safety profile of all citicoline groups differed minimally
from placebo; only the rate of dizziness and accidental injuries (falls)
differed significantly from placebo. The 500 mg dose was deemed to be optimal,
although all doses appeared to be well tolerated.
Efficacy outcome measures for the 1000 milligram daily group did not
reach statistical significance in this trial. Patients in the 1000 milligram
group had statistically significantly higher body weight on baseline entry into
the study compared to the other treatment groups and a higher prevalence of
co-morbid medical conditions. The Company believes that this and other
confounding variables may explain the performance of the 1000 milligram group in
the trial, although there can be no assurance that this interpretation is
correct. See "Risk Factors - Uncertainties Relating to Clinical Trials."
In 12 patients studied in this trial at one center, a specialized
imaging technique was used to measure the size of the infarct. Analysis of this
group of patients suggests that citicoline treatment limited the size of infarct
following interrupted blood flow in connection with stroke.
In June 1996, the Company initiated a second Phase 3 trial with
citicoline to treat patients suffering from ischemic stroke. The double-blind,
placebo controlled trial will involve several hundred patients, take place on a
national, multi-center basis and test 500 milligrams of citicoline administered
daily against placebo. The primary efficacy outcome of the study will be
improved neurologic function at three months after stroke onset. In October
1996, the Company initiated a supportive Phase 3 study with citicoline to study
its effect in limiting the size of infarct caused by stroke. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In January 1993, the Company licensed exclusive marketing and
manufacturing rights based on certain patent rights relating to the use of
citicoline, including certain patent and know-how rights in the U.S. and
know-how rights in Canada, from Grupo Ferrer, a Spanish pharmaceutical company
("Ferrer"). See "Agreements - Citicoline." The compound citicoline is not
covered by a composition of matter patent. The licensed U.S. patent covering the
administration of citicoline to treat patients afflicted with certain conditions
associated with the inadequate release of brain acetylcholine expires in 2003.
As described in the licensed U.S. patent, the inadequate release of
acetylcholine may be associated with several disorders, including the behavioral
and neurological syndromes seen after brain traumas and peripheral
neuro-muscular disorders including myasthenia gravis and post-stroke
rehabilitation. The claim of the licensed patent, while being broadly directed
to the treatment of inadequate release of brain acetylcholine, does not
specifically recite the indications for which the Investigational New Drug
("IND") application has been filed. In addition to any proprietary rights
provided by this patent, the Company expects to rely on certain marketing
exclusivity regulations of the FDA. In March 1995, the Company filed a patent
application relating to the use of citicoline to reduce infarct size. Additional
domestic and international applications were filed by the Company in 1996. See
"Patents and Proprietary Rights," "Government Regulation" and "Risk Factors -
Uncertaintity of Patent Position and Proprietary Rights."
In June 1996, Genentech, Inc. announced that its clot-dissolving agent,
Activase, a genetically engineered version of the naturally occurring tissue
plasminogen activator (t-PA), was cleared for marketing by the FDA for treatment
of acute ischemic stroke within three hours of symptom onset. Activase is the
first therapy to be indicated for the management of stroke. A number of other
drugs in clinical trials are also being developed for this indication, including
compounds under development by Janssen Pharmaceutical NV and Boehringer
Ingelheim GmbH. Based on citicoline clinical data to date, however, the Company
believes citicoline may be an attractive post-stoke therapy, particularly due to
its potentially broader, 24-hour post-stroke therapeutic window and its possible
use in combination with other therapies.
9
Supplies of citicoline used for clinical purposes have been produced on
a contract basis by a third party manufacturer. Ferrer has the right to
manufacture commercial supplies, subject to certain conditions. The Company is
evaluating marketing options for the drug and may expand its sales force and
develop a marketing organization to market or co-promote citicoline to
neurologists and related specialists, and/or seek to enter into a collaboration
with a large pharmaceutical company for marketing of the drug, assuming
succesful development and regulatory approval of the drug.
Pagoclone:
Pagoclone is under development by the Company as a drug to treat
panic/anxiety disorders. These disorders are believed to be related to excess
activity of certain neurons, resulting from the decreased action of the
neurotransmitter GABA (gamma amino butyric acid). The Company believes that
pagoclone increases the action of GABA, thus reducing excess neuronal activity
and alleviating symptoms of panic and anxiety.
Current pharmacological treatments for anxiety and panic disorders
include serotonin agonists such as BuSpar, and benzodiazepines, such as Valium
and Xanax, as well as the serotonin reuptake inhibitor, Paxil, approved for the
treatment of panic disorders. Serotonin agonists have been shown to have limited
effectiveness in treating anxiety and are generally not effective in treating
panic disorders. Although benzodiazepines help to regulate GABA in the brain,
they may cause side effects such as sedation, hangover, dizziness and tolerance
with continuing use and have the potential for addiction. In addition, the
sedative/hypnotic effects of benzodiazepines are increased by alcohol intake,
which may lead to serious side effects that may include coma.
In November 1996, the Company initiated its first Phase 2/3 trial of
pagoclone in patients suffering from panic disorder. This national, multi-center
dose-response trial will include an estimated 300 patients and will compare the
effects of three doses of pagoclone to placebo in treating panic disorder during
a 10-week period. Primary outcome measures will include the frequency and
severity of panic attacks experienced by patients. The Company submitted an IND
application for this trial in September 1996, following the completion of a
multiple-dose tolerability trial in the United Kingdom. Pre-clinical and early
clinical data suggest that pagoclone may offer advantages over traditional
benzodiazepine anti-anxiety agents, including reduced drowsiness, lower
addiction and withdrawal potential and less potential for alcohol interactions.
In 1994, the Company licensed from RPR exclusive worldwide rights to
pagoclone, in exchange for licensing, milestone and royalty payments to RPR. See
"Patents and Proprietary Rights." The Company currently intends to seek to
sublicense marketing rights to this product.
Melzone and Melatonin Related Compounds:
The Company has developed Melzone, a dietary supplement which contains
a low dose form of melatonin, a naturally occurring hormone produced by the
pineal gland that may play a key role in regulating the body's circadian rhythm,
or biologic clock. Research has shown that when a person's melatonin level
mimics normal nighttime levels produced by the body, sleep is induced, and when
it is low, wakefulness and vigilance are enhanced. Melzone contains the amount
of melatonin believed to be appropriate to raise blood melatonin levels to
normal nighttime levels following which, these levels fall again each morning
consistent with a normal day-night rhythm in blood melatonin levels.
Melatonin is believed to induce restful sleep while offering advantages
over currently available sleeping aids, many of which may have undesirable side
effects, such as amnesia or "hangover". Although melatonin is available,
generally at much higher strengths, as a dietary supplement in health food
stores and other outlets, the Company believes that lower strengths, which are
intended to mimic normal nighttime levels, and which are manufactured in
accordance with good manufacturing practices, can offer an innovative inducement
of sleep with a reduced risk of adverse side effects that may be associated with
higher doses.
The Company initiated regional test-marketing of Melzone in December
1996 in the greater Boston area as a dietary supplement containing 0.3 milligram
of melatonin for normal restful sleep. This product is based upon research
leading to a patent licensed by the Company from MIT in September 1995 that
covers the use of very low amounts (less
10
than one milligram) of melatonin for the induction of sleep, in exchange for
royalties based on sales.
A patent was also issued to the Company in April 1995 for a class of
melatonin analogs that includes IP-100-9, under limited pre-clinical development
as a novel prescription sleeping aid. The analogs, compounds with chemical
structures similar to melatonin, were synthesized through rational drug design
computer modeling techniques, using naturally occurring melatonin as a lead
compound.
THE SUBSIDIARIES
INTERCARDIA, INC.
General
Through Intercardia, the Company is developing bucindolol, a
cardiovascular drug in Phase 3 clinical trials for the treatment of congestive
heart failure ("CHF"), a syndrome of progressive degeneration of cardiac
function which is generally defined as the inability of the heart to pump
sufficient volume of blood for proper functioning of vital organs. CHF is caused
by a number of conditions that produce a primary injury or stress to the heart
muscle. Regardless of the cause of the primary damage, the body will activate
compensatory mechanisms in an attempt to maintain cardiac output. These
mechanisms include activation of the cardiac adrenergic systems resulting in
stimulation of beta-adrenergic receptors on cells located in the heart and
vascular system. Chronic stimulation of these receptors is believed to
contribute to the continual worsening of cardiac function and high mortality.
Intercardia licensed worldwide rights to bucindolol through its 80%
owned subsidiary, CPEC, Inc. ("CPEC") of which the remaining 20% is owned by
Interneuron. Originally developed by Bristol-Myers Squibb Company ("BMS") and
licensed by BMS to CPEC in exchange for royalties based on sales, bucindolol is
a non-selective beta-blocker with mild vasodilating properties that works by
blocking beta-adrenergic receptors on cells located in the heart and vascular
system. The Company believes that vasodilating beta-blockers such as bucindolol
possess potential advantages over earlier beta blockers (which are
contra-indicated for CHF) and represent a promising approach to the treatment of
CHF. Bucindolol is expected to be used in addition to other drugs for the
treatment of CHF.
The Company is aware that carvedilol, also a vasodilating non-selective
beta-blocker, owned by Boehringer Mannheim GmbH and licensed in the U.S. and
certain other countries to SmithKline Beecham PLC, is under review by the FDA.
Although an advisory committee of the FDA recommended against the approval of
carvedilol as a treatment for congestive heart failure, the Company believes
that SmithKline Beecham is continuing to attempt to gain FDA approval of
carvedilol as a treatment for CHF and it is possible that carvedilol could
receive approval by the FDA for marketing as a treatment for CHF prior to
bucindolol. The Company is aware that carvedilol has been approved for the
treatment of CHF in seven countries, including Canada. See "Competition."
The U.S. composition of matter patent on bucindolol expires in 1997,
prior to the anticipated launch of the product. Intercardia intends to pursue up
to five years' market exclusivity under the Drug Price Competition and Patent
Term Restoration Act of 1984 (commonly referred to as the Waxman-Hatch Act) by
developing a once-daily formulation. See "Government Regulation" and "Risk
Factors - Uncertainty Regarding Waxman Hatch Act." Intercardia intends to seek
partners for the development and marketing of this formulation.
BEST Study
A Phase 3 clinical trial began in June 1995 among patients with CHF, to
test whether the addition of bucindolol to optimal therapy for CHF will reduce
mortality in patients with moderate to severe CHF. Known as BEST (Beta- blocker
Evaluation of Survival Trial), the bucindolol study is being conducted by the
National Institutes of Health ("NIH") and the Department of Veterans Affairs
("VA"). The BEST study is designed to include up to 2,800 patients (of which at
least 33% are recommended to be female), having moderate to severe symptons
(NYHA classes III and IV), at approximately 90 clinical centers throughout the
U.S. As of November 30, 1996, 1,350 patients have been enrolled in the BEST
study. All patients are expected to receive a minimum follow-up of 18 months or
more, giving a potential maximum duration for the study of four and one half
years. The study is designed so that in the event that significant
11
mortality improvement is evident to an independent Data and Safety Monitoring
Board during the course of the study, the study could be stopped early.
The NIH and VA have committed up to $15,750,000 primary funding for
BEST, with specific levels of NIH/VA funding to be based upon patient enrollment
milestones. Intercardia has agreed to commit up to $2,000,000 over the course of
the study (of which $1,250,000 has been paid as of September 30, 1996), in
addition to supplying the drug and providing monitoring services estimated to
cost an additional $2,250,000.
Marketing
In December 1995, Intercardia entered into an agreement with Astra
Merck for the development, commercialization and marketing in the U.S. of a
twice-daily formulation of bucindolol for the treatment of CHF. Under the
agreement, Astra Merck made a $5,000,000 initial payment to Intercardia and
agreed to fund up to $15,000,000 of U.S. development costs for the twice-daily
formulation of bucindolol, including Intercardia's costs related to the BEST
study. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Astra Merck agreed to market bucindolol, with
Intercardia retaining certain co-promotion rights, and agreed to make milestone
payments to Intercardia upon FDA approval and the achievement of specified
levels of sales. Intercardia is entitled to royalties of 15% of the first
$110,000,000 of net sales and 30% of yearly net sales above $110,000,000,
adjusted for inflation, and Astra Merck agreed to pay royalties due BMS.
Intercardia is committed to reimburse Astra Merck $10,000,000 in December 1997
and to reimburse one-third of the launch costs through the first 12 months of
commercial sales, up to a total launch cost reimbursement of $11,000,000. In the
event Intercardia does not make either of these payments, the royalty rate
declines to 7% of net sales. Intercardia retained U.S. rights to a once-daily
formulation of bucindolol as well as rights for all formulations of bucindolol
outside the U.S.
Intercardia Initial Public Offering
In February 1996, Intercardia completed its initial public offering
(the "Intercardia IPO"), resulting in net proceeds of approximately $35,000,000,
including approximately $5,000,000 from Interneuron's purchase of Intercardia
Common Stock in the Intercardia IPO.
CPEC Acquisition
In September 1994, Intercardia acquired 80% of the outstanding capital
stock of CPEC and in January 1996, Interneuron acquired the remaining 20% of
CPEC not owned by Intercardia. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Early-Stage Programs
Intercardia's pre-clinical research and development activities,
conducted through its 61% owned subsidiary, Aeolus Pharmaceuticals, Inc.
("Aeolus") are focused currently in the area of antioxidant small molecules.
These compounds may have potential to address diseases involving toxicities
associated with excess oxygen free radicals and regulation of nitric oxide
levels. These diseases include cardiomyopathy, neonatal respiratory distress
syndrome, adult respiratory distress syndrome and stroke. Intercardia may
implement its expansion strategy by establishing additional subsidiaries for
targeted development programs.
12
Clayton I. Duncan is President and Chief Executive Officer of
Intercardia, which had 16 full-time employees as of September 30, 1996. As of
September 30, 1996, Interneuron owned approximately 60% of the outstanding
securities of Intercardia, and 51% on a fully diluted basis. In certain
circumstances, Interneuron has the right to purchase additional shares of
Intercardia common stock at fair market value so that Interneuron's equity
ownership in Intercardia does not fall below 51%.
PROGENITOR, INC.
Progenitor, formed in February 1992, focuses on functional genomics
using developmental biology and is engaged in the discovery, characterization
and validation of novel genes, receptors and related proteins. Progenitor's
functional genomic approach combines developmental biology expertise and
proprietary technology with gene sequencing and other molecular biology
techniques to accelerate the discovery process. Using its developmental biology
approach to functional genomics, Progenitor has made several discoveries,
including the discovery of the B219 leptin receptor, for which it filed several
patent applications. Progenitor believes leptin may have important roles in
blood cell formation ("hematopoiesis"), reproduction and obesity. Progenitor has
entered into a collaboration with Chiron for the development and
commercialization of Progenitor's T7T7 gene delivery system, and a collaboration
with Novo Nordisk for the isolation, development and commercialization of blood
cell growth factors.
Developmental biology is the study of the genetic and cellular events
that control the transformation of a fertilized egg into a full-formed, complex
organism. Many genes involved in the process of cell growth and differentiation
may be expressed exclusively, or at enhanced levels, during certain stages of
early development and may become inactive in the normal cells of full-formed
organisms. By comparing the sequential expression of genes from one stage of
early development to the next, Progenitor believes it can identify, isolate and
sequence specific genes, receptors and other proteins which play key roles in
cell growth and differentiation. Progenitor believes that early developmental
cells and tissues are a rich and largely unexploited source for genes and
proteins that may lead to the development of treatments for diseases
characterized by aberrant cell growth and differentiation, such as cancer, blood
and immune system disorders and degenerative diseases associated with aging.
Progenitor possesses a number of proprietary technologies that it uses
in its discovery programs. Progenitor has developed proprietary methods and cell
lines using mouse (murine) embryonic stem cells for studying the differentiation
of cells in the early development of tissues and organs. Progenitor also has
developed proprietary techniques to isolate, grow, maintain in culture and
differentiate cells from the murine yolk sac. The yolk sac contains the earliest
cells in development that are committed to differentiate into the blood, immune
and vascular systems. In addition, Progenitor has developed proprietary gene
cloning and screening techniques to identify genes that encode receptors for
growth factors believed to be important in hematopoiesis and cancer therapy, as
well as the growth and development of neural and other tissues.
Progenitor has used its functional genomics approach to make three
principal discoveries. In addition to its ob-r, or B219, leptin receptor
discovery, Progenitor has discovered, in collaboration with Vanderbilt
University ("Vanderbilt"), the developmentally-regulated endothelial cell locus
("del-l") gene. The del-l gene is involved in the early growth and development
of blood vessels and bone. Progenitor believes that del-l may have potential
applications in diseases accompanied by excessive blood vessel formation, such
as cancer, and in cardiovascular and other disorders that may be treatable by
stimulating blood vessel growth. Progenitor also has identified a murine burst
forming units-erythroid ("BFU-e") red blood cell growth factor activity.
Progenitor believes that a BFU-e factor may be useful in the development of
treatments for a variety of blood disorders.
Progenitor currently is focusing its efforts and resources on the
discovery, characterization and validation process and intends to seek to enter
into corporate collaborations for the development and commercialization of any
drugs or other products developed based on its discoveries. In March 1995,
Progenitor entered into an agreement with Chiron for the development and
commercialization of Progenitor's T7T7 gene delivery system for selected
applications. In May 1995, Progenitor entered into a development and
commercialization agreement with Novo Nordisk relating to the BFU-e red blood
cell growth factor. See "Agreements--Progenitor Agreements".
13
Progenitor's research is at a very early stage, and Progenitor requires
significant additional funds to complete development, conduct pre-clinical and
clinical testing and pursue regulatory review of any potential products.
Progenitor is seeking to enter into additional collaborations or business
combinations to pursue development of its technologies and/or to obtain
independent equity financing. There can be no assurance that Progenitor's
efforts to obtain such additional funding or collaborations will be successful,
in which case Progenitor would be required to reduce or eliminate certain
operations.
Douglass B. Given, M.D., Ph.D. is President and Chief Executive Officer
of Progenitor, which had 25 full-time employees as of September 30, 1996. As of
September 30, 1996 Interneuron owned approximately 76% of the outstanding
capital stock of Progenitor.
TRANSCELL TECHNOLOGIES, INC.
Transcell is engaged in developing new pharmaceutical products using
core technologies in the field of carbohydrate chemistry. Transcell's primary
core technology is directed toward drug discovery based on the chemical
synthesis of complex carbohydrate compounds known as oligosaccharides and
glycoconjugates. Transcell also has technology relating to the development of
new carrier compounds for transport and/or targeted delivery of a wide variety
of drugs, including gene-based therapeutics, directly into cells. Transcell has
exclusive, worldwide licenses to its core technologies from Princeton
University, where Daniel Kahne, Ph.D., and Suzanne Walker-Kahne, Ph.D.,
consultants to Transcell, performed Transcell's founding scientific research.
Combinatorial Chemistry
Transcell's efforts are focused primarily on its drug discovery
technology which involves methods of synthesizing oligosaccharides, which are
carbohydrate molecules, for therapeutic use. Oligosaccharides are present on all
cell surfaces and, in different configurations, are integral to virtually all
inter-cellular reactions, including viral, bacterial and immune system
interactions. Transcell's technology is also directed toward adding carbohydrate
components to existing molecules to make glycoconjungates to improve the overall
efficacy and toxicity profile of the parent compound. Transcell believes its
novel carbohydrate synthesis technology may reduce the obstacles associated with
traditional methods for making carbohydrates, such as lack of specificity, low
yields and relatively long production periods producing unique libraries of
oligosaccharide compounds and glycoconjugates more efficiently and in fewer
steps, with both solution and the solid phase methods.
Transcell is applying this technology to produce libraries of
carbohydrates and glycoconjugates for screening as drug candidates. Transcell's
combinatorial chemistry approach in this area is based upon investigating the
synthesis of both random libraries of carbohydrates and carbohydrates directed
to a specific therapeutic target. Transcell has rights under several patent
applications that are currently pending in the U.S. and several foreign
jurisdictions and which cover various aspects of the synthesis of
oligosaccharides. Notices of Allowance have been received in three of such
patent applications.
Drug Transport
Transcell's second core technology is focused on utilizing a series of
"carrier" compounds (Transphores) to deliver therapeutic compounds across
various membranes. Biological membranes are essentially impermeable to many
molecules, including proteins and oligonucleotides, thereby decreasing the
efficacy of diagnostics or therapeutics based on such compounds. Two patents and
one notice of allowance in the United States have been issued on this
technology. Corresponding foreign patent applications are pending.
Gene therapy
Transcell has synthesized a series of novel compounds that may permit
the transport (transfection) of DNA or antisense molecules into cells without
the use of a viral-based delivery mechanism. Patent applications, including
foreign counterparts, covering these compounds and their uses are pending or are
being filed.
14
Transcell's research is at a very early stage and requires significant
additional funds to complete development, conduct pre-clinical and clinical
testing and pursue regulatory review of any potential products. Transcell is
seeking to enter into collaborations or business combinations to pursue
development of its technologies but has no agreements with respect to any
significant collaborations. There can be no assurance that Transcell's efforts
to obtain such additional funding or collaborations will be successful, in which
case Transcell would be required to reduce or eliminate certain operations.
Glenn L. Cooper, M.D., is the Acting President and Chief Executive
Officer of Transcell, which had 30 full-time employees as of September 30, 1996.
At September 30, 1996, Interneuron owned approximately 78% of Transcell's
outstanding capital stock.
INTERNUTRIA, INC.
In April 1995, Interneuron formed InterNutria to develop and market
non-prescription, nutritional products for the dietary management of medical and
non-medical conditions. InterNutria's product strategy is based on initial
research conducted at MIT by scientific founder Judith Wurtman, Ph.D., which
examined the connection between food, behavior and the brain, and how
modifications of food intake can enhance the synthesis and release of certain
neurotransmitters and thus enhance control over behavior, performance and
disease states.
InterNutria's strategy is to acquire, develop and commercialize
proprietary nutritional products that are clinically evaluated, regulated by the
Dietary Supplement Health Education Act of 1994 ("DSHEA") for the dietary
management of physiological processes, and manufactured in a well-controlled
environment. Under the provisions of DSHEA, these are "foods or beverages which
have been uniquely developed to provide medical, health or performance benefit,
including the management of disease states." The marketing of InterNutria's
products is expected to be consumer-oriented. See "Government Regulation."
In November 1995, InterNutria acquired technology, including a patent
application and know-how, from Walden Laboratories, Inc., relating to
InterNutria's first potential product, PMS Escape, in exchange for $2.4 million
payable in two installments of Interneuron Common Stock, the first in late 1996
and the second in late 1997, at the then-prevailing market price. Certain
affiliates of Interneuron are or were stockholders of Walden but will not
receive any of the purchase price. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PMS Escape, a dietary supplement for women with pre-menstrual syndrome,
is a powdered beverage mix that contains a special formulation of natural
carbohydrates specifically designed to increase serotonin levels. In October
1996, InterNutria expanded a regional test launch of PMS Escape in New England,
where the product is available at certain retail outlets, while continuing
clinical evaluation of the product. Depending upon the results of the test
launch, ongoing clinical evaluation and the availability of sufficient funds,
the Company will determine whether to commence commercial launch of PMS Escape
beyond the New England region. InterNutria currently has a six-person sales
force, retained on a contract basis, targeting obstetricians and gynecologists,
as well as retail accounts. Any broader commercial marketing, including
distribution and order fulfillment, is similarly expected to be conducted on a
contract basis.
InterNutria is also developing a sports drink as a dietary supplement
for enhancement of athletic performance and reduction of fatigue which
InterNutria expects to test launch on a regional basis in fiscal 1997.
James F. Pomroy is Chairman and Lewis D. Lepene is President and Chief
Executive Officer of InterNutria, which had five full-time employees as of
September 30, 1996. As of September 30, 1996, Interneuron owned 100% of the
outstanding capital stock of InterNutria.
MANUFACTURING AND MARKETING
General
The Company has no manufacturing facilities and limited marketing
capabilities. In general, the Company intends to rely primarily on third parties
for manufacturing and for marketing products requiring broad marketing
capabilities and for overseas marketing. For certain products, including Redux,
citicoline, Melzone and InterNutria's
15
dietary supplements and medical foods, the Company is conducting and may conduct
certain marketing or co- promotional activities in the United States directly.
Such activities may include a combination of educational programs to
professional audiences, sales force activities or direct advertising and
promotion.
To the extent the Company enters into collaborative arrangements with
pharmaceutical and other companies for the manufacturing or marketing of
products, these collaborators are generally expected to be responsible for
funding or reimbursing all or a portion of the development costs, including the
costs of clinical testing necessary to obtain regulatory clearances, and for
commercial-scale manufacturing. These collaborators are expected to be granted
exclusive or semi-exclusive rights to sell specific products on a disease
application or market specific basis in exchange for a royalty, joint venture,
equity investments, co-marketing or other financial interest. Such collaborative
arrangements could result in lower revenues than if the Company marketed a
product itself.
In the event the Company determines to establish its own manufacturing
or marketing capabilities, it will require additional funds for manufacturing,
facilities, equipment and personnel. For example, the Company may seek to market
certain products by developing its internal sales force or through contract
sales representatives, directly to selected groups of physician specialists
likely to prescribe the product. In such event, the Company would be responsible
for all costs associated with developing, manufacturing and marketing the
product. For ongoing or planned regional test launches of Melzone, PMS Escape
and Boston Sports Supplement, the Company is or will be responsible for these
costs. Depending upon the results of the test launches, ongoing clinical
evaluation and the availability of sufficient funds, the Company will determine
whether to commence commercial launch of PMS Escape and Boston Sports Supplement
beyond the regional test launch areas.
Redux
With respect to the marketing and manufacture of Redux, the Company has
sublicensed its exclusive U.S. marketing rights to AHP, while retaining
co-promotion rights. The Company will rely on AHP to target the obesity market
and for distribution and advertising and promotional activities. The Company's
approximately 30-person sales force is promoting Redux to selected
diabetologists, endocrinologists, bariatricians, nutritionists and weight
management specialists, subject to certain restrictions. Under the Servier
Agreements, the Company is required to purchase from a designee of Servier for
five years from commercial introduction all requirements of dexfenfluramine bulk
chemical for incorporation into the finished dosage formulation. Under a
contract manufacturing agreement expiring in December 1998 Boehringer is
producing on behalf of Interneuron commercial scale quantities of the finished
dosage formulation of Redux in capsule form. See "Agreements - Redux
Agreements."
Citicoline
Supplies of citicoline used for clinical purposes have been produced on
a contract basis by a third party manufacturer. Ferrer has the right to
manufacture commercial supplies, subject to certain conditions. The Company is
evaluating marketing options for the drug and may expand its sales force and
develop a marketing organization to market or co-promote citicoline to
neurologists and related specialists, and/or seek to enter into a collaboration
with a large pharmaceutical company for marketing of the drug.
Bucindolol
Intercardia has an agreement with Astra Merck for the U.S. development
and marketing of bucindolol. A steering committee consisting of representatives
of Intercardia and Astra Merck will select a third party manufacturer for
bucindolol for the U.S. Astra Merck agreed to conduct sales and marketing of
bucindolol in the U.S., with Intercardia retaining co-promotion rights. See
"Agreements - Intercardia Agreements."
Progenitor
Progenitor has an agreement with Chiron to collaborate in the
development and commercialization of Progenitor's gene delivery technology in
selected cancer fields, and for certain cardiovascular disorders and infectious
16
diseases, for which Chiron gains certain exclusive manufacturing and marketing
rights. Chiron agreed to supply clinical and commercial manufacturing for any
products resulting from the collaboration and would be a preferred manufacturer
for the product fields retained by Progenitor. See "Agreements - Progenitor
Agreements."
Progenitor and Novo Nordisk have a research, development and
commercialization agreement under which Novo Nordisk will gain access to one
proprietary therapeutic growth factor project that addresses early development
of the hematopoietic (blood-cell formation) system and may be valuable in cancer
therapy and as treatments for diseases of the blood and immune systems. Novo
Nordisk has the right to manufacture and market, on an exclusive worldwide
basis, any products developed from this collaboration. See "Agreements -
Progenitor Agreements."
COMPETITION
General
The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies, including
major pharmaceutical companies and specialized biotechnology companies, are
engaged in research and development of technologies and therapies similar to
those being pursued by the Company. Many of the Company's competitors have
substantially greater financial and other resources, larger research and
development staffs and, unlike the Company, have significant experience in
pre-clinical testing, human clinical trials and other regulatory approval
procedures.
The Company does not have the resources and does not intend to compete
directly with major pharmaceutical companies in drug manufacturing and
marketing, except for certain neuropharmaceutical and nutritional products and
food related products which the Company may directly market in the United
States. In the event the Company seeks to market any products directly, it will
compete with companies with well-established distribution networks and market
position. See "Manufacturing and Marketing" and "Government Regulation".
Redux
The marketing of Redux may be subject to substantial competition.
Dexfenfluramine is an isomer of fenfluramine, which is sold under the brand name
Pondimin by AHP for approximately the same use as dexfenfluramine, although
indicated only for "short-term (a few weeks) use." Although dexfenfluramine is
distinguishable from fenfluramine, there can be no assurance that Redux, which
is priced higher than Pondimin, will achieve greater market acceptance than
Pondimin or any other prescription drug used to treat obesity. AHP also has an
anti-obesity compound which the Company believes is in Phase 2 clinical trials.
The Company is aware of other drugs under development for the treatment of
obesity, including sibutramine, for which an affiliate of BASF AG has filed an
NDA. Although an FDA advisory committee has recommended against its approval,
it has been reported that the FDA has issued an approvable letter for the drug.
An affiliate of Roche Holdings Ltd. is developing a drug, Orlistat, to block fat
absorption that has completed Phase 3 clinical trials, and Neurogen Corporation
is conducting Phase 1 clinical trials with an anti-obesity drug, NGD 95-1. The
introduction of additional competitive obesity drugs may adversely affect Redux
sales. Other drugs and technologies relating to the treatment of obesity are in
earlier stages of development and, due to the limited period of marketing
exclusivity, Redux may eventually be subject to competition from generic
versions of dexfenfluramine. These drugs can be expected to be available at a
significantly lower price than Redux, especially due to the minimum royalties
due to Servier and fixed price provisions for the purchase of dexfenfluramine to
which the Company is subject. Competitive factors will also include the relative
price of competitive drugs as well as their perceived safety and effectiveness.
See "Risk Factors - Risks Relating to Redux - and - Competition."
Citicoline
In June 1996, Genentech, Inc. announced that its clot-dissolving agent,
Activase, a genetically engineered version of the naturally occurring tissue
plasminogen activator (t-PA), was cleared for marketing by the FDA for the
treatment of acute ischemic stroke within three hours of symptom onset. Activase
is the first therapy to be indicated for the management of stroke. A number of
other drugs in clinical trials are also being developed for this indication,
including compounds under development by Janssen Pharmaceutical NV and
Boehringer Ingelheim GmbH. Based on
17
existing clinical data on citicoline, however, the Company believes citicoline
may be an attractive post-stroke therapy, particularly due to its potentially
broader, 24-hour post-stroke therapeutic window.
Bucindolol
The cardiovascular drug market is highly competitive with many drugs
marketed by major multi-national and integrated pharmaceutical companies having
substantially greater technical, marketing and financial resources than
Intercardia. In particular, carvedilol, a non-selective beta-blocker with
vasodilating properties is owned by Boehringer Mannheim GmbH and licensed in the
U.S. and certain other countries to SmithKline Beecham. Since 1991, carvedilol
has been approved as a treatment for hypertension in several European countries,
and in September 1995, it was approved by the FDA for commercial marketing in
the U.S. as a twice-daily treatment for hypertension. In February 1995, the
Phase 3 studies of carvedilol for treatment of congestive heart failure were
stopped early due to carvedilol's unexpected effect in reducing mortality. In
November 1995, SmithKline Beecham submitted data to the FDA to supplement its
hypertension NDA for carvedilol to cover the treatment of congestive heart
failure. Although an FDA advisory committee recommended against carvedilol as a
treatment for congestive heart failure in May 1996, the Company believes that
SmithKline Beecham is continuing to attempt to gain FDA approval for carvedilol
as a treatment for CHF and there can be no assurance that carvedilol will not be
approved for treatment of congestive heart failure, possibly prior to
bucindolol. The Company is aware that carvedilol has been approved for the
treatment of CHF in at least seven countries, including Canada. In addition,
beta-blockers have not historically been accepted by the medical community to
treat congestive heart failure, and substantial educational efforts may be
required to convince physicians of the therapeutic benefits of bucindolol
notwithstanding its action as a beta-blocker. The Company is also aware of other
drugs and devices under development for the treatment of heart failure. E. Merck
is testing bisoprolol, a beta-1 selective beta-blocker marketed in the U. S. by
a division of AHP for hypertension, as a treatment in CHF patients in Europe.
The Company believes that Astra AB has initiated or plans to initiate shortly a
large mortality study for the beta-1 selective beta-blocker metoprolol.
Pagoclone
Current therapy for anxiety generally includes the prescription of
benzodiazepine-class and serotonergic compounds. In addition, the Company is
aware of competitors which market certain prescription drugs for indications
other that anxiety who are planning to seek an expansion of labelling to include
anxiety as an indication. The Company believes it is likely there are also
several compounds for anxiety that are in an early stage of preclinical or
clinical development.
There can be no assurance that products under development or introduced
by others will not render the Company's products or potential products obsolete
or uneconomical or result in treatments or cures superior to any therapy
developed by the Company or that any therapy developed by the Company will be
preferred to any existing or newly developed products or technologies. Other
companies may succeed in developing and commercializing products earlier than
the Company which are safer and more effective than those proposed for
development by the Company. Further, it is expected that competition in these
fields will intensify. Colleges, universities, governmental agencies and other
public and private research organizations continue to conduct research and are
becoming more active in seeking patent protection and licensing arrangements to
collect royalties for use of technology that they have developed, some of which
may be directly competitive with those of the Company. In addition, these
institutions may compete with the Company in recruiting highly qualified
scientific personnel. The Company expects technological developments in its
fields of research and development to occur at a rapid rate and expects
competition to intensify as advances in these fields are made. Accordingly, the
Company will be required to continue to devote substantial resources and efforts
to research and development activities.
AGREEMENTS
Redux Agreements:
AHP Agreements
In November 1992, the Company entered into a series of agreements (the
"AHP Agreements") which granted American Cyanamid Company the exclusive right to
manufacture and market dexfenfluramine in the U.S. for use in treating obesity
associated with abnormal carbohydrate craving, with the Company retaining
co-promotion rights. In 1994 AHP acquired American Cyanamid Company. The
agreement is for a term of 15 years commencing on the date dexfenfluramine is
first commercially introduced by AHP, subject to earlier termination.
18
Under the AHP Agreements, through September 30, 1996, the Company
received $5,000,000 in milestone payments, $3,500,000 in equity investments and
approximately $1,700,000 in research and development funding. As of December 13,
1996, AHP owned shares of Interneuron Preferred Stock convertible into an
aggregate of 622,222 shares of Common Stock. AHP is obligated to make additional
payments and purchase additional shares of Preferred Stock pursuant to the AHP
Agreements upon the achievement of specified milestones, including descheduling
of dexfenfluramine prior to April 1997 or the achievement of specified levels of
net sales if dexfenfluramine is not descheduled. AHP is also responsible for
reimbursing the Company for 50% of certain expenditures related to clinical
development, Phase 4 studies and market surveillance for abuse potential.
The AHP Agreements provide for "base" royalties to the Company of 11.5%
of AHP's net sales (equal to the royalty required to be paid by the Company to
Servier) and for "additional royalties", ranging from a minimum of 5% of the
first $50,000,000 of net sales if dexfenfluramine is not descheduled to a
maximum of 12% of net sales over $200,000,000 if dexfenfluramine is descheduled
and the Company does not manufacture the finished dosage formulation of
dexfenfluramine (subject to 50% reduction if generic drug competition exceeds a
market share of 10% or greater of total new Redux prescriptions in two
consecutive quarters); if the finished dosage formulation is manufactured by the
Company (which the Company currently does under an agreement with Boehringer),
the maximum additional royalty is 11%.
The Company also agreed to sell to AHP and AHP agreed to purchase from
the Company for five years from commercial introduction of dexfenfluramine all
of AHP's requirements for dexfenfluramine in bulk chemical form at a purchase
price equal to the price required to be paid by the Company to Servier.
The Company and AHP agreed to confer with respect to the allocation of
the obligation to manufacture Redux capsules between themselves and third
parties and AHP approved Boehringer as a third party supplier.
AHP has the right to terminate its sublicense upon 12 months notice to
the Company. See "Risk Factors - Risks Relative to Redux." The AHP Agreements
provide that Servier has the right to withdraw its consent to the sublicense in
the event that any entity acquires stock in AHP sufficient to elect a majority
of AHP's Board of Directors or otherwise obtains control of AHP, provided that
no such termination shall occur if AHP or its successor achieves minimum net
sales of $75,000,000 in the first marketing year or $100,000,000 thereafter or
pays Servier amounts it would have been entitled to if AHP had achieved such
minimum net sales. Servier consented to the AHP acquisition of American Cyanamid
Company.
AHP may continue to market Pondimin but agreed that so long as Redux
remains commercially viable, AHP will differentiate Redux for promotional and
marketing purposes and will not promote or market Pondimin or any other product
for the anti-obesity indication which competes directly with Redux in a manner
which negatively affects the future market for Redux.
Effective June 1996 the Company entered into a three year co-promotion
agreement with Wyeth-Ayerst. The agreement provides for Interneuron to promote
Redux to certain diabetologists, endocrinologists, bariatricians and weight
management specialists , subject to certain restrictions, and receive payments
from AHP for a portion of the Company's actual costs for up to 33 salespersons
during the first and second years. In addition, Interneuron is entitled to
varying percentages of profit derived from sales generated by its sales force,
after deducting costs, including cost of product revenue, royalties to
Interneuron, and Interneuron's proportionate share of advertising and promotion
costs. Total payments to Interneuron for sales force payments and profit sharing
will not exceed $10,000,000 per year. Interneuron has agreed, if requested by
AHP, to promote other products of Wyeth-Ayerst that fit within the physician
specialists targeted by Interneuron's sales force. Interneuron's Redux sales
force cannot promote another company's products except under certain conditions.
The co-promotion agreement may be terminated by Wyeth-Ayerst under certain
conditions including if sales generated by Interneuron do not exceed a specified
level per year. Interneuron is able to terminate the agreement at any time on
six month's notice.
Servier Agreements
The Servier Agreements, entered into in February 1990 and as
subsequently amended, grant the Company an exclusive right to market
dexfenfluramine in the U.S. to treat obesity associated with abnormal
carbohydrate craving for a term of 15 years from the date dexfenfluramine is
first marketed in the U.S. The agreements provide for royalties
19
of 11.5% of net sales, with minimum royalties based on the achievement of
specified net sales. The license includes rights to Servier's Redux trademark.
Servier has the right to terminate the license agreement upon the
occurrence of certain events, including a sale or transfer of a substantial part
of the Company's assets or a majority of its stockholdings (other than in
connection with a public offering), an acquisition by any party (other than
existing stockholders or their affiliates as of the date of the Servier
Agreements) of a 20% beneficial interest in the Company, or if the Company
manifests an intent to market a substantially similar pharmaceutical product.
An affiliate of Servier has agreed to supply the Company with, and the
Company has agreed to purchase, all of the Company's bulk chemical requirements
for dexfenfluramine for incorporation into the finished dosage formulation,
subject to provisions for alternate supply if the Company's requirements cannot
be satisfied. The purchase price is fixed, subject to annual increases to cover
production costs. The supply agreement is for a term expiring five years from
the date of commercial introduction of dexfenfluramine and is automatically
extended for an additional five-year term, subject to provisions for termination
for a third party supplier under certain conditions.
Boehringer Ingelheim Agreement
In November 1995, the Company entered into an exclusive manufacturing
agreement with Boehringer under which Boehringer agreed to supply, and the
Company agreed to purchase all of its requirements for Redux capsules from
Boehringer. The contract, which expires December 31, 1998, contains certain
minimum purchase and insurance commitments by the Company and requires
conformance by Boehringer to the FDA's Good Manufacturing Practices regulations.
The agreement provides for the Company to be able to qualify a second source
manufacturer under certain conditions.
Citicoline
In January 1993, the Company entered into a license and supply
agreement with Ferrer (the "Ferrer Agreement") granting the Company the
exclusive right to make, use and sell any products or processes developed under
patent rights relating to certain uses of citicoline in exchange for an up-front
license fee to be credited against royalties based on sales. The Company's
license includes patent and know-how rights in the U.S. and know-how rights in
Canada, and is for a period coextensive with Ferrer's license from MIT. The
underlying U.S. patent expires in 2003. See "Patents and Proprietary Rights".
The Ferrer Agreement also provides that Ferrer shall, subject to certain
limitations, be the exclusive supplier at a fixed price of raw materials
required for the manufacture of any product developed under such patent rights.
The agreement provides that Ferrer may terminate the agreement under certain
circumstances, including failure to obtain FDA approval prior to January 1999 or
in the event more than 50% of the ownership of Interneuron is transferred to a
non-affiliated third party.
Pagoclone
In February 1994, the Company licensed from RPR exclusive worldwide
rights to pagoclone, a patented compound, for use as an anti-anxiety drug,
together with related know-how, in exchange for license fees, milestone payments
and royalties based on sales.
MIT Licenses
In March 1994, the Company entered into a license agreement with MIT
granting the Company an exclusive worldwide license to a number of patent rights
and related technology, including a patent covering a low-dose formulation of
melatonin for use in inducing sleep, in exchange for an initial license fee and
royalties based on sales.
The Company also licensed from MIT in February 1992, a number of other
patent rights with respect to which Dr. Richard Wurtman was the inventor or
co-inventor in exchange for a license fee and royalties based on sales (the "MIT
License"). The Company's license is exclusive for the longer of the first 12
years following commercialization of an individual licensed product or 2007. The
patents underlying the MIT License expire at various times commencing in 1997.
20
The MIT License includes a patent covering the use of a choline source
to reduce fatigue caused by intense exercise. This license is subject to, and
limited by, a license previously granted by MIT to another company, which
licensed two U.S. patents relating to the use of lecithin in capsule, granular
or liquid form (but not in food form or as part of a prescription drug) for
raising blood choline levels. As the Company's choline sports drink (Boston
Sports Supplement) is in a food form (e.g., a drink), it does not believe this
license will materially restrict its ability to market this proposed product.
Although the Company believes this product will be considered a food or a
dietary supplement, there can be no assurance that the FDA will not regulate it
as a drug, thereby requiring the filing and approval of an NDA.
Intercardia Agreements
Astra Merck Agreement
In December 1995, Intercardia entered into the Astra Merck
Collaboration, a development and marketing collaboration and license agreement
with Astra Merck which provides for the development, commercialization and
marketing of a twice-daily formulation of bucindolol for the treatment of
congestive heart failure in the U.S. Astra Merck made a $5,000,000 payment to
Intercardia and agreed to fund up to $15,000,000 of development costs, including
Intercardia's obligations relating to the BEST study and to pay royalties to
BMS. Astra Merck agreed to market bucindolol in the U.S., with Intercardia
retaining certain co-promotion rights. Astra Merck may terminate the Astra Merck
Collaboration at any time in order to enter into a contract relating to, or to
launch, a competing product if it first makes a payment to Intercardia. If a
termination occurs more than five years after FDA approval of an NDA for
bucindolol, no payment would be required.
The agreement calls for Intercardia to receive additional payments
based upon milestones related to FDA approval and the achievement of specified
levels of sales. Astra Merck agreed to pay the Company $5,000,000 within 10 days
of the grant by the FDA of marketing approval for a twice-daily formulation of
bucindolol, unless such an approval has previously been granted for another
beta-blocker based upon a reduction in heart failure mortality claims.
Intercardia is entitled to royalties of 15% of the first $110,000,000 per year
in net sales and 30% of yearly net sales above $110,000,000, adjusted for
inflation, Intercardia is committed to reimburse Astra Merck $10,000,000 in
December 1997 and to reimburse one-third of the launch costs through the first
12 months of commercial sales, up to $11,000,000. In the event Intercardia does
not make either of these payments, the royalty rate declines to 7% of net sales.
Intercardia retained U.S. rights to a once-daily formulation of bucindolol, as
well as rights for all formulations of bucindolol outside of the U.S.
Bristol-Myers Squibb Agreement
Through CPEC, Intercardia has an exclusive worldwide license to
bucindolol from BMS for pharmaceutical therapy for congestive heart failure and
left ventricular function. The license requires Intercardia to conduct all
appropriate and necessary clinical trials and to take all actions that are
reasonably necessary for the preparation and filing of an NDA and a comparable
application in at least one Western European country. Intercardia is obligated
to pay royalties on net product sales. Unless earlier terminated, the bucindolol
license continues, with respect to each country, until the later of patent on
bucindolol issued expiration, or 15 years after first commercial sale of
bucindolol (subject to two five-year renewals at Intercardia's option).
Duke License
In July 1995, Aeolus, Intercardia's 61% subsidiary, obtained from Duke
University ("Duke") an exclusive worldwide license (the "Duke License") to
products using catalytic antioxidant small molecule technology and compounds.
The Duke License also provides the Company a 180-day option and negotiation
period to license certain future discoveries in the field of antioxidant
research.
21
The Duke License requires Aeolus to use its best efforts to diligently
pursue development of products using the licensed technology and compounds and
to have the licensed technology cleared for marketing in the U.S. by the FDA and
other countries. Duke was issued 6.7% of the outstanding shares of Aeolus common
stock in connection with the Duke License. Aeolus will pay royalties to Duke on
net product sales and milestone payments upon the occurrence of certain events.
Progenitor Agreements
Chiron Agreement
In March 1995, Progenitor entered into an agreement with Chiron to
collaborate in the development and commercialization of Progenitor's T7T7 gene
delivery technology. The agreement licenses to Chiron Progenitor's T7T7 delivery
system for various fields. All rights to product applications of the technology
that are not specifically included in the agreement are retained by Progenitor.
Chiron would supply clinical and commercial manufacturing for any collaboration
products and would be a preferred manufacturer for the product fields retained
by Progenitor. Under the agreement, Progenitor has received payments of
$3,000,000, of which $750,000 was then paid by Progenitor to Chiron as
Progenitor's share in certain start-up nonviral gene therapy manufacturing costs
at Chiron, and Progenitor may receive additional payments based upon the
achievement of defined, mostly late-stage clinical development and regulatory
milestones. The agreement encompasses a minimum of eleven potential products
subject to the research and development collaboration that Chiron may take
forward for clinical development. Progenitor also would receive royalties from
commercial sales of any products resulting from the collaboration.
Novo Nordisk/ZymoGenetics Agreement
In May 1995, Progenitor and ZymoGenetics, a subsidiary of Novo Nordisk,
entered into a research, development and commercialization agreement. Under the
agreement, ZymoGenetics obtained an exclusive, worldwide license to any rights
of Progenitor relating to the BFU-e red blood cell growth factor activity
identified by Progenitor for use in all human therapeutic and small molecule
drug design uses. The development effort is divided into two stages. One project
was terminated at the first stage by Progenitor. If the first stage of the
second project, which is ongoing, is completed successfully, and ZymoGenetics
decides to proceed to the second stage, Progenitor could also receive license
fees and additional payments contingent on achieving late stage development and
regulatory approval milestones for each product. Progenitor would also receive
royalties from commercial sales. ZymoGenetics has the right to manufacture and
market, on an exclusive worldwide basis, products developed from this
collaboration.
Other Progenitor Agreements
Progenitor entered into a license agreement and a sponsored research
agreement with Ohio University in January 1992, as amended in October 1993. The
license agreement grants Progenitor the exclusive worldwide rights to yolk sac
stem cells, gene delivery technologies, and related technologies in exchange for
royalties based on net sales and an equity investment in Progenitor. One United
States patent and several foreign patents have been issued, and three patent
applications are pending in the U.S. and certain foreign countries.
In connection with the foregoing agreements, Progenitor issued 5% of
its original equity and sold for $350,000 an additional 117,000 shares of
Progenitor common stock to the Ohio University Foundation. In the event an
initial public offering, merger or similar corporate transaction of Progenitor
is consummated, the Ohio University Foundation is entitled to purchase 25,000
shares of Progenitor common stock at a price equal to 50% of the anticipated
public offering price or merger or other consideration (subject to adjustment in
the event of stock splits or similar transactions). At September 30, 1996, the
Ohio University Foundation owned approximately 4.5% of Progenitor's outstanding
capital stock.
22
The license agreement also contains certain requirements relating to
the management and operations of Progenitor, including the nomination of two
Ohio University designees to the Board of Directors of Progenitor.
In July 1995, Progenitor obtained from Vanderbilt University exclusive
worldwide rights to Vanderbilt's rights under a jointly owned patent application
utilizing technology relating to a gene, del-1, that may play a role in the
development and growth of blood vessels. The gene was co-discovered by
Progenitor and Vanderbilt. The license was granted in exchange for royalties
based on sales. Vanderbilt may terminate the license after three years if
Progenitor has not made adequate efforts to commercialize products based on the
gene.
In September 1996, Progenitor entered into sponsored research
agreements with the National Jewish Center for Immunology and Respiratory
Medicine and with Vanderbilt University. Under the separate agreements,
Progenitor will fund genomic research to characterize the genes that are active
early in the formation of blood and immune cells and in the development of blood
vessels. Each agreement provides Progenitor first rights to license discoveries
and technologies arising from the research programs.
Transcell Agreements
In January 1992 and October 1993, Transcell entered into license
agreements with Princeton pursuant to which Transcell was granted exclusive
worldwide licenses to specified patent applications and any patents that issue
therefrom, including any derivative patent applications or patents that issue,
relating to certain technology funded by Transcell and any licensed products, in
exchange for an upfront license fee and royalties based on sales. The license
agreements provide for Transcell to use its best efforts to commercialize the
licensed products or processes, including satisfying milestones.
PATENTS AND PROPRIETARY RIGHTS
Redux
Under the Servier Agreements, the Company has an exclusive license to
sell dexfenfluramine in the U.S. under a patent covering the use of
dexfenfluramine to treat abnormal carbohydrate craving, which has been
sublicensed by the Company to AHP. The compound patent on dexfenfluramine, which
was discovered by Servier, has expired. Use of dexfenfluramine for the treatment
of abnormal carbohydrate craving was patented by Drs. Richard Wurtman and Judith
Wurtman, consultants to the Company and directors of Interneuron and
InterNutria, respectively. This use patent was assigned to MIT and licensed by
MIT to Servier, and pursuant to the Servier Agreements was licensed to the
Company. The Drs. Wurtman have advised the Company that, in accordance with MIT
policy, they are entitled to 50% of the royalties received by MIT in connection
with MIT's licensing of dexfenfluramine to Servier.
This use patent expires in 2000, although the Company has applied for
an extension of the expiration date by an amount of time relating to the FDA
regulatory review process (but in any event no longer than five additional
years). However, there can be no assurance of receipt of such extension on a
timely basis or at all or as to the period of any such extension. Upon
expiration of the patent, generic drugs claiming the same use previously covered
by the patent may become available. Fenfluramine is already available in the
United States for the treatment of obesity. See "Competition" and "Government
Regulation."
Citicoline
The compound citicoline is not covered by a composition of matter
patent. The licensed U.S. patent covering the administration of citicoline to
treat patients afflicted with conditions associated with the inadequate release
of brain acetylcholine expires in 2003. As described in the licensed patent, the
inadequate release of acetylcholine may be associated with several disorders,
including the behavioral and neurological syndromes seen after brain traumas and
peripheral neuro-muscular disorders including myasthenia gravis and post-stroke
rehabilitation. The claim of the licensed patent, while being broadly directed
to the treatment of inadequate release of brain acetylcholine, does not
specifically recite the indications for which the IND has been filed. In
addition to any proprietary rights provided by this patent, the Company expects
to rely on certain marketing exclusivity regulations of the FDA. In March 1995,
the Company filed a patent application relating to the use of citicoline to
reduce the size of the area damaged by the stroke, or infarct size. Additional
domestic and international applications were filed by the Company in 1996.
23
Pagoclone
Interneuron licensed from RPR on a worldwide basis patents and patent
applications covering a composition of matter, processes, and metabolites of
pagoclone. A U.S. composition of matter patent was issued in October 1990 and
related U.S. patents were issued in February and March 1996.
Melzone
Interneuron licensed from MIT a patent issued in September 1995 that
covers the use of low-doses of melatonin for the induction of sleep, in exchange
for royalties based on sales.
Bucindolol
CPEC has licensed from BMS a compound patent on bucindolol which
expires in 1997, prior to the anticipated launch of the product. Intercardia
intends to pursue up to five years' market exclusivity under the Waxman-Hatch
Act, although there can be no assurance such exclusivity will be obtained, and
to develop a once-daily formulation of the drug. See "Government Regulation."
Progenitor
Progenitor has filed several U.S. patent applications relating to
leptin receptors (including various isoforms of the leptin receptors). The
Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights relating to the leptin
receptor or receptors. If the Company becomes involved in such litigation, it
could consume a substantial portion of the Company's managerial and financial
resources. The Company is aware that Millennium Pharmaceuticals, Inc.
("Millennium") has filed a patent application relating to a receptor for leptin
and its use in obesity applications, and has licensed to Hoffman-LaRoche, Inc.
rights to develop certain therapeutics for obesity using Millennium's discovery
of a leptin receptor. Millennium has filed a "Protest" in the United States
Patent and Trademark Office in connection with certain Progenitor applications
relating to leptin receptors. A Protest is an available procedure sometimes used
by a third party to provide the patent examiner who is reviewing the involved
application or applications with what the third party believes to be relevant
information. The Protest procedure does not afford any right to the third party
to participate in the patent prosecution process beyond the filing of its
written Protest. Millennium's Protest primarily argues that any claims allowed
to Progenitor should not be so broad as to cover Millennium's own leptin
receptor. There can be no assurance that Millennium's patent application, or
additional patent applications filed by Millennium or others, will not result in
issued patents covering a leptin receptor, the leptin protein or other ligands,
or any of their respective uses. There can be no assurance that the invention by
Millennium will be accorded an invention date later than Progenitor's invention
date, that any patent will issue to Progenitor or that any such patent issued to
Progenitor would be broad enough to cover leptin receptors of Millennium or
others. Progenitor's failure to obtain a patent on a leptin receptor, or its
failure to obtain a patent that covers the leptin receptors of Millennium or
others, or the issuance of a patent to a third party covering a leptin receptor,
the leptin protein or other ligands, or any of their respective uses, could have
a material adverse effect on Progenitor. Any legal action against the Company
claiming damages and seeking to enjoin commercial activities relating to the
affected products and processes could, in addition to subjecting the Company to
potential liability for damages, require the Company or any strategic partner to
obtain a license in order to continue to manufacture or market the affected
products and processes. There can be no assurance that the Company would prevail
in any such action or that any license required under any such patent would be
made available on commercially acceptable terms, if at all.
Progenitor has licensed from Ohio University one U.S. patent and
several pending U.S. patent applications relating to stem cell technology and
gene delivery technology (T7T7), along with certain corresponding foreign
patents and applications.
Transcell
Transcell has exclusive licenses under two U.S. patents assigned to
Princeton University relating to Transcell's drug transport technology.
Transcell also has exclusive rights under domestic patent applications and their
foreign counterparts relating to oligosaccharide synthesis/combinatorial
chemistry, drug transport and gene therapy technologies.
24
Notices of Allowance have been received on various aspects of Transcell's
oligosaccharide synthesis/combinatorial chemistry.
There can be no assurance that patent applications filed by the Company
or others, in which the Company has an interest as assignee, licensee or
prospective licensee, will result in patents being issued or that, if issued,
any of such patents will afford protection against competitors with similar
technology or products, or could not be designed around or challenged. If the
Company is unable to obtain strong proprietary rights protection of its products
after obtaining regulatory clearance, competitors may be able to market
competing products by obtaining regulatory clearance, through showing
equivalency to the Company's product, without being required to conduct the
lengthy clinical tests required of the Company. The patent situation in the
field of biotechnology generally is highly uncertain and involves complex legal,
scientific and factual questions. To date, there has emerged no consistent
policy regarding the breadth of claims allowed in biotechnology patents.
Products being developed by the Company may conflict with patents which
have been or may be granted to competitors, universities or others. Third
parties could bring legal actions against the Company claiming patent
infringement and seeking damages or to enjoin clinical testing, manufacturing
and marketing of the affected product or process. If any such actions are
successful, in addition to any potential liability for damages, the Company
could be required to obtain a license, which may not be available, in order to
continue to manufacture or market the affected product or use the affected
process. The Company also relies upon unpatented proprietary technology and may
determine in some cases that its interest would be better served by reliance on
trade secrets or confidentiality agreements rather than patents. No assurance
can be made that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to such
proprietary technology or disclose such technology or that the Company can
meaningfully protect its rights in such unpatented proprietary technology. The
Company also intends to conduct research on other pharmaceutical compounds or
technologies, the rights to which may be held by, or be subject to, patent
rights of third parties and accordingly, if products based on such technologies
are commercialized, they may infringe such patents or other rights.
GOVERNMENT REGULATION
Therapeutics
Most of the Company's products will require regulatory clearance by the
FDA prior to commercialization. The nature and extent of regulation differs with
respect to different products. In order to test, produce and market certain
therapeutic products in the United States, mandatory procedures and safety
standards, approval processes, and manufacturing and marketing practices
established by the FDA must be satisfied.
An IND application is required before human clinical use in the United
States of a new drug compound or biological product can commence. The IND
application includes results of pre-clinical (animal) studies evaluating the
safety and efficacy of the drug and a detailed description of the clinical
investigations to be undertaken.
Clinical trials are normally done in three phases. Phase 1 trials are
concerned primarily with the safety and preliminary effectiveness of the
product. Phase 2 trials are designed primarily to demonstrate effectiveness in
treating the disease or condition for which the product is limited, although
short-term side effects and risks in people whose health is impaired may also be
examined. Phase 3 trials are expanded clinical trials intended to gather
additional information on safety and effectiveness needed to clarify the
product's benefit-risk relationship, discover less common side effects and
adverse reactions, and generate information for proper labeling of the drug. The
FDA receives reports on the progress of each phase of clinical testing and may
require the modification, suspension or termination of clinical trials if an
unwarranted risk is presented to patients. When data is required from long-term
use of a drug following its approval and initial marketing, the FDA can require
Phase 4, or post-marketing, studies to be conducted. The Company expects that a
Phase 4 study may be initiated with Redux.
With certain exceptions, once clinical testing is completed, the
sponsor can submit an NDA for approval of a drug or Product License Application
("PLA") for approval of a biologic. The FDA's review of an NDA or PLA is
lengthy. In addition, an establishment license application is required to be
filed with and approved by the FDA for the manufacturing facility for a
biologic.
25
Patent Term Extension and Market Exclusivity
Under the Drug Price Competition and Patent Term Restoration Act of
1984 (commonly referred to as the "Waxman-Hatch Act"), a patent which claims a
product, use or method of manufacture covering drugs and certain other products
may be extended for up to five years to compensate the patent holder for a
portion of the time required for research and FDA review of the product.
Although Interneuron has applied for such protection for the use patent covering
dexfenfluramine, the Company cannot predict whether it will receive such an
extension. The Waxman-Hatch Act also establishes periods of market exclusivity,
which are various periods of time following approval of a drug during which the
FDA may not approve, or in certain cases even accept, applications for certain
similar or identical drugs from other sponsors unless those sponsors provide
their own safety and effectiveness data. Under present regulatory
interpretations, the longest period of market exclusivity (five years) may not
be available to isomers, such as dexfenfluramine, of a previously approved drug
(fenfluramine) whose active ingredient is a mixture of related isomers. The
Company is asking the FDA to reconsider this interpretation and it is possible,
but not likely, that dexfenfluramine may qualify for this five year period of
exclusivity. However, it is probable that the FDA would recognize at least three
years of marketing exclusivity for dexfenfluramine such that generic drugs would
not be eligible to compete in the marketplace for the first three years after
the FDA's approval of marketing of dexfenfluramine.
The Company believes that citicoline and bucindolol may be entitled to
patent extension and to five years of market exclusivity, respectively, under
the Waxman-Hatch Act. However, there can be no assurance that the Company will
be able to take advantage of either the patent term extension or marketing
exclusivity provisions or that other parties will not challenge the Company's
rights to such exclusivity.
Medical Foods and Dietary Supplements
Foods with health-related claims will be subject to regulation by the
FDA as foods, medical foods, dietary supplements or drugs, and a product's
classification will depend, in part, on its intended use as reflected in the
claims for the product. InterNutria's products are expected to be clinically
evaluated and regulated by the Dietary Supplement Health Education Act of 1994
("DSHEA") for the dietary management of physiological processes.
If represented for use in the cure, mitigation, treatment or prevention
of disease, a product will be regulated as a drug. If no such claims are made,
the product may be regulated as a food, a medical food, or a dietary supplement.
No explicit or implicit claim that "characterizes the relationship" of a
nutrient to a "disease or health-related condition" is permitted in food
labeling unless the FDA has authorized that claim by regulation. Any food
product that bears an unauthorized health claim is considered misbranded.
Dietary supplements may bear claims describing the role of nutrient or
dietary ingredient intended to affect the structure or function of the body,
provided certain requirements (such as substantiation for the claims) are met.
These claims need not be authorized by the FDA in a regulation. Medical foods
are specifically exempted from the restrictions of making health claims for
foods. FDA regulations define a medical food, in part, as "a food which is
formulated to be consumed or administered internally under the supervision of a
physician and which is intended for the specific dietary management of a disease
or condition for which distinctive nutritional requirements, based on recognized
scientific principles, are established by medical evaluation." Medical foods
occupy an intermediate position between a "food" and a "drug." While a medical
food is not now subject to regulation as a drug or to any type of prior approval
under the federal food and drug laws, the FDA is in the process of reevaluating
its regulation of medical foods and there is no assurance that the FDA's
regulatory policies on medical foods will not change.
Although the Company believes that Melzone, PMS Escape and Boston
Sports Supplement are considered dietary supplements, there can be no assurance
that the FDA will not attempt to regulate them as drugs, thereby requiring the
filing of NDAs and review and approval by the FDA prior to marketing. In
addition, classification of these three products as dietary supplements limits
the types of claims that can be made in marketing.
The FDA also regulates the substances that may be included in food
products. A substance intended for use as a food or to be added to a food may be
marketed only if it is generally recognized among qualified experts as safe for
its intended use or if it has received FDA approval for such use in the form of
a food additive regulation. If the Company
26
develops a food which is, or which contains, a substance that is not generally
recognized as safe or approved by the FDA in a food additive regulation for its
intended use, then such approval must be obtained prior to the marketing of the
product. The Company will be required to present studies showing, among other
things, that the substance is safe, and that its use will not promote deception
of the consumer or otherwise violate the Federal Food, Drug, and Cosmetic Act.
Dietary ingredients used in dietary supplements need not be generally recognized
as safe, but they may not present a significant or unreasonable risk of illness
or injury.
Progenitor
The precise regulatory standards to which Progenitor's proposed
products eventually will be held are uncertain due to the uniqueness of the
therapies under development and the lack of regulatory policy associated with
bone marrow transplantation. The Company assumes that Progenitor's therapeutic
products will be subjected to clinical testing similar to that of a drug, in
addition to other FDA and international approval processes. The Company expects
that the majority, if not all, of the therapeutic products developed by
Progenitor will be classified by the FDA as biological products.
It is possible that certain of the products being developed by
Progenitor will be regulated by the FDA as drugs or as medical devices. The FDA
approval process for medical devices differs from that for drugs or biologics
but may also be expensive and time-consuming. Progenitor's activities may also
be subject to guidelines established by the NIH relating to the transfer of
recombinant DNA into humans. All such research, including clinical trials, must
be approved by the NIH Recombinant DNA Advisory Committee.
Gene Therapy Regulation
The NIH has established the NIH Recombinant DNA Advisory Committee (the
"RAC") to advise the NIH concerning approval of NIH-supported research involving
the use of recombinant DNA. A proposal will be considered by the RAC only after
the protocol has been approved by the local Institutional Review Board and
Institutional BioSafety Committee of the institution where the trial is to be
conducted, which address issues such as the provision of informed consent by
human research subjects and the risks to human subjects in relationship to
anticipated benefits of the research. All meetings of the RAC are open to the
press and public and therefore could subject Progenitor to unfavorable public
sentiment regarding human gene therapy products. Although the jurisdiction of
the NIH currently applies only when NIH-funded research or facilities are
involved in any aspect of the protocol, the RAC encourages all gene transfer
protocols to be submitted for its review. The NIH and FDA are currently
considering a revision to the RAC review process to make it applicable only to
specific protocols that raise novel issues. Progenitor intends to comply with
RAC and NIH guidelines even when, under present policy, it may not be subject to
them. In addition, the FDA, which has jurisdiction over drug and biological
products intended for use in patients, also must review and authorize human
trials involving gene therapy, whether or not the research is federally funded,
before such human trials can proceed. The FDA requires the submission of an IND
application before human trials with new biological drugs can be conducted.
Because gene therapy is a novel therapeutic approach, the approval process for
clinical trials involving gene therapy is not yet clearly defined. There can be
no assurance that Progenitor will be able to comply with future requirements or
that its products will be approvable.
New human gene therapy products are expected to be subject to extensive
regulation by the FDA and comparable agencies in other countries. The precise
regulatory requirements that will have to be complied with are uncertain at this
time due to the novelty of the human gene therapies under development.
Currently, each protocol is reviewed by the FDA on a case by case basis. The FDA
has published a "Points to Consider" guidance document with respect to the
development of gene therapy protocols. The Company believes that certain
products developed by Progenitor will be regulated as biological products. In
addition, each vector containing a particular gene is expected to be regulated
as a separate biological product or new drug, depending upon its intended use
and FDA policy. New drugs are subject to regulation under the Federal Food, Drug
and Cosmetic Act, and biological products, in addition to being subject to
certain provisions of that Act, are regulated under the Public Health Service
Act. One or both statutes and the regulations promulgated thereunder govern,
among other things, the testing, manufacturing, safety, efficacy, labeling,
storage, record keeping, advertising and other promotional practices involving
biologics or new drugs. FDA approval or other clearances must be obtained before
clinical testing, and before manufacturing and marketing, of new biologics or
other new drug products. At the FDA, the Center for Biologics Evaluation and
Research ("CBER") is responsible
27
for the regulation of new biological drugs. CBER has a Division of Cell and Gene
Therapy, which is the primary group within the FDA to oversee gene therapy
products
Other
The Federal Food, Drug, and Cosmetic Act, the Public Health Service
Act, the Federal Trade Commission Act, and other federal and state statutes and
regulations govern or influence the research, testing, manufacture, safety,
labeling, storage, record keeping, approval, advertising and promotion of drug,
biological, medical device and food products. Noncompliance with applicable
requirements can result, among other things, in fines, recall or seizure of
products, refusal to permit products to be imported into the U.S., refusal of
the government to approve product approval applications or to allow Interneuron
to enter into government supply contracts, withdrawal of previously approved
applications and criminal prosecution. The FDA may also assess civil penalties
for violations of the Federal Food, Drug, and Cosmetic Act involving medical
devices. The Federal Trade Commission may assess civil penalties for violations
of the requirement to rely upon a "reasonable basis" for advertising claims for
non-prescription and food products.
Employees
As of September 30, 1996, Interneuron and its Subsidiaries had 139
full-time employees, including 63 at Interneuron, 25 at Progenitor, 30 at
Transcell, 16 at Intercardia, five at InterNutria and a number of part-time
consultants, including Richard Wurtman, M.D., Judith Wurtman, Ph.D., and Lindsay
Rosenwald, M.D., Interneuron's Chairman. None of the Company's employees is
represented by a labor union and Interneuron believes its employee relations are
satisfactory.
Item 2. Properties
The Company leases an aggregate of approximately 10,200 square feet of
office space in Lexington, MA. The lease expires in December 1996, provides for
annual rent of approximately $356,000, and grants the Company a right of first
refusal for an additional 8,100 square feet of laboratory space, subject to the
present tenant electing not to remain in such space. The Company intends to
renew its current lease and/or lease additional space at its present location or
similar space in another location in the Boston, MA area. The Subsidiaries are
parties to office leases providing for aggregate annual rental of approximately
$987,000. The Company has guaranteed certain Subsidiaries' obligations under
these leases.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
EXECUTIVE OFFICERS AND KEY PERSONNEL
The following table sets forth the names and positions of the
executive officers and key personnel of the Company:
Name Age Position
Executive Officers
Lindsay A. Rosenwald, M.D. 41 Chairman of the Board of Directors
Glenn L. Cooper, M.D. 43 President, Chief Executive Officer
and Director
28
Mark S. Butler 50 Executive Vice President, Chief
Administrative Officer and General
Counsel
Thomas F. Farb 40 Executive Vice President, Finance,
Chief Financial Officer and
Treasurer
Bobby W. Sandage, Jr., Ph.D. 43 Executive Vice President, Research
and Development and Chief Scientific Officer
Key Personnel
Brian R. Anderson 50 Senior Vice President, Marketing
and Commercial Development of
Interneuron
Clayton I. Duncan 47 President, Chief Executive Officer
and Director of Intercardia
Douglass B. Given, M.D., Ph.D. 44 President, Chief Executive Officer
and Director of Progenitor
James F. Pomroy 62 Chairman of InterNutria
Executive Officers
Lindsay A. Rosenwald, M.D. was a co-founder and since February 1989 has
been Chairman of the Board of Directors of the Company. Dr. Rosenwald has been
the Chairman and President of The Castle Group, Ltd., a biotechnology and
biopharmaceutical venture capital firm, since October 1991, the Chairman and
President of Paramount Capital Investment, LLC, a merchant banking firm, since
1995 and the Chairman and President of Paramount Capital, Inc., an investment
banking firm, since February 1992. In June 1994, Dr. Rosenwald founded Paramount
Capital Asset Management, Inc. a money management firm specializing in the
biotechnology and health sciences industry. From 1987 until 1991, Dr. Rosenwald
was a Managing Director, Corporate Finance at D.H. Blair & Co., Inc., an
investment banking firm. Dr. Rosenwald received his M.D. from Temple University
School of Medicine and his B.S. in Finance from Pennsylvania State University.
Dr. Rosenwald is also a director of the following publicly -traded
pharmaceutical or biotechnology companies: Titan Pharmaceuticals, Inc., Ansan,
Inc., Atlantic Pharmaceuticals, Inc., Avigen, Inc.,VimRx Pharmaceuticals, Inc.,
Xenometrix, Inc., BioCryst Pharmaceuticals, Inc., Sparta Pharmaceuticals, Inc.,
and Neose Technologies, Inc. and is Chairman of the Board or a director of a
number of privately held companies in biotechnology or pharmaceutical fields.
Glenn L. Cooper, M.D. has been President, Chief Executive Officer and a
director of the Company since May 1993. Dr. Cooper was also Progenitor's
President and Chief Executive Officer from September 1992 to June 1994, is a
director of each of the Subsidiaries and currently serves as acting President
and Chief Executive Officer of Transcell. Prior to joining Progenitor, Dr.
Cooper was Executive Vice President and Chief Operating Officer of Sphinx
Pharmaceuticals Corporation from August 1990. Dr. Cooper had been associated
with Eli Lilly since 1985, most recently, from June 1987 to July 1990, as
Director, Clinical Research, Europe, of Lilly Research Center Limited; from
October 1986 to May 1987 as International Medical Advisor, International
Research Coordination of Lilly Research Laboratories; and from June 1985 to
September 1986 as Medical Advisor, Regulatory Affairs, Chemotherapy Division at
Lilly Research Laboratories. Dr. Cooper received his M.D. from Tufts University
School of Medicine, performed his postdoctoral training in Internal Medicine and
Infectious Diseases at the New England Deaconess Hospital and Massachusetts
General Hospital and received his A.B. from Harvard College.
Mark S. Butler joined the Company in December 1993 as Senior Vice
President (and in December 1995 was appointed Executive Vice President), Chief
Administrative Officer and General Counsel. Prior to joining the Company, Mr.
Butler was associated with the Warner-Lambert Company since l979, serving as
Vice President, Associate General
29
Counsel since 1990, as Associate General Counsel from 1987 to 1990, Assistant
General Counsel from 1985 to 1987 and in various other legal positions from 1979
to 1985. From 1975 to 1979, Mr. Butler was an attorney with the law firm of
Shearman & Sterling.
Thomas F. Farb joined the Company in April 1994 as Senior Vice
President (and in December 1995 was appointed Executive Vice President) Finance,
Chief Financial Officer and Treasurer. Prior to joining the Company, from
October 1992, Mr. Farb was the Vice President of Finance and Corporate
Development of Cytyc Corporation, a public medical device and diagnostics
company. From 1989 to October 1992, he was Senior Vice President, Chief
Financial Officer and a Director of Airfund Corporation, a commercial aircraft
leasing company, and from October 1983 to April 1989, he held various positions
at Symbolics, Inc., a computer and software manufacturer, including General
Manager of Eastern Operations, Vice President, Finance and Corporate Development
and Chief Financial Officer. Mr. Farb received an A.B. from Harvard College. He
is a director of HNC Software, Inc. and Redwood Trust, Inc., both public
companies.
Bobby W. Sandage, Jr., Ph.D. joined the Company in November 1991 as
Vice President - Medical and Scientific Affairs and was appointed Vice President
- - Research and Development in February 1993, Senior Vice President - Research
and Development in February 1994 and Executive Vice President - Research and
Development and Chief Scientific Officer in December 1995. From February 1989 to
November 1991 he was Associate Director, Project Management for the
Cardiovascular Research and Development division of DuPont Merck Pharmaceutical
Company. From May 1985 to February 1989 he was affiliated with the Medical
Department of DuPont Critical Care, most recently as associate medical director,
medical development. Dr. Sandage is an adjunct professor in the Department of
Pharmacology at the Massachusetts College of Pharmacy. Dr. Sandage received his
Ph.D. in Clinical Pharmacy from Purdue University and his B.S. in Pharmacy from
the University of Arkansas. He is a director of Aeolus, a subsidiary of
Intercardia.
Key Personnel
Brian Anderson joined the Company in September 1995 as Senior Vice
President, Marketing and Commercial Development. Prior to joining Interneuron,
Mr. Anderson was associated with Bristol-Myers Squibb since August 1987. Most
recently, since January 1994, he was Senior Director, CNS Marketing, U.S.
Pharmaceuticals of Bristol-Myers Squibb Pharmaceutical Group; from April 1990 to
December 1993 he was Senior Director, CNS Business Planning and from August 1987
to April 1990 he was Director, Business Development of Bristol-Myers
International Group. Prior to joining Bristol-Myers, Mr. Anderson was associated
with the Upjohn Company of Canada since 1971.
Clayton I. Duncan joined Intercardia as its President, Chief Executive
Officer and director in January 1995. Mr. Duncan served as President and Chief
Executive Officer of Sphinx Pharmaceuticals Corporation from April 1989 to
December 1993, and was a member of the Board of Directors of Sphinx from August
1988 to September 1994. From 1987 to 1990, Mr. Duncan was Chairman of the Board
of CRX Medical, Inc., a medical products company founded by him. From 1987 to
1989, Mr. Duncan was General Partner of InterSouth Partners, a venture capital
fund and, from 1979 to 1987, was Executive Vice President and a director of
Carolina Securities Corporation, a regional investment banking firm. Mr. Duncan
is also a director of Transcell.
Douglass B. Given, M.D., Ph.D. joined Progenitor in January 1993 as
Executive Vice President and was appointed President, Chief Executive Officer
and a director of Progenitor in June 1994. From March 1989 to January 1993, Dr.
Given was Vice President for U.S. Regulatory Affairs at the Schering-Plough
Research Institute. From August 1986 to March 1989, Dr. Given was Vice President
of Project Management and Worldwide Regulatory Affairs at G.D. Searle. From
August 1983 to August 1986, he held clinical investigation positions at Eli
Lilly. Dr. Given received his M.D. and Ph.D. from the University of Chicago,
performed his postdoctoral training in Internal Medicine and Infectious Diseases
at Harvard Medical School and Massachusetts General Hospital, and received an
M.B.A. from the Wharton School at the University of Pennsylvania.
James F. Pomroy was named Chairman of InterNutria in April 1995. From
January 1994 to February 1995, Mr. Pomroy was President and Chief Executive
Officer of Nutriceutical Products Corporation, and from January 1992 to January
1994, he served as Chairman and Chief Executive Officer of Everfresh Beverages.
Previously, Mr. Pomroy was President and Chief Executive Officer of Drake
Bakeries, Inc. from June 1989 to December 1991, and Chairman
30
and Chief Executive Officer of Sundor Brands from April 1983 to March 1989. From
November 1976 to March 1983, Mr. Pomroy was Executive Vice President of Iroquois
Brands, and from 1972 to 1976 he was Senior Vice President of the Kitchens of
Sara Lee. Mr. Pomroy holds an M.B.A. from Harvard University Graduate School of
Business.
COMPLIANCE WITH SECTION l6(a) OF THE SECURITIES EXCHANGE ACT OF l934.
To the Company's knowledge, there were no reports required under
Section 16(a) of the Securities Exchange Act of l934 which were not timely filed
during fiscal 1995.
31
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Price Range of Securities
Interneuron's Common Stock trades on the Nasdaq National Market under
the symbol "IPIC". The table below sets forth the high and low sales prices of
Interneuron's Common Stock as reported by the Nasdaq National Market for the
periods indicated. These prices are based on quotations between dealers, do not
reflect retail mark-up, mark-down or commissions, and do not necessarily
represent actual transactions.
High Low
---- ---
Fiscal Year Ended September 30, 1995:
October 1 through December 31, 1994 $6 1/4 $4
January 1 through March 31, 1995 8 4 1/8
April 1 through June 30, 1995 10 3/4 6 3/4
July 1 through September 30, 1995 19 1/4 9 1/8
Fiscal Year Ended September 30, 1996:
October 1 through December 31, 1995 $31 1/4 $11 5/8
January 1 through March 31, 1996 38 22 1/2
April 1 through June 30, 1996 44 1/2 29 1/2
July 1 through September 30, 1996 35 1/2 19 3/4
(b) Approximate Number of Equity Security Holders
The number of record holders of the Company's Common Stock as of
December 13, 1996 was approximately 700. The Company believes that the number of
beneficial owners exceeds 16,000.
(c) Dividends
The Company has never paid a cash dividend on its Common Stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of cash
dividends. Any dividends will be subject to the preferential dividend of $0.1253
per share payable on the outstanding Series B Preferred Stock ($30,000 per
annum), $1.00 per share payable on the outstanding Series C Preferred Stock
($5,000 per annum) and dividends payable on any other preferred stock issued by
the Company.
32
Item 6. Selected Financial Data
The selected financial data presented below summarizes certain
financial data which has been derived from and should be read in conjunction
with the more detailed financial statements of the Company and the notes thereto
which have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report thereon is included elsewhere in this Annual Report on Form 10-K
along with said financial statements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."
33
Fiscal Year Ended September 30,
(Amounts in thousands except per share data)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Statement of Operations Data:
- -----------------------------
Revenues:
Product revenue $ --- $ --- $ --- $ --- $ 14,162
Contract & license fee revenue 67 11,584 101 3,463 8,335
Investment income 759 938 505 1,039 4,465
--------- ---------- ------- ------- --------
Total revenues 826 12,522 606 4,502 26,962
========= ======== ======= ======= =========
Cost of product revenue --- --- --- --- 11,617
Research and development expenses 10,235 20,014 17,737 15,168 17,824
Selling, general and
administrative expenses 2,863 5,242 8,403 7,878 17,497
Purchase of in-process research
and development --- --- 1,852 --- 8,584
Net loss (12,272) (12,734) (27,386) (17,981) (27,986)
Net loss per common share $ (.57) $ (.50) $ ( .98) $ (.59) $ (.76)
Weighted average common
shares outstanding 21,428 25,492 27,873 30,604 37,004
******************************
September 30,
Balance Sheet Data: (Amounts in thousands)
- -------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Working capital $16,025 $19,444 $ 8,577 $25,755 $155,246
Total assets 18,244 23,689 18,278 37,516 186,438
Capital lease obligations
long-term portion ---- ---- 1,025 782 526
Total liabilities 1,472 2,462 8,501 10,486 22,303
Accumulated deficit (20,692) (33,426) (60,811) (78,792) (106,778)
Stockholders' equity 16,771 21,227 9,777 21,392 144,762
34
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report.
Liquidity and Capital Resources
Cash, Cash Equivalents and Marketable Securities
At September 30, 1996, the Company had cash, cash equivalents and
marketable securities of $169,608,000, an increase of $134,619,000 from
September 30, 1995, primarily reflecting (a) receipt in fiscal 1996 of (i)
approximately $109,000,000 of net proceeds to Interneuron from the June 1996
public offering of 3,000,000 shares of Common Stock, (ii) approximately
$30,000,000 of net proceeds to Intercardia (excluding $5,000,000 received from
Interneuron), from the February 1996 Intercardia IPO, and (iii) approximately
$17,000,000 of net proceeds to Interneuron from the exercise of Class B
Warrants, options and other warrants; and (b) approximately $21,000,000 of cash
used in operating activities and for capital expenditures.
Redux
During fiscal 1996, the Company acquired inventories in connection with
the scale-up of the manufacturing process to support the launch and continued
supply of Redux. Inventories related to Redux were approximately $8,000,000 at
September 30, 1996 and depend to a large extent on forecasts provided by AHP and
production capabilities of Boehringer. There can be no assurance that AHP's
forecasts and the Company's production planning will be accurate, which may
result in higher inventory costs to the Company or inadequate or excessive
supplies of the product. In addition, there can be no assurance that the
manufacture of the capsules and their sale to AHP will result in profits to
Interneuron. There may be seasonality associated with Redux inventories and
revenues which the Company is unable to determine.
The contract manufacturing agreement between Boehringer and the Company
obligates Boehringer to provide, and the Company to purchase, manufactured
product to the extent defined in the agreement, through the current contract
expiration date of December 31, 1998. At the expiration of the agreement, the
Company would be obligated to purchase from Boehringer any unused manufacturing
materials, work in process, or finished product and to assume any unfilled
Boehringer purchase commitments that could not be canceled prior to the
expiration or termination of the agreement. See "Agreements - Redux Agreements."
The Company is highly dependent upon AHP to market Redux and upon Redux
to generate revenues. Currently applicable royalties to the Company under its
agreements with AHP are: (i) "base" royalties to the Company equal to 11.5% of
AHP's net sales (equal to the royalties required to be paid by the Company to
Servier), and (ii) "additional" royalties ranging from 5% of the first
$50,000,000 of net sales to 10% of net sales over $150,000,000 (based on the
current status of dexfenfluramine as a scheduled drug and because the Company is
supplying Redux to AHP). See "Business - Interneuron Products - Redux." In
connection with the April 1996 receipt of FDA marketing clearance of Redux, the
Company received a $500,000 milestone payment from AHP and will be entitled to
an additional $6,000,000 payment and a $3,500,000 equity investment if
dexfenfluramine is descheduled as a controlled substance by April 29, 1997.
There is no assurance that dexfenfluramine will be descheduled as a controlled
substance by such date. See "Risk Factors - Risks Relating to Redux."
35
Intercardia
In February 1996, Intercardia completed the Intercardia IPO resulting
in net proceeds to Intercardia of approximately $30,000,000 (not including
$5,000,000 from Interneuron's purchase of Intercardia shares in the Intercardia
IPO). Interneuron's ownership in Intercardia's outstanding capital stock
decreased from approximately 88% at September 30, 1995 to approximately 60% at
September 30, 1996 as a result of these transactions.
In December 1995, Intercardia received $5,000,000 upon execution of the
Astra Merck Collaboration, which obligates Astra Merck to fund certain future
U.S. development, marketing and manufacturing costs and to assume Intercardia's
funding obligation for the BEST Study, including the drug supplies and
monitoring costs, and royalty obligation to BMS. Intercardia will be entitled to
royalties based on net sales by Astra Merck. Intercardia has agreed to pay Astra
Merck $10,000,000 in December 1997 and to reimburse Astra Merck for one-third of
certain product launch costs, up to a total of $11,000,000. In the event
Intercardia does not make either of these payments, royalties payable by Astra
Merck to Intercardia will be substantially reduced. See "Agreements -
Intercardia Agreements."
In September 1994, Intercardia acquired 80% of the outstanding capital
stock of CPEC in exchange for (i) 170,000 shares of Interneuron's Common Stock
and (ii) payments to shareholders of CPEC and other related expenses and assumed
liabilities totaling approximately $1,100,000. Intercardia agreed to make two
additional purchase price payments, up to a maximum of 75,000 shares of
Interneuron Common Stock each, subject to adjustment based on the fair market
value at the time of issuance, upon the achievement of milestones relating to
the regulatory review of bucindolol. As a result of the transaction, the Company
recorded a charge for the purchase of in-process research and development of
approximately $1,852,000. The Company may incur an additional noncash charge in
connection with each future issuance of such securities, based upon their fair
market value at the time of issuances, of a minimum of $750,000 and a maximum of
$1,875,000. In January 1996, Interneuron acquired the remaining 20% of the
outstanding capital stock of CPEC not owned by Intercardia by issuing an
aggregate of 342,792 shares of Common Stock to the former CPEC minority
stockholders. As a result of this transaction, the Company recorded a noncash
charge for the purchase of in-process research and development of approximately
$6,100,000 in fiscal 1996.
Other Subsidiaries
In December 1995, InterNutria acquired technology and know-how
subsequently resulting in the PMS Escape product in exchange for $2,400,000,
payable in two installments of Interneuron Common Stock, the first in December
1996 and the second in December 1997, at the then-prevailing market price. See
"Results of Operations". InterNutria commenced a test-launch of PMS Escape in a
regional market in March 1996 while continuing clinical studies of the product.
The costs related to this test-launch and continuing clinical studies are
estimated to be approximately $2,200,000 in fiscal 1997. There can be no
assurance of the success of the test launch or the clinical studies.
Interneuron is currently funding operations of Progenitor, Transcell
and InterNutria. Expenses of the Subsidiaries, including those required under
collaboration agreements, constitute a significant part of the Company's overall
expenses.
In June 1996, Progenitor filed a registration statement relating to an
initial public offering of its common stock which was indefinitely postponed.
There can be no assurance this offering will be completed. See "Business -
Progenitor."
Clinical Studies
In addition to Redux-related expenses, the Company's principal
expenditures are for product development and clinical trials, including expenses
required under collaborative agreements. In particular, the Company is
performing two pivotal Phase 3 clinical trials with citicoline which are
expected to proceed at least through fiscal 1997. The costs of the clinical
trials and related studies and the preparation of the NDA are estimated, based
upon current trial protocols, to aggregate approximately $17,500,000. The
Company is unable to predict with certainty the costs of related studies which
will depend upon FDA requirements. Further, in the event the Company markets
citicoline directly, additional funds would be required for manufacturing,
distribution and selling efforts. The Company will also incur substantial
development costs in connection with a Phase 2/3 clinical trial on pagoclone
which commenced in November 1996, and on other products under development,
including those which may be acquired by the Company in the future.
Other
Accounts receivable of $4,338,000 at September 30, 1996 include
Interneuron's receivable from AHP for Redux capsules and support for Redux sales
force expenses pursuant to the copromotion agreement between Interneuron and AHP
and approximately $1,400,000 of Intercardia's receivable from Astra Merck for
bucindolol development costs assumed by Astra Merck.
36
Accrued expenses increased $3,610,000 to $11,604,000 at September 30,
1996 from $7,994,000 at September 30, 1995 primarily due to accruals related to
purchases of Redux capsules and dexfenfluramine drug substance and the Company's
and Subsidiaries' accruals relating to clinical trials and developmental studies
and product marketing.
Deferred revenue of $6,921,000 at September 30, 1996 consists primarily
of payments received from AHP for dexfenfluramine drug substance that had not
been used in the production process or recognized as revenue. See Note B of
Notes to Consolidated Financial Statements.
At September 30, 1996, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $100,000,000 which
expire at various dates from 2004 to 2011. In addition, the Company had
approximately $3,700,000 of tax credit carryforwards for federal income tax
purposes expiring at various dates through 2011. The Company's ability to use
the carryforwards may be subject to limitations resulting from ownership changes
as defined in the U.S. Internal Revenue Code Sections 382 and 383.
The Company's strategy includes evaluation of various technology,
product or company acquisition and/or financing opportunities (including private
placements and initial and follow-on equity offerings) and the Company and
certain of its subsidiaries are currently engaged in discussions relating to
such opportunities, although it has no agreements or commitments relating to any
particular opportunity. Any such initiatives may involve the sale of securities
of Interneuron or its subsidiaries and/or financial commitments to fund product
development.
While the Company believes it has sufficient cash for currently planned
expenditures in fiscal 1997, it may seek additional funds through other equity
and/or debt financings and corporate collaborations to provide working capital
financing and funding for new business opportunities and future growth. In
addition, certain subsidiaries are exploring various financings (including
issuances of securities of the subsidiaries, possibly in combination with
securities of Interneuron, in public offerings or private placements),
collaborations or business combinations. If such efforts are not successful,
certain activities at these subsidiaries may be reduced. Although Interneuron
may acquire additional equity in subsidiaries through participation in
financings or conversion of inter-company debt, equity financings by a
subsidiary will likely reduce Interneuron's percentage ownership of that
subsidiary and funds held by the subsidiaries will generally not be available to
Interneuron. The Company's goal is for its subsidiaries to establish independent
operations and financing through corporate alliances, third-party financings,
mergers or other business combinations, with Interneuron generally retaining an
ongoing equity interest. The nature of any such transaction is expected to vary
depending on the business and capital needs of each subsidiary and the state of
development of their respective technologies or products.
Results of Operations
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September 30,
1995
Total revenues increased $22,460,000 to $26,962,000 in fiscal 1996 from
$4,502,000 in fiscal 1995 reflecting $14,162,000 in product revenue (primarily
from initial sales of Redux), $8,335,000 in contract and license fee revenue and
$4,465,000 in investment income.
Product revenue of $14,162,000 in fiscal 1996 consists primarily of
$8,348,000 of sales of Redux capsules and dexfenfluramine drug substance to AHP
and $5,483,000 of total royalties received by Interneuron from AHP based upon
AHP-reported net sales of Redux for the quarter ended June 30, 1996. The Company
recognizes Redux royalty revenue when net sales are reported to it by AHP, which
occurs in the quarter after AHP shipments of Redux to distributors. See Note B
of Notes to Consolidated Financial Statements.
Contract and license fee revenue increased $4,872,000, or 141%, to
$8,335,000 in fiscal 1996 from $3,463,000 in fiscal 1995. This increase reflects
primarily $5,000,000 received by Intercardia pursuant to the Astra Merck
Collaboration, revenues derived under the co-promotion agreement with AHP to
support Interneuron's sales force and a milestone payment from AHP paid upon the
marketing approval of Redux. Partially offsetting these increases is a net
reduction of $2,000,000 pertaining to payments made to Progenitor in fiscal 1995
pursuant to Progenitor's license agreement with Chiron.
37
Investment income increased $3,426,000, or 330%, to $4,465,000 in
fiscal 1996 from $1,039,000 in fiscal 1995. This increase is due to
substantially higher weighted average invested cash balances resulting primarily
from proceeds from Interneuron's and Intercardia's public offerings and the
exercise of Interneuron's Class B Warrants and other warrants and options.
Total costs and expenses increased $32,476,000 or 141%, to $55,522,000
in fiscal 1996 from $23,046,000 in fiscal 1995. For the first time, during
Fiscal 1996, the Company incurred cost of product revenue, aggregating
$11,617,000 and representing 36% of the increase in total costs and expenses.
Cost of product revenue consists primarily of cost of Redux capsules and
dexfenfluramine drug substance sold to AHP and royalties paid to Servier on
total net sales of Redux. The Company also incurred charges of $8,584,000
relating to the purchase of in-process research and development, which
represents 26% of the increase in total costs and expenses. The charges for the
purchase of in-process research and development, of which $8,098,000 was
noncash, related primarily to (i) Interneuron's acquisition of the remaining 20%
of CPEC not owned by Intercardia in exchange for the issuance of 342,792 shares
of Interneuron Common Stock and (ii) the Company's acquisition of technology and
know-how to produce a specially-formulated dietary supplement for women's use
during their pre-menstrual period (PMS Escape) in exchange for the issuance of
Interneuron Common Stock in December 1996 and 1997. See Note 2 of Notes to
Consolidated Financial Statements.
Research and development expenses increased $2,656,000, or 18%, to
$17,824,000 in fiscal 1996 from $15,168,000 in fiscal 1995. This increase is due
primarily to increased license fees, patent expenses and milestones related to
certain products in various stages of development and increased product
development expenses relating to antioxidant small molecules, Melzone, PMS
Escape and other products and compounds. The Company continues to expend
substantial funds on the development of citicoline and commenced two additional
pivotal Phase 3 trials in 1996 which are expected to continue through 1997.
Additionally, the Company has begun a Phase 2/3 study on pagoclone and will
share 50% of the costs of a Phase 4, or post-marketing, study on Redux with AHP,
expected to commence during fiscal 1997. Research and development expenses in
fiscal 1996 of $17,824,000 was comprised primarily of Interneuron's costs to
develop citicoline dexfenfluramine and pagoclore and the subsidiaries' costs to
develop their technologies, including Intercardia's efforts to develop
bucindolol.
Selling, general and administrative expense increased $9,619,000, or 122%,
to $17,497,000 in fiscal 1996 from $7,878,000 in fiscal 1995. This increase
reflects increased expenses from the Subsidiaries, including the addition of
management personnel by Intercardia and InterNutria, costs relating to
InterNutria's commencement of a regional test launch of PMS Escape and related
sales, marketing and public relations expenses and costs relating to a proposed
initial public offering by Progenitor which has been indefinitely postponed.
During the quarter ended June 30, 1996, Interneuron hired an approximately 30
person sales force to co-promote Redux along with Wyeth-Ayerst and incurred
related hiring and carrying costs. Interneuron is expected to incur additional
costs in fiscal 1997 relating to a regional test launch of Melzone and Boston
Sports Supplement and continued test marketing of PMS Escape. Redux co-promotion
costs are expected to increase substantially in future periods.
Primarily as a result of increased selling, general and administrative
expenses and the non-recurring charges for the purchase of in-process research
and development, particularly offset by increased contract and license fees and
increased investment income, net loss increased to ($27,986,000) in fiscal 1996
from ($17,981,000) in fiscal 1995. Net loss per share increased to ($0.76) in
fiscal 1996 from ($0.59) in fiscal 1995. Weighted average common shares
increased in the fiscal 1996 periods reflecting additional equity issuances.
The Company from time to time explores various technology, product or
company acquisitions and/or business combinations or financing opportunities and
is currently engaged in discussions relating to such opportunities. Any such
initiatives may involve the issuance of shares of Interneuron's Common Stock or
other securities and/or financial commitments for licensing fees and/or to fund
product development, either of which may adversely affect the Company's
consolidated financial condition or results of operations.
Fiscal Year Ended September 30, 1995 Compared to Fiscal Year Ended September 30,
1994
Contract and license fee revenue increased $3,362,000 to $3,433,000 in
fiscal 1995 from $101,000 in fiscal 1994. This increase is primarily due to the
receipt of $2,500,000 by Progenitor under its license agreement with Chiron. The
Company had minimal contract and license fee revenue in fiscal 1994. Also,
investment income increased substantially primarily due to higher invested
balances as well as higher
38
prevailing interest rates. The Company may continue to experience significant
fluctuations in revenues from the timing of license fees, contract and royalty
income and milestone payments.
Total costs and expenses decreased $4,946,000, or 18%, to $23,046,000 in
fiscal 1995 from $27,992,000 in fiscal 1994. This decrease was due to a general
reduction in spending and prioritizing of resources and the non-recurrence of a
$1,852,000 charge during fiscal 1994 relating to the purchase of technology
rights associated with the acquisition of CPEC. See Note L of Notes to the
Consolidated Financial Statements. Activities of the Subsidiaries continued to
represent a significant percentage of the Company's consolidated expenses and
represented 54% and 42% of consolidated expenses in fiscal 1995 and 1994,
respectively.
Research and development expenses decreased $2,569,000, or 14% to
$15,168,000 in fiscal 1995 from $17,737,000 in fiscal 1994. Substantial initial
expenses incurred in fiscal 1994 for the Phase 3 clinical trial for citicoline
caused a relative decrease in such spending in fiscal 1995. Also contributing to
this decrease were reduced spending on development of certain other products by
the Company and decreased spending by Transcell and Progenitor. Additionally,
fiscal 1994 included an initial license payment by Interneuron to RPR for the
acquisition of pagoclone and a non-recurring charge pertaining to the issuance
of warrants to a licensee of the Company. Partially offsetting these decreases
in fiscal 1995 was a $750,000 charge for Progenitor's obligation to fund certain
manufacturing costs at Chiron, Intercardia's increased funding of Phase 3
clinical trial for bucindolol, and the Company's increased spending to prepare
for Redux-related advisory committee meetings which occurred in September 1995.
General and administrative expenses decreased $525,000, or 6%, to
$7,878,000 in fiscal 1995 from $8,403,000 in fiscal 1994. This decrease was
primarily due to decreased recruiting, relocation and severance costs and
non-recurring business development costs which were partially offset by wage,
benefit and administrative costs related to management additions and business
development activity at Intercardia and InterNutria.
Primarily as a result of increased revenues, decreased costs and expenses
and the allocation of the net loss of certain Subsidiaries to their minority
stockholders, net loss decreased $9,405,000, or 34%, to ($17,981,000) in fiscal
1995 from ($27,386,000) in fiscal 1994. Net loss per share decreased from ($.98)
in fiscal 1994 to ($.59) in fiscal 1995 also reflecting an increase in weighted
average shares outstanding from 27,873,000 in fiscal 1994 to 30,604,000 in
fiscal 1995 resulting from additional equity issuances.
Item 8. Financial Statement and Supplementary Data
The response to this item is included in a separate section of this Report.
See Index to Consolidated Financial Statements on Page F-1.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure.
Not applicable.
39
PART III
The information called by Item 10: Directors and Executive Officers of the
Registrant; Item 11: Executive Compensation; Item 12: Security Ownership of
Certain Beneficial Owners and Management; and Item 13: Certain Relationships and
Related Transactions will be included in and is incorporated by reference from
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the close of its fiscal year.
RISK FACTORS
An investment in the Company's securities is speculative in nature
and involves a high degree of risk. Each prospective investor should carefully
consider the following risk factors, as well as others described elsewhere in
this Form 10-K, before making an investment.
History of Losses; Accumulated Deficit and Potential Future Losses;
Potential Fluctuations in Revenues. Until recently, the Company has been engaged
primarily in research and development activities. At September 30, 1996, the
Company had accumulated net losses since inception of approximately $107
million. Losses are continuing and cash continues to be used by operating
activities. The Company will be required to conduct significant development and
clinical testing activities and establish marketing, sales, regulatory and
administrative capabilities for many of its proposed products, including
products which may be acquired in the future, which are expected to result in
continued operating losses for the foreseeable future. The extent of future
losses and time required to achieve profitability are highly uncertain. There
can be no assurance that the Company will be able to achieve profitability on a
sustained basis, if at all. The Company has experienced, and may continue to
experience, fluctuations in revenues as a result of the timing of license fees,
royalties, or product shipments regulatory approvals, product launches and
milestone payments.
Risks Relating to Redux. The Company's future success may depend
in large part on the long-term marketing success of Redux. There can be no
assurance as to the successful commercialization of Redux, which may be affected
by various factors, including the following:
Safety Issues; Post-Marketing Study. Included in the
FDA-approved labeling for Redux are references to certain risks
that may be associated with dexfenfluramine and which were
highlighted during the FDA's review of the drug. One issue relates
to whether there is an association between appetite suppressants,
including dexfenfluramine, and the development of primary
pulmonary hypertension ("PPH"), a rare but serious lung disorder.
In the general population, the yearly occurrence of PPH is
estimated to be about one to two cases per million. An
epidemiologic study conducted in Europe examining risk factors for
PPH showed that among other factors, weight reduction drugs
including dexfenfluramine, systemic hypertension, and obesity
itself were associated with a higher risk of PPH. Results of the
final study, including a reclassification and inclusion of certain
previously excluded cases by the authors of the study, estimated
the yearly occurrence to be between 23 and 46 cases per million
for patients taking appetite suppressants for greater than three
months duration. Although the Company believes that the benefits
of weight loss by obese patients meeting the labeling criteria for
Redux outweigh the risk of developing PPH, issues relating to PPH
may adversely affect the market for, and the sales and marketing
of, Redux as well as the Company's business, financial condition
and results of operations.
A second issue discussed in the FDA-approved labeling for
Redux is whether dexfenfluramine is associated with certain
neurochemical changes in the brain. Certain studies related to
this issue, conducted by third parties, purport to show that very
high doses of dexfenfluramine cause prolonged serotonin depletion
in certain animals, which some researchers believe is an
indication of neurotoxicity. The Company presented data relating
40
to the lack of neurocognitive effects in patients taking Redux and
believes that, as demonstrated in human trials, these animal
studies are clinically irrelevant to humans because of
pharmacokinetic differences between animals and humans (resulting
in much higher brain concentrations of dexfenfluramine and its
active metabolite in certain animals than in humans) and because
of the high dosages used in animal studies. The Company has agreed
with the FDA to conduct a Phase 4, or post marketing, study of
Redux. Interneuron expects the Phase 4 study to be a double-blind
placebo-controlled trial to further evaluate long-term
neurocognitive function in patients taking Redux. Adverse results,
if any, of this study or the perceived likelihood of the
occurrence of the labeled risks in patients taking Redux may
materially adversely affect the labeling market, and/or marketing,
of the drug as well as the Company's business, financial condition
and results of operations.
Recent FDA Approval and Launch; Costs Associated with
Sales Force; Potential Fluctuations in Revenues and Related Costs.
Redux was launched commercially by AHP in June 1996. Accordingly,
the Company has only limited experience in sales and manufacturing
of Redux in commercial quantities and cannot predict the extent of
fluctuations in revenues and costs and inventory levels. The
Company has incurred substantial costs in connection with the
launch of Redux, including costs associated with developing a
sales force and implementation of co-promotion activities.
Substantial working capital is required to fund inventories and
receivables associated with the commercialization of Redux.
Dependence on AHP for Marketing: The success of Redux
depends to a significant extent on the marketing and sales efforts
of AHP, over which the Company has minimal control. There can be
no assurance that the Company will generate significant revenues
from royalties, or that such royalties will be sufficient to
offset the Company's significant investment in research and
development, manufacturing, sales force and other costs associated
with Redux.
Dependence on Suppliers; Risks Related to Manufacturing.
The Company is required to purchase all dexfenfluramine bulk
chemical from Servier at a fixed cost, subject to annual
adjustments. The Company is responsible for supplying AHP with
Redux finished product requirements and has contracted to purchase
all Redux finished product until December 1998 from Boehringer,
which is the sole manufacturer of the finished product identified
in the Redux NDA. The Company will be required to obtain a
replacement GMP manufacturing facility for Redux prior to
expiration of the Boehringer agreement. There can be no assurance
a replacement supplier will be approved by the FDA in sufficient
time to avoid an interruption in supply. The Company is materially
dependent on the ability of each of Servier and Boehringer to have
manufactured and delivered, on a timely basis, sufficient
quantities of bulk chemical and finished product, respectively, in
accordance with applicable specifications. In the event Servier or
Boehringer are unable to satisfy production requirements on a
timely basis or are prevented for any reason from manufacturing
bulk chemical or finished product, respectively, the Company would
likely be unable to secure any alternate supplier or manufacturer
without materially adverse disruption and substantially increased
costs, if at all, which would materially adversely affect the
Company's business and results of operations.
Inventory levels depend to a large extent on forecasts
provided by AHP and production capabilities of Boehringer. There
can be no assurance that AHP's forecasts and the Company's
resulting production planning will be accurate, or that Boehringer
(or its suppliers) will be able to manufacture product according
to specifications on a timely basis, which may result in higher
product costs to the Company or inadequate or excessive supplies
of the product, any of which could materially adversely affect the
Company's business and results of operations. There may be
seasonality associated with Redux inventories and revenues which
the Company is unable to determine. In addition, there can be no
assurance that the manufacture and sale of Redux capsules will be
profitable to the Company.
41
Effect of Controlled Substances Act and Similar State
Regulations. Fenfluramine and its isomers, including
dexfenfluramine, are currently designated as Schedule IV
substances under the Controlled Substances Act. This act imposes
various registration and record keeping requirements and restricts
the number of prescription refills. In September 1995, an advisory
committee of the FDA recommended the removal of fenfluramine and
its isomers, including dexfenfluramine, from these controls. There
can be no assurance as to whether descheduling will occur or as to
the timing of such descheduling. In connection with the
committee's recommendation, the Company and AHP have agreed to
develop and administer a program to monitor for potential abuse or
misuse of dexfenfluramine. Further, state descheduling actions are
required by many states even after federal descheduling. The
continued status of dexfenfluramine as a controlled substance
would adversely affect the marketability of the drug and is
resulting in delayed milestone payments and equity investments in
the Company. Interneuron will receive such payments and investment
only if dexfenfluramine is descheduled prior to April 29, 1997. In
addition, because dexfenfluramine is scheduled, royalties payable
to the Company by AHP are lower than if the drug were descheduled.
Termination of Agreements. The Servier Agreements may be
terminated by Servier under certain conditions, including an
acquisition by a new party (other than existing stockholders or
their affiliates as of the date of the Servier Agreements) of a
20% beneficial ownership interest in the Company without Servier's
consent. The Servier Agreements also require Servier's consent to
a Company sublicense, which consent was obtained in connection
with the AHP Agreements. However, Servier has the right to
withdraw its consent to the AHP Agreements in the event of a
change in control of AHP or unless certain minimum net sales are
achieved or payments are made as if such minimum sales were
achieved. In the event of a breach of the Servier Agreements by
the Company, or of other specified events which result in the
termination of the Servier Agreements, AHP may succeed to the
Company's position under the Servier Agreements. AHP has the right
to terminate the AHP Agreements at any time on 12 months notice.
Wyeth-Ayerst may also terminate the co-promotion agreement in the
event annual sales generated by the Interneuron sales force do not
exceed specified levels. The Company anticipates that for the
foreseeable future, royalties from AHP on Redux sales will
constitute a substantial portion of the Company's revenues.
Accordingly, the termination of the Servier Agreements or the AHP
Agreements would have a material adverse effect on the Company.
Other Risks. The successful commercialization of Redux is
also subject to other risks including those set forth under "Risks
Factors -- Competition" and "- Uncertainty of Patent Protection
and Proprietary Rights," "- Risks Relating to Managing Growth,"
"Competition," "- Risk of Product Liability" and "- Uncertainty
Regarding Pharmaceutical Pricing and Reimbursement."
Uncertainties Related to Clinical Trials. Before obtaining
regulatory approval for the commercial sale of any of its pharmaceutical
products under development, the Company must demonstrate that the product is
safe and efficacious for use in each target indication. The results of
preclinical studies and early clinical trials may not be predictive of results
that will be obtained in large-scale testing or use, and there can be no
assurance that clinical trials of the products under development by the Company
will demonstrate the safety and efficacy of such products or that, regardless of
clinical trial results, FDA approval will be obtained. A number of companies in
the pharmaceutical industry have suffered significant setbacks in advanced
clinical trials or have not received FDA approval, even after promising results
in earlier trials. If clinical trials do not demonstrate the safety and efficacy
of certain products under development, the Company may be adversely affected.
Citicoline and bucindolol are currently in Phase 3 clinical trials and a Phase
2/3 clinical trial on pagoclone has recently commenced. There can be no
assurance that these trials will confirm or demonstrate the safety and efficacy
of the respective drug or that FDA approval will be obtained. Ferrer may
terminate the Ferrer Agreement in the event FDA approval of citicoline is not
obtained by January 1999. The Company also expects to conduct clinical
evaluation on certain dietary supplement products under development to
substantiate the claims that are expected to be made for the products. There can
be no assurance that these clinical evaluations will be successful.
Funding Requirements. The Company has expended and will continue
to expend substantial funds to conduct research and development activities and
preclinical and clinical testing on products under development, including
products which may be acquired in the future. In addition, the Company is
establishing sales and marketing capabilities for certain of its products. The
Company is co-promoting Redux and intends to market and/or co-promote directly
citicoline, Melzone and PMS Escape, assuming applicable regulatory
42
approvals are obtained and test launches are successful. The Company will
therefore be required to establish and maintain appropriate internal sales
forces and functions and will require additional funds for manufacturing and
marketing activities. The Company may seek additional funds through corporate
collaborations or future equity or debt financings to provide funding for new
business opportunities and future growth.
Interneuron is also currently funding the activities of
Progenitor, Transcell and InterNutria, each of which is seeking to enter into
collaborations, business combinations or private or public equity or debt
financings to pursue development and commercialization of their technologies or
products. Although Interneuron may acquire additional equity in a subsidiary
through participation in any such financing or conversion of intercompany debt,
equity financings by a subsidiary will likely reduce Interneuron's percentage
ownership of that subsidiary and funds raised by the subsidiaries will generally
not be available to Interneuron. Although certain of the subsidiaries are
engaged in discussions relating to potential business combinations or private or
public equity financings, none of the subsidiaries has any commitments for
additional financing and there can be no assurance that any such financing will
be available on acceptable terms, if at all. In particular, Progenitor had filed
a registration statement with the Commission relating to an initial public
offering of its securities. Such offering has been postponed indefinitely and
there can be no assurance that such offering will be completed or as to the
timing or amount of any offering.(1) If adequate funds are not available to
these subsidiaries on acceptable terms, such subsidiaries may be required to
delay, scale back or eliminate some or all of their respective research and
product development programs or product launches.
Risks Relating to Test Launches of Non-Pharmaceutical Products.
During 1996, the Company commenced a regional test launch of PMS Escape, a
dietary supplement for women with pre-menstrual syndrome which is continuing to
be clinically evaluated. The Company also recently commenced a regional test
launch of Melzone, a low-dose dietary supplement formulation of melatonin and
intends shortly to commence a test launch of Boston Sports Supplement. Based on
the results of the test launches, ongoing clinical evaluation and the
availability of sufficient funds, the Company may determine not to market any of
these products, to conduct additional testing of any of these products or to
market any of these products on a broader scale. There can be no assurance any
of these test launches will be successful, or if successful, be predictive of
the commercial viability of any product if marketed more broadly.
Uncertainty of Government Regulation. The Company's research,
development and pre-clinical and clinical trials and the manufacturing and
marketing of most of its products are subject to an extensive regulatory
approval process by the FDA and other regulatory agencies in the U.S. and other
countries. The process of obtaining FDA and other required regulatory approvals
for drug and biologic products, including required preclinical and clinical
testing, is lengthy, expensive and uncertain. There can be no assurance that,
even after such time and expenditures, the Company will be able to obtain
necessary regulatory approvals for clinical testing or for the manufacturing or
marketing of any products. Even if regulatory clearance is obtained, post-market
evaluation of the products, if required, could result in restrictions on a
product's marketing or withdrawal of the product from the market as well as
possible civil or criminal sanctions. In addition, the Company will be dependent
upon the manufacturers of its products to maintain compliance with current Good
Manufacturing Practices ("GMP") and on laboratories and medical institutions
conducting preclinical studies and clinical trials to maintain both good
laboratory and good clinical practices. There can be no assurance that GMP
manufacturers capable of producing product according to forecasts can be
obtained on a timely basis, or at all, for products under development, including
citicoline and pagoclone, which would materially adversely affect the Company's
ability to commercialize these products. Certain products are proposed to be
marketed by the Company as dietary supplements, such
- --------
(1) A registration statement relating to those securities has been
filed with the Commission but has not yet become effective. Those
securities may not be sold nor offers to buy be accepted prior to
the time the registration statement becomes effective. This Form
10-K shall not constitute an offer to sell or the solicitation of
an offer to buy nor shall there be any sales of those securities
in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the
securities laws of any such state.
43
as Melzone and PMS Escape. There can be no assurance that the FDA will not
attempt to regulate the products as drugs, which would require the filing of
NDAs and review and approval by the FDA prior to marketing, or otherwise
restrict the marketing of these products. In addition, classification of these
products as dietary supplements limits the types of claims that can be made in
marketing.
In addition to the regulatory framework for product approvals, the
Company and its collaborative partners may be subject to regulation under state
and federal laws, including requirements regarding occupational safety,
laboratory practices, environmental protection and hazardous substance control,
and may be subject to other present and possible future local, state, federal
and foreign regulation. The impact of such regulation upon the Company cannot be
predicted and could be material and adverse.
Uncertainty of Patent Position and Proprietary Rights. The
Company's success will depend to a significant extent on its ability to obtain
and enforce patent protection on its products and technologies, to maintain
trade secrets and to operate without infringing on the proprietary rights of
others. There can be no assurance that any Company patents will afford any
competitive advantages or will not be challenged or circumvented by third
parties or that any pending patent applications will result in patents being
issued. Certain of the Company's patents and patent applications include
biotechnology claims, the patentability of which generally is highly uncertain
and involves complex legal and factual questions. Because of the extensive time
required for development, testing and regulatory review of a potential product,
it is possible that before a potential product can be commercialized, any
related patent may expire, or remain in existence for only a short period
following commercialization, thus reducing any advantage of the patent.
The composition of matter patent on dexfenfluramine in the U.S.
has expired. The use patent on dexfenfluramine for the treatment of abnormal
carbohydrate craving, which has been licensed to the Company, expires in 2000.
Competitors, including generic drug manufacturers, may market dexfenfluramine in
the U.S. claiming uses for obesity, assuming FDA approval can be obtained. Thus
there can be no assurance that this use patent will afford any competitive
advantage or will not be challenged or circumvented by third parties, although
the Company believes Redux will likely be entitled to market exclusivity under
the Drug Price Competition and Patent Term Restoration Act of 1984 (the
"Waxman-Hatch Act") until April 1999. Subsequent to the expiration of market
exclusivity or patent extension, the Company's revenues from Redux may be
materially reduced. The Company's royalty obligations to Servier for the license
of the know-how and trademark extend beyond the patent expiration date. This
royalty obligation may adversely affect the Company's ability to compete against
any then available generic drugs that are offered at lower prices. In addition,
the Company's royalties from AHP are subject to 50% reduction if generic drug
competition achieves a market share of 10% or greater of total new Redux
prescriptions in two consecutive quarters.
The U.S. composition of matter patent on bucindolol expires in
November 1997, prior to the anticipated launch of the product. As a result,
assuming FDA approval can be obtained, competitors, including generic drug
manufacturers, may market bucindolol, subject to potential market exclusivity
under the Waxman-Hatch Act. The Company's licensed U.S. patent covering the
administration of citicoline to treat patients afflicted with conditions
associated with the inadequate release of brain acetylcholine expires in 2003.
As described in the licensed patent, the inadequate release of acetylcholine may
be associated with several disorders, including the behavioral and neurological
syndromes seen after brain traumas and peripheral neuro-muscular disorders
including myasthenia gravis and post-stroke rehabilitation. The claim of the
licensed patent, while being broadly directed to the treatment of inadequate
release of brain acetylcholine, does not specifically recite the indications for
which the IND has been filed.
The Company may conduct research on pharmaceutical or chemical
compounds or technologies, the patents or other rights to which may be held by
third parties. Others have filed and in the future may file patent applications
covering certain products or technologies that are similar to those of the
Company. If products based on such technologies are commercialized by the
Company, they may infringe such patents or other rights, licenses to which may
not be available to the Company. Failure to obtain needed patents, licenses or
proprietary information held by others may have a material adverse effect on the
Company's business. There can be no assurance that others will not independently
develop similar technologies or duplicate any technology developed by the
Company or, if patents are issued, successfully design around the patented
aspects of any technology developed by the Company. Furthermore, litigation may
be necessary to enforce any patents issued to the Company, to determine the
scope and validity of the patent rights of others or in response to legal action
against the Company claiming damages for infringement of patent rights or other
proprietary rights or seeking to enjoin commercial activities relating
44
to the affected product or process. Not only is the outcome of any such
litigation highly uncertain, but such litigation may also result in significant
use of management and financial resources. The Company believes there may be
significant litigation in the industry regarding patent and other intellectual
property rights relating to leptin and leptin receptors; patent applications
relating to leptin receptors have been filed by Progenitor. The Company is aware
that Millennium has filed a patent application relating to a receptor for leptin
and its use in obesity applications, and has licensed to Hoffman-LaRoche Inc.
rights to develop certain therapeutics for obesity using Millennium's discovery
of a leptin receptor.
Millennium has filed a "Protest" in the United States Patent and
Trademark Office in connection with certain Progenitor applications relating to
leptin receptors. A Protest is an available procedure sometimes used by a third
party to provide the patent examiner who is reviewing the involved application
or applications with what the third party believes to be relevant information.
The Protest procedure does not afford any right to the third party to
participate in the patent prosecution process beyond the filing of its written
Protest. Millennium's Protest primarily argues that any claims allowed to
Progenitor should not be so broad as to cover Millennium's own leptin receptor.
There can be no assurance that Millennium's patent application, or
additional patent applications filed by Millennium or others, will not result in
issued patents covering a leptin receptor, the leptin protein or other ligands,
or any of their respective uses, including obesity. There can be no assurance
that the invention by Millennium will be accorded an invention date later than
Progenitor's invention date, that any patent will issue to Progenitor or that
any such patent issued to Progenitor would be broad enough to cover leptin
receptors of Millennium or others.
To the extent that consultants, key employees or other third
parties apply technological information independently developed by them or by
others to the Company's proposed products, disputes may arise as to the
proprietary rights to such information which may not be resolved in favor of the
Company. Most of the Company's consultants are employed by or have consulting
agreements with third parties and any inventions discovered by such individuals
generally will not become property of the Company. There can be no assurance
that Company confidentiality agreements will not be breached or that the
Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
Uncertainty Regarding Waxman-Hatch Act. Certain provisions of the
Waxman-Hatch Act grant market exclusivity for certain new drugs and dosage
forms. The Waxman-Hatch Act provides that a patent which claims a product, use
or method of manufacture covering certain drugs and certain other products may
be extended for up to five years to compensate the patent holder for a portion
of the time required for research and FDA review of the product. Although the
Company has applied for such protection for the use patent relating to
dexfenfluramine, there can be no assurance that it will receive an extension.
See "Risk Factors - Uncertainty of Patent Position and Proprietary Rights". The
Waxman-Hatch Act also establishes a period of time from the date of FDA approval
of certain new drug applications during which the FDA may not accept or approve
short-form applications for generic versions of the drug from other sponsors,
although it may accept or approve long-form applications (that is, other
complete NDAs) for such drug. There can be no assurance the Company will receive
marketing exclusivity any of its products, including bucindolol, for which the
composition of matter patent expires in November 1997. There can be no assurance
that any of the benefits of the Waxman-Hatch Act or similar foreign laws will be
available to the Company or that such laws will not be amended or repealed.
Risk of Clinical Trial and Product Liability. The use of the
Company's products in clinical trials and the marketing of any products may
expose the Company to substantial clinical trial and product liability claims.
Certain of the Company's agreements require the Company to obtain specified
levels of insurance coverage, naming the other party thereto as an additional
insured. There can be no assurance that the Company will continue to be able to
obtain such insurance coverage, that such insurance can be acquired in
sufficient amounts to protect the Company or other named parties against such
liability, at a reasonable cost, or at all or that any insurance obtained will
cover any particular liability claim. The Company is required to indemnify
Servier, Boehringer and AHP against claims, damages or liabilities incurred by
any of them in connection with the marketing of dexfenfluramine under certain
circumstances. The Company may also be required to indemnify other licensors
against product liability claims incurred by them as a result of products
developed by the Company under licenses from such entities. In the event of an
uninsured or inadequately insured
45
product liability claim, or in the event an indemnification claim was made
against the Company, the Company's business and financial condition could be
materially adversely affected.
Early Stage of Products Under Development by the Company. The
Company is investigating for therapeutic potential a variety of pharmaceutical
compounds, technologies and other products at various stages of development. In
particular, Progenitor and Transcell each are conducting very early stage
research and all of their proposed products require significant further research
and development, as well as testing and regulatory clearances, and are subject
to the risks of failure inherent in the development of products or therapeutic
procedures based on innovative technologies. The products under development by
the Company are subject to the risk that any or all of these proposed products
are found to be ineffective or unsafe, or otherwise fail to receive necessary
regulatory clearances. The Company is unable to predict whether any of its
products will be successfully manufactured or marketed. Further, due to the
extended testing and regulatory review process required before marketing
clearance can be obtained, the time frames for commercialization of any products
or procedures are long and uncertain.
Dependence on Others for Clinical Development, Regulatory
Approvals, Manufacturing and Marketing. The Company expects to rely upon
collaborative partners for the development, manufacturing and marketing of
certain of its products, including products which may be required in the future.
The Company is therefore dependent on the efforts of these collaborative
partners and the Company may have limited control over the manufacture and
commercialization of such products. For example, with respect to bucindolol,
neither the Company nor Intercardia controls the BEST Study, which is being
conducted by the NIH and the VA, and the Company will be substantially dependent
upon Astra Merck for the commercial success of the twice-daily formulation of
bucindolol in the U.S., assuming FDA approval is obtained. In the event certain
of the Company's collaborative partners terminate the related agreements or fail
to manufacture or commercialize products, the Company would be materially
adversely affected. Because the Company will generally retain a royalty interest
in sales of products licensed to third parties, its revenues may be less than if
it retained commercialization rights and marketed products directly. Although
the Company believes that its collaborative partners will have an economic
motivation to commercialize the products that they may license, the amount and
timing of resources devoted to these activities generally will be controlled by
each partner. There can be no assurance that the Company will be successful in
establishing any additional collaborative arrangements, or that any such
collaborative partners will be successful in commercializing products or not
terminate their collaborative agreements with the Company.
Risks Relating to Managing Growth. As a result of the Redux launch
and, assuming additional proposed product launches occur, the Company
anticipates experiencing a period of rapid growth, which is likely to place
significant demands on the Company's management, operational, financial and
accounting resources. The Company's intention to market certain products
directly will further strain these resources. In particular, the Company is
co-promoting Redux, which requires the Company to maintain a sales force and
related management systems. The Company's future success will depend in part on
whether it can expand its operational, financial and accounting systems and
expand, train and manage its employee base. The Company's inability to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
Competition. Competition from other pharmaceutical companies,
biotechnology companies, dietary supplement companies and research and academic
institutions is intense and expected to increase. The Company is aware of
products and technologies under development by its competitors that address
diseases being targeted by the Company and competitors have developed or are in
the process of developing products or technologies that are, or in the future
may be, the basis for competitive products. Redux may be subject to substantial
competition. Dexfenfluramine is an isomer of fenfluramine, which is sold under
the brand name Pondimin by AHP for approximately the same use as
dexfenfluramine, although indicated only for "short-term (a few weeks) use."
Although dexfenfluramine is distinguishable from fenfluramine, there can be no
assurance that Redux, which is higher priced than Pondimin, will achieve greater
market acceptance than Pondimin or any other prescription drug used to treat
obesity. The Company is aware of drugs under development for the treatment of
obesity including sibutramine, for which an affiliate of BASF AG has filed an
NDA to treat obesity. Although an FDA advisory committee had recommended against
its approval, it has been reported that the FDA has issued an approvable letter
relating to the drug. In addition, the Company is aware of anti-obesity drugs
under development by an affiliate of Roche Holdings Ltd. and by Neurogen
Corporation. In addition, other drugs and technologies relating to the treatment
of obesity are in earlier
46
stages of development and, due to the limited period of marketing exclusivity,
Redux may eventually be subject to competition from generic versions of
dexfenfluramine. The introduction of additional competitive products may
substantially reduce the Company's revenues from Redux.
Activase was recently approved for stroke and the Company is also
aware of a number of products in clinical development pursuing an indication for
stroke which could compete with citicoline. In addition, if regulatory approval
is obtained, bucindolol may compete with carvedilol, which is under development
in the U.S. by SmithKline Beecham, for the treatment of congestive heart
failure. An advisory committee of the FDA recommended against the approval of
carvedilol to treat congestive heart failure, although the Company believes
SmithKline Beecham is continuing to seek to gain FDA approval for the drug. In
addition, Melzone will compete with a substantial number of available melatonin
dietary supplement products and PMS Escape will compete with a number of
products for use during the pre-menstrual period.
Many companies in the pharmaceutical and dietary supplement
industries have substantially greater financial resources and development
capabilities than the Company and have substantially greater experience in
undertaking preclinical and clinical testing of products, obtaining regulatory
approvals and manufacturing and marketing products. In addition to competing
with universities and other research institutions in the development of
products, technologies and processes, the Company may compete with other
companies in acquiring rights to products or technologies. There can be no
assurance that the Company will develop products that are more effective or
achieve greater market acceptance than competitive products, or that the
Company's competitors will not succeed in developing products and technologies
that are safer or more effective or less expensive than those being developed by
the Company or that would render the Company's products and technologies less
competitive or obsolete.
Dependence Upon Key Personnel and Consultants. The Company is
dependent on certain executive officers and scientific personnel. The Company
has key person life insurance policies on the lives of Glenn L. Cooper, M.D.,
Richard Wurtman, M.D. and Lindsay A. Rosenwald, M.D. Drs. Wurtman and Rosenwald
devote only a portion of their time to the Company's business. In addition, the
Company is dependent upon certain executive officers or scientific personnel of
the subsidiaries, each of which has separate management who are responsible, to
a large extent, for the day-to-day operations and the strategic direction of the
respective subsidiary. In addition, the Company relies on independent
consultants to design and supervise clinical trials and assist in preparation of
FDA submissions.
Competition for qualified employees among pharmaceutical and
biotechnology companies is intense, and the loss of any of such persons, or an
inability to attract, retain and motivate additional highly skilled employees,
could adversely affect the Company's business and prospects. There can be no
assurance that the Company will be able to retain its existing personnel or to
attract additional qualified employees.
Uncertainty Regarding Pharmaceutical Pricing and Reimbursement.
The Company's business will be affected by the efforts of governmental and
third-party payors to contain or reduce the cost of health care. There have
been, and the Company anticipates that there will continue to be, a number of
proposals to implement government control over the pricing or profitability of
prescription pharmaceuticals, as is currently the case in many foreign markets.
The announcement or adoption of such proposals could have an adverse effect on
the Company. Furthermore, the Company's ability to commercialize its products
may be adversely affected to the extent that such proposals have a material
adverse effect on the business, financial condition and profitability of
companies that are prospective collaborative partners of the Company. Successful
commercialization of many of the Company's products, including Redux, may depend
on the availability of reimbursement for the cost of such products and related
treatment from third-party health care payors, such as the government, private
insurance plans and managed care organizations. There can be no assurance that
such reimbursement will be available. Such third-party payors are increasingly
challenging the price of medical products and services.
Control by Present Stockholders; Anti-Takeover Provisions. The
officers, directors and principal stockholders of the Company (including
individuals or entities related to such stockholders) beneficially own
approximately 47% of Interneuron's outstanding Common Stock. Accordingly,
these officers, directors and stockholders may have the ability to exert
significant influence over the election of the Company's Board of Directors and
to determine corporate actions requiring stockholder approval.
The Board of Directors has the authority, without further approval
of the Company's stockholders, to fix the rights and preferences of and to issue
shares of preferred stock. Further, the Servier
47
Agreements may be terminated in the event of any acquisition by a new party
(other than existing stockholders or their affiliates as of the date of the
Servier Agreements) of a 20% beneficial interest in the Company. The preferred
stock held by AHP provides that AHP's consent is required prior to the merger of
the Company, the sale of substantially all of the Company's assets or certain
other transactions. In addition, Ferrer may terminate the Ferrer Agreement in
the event an unaffiliated third party acquires 50% of Interneuron's Common
Stock. In addition, outstanding options under the Company's Stock Option Plans
become immediately exercisable upon certain changes in control of the Company.
In addition, Delaware corporate law imposes limitations on certain business
combinations. These provisions could, under certain circumstances, have the
effect of delaying or preventing a change in control of the Company and,
accordingly, could adversely affect the price of the Company's Common Stock.
No Dividends. The Company has not paid any cash dividends on its
Common Stock since inception and does not expect to do so in the foreseeable
future. Any dividends will be subject to the preferential cumulative dividend of
$0.1253 per share and $1.00 per share payable on the outstanding Series B
Preferred Stock and Series C Preferred Stock, respectively, held by AHP and
dividends payable on any other preferred stock issued by the Company.
Possible Volatility of Stock Price. The market prices for
securities of emerging growth companies have historically been highly volatile.
Future announcements concerning the Company or its subsidiaries, including
Intercardia, which is publicly-traded, or the Company's competitors, including
the results of testing and clinical trials, technological innovations or
competitive products, government regulations, developments concerning
proprietary rights, litigation, the Company's results of operations or public
concern as to the safety or commercial value of the Company's products, may have
a significant impact on the market price of the Company's Common Stock.
Shares Eligible for Future Sale; Registration Rights. As of
December 13, 1996, approximately 41,017,875 shares of Common Stock were
outstanding. Of these shares, approximately 19,000,000 are owned by affiliates
(or individuals or entities that may be deemed affiliates) of the Company or are
"restricted securities" within the meaning of Rule 144. Substantially all of
these shares are eligible for sale under Rule 144. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated),
including persons who may be deemed to be "affiliates" of the Company as that
term is defined under the Securities Act of 1933, as amended (the "Securities
Act"), is entitled to sell within any three-month period a number of restricted
shares beneficially owned for at least two years that does not exceed the
greater of (i) one percent of the then outstanding shares of Common Stock, or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. However, a person who is not an
affiliate and has beneficially owned such shares for at least three years is
entitled to sell such shares without regard to the volume or other requirements.
A stockholder of the Company with demand registration rights has
requested that the Company file a registration statement on Form S-3 relating to
the resale of such stockholder's shares of Common Stock and the Company intends
to file such registration statement in December 1996. Other stockholders of the
Company have demand and/or piggy back registration rights, including (i) one
stockholder of the Company with demand and piggy-back registration rights
relating to 622,222 shares of Common Stock issuable upon conversion of preferred
stock, (ii) two stockholders of the Company having piggy-back registration
rights until March 1997 relating to an aggregate of approximately 1,330,000
shares of Common Stock; (iii) individuals and entities entitled to receive
shares of Common Stock in each of December 1996 and 1997 with a market value of
$1,200,000 at the time of each issuance have registration rights in January 1997
and 1998 relating to the resale of those shares; and (iv) in the event up to a
maximum of 2,181,250 shares of Common Stock are issued in June 1998 pursuant to
certain put protection rights, holders of such shares will have registration
rights at that time.
The Company has outstanding other registration statements on Form
S-3 relating to the resale of shares of Common Stock and has registration
statements on Form S-8 relating to its 1989 Stock Option Plan, 1994 Long-Term
Incentive Plan and its 1995 Stock Purchase Plan.
Outstanding Options and Warrants. As of September 30, 1996,
approximately 5,000,000 shares of Common Stock were issuable upon exercise of
outstanding options and warrants. In addition, the Company is required to issue
additional shares of Common Stock in connection with technology acquisitions and
may issue
48
additional shares if certain put protection rights are exercised. To the extent
such shares are issued, the interest of holders of Common Stock will be diluted.
49
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) 1. Financial Statements
An index to Consolidated Financial Statements appears on page F-1.
2. Schedules
All financial statement schedules are omitted because they are not
applicable, not required under the instructions or all the information
required is set forth in the financial statements or notes thereto.
3. Exhibits
3.4 - Restated Certificate of Incorporation of Registrant (17)
3.5 - By-Laws of Registrant (1)
4.4 - Certificate of Designation establishing Series C Preferred Stock(17)
4.6 - Form of Registrant Warrant issued in subsidiary private
placement (25)
4.7 - Form of Registrant Warrant issued to designees of Paramount
Capital, Inc., and D.H. Blair& Co., Inc.(25)
10.5 (a) - Consultant and Non-competition Agreement between the
Registrant, Richard Wurtman, M.D. (34)
10.5 (b) - Consultant and Non-competition Agreement between InterNutria,
Inc. and Judith Wurtman, Ph.D. (34)
10.6 - Assignment of Invention and Agreement between Richard Wurtman,
M.D.,Judith Wurtman and the Registrant (1)
10.7 - Management Agreement between the Registrant
and Lindsay Rosenwald, M.D. (1)
10.9(a) - Restated and Amended 1989 Stock Option Plan (7)
10.10 - Form of Indemnification Agreement (1)
10.11 - Restated Amendment to MIT Option Agreement (1)
10.12(a) - Patent and Know-How License Agreement between the
Registrant and Les Laboratoires Servier ("Servier") dated February 7, 1990 ("License
Agreement") (1)
10.12(b) - Revised Appendix A to License Agreement (1)
10.12(c) - Amendment Agreement between Registrant and Servier, Orsem and Oril, Produits
Chimiques dated November 19,1992(3)(12)
10.12(d) - Amendment Agreement dated April 28, 1993 between Registrant and
Servier (16)
10.12 (e) - Consent and Amendment Agreement among Servier, American Home Products Corp.
and Registrant (34)
10.13 - Trademark License Agreement between the Registrant and Orsem dated February 7,
1990 (1)
10.14 - Supply Agreement between the Registrant and Oril Products Chimiques dated
February 7, 1990 (1)(3)
10.15(a) - Form of Indemnification Agreement between the Registrant and Alexander M. Haig,
Jr. (1)
10.16 - Assignment of Invention by Richard Wurtman, M.D. (1)
10.22(a) - License Agreement dated January 15, 1993, as amended, between the
Registrant and Grupo Ferrer (3)(16)
10.25 - License Agreement between the Registrant and the Massachusetts
Institute of Technology (4)
10.28 - Letter Agreement between the Registrant and Bobby W. Sandage, Jr., Ph.D. (7)
50
10.29 - Amended Lease dated December 12, 1991 for Registrant's offices in
Lexington, Massachusetts (7)
10.29(a) - First Amendment to Lease dated as of October 14, 1994 between Registrant and
Ledgemont Realty Trust (25)
10.30 - License Agreement dated January 1, 1992 between the Trustees of Princeton
University and the Registrant (3)(8)
10.31 - Research Agreement dated as of July 1, 1991 between the Registrant and the
Trustees of Princeton University (3)(8)
10.32 - Consulting Agreement dated as of July 1, 1991 between the Registrant and Daniel
Kahne, Ph.D. (3)(8)
10.33 - License Agreement dated January 28, 1992 between Ohio University, The Castle
Group, Inc. and Scimark Corporation (assigned to Progenitor, Inc.)(3)(8)
10.34 - Sponsored Research Agreement between Scimark Corporation (assigned to
Progenitor, Inc.) and Ohio University (3)(8)
10.34(a) - Letter Amendment between Progenitor, Inc. and Ohio University (18)
10.35 - Technology License Contract dated December 18, 1991 between the
Registrant and the Mayo Foundation for Medical Education and Research (3) (8)
10.36 - Exclusive License Agreement dated February 24, 1992 between the
Registrant and Purdue Research Foundation (9)
10.37 - License Agreement dated as of February 15, 1992 between the
Registrant and Massachusetts Institute of Technology (9)
10.39 - Employment Agreement between Transcell Technologies, Inc. and Elizabeth Tallet
dated November 11, 1992 and Guarantee by
Registrant (13)
10.40 - Patent and Know-How Sublicense and Supply Agreement between
Registrant and American Cyanamid Company dated November 19, 1992 (3)(12)
10.41 - Equity Investment Agreement between Registrant and American Cyanamid Company
dated November 19, 1992 (12)
10.42 - Trademark License Agreement between Registrant and American
Cyanamid Company dated November 19, 1992 (12)
10.43 - Consent Agreement between Registrant and Servier dated November
19,1992 (12)
10.45 - Agreement between Registrant and Parexel International Corporation
dated October 22, 1992 (as of July 21, 1992) (3) (14)
10.46 - License Agreement dated February 9, 1993 between the Registrant and Massachusetts
Institute of Technology (3)(15)
10.47 - Sublease between Enichem America and Transcell Technologies, Inc.
including guarantee by the Registrant (15)
10.49 - License Agreement between Registrant and Elan Corporation, plc dated September
9, 1993 (3)(18)
10.51 - Letter Agreement between the Registrant and Mark Butler (18)
10.52 - License Agreement dated February 18, 1994 between Registrant and
Rhone-Poulenc Rorer, S.A. (20)
10.54 - Form of Purchase Agreement dated as of February 24, 1994 (20)
10.54(a) - Form of Amendment to Purchase Agreement (20)
10.55 - Patent License Agreement between Registrant and Massachusetts
Institute of Technology dated March 1, 1994 (20)
10.57 - Employment Letter dated February 28, 1994 between the Registrant and Thomas F.
Farb (21)
10.58 - Master Equipment Lease including Schedules and Exhibits between
Phoenix Leasing and Registrant (agreements for Transcell and
Progenitor are substantially identical), with form of continuing
guarantee for each of Transcell and Progenitor (22)
10.59 - Exhibit D to Agreement between Registrant and Parexel International
Corporation dated as of March 15, 1994 (3)(22)
51
10.60(a) - Acquisition Agreement dated as of May 13, 1994 among the Registrant, Intercardia,
Inc., Cardiovascular Pharmacology Engineering Consultants, Inc. (CPEC), Myocor,
Inc. and the sellers named therein (23)
10.60(b) - Amendment dated June 15, 1994 to the Acquisition Agreement (23)
10.61 - License Agreement dated December 6, 1991 between Bristol-Myers
Squibb and CPEC, as amended (3)(23)
10.61(a) - Letter Agreement dated November 18, 1994 between CPEC and Bristol-Myers
Squibb (25)
10.62 - Lease Agreement between Thomas R. Eggers and Progenitor, Inc. dated as of
November 1994 with Registrant guaranty (25)
10.63 - Form of Stock Purchase Agreement dated December 15, 1994 (25)
10.64 - Form of Investor Rights Agreement among Progenitor, Transcell, Registrant and each
investor in the subsidiary private placement (25)
10.64(a) - Form of Investor Rights Agreement among Intercardia, the Registrant and each
investor in the Intercardia private placement (25)
10.65 - 1994 Long-Term Incentive Plan (25)
10.67 - Employment Agreement between Intercardia and Clayton I. Duncan with Registrant
guarantee (25)
10.67(a) - Amendment to Employment Agreement between Intercardia, Inc. and Clayton I.
Duncan (36)
10.68(a) - Interneuron Pharmaceuticals, Inc. 1995 Employee Stock Purchase Plan, as amended (36)
10.69 - Office Lease, dated April 24, 1995 between Intercardia, Inc. and Highwoods/Forsyth
Limited Partnership, with Registrant Guaranty (27)
10.70 (a) - License and Collaboration Agreement by and between Progenitor, Inc., and Chiron
Corporation dated March 31, 1995 (3) (30)
10.71 - Securities Purchase Agreement dated June 2, 1995
between the Registrant and Reliance Insurance
Company, including Warrant and exhibits (29)
10.72 - Sponsored Research and License Agreement dated as of May 1, 1995 between
Progenitor and Novo Nordisk (3) (30)
10.73 - Form of Stock Purchase Agreement dated as of June 28, 1995 (31)
10.74 - Securities Purchase Agreement dated as of August 16, 1995 between the Registrant
and BT Holdings (New York), Inc., including Warrant issued to Momint (nominee
of BT Holdings) (32)
10.75 - Stock Purchase Agreement dated as August 23, 1995 between the Registrant and
Paresco, Inc. (32)
10.76 - Stock Purchase Agreement dated as of September 15, 1995 between the Registrant
and Silverton International Fund Limited (32)
10.77 - Subscription Agreement dated September 21, 1995, as of August 31, 1995, including
Registration Rights Agreement between Registrant and GFL Advantage Fund
Limited. (32)
10.78 - Contract Manufacturing Agreement dated November 20,1995 between Registrant and
Boehringer Ingelheim Pharmaceuticals, Inc. (3) (34)
10.79 - Development and Marketing Collaboration and License Agreement
between Astra Merck, Inc., Intercardia, Inc. and CPEC, Inc., dated December 4, 1995.
(3) (33)
10.80 - Intercompany Services Agreement between Registrant and Intercardia, Inc. (33)
10.81 - Asset Purchase Agreement dated November 14, 1995 among Registrant, InterNutria,
Inc., and Walden Laboratories, Inc. (34)
10.82 - Employment Agreement between Registrant and Glenn L. Cooper, M.D. dated April
30, 1996 effective as of May 13, 1996 (37)
10.83 - Co-promotion Agreement effective June 1, 1996 between Wyeth-Ayerst
Laboratories and Interneuron Pharmaceuticals, Inc. (3)(38)
10.84 - Master Consulting Agreement between Interneuron Pharmaceuticals, Inc. and Quintiles,
Inc. dated July 12, 1996(38)
10.85 - Amendment No. 1 dated July 3, 1996 to Master Consulting Agreement between
Interneuron Pharmaceuticals, Inc. and Quintiles, Inc. dated July 12, 1996 (3)(38)
10.86 - Lease Agreement between Transcell Technologies, Inc. and Cedar Brook Corporate
Center, L.P., dated September 19, 1996, with Registrant guaranty
52
21 - List of Subsidiaries
23 - Consent of Coopers & Lybrand L.L.P.
27 - Financial Data Schedule
- ---------------------------
(1) Incorporated by reference to the Registrant's registration statement on Form S-1 (File No. 33-32408)
declared effective on March 8, 1990.
(3) Confidential Treatment requested for a portion of this Exhibit.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September
30, 1990.
(7) Incorporated by reference to Post-Effective Amendment No. 2 to the Registrant's registration statement
on Form S-1 (File No. 33-32408) filed December 18, 1991.
(8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the three months ended
December 31, 1991.
(9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the three months ended
March 31, 1992.
(12) Incorporated by reference to the Registrant's Form 8-K dated November 30, 1992.
(13) Incorporated by reference to Post-Effective Amendment No. 5 to the Registrant's Registration Statement
on Form S-1 (File No. 33-32408) filed on December 21, 1992.
(14) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1992.
(15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the three months ended
December 31, 1992
(16) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the six months ended
March 31, 1993
(17) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the nine months ended
June 30, 1993
(18) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1993
(20) Incorporated by reference to the Registrant's Registration Statement on Form S-3 or Amendment No. 1
(File no. 33-75826)
(21) Incorporated by reference to the Registrant's Form 8-K dated March 31, 1994
(22) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the six months ended
March 31, 1994
(23) Incorporated by reference to the Registrant's Form 8-K dated June 20, 1994
(25) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994
(27) Incorporated by reference to the Registrant's Quarterly Report on From 10-Q for the six months ended
March 31, 1995
(29) Incorporated by reference to the Registrant's Quarterly Report on Form 8-K dated June 2, 1995
(30) Incorporated by reference to the Registrant's Quarterly Report on Form 8-K dated May 16, 1995; Exhibit
10.70 (a) supersedes Exhibit 10.70.
(31) Incorporated by reference to Registrant's Quarterly Report on Form
10-Q for the nine months ended June 30, 1995.
(32) Incorporated by reference to Registrant's Report on Form 8-K dated August 16, 1995.
(33) Incorporated by reference to Registration Statement filed on Form S-1 (No. 33-80219) by Intercardia, Inc.
on December 8, 1995.
(34) Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995.
(36) Incorporated by reference to Amendment No. 1 to Registrant's Registration Statement on Form S-3 (File
No. 333-1273) filed March 15, 1996.
(37) Incorporated by reference to Registrant's Registration Statement on Form S-3 (File No. 333-03131) filed
May 3, 1996
(38) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q or 10-Q/A for the quarter ended
June 30, 1996.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the three
month period ended September 30, 1996.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Financial Statements Page
- ---------------------------- ----
Report of Independent Accountants..........................................F-2
Consolidated Balance Sheets -- September 30, 1996 and 1995.................F-3
Consolidated Statements of Operations -- For the years ended
September 30, 1996, 1995 and 1994........................................F-4
Consolidated Statements of Stockholders' Equity -- For the years
ended September 30, 1996, 1995 and 1994..................................F-5
Consolidated Statements of Cash Flows -- For the years ended
September 30, 1996, 1995 and 1994........................................F-6
Notes to Consolidated Financial Statements.................................F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Interneuron Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Interneuron
Pharmaceuticals, Inc. as of September 30, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Interneuron
Pharmaceuticals, Inc. as of September 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1996 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
November 8, 1996
F-2
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
September 30, September 30,
1996 1995
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $145,901 $16,781
Marketable securities 17,068 18,208
Accounts receivable 4,338 237
Inventories 8,376 -
Prepaids and other current assets 1,324 190
--------------- --------------
Total current assets 177,007 35,416
Marketable securities 6,639 -
Property and equipment, net 2,689 1,671
Other assets 103 429
---------------- --------------
$186,438 $37,516
================ ==============
LIABILITIES
Current liabilities:
Accounts payable $ 2,575 $ 1,161
Accrued expenses 11,604 7,994
Deferred revenue 6,921 -
Current portion of capital lease obligations 661 506
---------------- --------------
Total current liabilities 21,761 9,661
Long-term portion of capital lease obligations 526 782
Other long-term liabilities 16 43
Minority interest 19,373 5,638
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value, authorized 5,000,000 shares:
Series B, 239,425 shares issued and outstanding at September 30, 1996
and September 30, 1995, respectively (liquidation preference at
September 30, 1996 $3,026) 3,000 3,000
Series C, 5,000 shares issued and outstanding at September 30, 1996
and September 30, 1995, respectively (liquidation preference at
September 30, 1996 $502) 500 500
Common stock, par value $.001; 60,000,000 shares authorized;
41,015,969 and 33,284,006 shares issued and outstanding at
September 30, 1996 and September 30, 1995, respectively 41 33
Additional paid-in capital 247,999 96,651
Accumulated deficit (106,778) (78,792)
---------------- --------------
Total stockholders' equity 144,762 21,392
---------------- --------------
$186,438 $37,516
================ ==============
The accompanying notes are an integral part of the consolidated financial statements.
F-3
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
For the years ended September 30,
1996 1995 1994
---- ---- ----
Revenues:
Product revenue $14,162 $ - $ -
Contract and license fee revenue 8,335 3,463 101
Investment income 4,465 1,039 505
--------- ------------ -------------
Total revenues 26,962 4,502 606
Costs and expenses:
Cost of product revenue 11,617 - -
Research and development 17,824 15,168 17,737
Selling, general and administrative 17,497 7,878 8,403
Purchase of in-process research and development 8,584 - 1,852
--------- ------------ -------------
Total costs and expenses 55,522 23,046 27,992
Net loss from operations (28,560) (18,544) (27,386)
Minority interest 574 563 -
----------- ---------- -------------
Net loss ($27,986) ($17,981) ($27,386)
=========== ========== =============
Net loss per common share ($0.76) ($.059) ($0.98)
=========== ========== =============
Weighted average common shares
outstanding 37,004 30,604 27,873
=========== ========== =============
The accompanying notes are an integral part of the consolidated financial statements.
F-4
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
Common Stock Preferred Stock
------------------------- -------------------- Additional Total
Number of Par Value Number of Paid in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------------------------- ---------- ---------- --------- ----------- -----------
Balance at September 30, 1993................. 26,851,867 $ 27 244,425 $3,500 $51,125 ($33,426) $21,226
Proceeds from exercise of Class B
Warrants......... .......................... 177,000 841 841
Proceeds from exercise of stock options....... 110,500 465 465
Private placements of common stock,
net of issuance costs of $1,609............. 1,707,000 2 13,752 13,754
Issuance of warrants.......................... 180 180
Issuance of common stock for technology
rights..... ................................ 170,000 759 759
Dividends on preferred stock.................. (63) (63)
Net loss...................................... (27,385) (27,385)
--------------- ------ ---------- ------- -------- -------- --------
Balance at September 30, 1994........... 29,016,367 29 244,425 3,500 67,059 (60,811) 9,777
Proceeds from exercise of Class B Warrants.... 257,107 1,221 1,221
Proceeds from exercise of stock options....... 61,200 151 151
Private placement of common stock, net of
issuance costs of $1,244 ................... 3,009,045 3 24,698 24,701
Dividends on preferred stock.................. (35) (35)
Proceeds from offerings of Employee Stock
Purchase Plan........... ................... 10,287 70 70
Proceeds from exercise of unit purchase
options and Class A warrants 930,000 1 2,324 2,325
Proceeds from issuance of Put Protection
Rights and warrants...... .................. 1,163 1,163
Net/loss...................................... (17,981) (17,981)
------------- ------- ---------- ------- -------- ---------- ----------
Balance at September 30, 1995........... 33,284,006 33 244,425 3,500 96,651 (78,792) 21,392
Proceeds from exercise of Class B and other
warrants.............. ..................... 3,524,897 4 13,124 13,128
Proceeds from exercise of stock options....... 740,022 1 3,141 3,142
Public offering of common stock, net of
issuance costs of $850.. .................. 3,000,000 3 109,127 109,130
Proceeds from offering of Employee Stock
Purchase Plan............ .................. 16,672 146 146
Dividends on preferred stock.................. (35) (35)
Shares issued in payment of dividends......... 9,935 105 105
Issuance of common stock for technology
rights ..................................... 342,792 8,827 8,827
Shares and payments pursuant to private
placement agreements...... ................. 97,645 (35) (35)
Gain on sale of stock by subsidiary........... 16,348 16,348
Stock-based compensation...................... 600 600
Net loss................................ (27,986) (27,986)
------------- ------- ---------- ------- -------- ---------- ----------
Balance at September 30, 1996 41,015,969 $41 244,425 $3,500 $247,999 ($106,778) $144,762
============= ======= ========== ====== ======== ========= ==========
The accompanying notes are an integral part of the consolidated financial statements
F-5
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
For the years ended September 30,
1996 1995 1994
--------- ---------- ----------
Cash flows from operating activities:
Net loss ($27,986) ($17,981) ($27,386)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 889 715 685
(Gain) loss on disposal of fixed assets 38 (34) 46
Amortization of bond premium - - 24
Minority interest in net loss of consolidated
subsidiaries (574) (563) -
Noncash license fee expense - - 180
Purchase of in-process research and
development 8,098 - 759
Noncash compensation 1,422 - 326
Change in assets and liabilities:
Accounts receivable and other assets (4,909) (186) 851
Inventories (8,376) - -
Accounts payable 1,414 44 535
Deferred revenue 6,921 - -
Accrued expenses and other liabilities 3,649 2,129 4,124
----- ----- -----
Net cash (used) by operating activities (19,414) (15,876) (19,856)
------ ------ ------
Cash flows from investing activities:
Capital expenditures (1,850) (504) (1,178)
Purchase of marketable securities (56,641) (22,465) (12,621)
Proceeds from maturities and sales of
marketable securities 51,141 8,614 22,736
Proceeds from sale of fixed assets 63 47 -
----- ------ ------
Net cash provided (used) by investing activities (7,287) (14,308) 8,937
----- ------ ------
Cash flows from financing activities:
Net proceeds from issuance of stock and
other financing activities 125,510 29,630 14,671
Net proceeds from issuance of stock by
subsidiaries 30,569 6,070 -
Proceeds from sale/leaseback 313 324 1,498
Principal payments of capital lease obligations (571) (416) (118)
------- ------ ------
Net cash provided by financing activities 155,821 35,608 16,051
------- ------ ------
Net change in cash and cash equivalents 129,120 5,424 5,132
Cash and cash equivalents at beginning of period 16,781 11,357 6,225
------ ------ -----
Cash and cash equivalents at end of period $145,901 $16,781 $11,357
======== ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
F-6
INTERNEURON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Nature of the Business:
Interneuron Pharmaceuticals, Inc. (the "Company") is a diversified
biopharmaceutical company engaged in the development and commercialization of a
portfolio of products and product candidates primarily for neurological and
behavioral disorders, including obesity, stroke, anxiety and insomnia. The
Company focuses primarily on developing products that mimic or affect
neurotransmitters, which are chemicals that carry messages between nerve cells
of the central nervous system ("CNS") and the peripheral nervous system. The
Company is also developing products and technologies, generally outside the CNS
field, through four subsidiaries ("the Subsidiaries"): Intercardia, Inc.
("Intercardia"), focuses on cardiovascular disease; Progenitor, Inc.
("Progenitor"), focuses on developmental genomics; Transcell Technologies, Inc.
("Transcell"), focuses on carbohydrate-based drug discovery; and InterNutria,
Inc. ("InterNutria"), focuses on dietary supplement products.
B. Summary of Significant Accounting Policies:
Basis of Presentation: The consolidated financial statements include the
accounts of the Company and its wholly- and majority-owned Subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Marketable Securities: The Company invests available
cash in short-term bank deposits, money market funds, U.S. and foreign
commercial paper and U.S. and foreign government securities. Cash and cash
equivalents includes investments with maturities of three months or less at date
of purchase. Marketable securities consist of investments purchased with
maturities greater than three months and are classified as non-current if they
mature one year or more beyond the balance sheet date. The Company classifies
its investments in debt securities as either held-to-maturity or
available-for-sale based on facts and circumstances present at the time the
investments are purchased. At September 30, 1995, all investments held were
classified as "held-to-maturity". At September 30, 1996, all investments held
were classified as "available-for-sale."
Property and Equipment: Property and equipment are stated at cost. The Company
provides for depreciation using the straight-line method based upon the
following estimated useful lives:
Estimated Useful Lives:
Office equipment. . . . . . . . . . . . . . . . .. . . . . . . . 2 to 5 years
Laboratory equipment.. . . . . . . . . . . . . . . . . . . . . . . . 5 years
Leasehold improvements. . . . . . Shorter of lease term or estimated useful life
F-7
Expenses for repairs and maintenance are charged to operations as incurred. Upon
retirement or sale, the cost of the assets disposed and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
credited or charged, respectively, to operations.
Inventories: Inventories are valued at the lower of cost (first-in, first-out
method) or market. Drug inventory costs are capitalized commencing from the time
the pertinent drug is recommended for approval by an Advisory Committee of the
U.S. Food and Drug Administration ("FDA") for drugs that are subject to FDA
approval and from the time product is manufactured with the intention of
commercial sale for products not requiring FDA approval.
Revenue Recognition: Product revenue consists of product sales which are
recognized at the later of shipment or acceptance and royalties from licensed
products which are recognized when the amount of and basis for such royalties
are reported to the Company in accordance with the related license agreements.
Cash received in advance of product shipments or acceptance is recorded as
deferred revenue. Contract and license fee revenue consists of contractual
research milestone payments, sales and marketing payments, research and
development grants and contractual research and development funding and is
recognized when services are performed or when contractual obligations are met.
Research and Development: Research and development costs are expensed in the
period incurred.
Income Taxes: Deferred tax liabilities and assets are recognized based on
temporary differences between the financial statement basis and tax basis of
assets and liabilities using current statutory tax rates. A valuation allowance
against net deferred tax assets is established if, based on the available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized (see Note I).
Accounting for Stock-Based Compensation: In October 1995, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123, Accounting for
Stock-Based Compensation, which changes measurement, recognition and disclosure
standards for stock-based compensation. The Company will adopt the disclosure
requirements of SFAS No. 123 in fiscal year 1997 and will continue to measure
stock-based compensation in accordance with present accounting rules. As such,
the adoption of SFAS No. 123 will not impact the financial position or the
results from operations of the Company.
Issuance of Stock by a Subsidiary: Gains on the issuance of common stock by a
subsidiary are included in net income unless the subsidiary is a research and
development, start-up or development stage company or an entity whose viability
as a going concern is under consideration. In those situations the Company
accounts for the change in its proportionate share of the subsidiary's net
assets resulting from the additional equity raised by the subsidiary as an
equity transaction and credits any resulting gain to additional paid-in capital.
Uncertainties: The Company is subject to risks common to companies in the
Biotechnology industry, including, but not limited to, development by the
Company or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with FDA
government regulations.
Reclassification: Certain prior year amounts have been reclassified to conform
with fiscal 1996 classifications.
F-8
C. Marketable Securities:
Investments in marketable securities consisted of the following at September 30,
1996 and 1995:
1996 1995
------------------------ --------------------------
Market Market
Cost Value Cost Value
---- ----- ---- -----
U.S. government treasury
and agency obligation ................. $2,005,000 $2,033,000 $4,953,000 $4,950,000
Foreign government and
corporate obligations ................. 3,260,000 3,193,000 - -
U.S. corporate notes ....................... 18,442,000 18,503,000 13,255,000 13,255,000
---------- ---------- ---------- ----------
Total ..................................... $ 23,707,000 $23,729,000 $18,208,000 $18,205,000
============ =========== =========== ===========
At September 30, 1996, marketable securities representing $6,639,000 of the
total cost mature between September 30, 1997 and 1998 and marketable securities
representing $17,068,000 of the total cost mature within one year from September
30, 1996. At September 30, 1996 and 1995, marketable securities were carried at
cost due to insignificant differences from market value. At September 30, 1996,
gross unrealized gains and loses were $144,000 and $122,000, respectively.
D. Inventories:
Inventories at September 30, 1996 consisted of:
Raw materials $5,420,000
Finished goods 2,956,000
---------
$8,376,000
==========
Raw materials consists primarily of dexfenfluramine drug substance and finished
goods consists primarily of finished Redux(TM).
E. Property and Equipment:
At September 30, 1996 and 1995, property and equipment consisted of the
following:
1996 1995
---- ----
Office equipment ............................ $1,622,000 $ 796,000
Laboratory equipment ........................ 2,612,000 2,036,000
Leasehold improvements ...................... 242,000 337,000
----------- ----------
4,476,000 3,169,000
Less: accumulated depreciation
and amortization ................. (1,787,000) (1,498,000)
--------- ---------
$2,689,000 $1,671,000
========== ==========
Included in the above amounts is property and equipment under capital lease
obligations of $2,169,000 and $1,890,000 at September 30, 1996 and 1995,
respectively, and related accumulated depreciation of $845,000 and $619,000 at
September 30, 1996 and 1995, respectively. Leased assets consist primarily of
laboratory equipment. The Company paid $158,000 and $146,000 in interest expense
during the years ended September 30, 1996 and 1995, respectively, related to
these capital lease obligations.
F-9
F. Accrued Expenses:
At September 30, 1996 and 1995 accrued expenses consisted of the following:
1996 1995
---------------- ---------
Professional fees. . . . . . . . . . $ 947,000 $ 526,000
Clinical and sponsored research. . . 5,490,000 3,737,000
Compensation related . . . . . . . . 3,058,000 1,504,000
Shared manufacturing costs . . . . . - 701,000
Other. . . . . . . . . . . . . . . . 2,109,000 1,526,000
----------- ---------
$11,604,000 $7,994,000
============ ===========
G. Commitments:
The Company leases its facilities, as well as certain laboratory equipment and
furniture, under non-cancelable operating leases. Rent expense under these
leases was approximately $1,195,000, $1,055,000 and $913,000 for the years ended
September 30, 1996, 1995 and 1994, respectively. The Company also leases certain
property and equipment under capital leases.
At September 30, 1996, the Company's future minimum payments under lease
arrangements are as follows:
Fiscal Year Operating Leases Capital Leases
----------- ---------------- --------------
1997 $ 1,022,000 $ 777,000
1998 1,078,000 329,000
1999 1,059,000 204,000
2000 1,050,000 47,000
2001 997,000 -
Thereafter 5,093,000 -
------------- --------------
Total lease payments $10,299,000 $1,357,000
===========
Less: amount representing interest (170,000)
-----------
Present value of net minimum lease payments $ 1,187,000
===========
H. Stockholders' Equity:
Preferred Stock: The Certificate of Incorporation of the Company authorizes the
issuance of 5,000,000 shares of Preferred Stock. The Board of Directors has the
authority to issue preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions, including the dividend, conversion,
voting, redemption (including sinking fund provisions), and other rights,
liquidation preferences, and the number of shares constituting any series and
the designations of such series, without any further vote or action by the
stockholders of the Company. In fiscal 1993 the Company issued shares of Series
B and Series C Preferred Stock in connection with an agreement with American
Home Products Corp. (see Note K).
Common Stock and Warrants: In March 1990, the Company completed its initial
public offering of securities. The offering consisted of 1,782,500 units at
$6.00 per unit, each unit consisting of three shares of Common Stock, $.001 par
value, and three Class A Warrants. Each Class A Warrant entitled the holder to
purchase one share of Common Stock and one Class B Warrant at an exercise price
of $2.20. As of February 1992, all such Class A Warrants had been exercised.
Each Class B Warrant entitled the holder to purchase one share of Common Stock
at $4.75 per share, from the date of issuance through March 15, 1996. During
fiscal 1995, 257,107 Class B Warrants were exercised and proceeds of
approximately $1,221,000 were realized by the Company. In fiscal 1996, Class B
Warrants were exercised (including 165,000 that were exercised on a cashless
basis by an affiliate of the Company resulting in the issuance of 138,432 shares
of Common Stock of the Company) resulting in net proceeds to the Company of
approximately $10,612,000 and the issuance of approximately 2,375,000 shares of
Common Stock.
F-10
In connection with the initial public offering, the Company also provided the
underwriter with Unit Purchase Options to purchase up to 155,000 units for $8.40
per unit. In fiscal 1995, all 155,000 Unit Purchase Options and underlying Class
A Warrants were exercised resulting in proceeds of $2,325,000 and issuance of
930,000 shares of the Company's Common Stock and 465,000 Class B Warrants, which
were exercised in full in fiscal 1996.
In fiscal 1994, the Company completed a private placement of 1,707,000 shares of
its Common Stock resulting in net proceeds of approximately $13,754,000.
In fiscal 1995, the Company completed private placements of 3,009,045 shares of
its Common Stock, at prices ranging from $3.75 to $13.08 per share, which
resulted in net proceeds of approximately $24,701,000. Additionally as part of
the private placements, the Company issued warrants to purchase 500,000 and
62,500 shares of its Common Stock at $10.00 and $12.77 per share, respectively,
which are exercisable through June 1,2002 and August 16, 2000, respectively. In
connection with these private placements, 91,000 additional warrants to purchase
shares of the Company's Common Stock were issued to certain financial
intermediaries at prices ranging from $5.00 to $13.08 per share which expire at
various dates from July 5, 2000 to February 3, 2005. At September 30, 1996,
70,000 of these warrants were outstanding at prices ranging from $5.00 to $7.88
per share and expiring from June 1, 2002 to February 3, 2005.
Pursuant to certain placement agreements, an additional 97,645 shares of the
Company's Common Stock were issued during the year ended September 30, 1996.
In January 1996, the Company issued 342,792 shares of Common Stock for the
purchase of the remaining 20% of outstanding capital stock of CPEC, Inc.
("CPEC") not owned by Intercardia (see Note L).
In June 1996, the Company completed a public offering of 3,000,000 shares of
Common Stock at $39.00 per share and received proceeds, net of issuance costs,
of approximately $109,130,000.
During fiscal 1995, certain Subsidiaries issued convertible preferred stock
through private placements which resulted in net proceeds of approximately
$7,233,000 (the "Subsidiaries' Private Placements"). In connection with certain
of the Subsidiaries' Private Placements the Company issued 218,125 warrants to
purchase shares of the Company's Common Stock exercisable at $4.625 per share
until June 30, 1998 (the "Warrants") of which 41,250 warrants were outstanding
at September 30, 1996. Additionally, investors in the private placements have
the ability on June 30, 1998 to cause the Company to purchase from them certain
amounts of the convertible preferred stock deemed to be illiquid but in no
circumstance for an amount greater than that initially paid by the investor (the
"Put Protection Rights"). The Company received approximately $1,163,000 from the
proceeds of the offerings as consideration for its issuance of the Warrants and
the Put Protection Rights, which was recorded as an equity issuance by the
Company. The Company may pay cash or issue its Common Stock to settle any
obligations arising from the Put Protection Rights and intends to choose
settlement through issuance of its Common Stock. The Company could be required
to issue up to a maximum aggregate of approximately 2,181,250 shares of Common
Stock under certain circumstances if the Put Protection Rights were exercised in
full and the Company's Common Stock is valued at $2.00 per share or less.
Investors also received registration rights relating to the shares underlying
the Warrants and Put Protection Rights. In connection with these private
placements, the Company issued to designees of the Placement Agent which is an
affiliate of the Company (see Note J), warrants to purchase approximately 21,813
shares of Common Stock at $4.625 per share, exercisable through June 30, 1998.
In connection with the Subsidiaries' Private Placements, Interneuron converted
the amounts owed to Interneuron by these Subsidiaries as a result of
Interneuron's funding of the Subsidiaries' operations into convertible preferred
stock of these Subsidiaries. In fiscal 1996, Intercardia completed an initial
public offering of 2,530,000 shares of Intercardia common stock (see Note M).
The Company's percentage of ownership in Progenitor, Transcell and Intercardia
changed from approximately 78%, 79% and 88%, respectively, at September 30, 1995
to approximately 76%, 78% and 60%, respectively, at September 30, 1996.
F-11
Stock Options and Warrants: Under the Company's 1989 Stock Option Plan (the
"1989 Plan"), incentive or non-qualified options to purchase 3,000,000 shares of
the Company's Common Stock may be granted to employees. Under the Company's 1994
Long-Term Incentive Plan (the "1994 Plan"), employees, directors and consultants
to the Company may be granted incentive or non-qualified options to purchase up
to 2,700,000 shares of the Common Stock of the Company and restricted stock
awards of up to 300,000 shares of the Common Stock of the Company. Restricted
stock awards may be made without payment of consideration by the recipient and
may be subject to performance criteria and restriction periods. Under the 1989
and 1994 Plans ("the Plans") the exercise price of incentive options granted
must not be less than the fair market value of the Common Stock as determined on
the date of grant and the term of each grant cannot exceed ten years.
The Company has also granted outside of the Plans options to purchase shares of
the Company's Common Stock ("Non-Plan Options"). At September 30, 1996, 100,000
Non-Plan options were outstanding
The Company has issued warrants to purchase shares of the Company's Common
Stock, certain of which were issued in connection with various financing
arrangments and have been disclosed in this and other Notes to the Consolidated
Financial Statements.
F-12
Presented below under the caption "Stock Options" is all Plan and Non-Plan
option activity and under the caption "Warrant" is all warrant activity certain
of which may also be disclosed in this and other Notes to the Consolidated
Financial Statements:
Stock Options Warrants
--------------------------- --------------------------------
Option Warrant
------ -------
Shares Price Shares Price
------ ----- ------ -----
Outstanding at
September 30, 1993 2,127,441 $ .83-$12.63 1,020,000 $4.00-$9.00
Granted 916,500 $5.12-$10.00 125,000 $5.12-$14.00
Exercised ( 110,500) $0.00-$ 6.25 -
Canceled (13,600) $4.38-$ 9.63 -
------ ---------------
Outstanding at
September 30, 1994 2,919,841 $ .83-$12.63 1,145,000 $4.00-$14.00
Granted 1,225,200 $4.88-$12.75 893,438 $4.63-$13.08
Exercised (61,200) $.83-$ 7.12 -
Canceled (2,400) $5.12-$ 7.12 -
------------ ---------------
Outstanding at
September 30, 1995 4,081,441 $ .83-$12.63 2,038,438 $4.00-$14.00
Granted 848,300 $14.75-$42.00 75,000 $23.25-$29.75
Exercised (740,021) $2.00-$10.00 (1,309,125) $4.00-$14.00
Canceled (298,000) $6.50-$42.00 -
------- ----------------
Outstanding at
September 30, 1996 3,891,720 $ .83-$32.00 804,313 $4.63-$29.75
========= ================
At September 30, 1996, outstanding stock options and warrants were exercisable
as follows:
Exercise Price Per Share: Under $5.00 $5.00 to $10.00 Over $10.00 Total
----------- --------------- ----------- --------
Stock options 127,315 3,066,705 697,700 3,891,720
Warrants 61,813 605,000 137,500 804,313
------- ------------- -------- ----------
189,128 3,671,705 835,200 4,696,033
======= ============= ========= =========
At September 30, 1996, 2,210,998 stock options and 740,980 warrants were
exercisable and there were no awards of restricted stock. All outstanding
options vest at various rates over periods up to six years and expire at various
dates from August 1, 1999 to September 26, 2006. All outstanding warrants expire
at various dates from June 30, 1998 to February 3, 2005.
F-13
Employee Stock Purchase Plan: On March 22, 1995, the stockholders approved the
Company's 1995 Employee Stock Purchase Plan ("the 1995 Plan") covering an
aggregate of 100,000 shares of Common Stock which is offered in one-year
offerings ("an Offering"), the first of which began April 1, 1995. Each Offering
is divided into two six-month Purchase Periods (the "Purchase Periods").
Employees may contribute up to ten percent (10%) of gross wages, with certain
limitations, via payroll deduction, to the 1995 plan. Stock will be purchased at
the end of each Purchase Period with employee contributions at the lower of 85%
of the last sale price of the Company's Common Stock on the first day of an
Offering or the last day of the related Purchase Period. In fiscal 1995 and
1996, 10,287 and 16,672 shares, respectively, of Common Stock had been purchased
pursuant to the 1995 plan.
Other: In addition to the 41,016,000 shares of Common Stock outstanding at
September 30, 1996, there were approximately 14,000,000 potentially issuable
shares of Common Stock ("Reserved Common Shares"). Included in the number of
Reserved Common Shares are the following: (i) 4,756,000 shares of Common Stock
reserved for issuance upon conversion of the Company's authorized but unissued
Preferred Stock; (ii) 622,222 shares of Common Stock issuable upon conversion of
issued and outstanding Preferred Stock; (iii) 2,181,250 shares reserved for the
maximum number of shares issuable under the Put Protection Rights, which assumes
exercise for the full amount possible; (iv) 4,900,000 shares reserved for
issuance under the Plans and the 1995 Plan (of this amount approximately
3,800,000 has been granted, not all of which was vested); (v) an estimated
250,000 shares issuable in connection with certain acquisitions; and (vi)
approximately 804,000 shares reserved for issuance from exercise of outstanding
warrants.
I. Income Taxes:
At September 30, 1996 and 1995, the significant components of the Company's
deferred tax asset consist of the following:
1996 1995
---- ----
Federal and state net operating loss
carryforwards $38,798,000 $28,315,000
Federal and state tax credit carryforwards 3,721,000 3,527,000
Deferred revenue and accrued expenses 3,723,000 2,555,000
---------- ------------
Total deferred tax asset before
valuation allowance 46,242,000 34,397,000
Valuation allowance against total
deferred tax asset (46,242,000) (34,397,000)
------------ -------------
Net deferred tax asset $ - $ -
============ =============
At September 30, 1996, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $100,000,000 which
expire at various dates from 2004 to 2011. In addition, the Company had
approximately $3,700,000 of tax credit carryforwards for federal income tax
purposes expiring at various dates through 2011. The Company's ability to use
the carryforwards may be subject to limitations resulting from ownership changes
as defined in the U.S. Internal Revenue Code Sections 382 and 383.
J. Related Party Transactions:
The Company licensed certain patents and technologies from Massachusetts
Institute of Technology ("MIT") relating to research of a principal shareholder
and director and his associates. The Company is obligated to reimburse MIT for
one half of any patent prosecution and maintenance costs to maintain certain of
these licenses.
F-14
During fiscal 1995, Paramount Capital, Inc. ("Paramount") served as placement
agent for the Subsidiaries' Private Placements (see Note H). Lindsay A.
Rosenwald, M.D., the Chairman of the Board and a principal stockholder of the
Company, is the Chairman, Chief Executive Officer and sole stockholder of
Paramount.
Paramount earned $657,000 in commissions related to the Subsidiaries' Private
Placements. In addition, the Company issued to Dr. Rosenwald and other designees
of Paramount warrants to purchase a total of 21,813 shares of the Company's
Common Stock at $4.625 per share, exercisable through June 30, 1998, of which
20,583 were outstanding at September 30, 1996.
D.H. Blair and Co., Inc. ("Blair") was a selected dealer associated with the
Subsidiaries' Private Placements. Blair is substantially owned by relatives of
the sole stockholder of the parent of D.H. Blair Investment Banking Corp., a
principal stockholder of the Company. Blair earned $113,000 in commissions
related to the Subsidiaries' Private Placements. Designees of Paramount
(including Dr. Rosenwald) and Blair also received warrants to purchase an
aggregate of 10% of the preferred stock of the Subsidiaries sold in the
Subsidiaries' Private Placements. These warrants represent less than 1% of the
subsidiaries outstanding stock at September 30, 1996.
Under consulting agreements with two directors and a party related to a director
to provide scientific advice and administrative services, the Company is
obligated to make monthly payments, generally for a one year period subject to
annual renewals. Payments were $180,000, $174,000 and $163,000 for the years
ended September 30, 1996, 1995 and 1994, respectively. Also, one of these
directors received additional payments aggregating approximately $103,000
related to certain patent matters and the April 1996 FDA approval of Redux.
Another director has a three year consulting agreement with the Company to
provide services for a total of up to $120,000. Payments under this agreement
were $32,000, $36,000, and $11,000 in fiscal 1996, 1995, and 1994, respectively.
In fiscal 1996, InterNutria acquired certain technology from Walden
Laboratories, Inc. of which the Company's Chairman is a stockholder (see Note
L).
Advances were provided to several employees of the Company and its Subsidiaries
for moving and relocation costs. As of September 30, 1996 and 1995, these loans
totaled approximately $204,000 and $560,000 respectively. Certain amounts will
be repaid and certain amounts will be forgiven upon achievement of specific
milestones; remaining balances will be repaid by the earlier of four years from
the date of the loan or termination of the executive's employment.
The Company made contributions of $182,000, $147,000 and $134,000 in the years
ended September 30, 1996, 1995 and 1994, respectively, to The Center for Brain
Science and Metabolism Charitable Trust of which one of the Company's directors
is the scientific director.
K. Agreements:
Servier: In February 1990, as amended, the Company entered into a series of
agreements with Les Laboratoires Servier ("Licensor") under which the Company
agreed to pursue activities designed to obtain approval to market
dexfenfluramine, a prescription drug developed by the Licensor for the treatment
of obesity associated with carbohydrate craving. Under the terms of the
agreements, the Company obtained U.S. marketing rights to the product in
exchange for future royalty payments based upon net product sales, as defined.
These agreements required non-refundable royalties of $100,000 paid in February
1991, and $300,000 in each subsequent February, until approval of the NDA, which
occurred on April 29, 1996. Additionally, under the terms of these agreements,
the Company is required to purchase the bulk compound from an affiliate of the
Licensor. The Company is obligated to pay to the Licensor 11.5% of net sales by
"AHP" (see below). During fiscal 1996, the Company incurred an expense of and
paid to the Licensor royalties of approximately $3,800,000 which fulfills the
Company's initial annual minimum royalty obligation to the Licensor. Payments
will continue to be made quarterly based upon sales of Redux.
American Home Products: In November 1992, the Company entered into an agreement
with American Cyanamid Company (which subsequently was acquired by American Home
Products Corp.) ("AHP") for the
F-15
development and marketing in the U.S. of dexfenfluramine for use in treating
obesity associated with carbohydrate craving. On this date, the Company received
$2,000,000 for a patent license and sold to American Home 239,425 shares of its
convertible Series B Preferred Stock for $3,000,000. Holders of Series B
Preferred Stock are entitled to receive mandatory dividends of $.1253 per share
payable at the election of the Company in cash or Common Stock. Such dividends
are payable annually on April 1 of each year, accrue on a daily basis and are
cumulative. Holders of Series B Preferred Stock are also entitled to a
liquidation preference of $12.53 per share, plus accumulated and unpaid
dividends. Holders of Series B Preferred Stock are entitled to convert such
shares into an aggregate of 533,333 shares of Common Stock (a conversion price
of $5.625 per share) subject to adjustment in the event of future dilution. The
agreement provides for additional cash payments for the patent license and
additional purchases of convertible Preferred Stock based upon the Company's
achievement of certain milestones. Additionally, the agreement with AHP provides
for royalty payments to the Company based upon net sales of dexfenfluramine and
for AHP to share equally with the Company certain research and development
expenses.
In June 1993, the Company received payments from AHP in connection
with the submission of a New Drug Application ("NDA") for dexfenfluramine,
consisting of $2,500,000 in a milestone payment and $500,000 through the
purchase of 5,000 shares of convertible Series C Preferred Stock. Holders of
Series C Preferred Stock are entitled to receive mandatory dividends of $1.00
per share payable annually on April 1, of each year, which accrue on a daily
basis and are cumulative. Holders of Series C Preferred Stock are also entitled
to a liquidation preference of $100 per share, plus accumulated and unpaid
dividends. Holders of Series C Preferred Stock are entitled to convert such
shares into an aggregate of 88,888 shares of Common Stock of the Company (a
conversion price of $5.625 per share) subject to anti-dilution adjustment.
Holders of the Series B and C Preferred Stock are entitled to vote on all
matters submitted to a vote of stockholders, other than the election of
directors, generally holding the number of votes equal to the number of shares
of Common Stock into which such shares of Preferred Stock are convertible.
On September 29, 1995 dexfenfluramine was recommended for removal from Schedule
IV of the Controlled Substances Act (the "Descheduling") by a joint committee of
the Endocrinologic and Metabolic Advisory Committee and Drug Abuse Advisory
Committee of the FDA and on April 29, 1996 received clearance for marketing as a
twice-daily prescription drug for the treatment of obesity. If the Descheduling
is effected within one year of NDA approval, the Company would receive
$6,000,000 as a milestone payment and $3,500,000 as an equity investment from
AHP. The Company is uncertain whether the Descheduling will occur within the
time required to receive this payment and investment.
AHP has the right to terminate its sublicense upon twelve months notice to the
Company. The AHP agreements provide that Servier has the right to withdraw its
consent to the sublicense in the event that any entity acquires stock in AHP
sufficient to elect a majority of AHP's Board of Directors or otherwise obtains
control of AHP, provided that no such termination shall occur if AHP or its
successor achieves minimum net sales of $75,000,000 in the first marketing year
or $100,000,000 thereafter or pays Servier amounts to which it would have been
entitled if AHP had achieved such minimum net sales. Servier consented to the
AHP acquisition of American Cyanamid Company.
On April 29, 1996, dexfenfluramine received FDA clearance for marketing under
the name Redux. The Company's License Agreement with AHP provides for base
royalties equal to 11.5% of AHP's net sales and additional royalties ranging
from 5% of the first $50,000,000 of AHP's annual net sales if Redux is a
scheduled drug to 11% of AHP's annual net sales over $200,000,000, providing
Redux is supplied to AHP by the Company and is descheduled. Royalties of
approximately $5,500,000 on net sales through June 30, 1996 were reflected as
product revenue in fiscal 1996. AHP will make quarterly royalty payments to the
Company for net sales of Redux. The Company manufactures Redux through an
arrangement with Boehringer Ingleheim Pharmaceuticals, Inc. (see Boehringer) and
is the exclusive supplier of Redux to AHP.
Boehringer: In November 1995, the Company entered into an exclusive
manufacturing agreement with Boehringer Ingleheim Pharmaceuticals, Inc.
("Boehringer") under which Boehringer agreed to supply, and the Company agreed
to purchase from Boehringer, all of the Company's requirements for
dexfenfluramine capsules. The contract, which expires December 31, 1998,
contains certain minimum purchase and insurance commitments by the Company and
requires conformance by Boehringer to the FDA's Good Manufacturing Practices
F-16
regulations. The agreement provides for the Company to be able to qualify a
second source manufacturer under certain conditions.
Ferrer: The Company has licensed from Ferrer International, S.A. exclusive
rights to citicoline, a drug for potential treatment for memory and motor
impairment due to ischemic stroke, for commercialization in the U.S., Puerto
Rico and Canada. A license fee and future royalties on net sales of citicoline
were consideration provided to Ferrer.
Rhone-Poulenc Rorer: In February 1994, the Company entered into a license
agreement with Rhone-Poulenc Rorer S.A., granting the Company worldwide
exclusive rights to an anti-anxiety compound (pagoclone). The Company paid an
upfront license fee of $250,000 upon execution of the agreement. Additional
payments totaling $1,250,000 relating to the initiation of clinical trials and
submission of an NDA are required based upon achievement of milestones, certain
of which were achieved in fiscal 1996. Payments to be made by the Company upon
approval of an NDA will range from $3,000,000 to $5,000,000, depending on the
number of countries in which approval is achieved. Additional royalties will be
paid based on sales.
Bristol-Myers Squibb: Intercardia acquired CPEC (see Note L), which holds an
exclusive worldwide license to bucindolol, for use in the treatment of
congestive heart failure, which CPEC acquired from Bristol-Myers Squibb Company
("BMS"). Royalties will be due to BMS based upon net sales of the product.
Astra Merck: In December 1995, Intercardia executed a Development and Marketing
Collaboration and License Agreement (the "Astra Merck Collaboration") with Astra
Merck, Inc. ("Astra Merck") to provide for the development, commercialization
and marketing in the U.S. of a twice-daily formulation of bucindolol for the
treatment of congestive heart failure. Intercardia received $5,000,000 upon
execution of the Astra Merck Collaboration, which was recognized as contract and
license fee revenue in the first quarter of fiscal 1996, and may receive
additional payments based upon achievement of certain milestones and royalties
based on net sales of bucindolol in the U.S. Intercardia has agreed to pay Astra
Merck $10,000,000 in December 1997 and to reimburse Astra Merck for one-third of
certain product launch costs, up to a total of $11,000,000. In the event
Intercardia elects not to make these payments, future royalties payable by Astra
Merck to Intercardia will be substantially reduced. During the year ended
September 30, 1996, Astra Merck made payments or assumed liabilities of
approximately $4,300,000 on Intercardia' behalf. These amounts did not flow
through the Consolidated Statement of Operations, as they were offset against
related expenses. Astra Merck had paid approximately $2,900,000 of this amount
by September 30, 1996 and approximately $1,400,000 was included as offsetting
accounts receivable and accrued expenses on the Balance Sheet at September 30,
1996.
Chiron: In April 1995, Progenitor entered into an agreement with Chiron
Corporation ("Chiron") to collaborate in the development and commercialization
of Progenitor's proprietary gene therapy technology.
Progenitor received an initial payment of $2,500,000 in April 1995 and paid
$750,000 for certain start-up manufacturing costs to Chiron during fiscal 1995
and 1996. These amounts have been recognized as contract revenue and research
and development expense, respectively, in the year ended September 30,1995.
Progenitor received an additional $500,000 payment in January 1996, which was
recognized as contract revenue in fiscal 1996.
L. Acquisitions:
In May 1994, Intercardia entered into an agreement to acquire 80% of the
outstanding common stock of CPEC, Inc. (formerly Cardiovascular Pharmacology
Engineering and Consultants, Inc.), ("CPEC"), subject to conditions which were
met on September 26, 1994, the effective date of the acquisition. CPEC has an
exclusive worldwide license in North America and Europe to bucindolol, a
non-selective beta-blocker currently under development for congestive heart
failure. Bucindolol began a Phase 3 clinical trial, the Beta-blocker Evaluation
of Survival Trial (the "BEST Study"), for treatment of congestive heart failure
in cooperation with the National Institutes of Health (the "NIH") and The
Department of Veteran Affairs (the "VA") in April 1995. The NIH and VA have
agreed to provide up to $15,750,000 throughout the study and CPEC is obligated
to provide up to an additional
F-17
$2,000,000, of which $1,250,000 has been paid through September 30, 1996, and
fund other costs of the study including drug supply and clinical monitoring.
The purchase price of CPEC was approximately $1,852,000 comprised of 170,000
shares of Common Stock of the Company, payments to stockholders of CPEC, assumed
liabilities, and other related expenses. Additionally, future issuances of
Interneuron's Common Stock are required upon achieving the milestones of filing
an NDA and receiving an approval letter from the FDA. The value of these
additional shares is not included in the purchase price because their issuance
is contingent upon achieving these milestones. Substantially all of the purchase
price has been allocated to the bucindolol technology rights. However, because
bucindolol was not a currently commercializable product at the time of
acquisition and future benefits are dependent upon successful completion of
clinical trials and FDA approval, the Company recorded a charge to operations
for the costs associated with this transaction. Future issuances of Common Stock
will result in additional charges.
Intercardia and CPEC also entered into a consulting agreement with a corporation
owned by the minority stockholders of CPEC providing for consulting fees
aggregating $300,000 over a three year period beginning October 1994.
In January 1996, the Company acquired the remaining 20% of the outstanding
capital stock of CPEC not owned by Intercardia by issuing an aggregate of
342,792 shares of Common Stock to the former CPEC minority stockholders. For the
same reasons as stated above, the Company, recorded a charge for the purchase of
in- process research and development of approximately $6,084,000 in fiscal 1996.
In December 1995, Internutria acquired from Walden Laboratories, Inc.
("Walden"), the technology and know-how to produce a specially formulated
dietary supplement for women's use during their pre-menstrual period called PMS
Escape in exchange for $2,400,000 payable in two installments of Common Stock,
the first in late calendar 1996 and the second in late calendar 1997, at the
then-prevailing market price. Certain affiliates of the Company are or were
stockholders or Walden but will not receive any of the purchase price. The
Company recorded a charge of approximately $2,150,000 in fiscal 1996 in
connection with this transaction for the purchase of in-process research and
development as the future benefits from this technology will depend upon the
successful completion of certain clinical trials.
M. Intercardia:
In February 1996, Intercardia completed an initial public offering of 2,530,000
shares of Intercardia common stock at $15.00 per share resulting in proceeds,
net of offering costs, of approximately $35,000,000 (the "Intercardia IPO") the
Company purchased 333,333 shares of the Intercardia IPO for approximately
$5,000,000. The Company's ownership of Intercardia' outstanding capital stock
decreased from approximately 88% at September 30, 1995 to approximately 60% as a
result of the Intercardia IPO, without giving effect to exercise of options and
warrants. In certain circumstances, the Company has the right to purchase
additional shares of Intercardia common stock at fair market value to provide
that the Company's equity ownership in Intercardia does not fall below 51%. As a
result of the Intercardia IPO, Put Protection Rights that could have caused the
Company to issue in June 1998 up to approximately 1,914,000 shares of Common
Stock expired. As a result of the Intercardia IPO and the Company's purchase of
333,333 shares thereof, the Company recognized a gain on its investment in
Intercardia of approximately $16,350,000 which has been recorded as an increase
to the Company's Additional paid-in capital.
F-18
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNEURON PHARMACEUTICALS, INC.
Date: December 16, 1996 By: /s/ Glenn L. Cooper
-------------------
Glenn L. Cooper, M.D.,
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons in the capacity
and as of the date indicated.
Name Title Date
---- ----- ----
/s/ Glenn L. Cooper President and Chief Executive December 16, 1996
- ---------------------------- Officer and Director (Principal
Glenn L. Cooper, M.D. Executive Officer)
/s/ Lindsay Rosenwald
- ---------------------------- Chairman of the December 16, 1996
Lindsay Rosenwald, M.D. Board of Directors
- ---------------------------- Director December , 1996
Harry Gray
/s/ Alexander M. Haig, Jr. Director December 16, 1996
- ----------------------------
Alexander M. Haig, Jr.
/s/ Peter Barton Hutt Director December , 1996
- ----------------------------
Peter Barton Hutt
/s/ Malcolm Morville Director December 16, 1996
- ----------------------------
Malcolm Morville
/s/ Robert K. Mueller Director December 16, 1996
- ----------------------------
Robert K. Mueller
/s/ Lee J. Schroeder Director December 16, 1996
- ----------------------------
Lee J. Schroeder
- ---------------------------- Director December , 1996
David Sharrock
/s/ Richard Wurtman
- ---------------------------- Director December 16, 1996
Richard Wurtman, M.D.
/s/ Thomas F. Farb
- ---------------------------- Executive Vice President, December 16, 1996
Thomas F. Farb Finance and Chief Financial
Officer (Principal Financial
and Accounting Officer)