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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2001
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 0-24972
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INKINE PHARMACEUTICAL COMPANY, INC.
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(Exact name of registrant as specified in its charter.)
New York 13-3754005
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1787 Sentry Parkway West
Building 18, Suite 440
Blue Bell, Pennsylvania 19422
-------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 283-6850
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Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
-----------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES __X__ NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $61,966,000. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the NASDAQ National Market of The Nasdaq Stock Market on March 27, 2002. For
purposes of this calculation only, the registrant has defined affiliates as
including all directors and executive officers. In making such calculation,
registrant is not making a determination of the affiliate or non-affiliate
status of any holders of shares of Common Stock. The number of shares of the
registrant's Common Stock outstanding as of March 27, 2002 was 34,903,370.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the
registrant's 2002 Annual Meeting of Shareholders to be filed within 120 days
after the end of the period covered by this Annual Report on Form 10-K are
incorporated by reference into Part III of this Form 10-K.
INKINE PHARMACEUTICAL COMPANY, INC.
INDEX TO FORM 10-K
Page
References
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PART I
ITEM 1. BUSINESS.....................................................1
ITEM 2. PROPERTIES..................................................26
ITEM 3. LEGAL PROCEEDINGS...........................................26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.........................................27
ITEM 6. SELECTED FINANCIAL DATA.....................................28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........36
ITEM 11. EXECUTIVE COMPENSATION......................................36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.................................................37
LIST OF EXHIBITS............................................37
SIGNATURES ............................................................40
INDEX TO FINANCIAL STATEMENTS................................................F-1
-i-
PART I
ITEM 1. BUSINESS.
FORWARD LOOKING STATEMENTS
In addition to historical facts or statements of current condition, this
report contains some forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
provide our current expectations or forecasts of future events. These may
include statements regarding anticipated scientific progress on our research
programs, development of potential pharmaceutical products, interpretation of
clinical results, prospects for regulatory approval, manufacturing development
and capabilities, market prospects for our products, sales and earnings
projections, and other statements regarding matters that are not historical
facts. You may identify some of these forward-looking statements by the use of
words in the statements such as "anticipate," "estimate," "expect," "project,"
"intend," "plan," "believe" or other words and terms of similar meaning. Our
performance and financial results could differ materially from those reflected
in these forward-looking statements due to general financial, economic,
regulatory and political conditions affecting the biotechnology and
pharmaceutical industries as well as more specific risks and uncertainties such
as those set forth in the discussion below. Given these risks and uncertainties,
any or all of these forward-looking statements may prove to be incorrect.
Therefore, you should not rely on any such factors or forward-looking
statements. Furthermore, we do not intend (and we are not obligated) to update
publicly any forward-looking statements. This discussion is permitted by the
Private Securities Litigation Reform Act of 1995.
OVERVIEW
InKine Pharmaceutical Company, Inc., formerly Panax Pharmaceutical
Company, Ltd., was incorporated in May 1993 to focus on the development of new
pharmaceutical compounds identified in and isolated from plants. In early 1996,
we modified our strategy, reducing our natural product discovery activities and
redirecting our principal efforts toward expanding our pipeline of commercially
viable pharmaceutical products by licensing or acquiring specifically-targeted
products developed for the treatment of certain diseases.
o In February 1997, we acquired the rights to develop and
commercialize "Visicol(TM)" tablets (brand of sodium phosphate)
(formerly "Diacol(TM)") to clean the colon for any medical purpose
and for use as a laxative, with respect to which a Phase IIb
clinical trial for use prior to colonoscopy had been completed at
that time.
o In November 1997, simultaneously with the consummation of a
private placement, we acquired the rights to develop and
commercialize two additional groups of technologies: (i)
technologies to down or up-regulate the Fc receptors on
macrophages and other cells to treat serious autoimmune disorders
and other diseases, including asthma/allergy (the "Fc Receptor
Technology") and (ii) technologies for the treatment of cancer,
specifically, the inhibition and prevention of tumor metastasis
(the "Thrombospondin Technology"). The compounds and technologies
making up the Fc Receptor Technology are currently in clinical
trials and pre-clinical stages of development while the compounds
and technologies making up the Thrombospondin Technology are
currently in pre-clinical stages of development.
o In February 2001, we entered into an agreement with Morton Grove
Pharmaceuticals to develop and manufacture IBStat(TM) (brand of
hyoscyamine sulfate), an immediate release antispasmodic product to
be marketed by us to gastroenterologists for use as an acute care
product for a variety of indications.
Visicol(TM). In February 1997, we entered into a License Agreement (the
"ALW License") with a partnership (the "ALW Partnership") where we acquired the
worldwide exclusive rights to sell, manufacture and sub-license Visicol(TM).
Visicol(TM) is the first and only patented tablet purgative preparation
indicated for bowel cleansing prior to colonoscopy. All other ethical colonic
cleansing products currently on the market are in liquid form, require the
ingestion of between one to four liters of fluid, and have either a very salty
taste or a taste so foul that patients are often unable to consume the required
dosage and/or nausea and vomiting occurs. Failure to ingest the required amount
of liquid could result in incomplete cleansing, and, in turn, an adenoma or
benign polyp could be overlooked
1
during colonoscopy. Two Phase III clinical studies conducted by us found that
Visicol(TM) is as effective a colonic cleanser, and better tolerated by
patients, than the most commonly prescribed liquid preparation. With respect to
patient tolerance of each preparation, compared to patients taking Visicol(TM)
over twenty times the number of the patients taking the liquid purgative found
the preparation "bad, barely tolerable" or "very bad, not tolerable." Most
patients taking Visicol(TM) found that the tablets had no taste.
In September 2000, we received notification from the United States Food
and Drug Administration, commonly known as the FDA, that Visicol(TM) was
approved for marketing for cleansing of the bowel as a preparation for
colonoscopy. The FDA's approval occurred in ten months from our submission of a
new drug application, commonly known as an NDA. The FDA's approval included full
labeling of the product. Following the FDA approval of Visicol(TM), we commenced
marketing and sales efforts and began shipping Visicol(TM) to our customers in
January 2001. In February 2001, we entered into a co-promotion agreement with
Procter and Gamble Pharmaceuticals to promote Visicol(TM) to gastroenterologists
and colorectal surgeons. In March 2002, we amended this agreement to provide for
incentives tied to prescription growth and to extend the term of the agreement
to December 31, 2002.
During 2001, gastroenterologists reported the visualization of
microcrystalline cellulose (MCC) in certain patients receiving Visicol(TM)
tablets. MCC is a commonly used, inert, but highly insoluble substance that
binds and fills Visicol(TM) tablets. Our strategy for overcoming the issue of
MCC visualization during colonoscopy has been twofold. First, we supported a
Phase IV clinical study to evaluate Visicol(TM)'s efficacy at a reduced dosing
regimen (20% and 30% less tablets and clear liquid volume). In early 2002 we
announced that colonic cleansing with the reduced regimen was efficacious.
Secondly, we were able to reformulate Visicol(TM) to contain significantly less
MCC. In December 2001 we submitted and in March 2002 the FDA approved a
supplemental new drug application, commonly known as an SNDA, for a new
formulation of Visicol(TM). We expect to launch this new formulation in the
second quarter of 2002.
IBStat(TM). In February 2001, we entered into an agreement with Morton Grove
Pharmaceuticals to develop and manufacture IBStat(TM), an immediate release
antispasmodic product. IBStat(TM) will be the combination of an FDA approved
generic drug and an FDA approved delivery system. IBStat(TM) will be marketed to
gastroenterologists for use as an acute care product for a variety of
indications, including spasm of the colon. Under the agreement, Morton Grove
Pharmaceuticals will develop and supply the product and we will market and sell
IBStat(TM) through our commercial operations. We estimate that IBStat(TM) may be
available to patients in the second quarter of 2002.
The Fc Receptor Technology. The focus of our research in the Fc
Receptor Technology area is to discover and develop pharmaceuticals designed to
modulate the immune system by manipulating macrophage and mast cell function.
Specifically, we are primarily focused on developing treatments for various
autoimmune diseases. Millions of patients in the United States suffer from
serious autoimmune diseases, including inflammatory bowel disease ("IBD"),
rheumatoid arthritis, systemic lupus erythematosus ("lupus"), Graves Disease,
idiopathic thrombocytopenic purpura ("ITP") and others. The therapeutic agents
that have traditionally constituted the mainstay for the treatment of autoimmune
disorders are glucocorticoid hormones (typically prednisone), which inhibit
macrophage Fc receptor expression but which must be administered in high dosages
and/or for extended periods of time and which are accompanied by substantial
side effects, including exacerbation of diabetes, hypertension, electrolyte
imbalance, weight gain, osteoporosis and increased susceptibility to infection.
In the case of ITP, an autoimmune disorder of the blood, most patients relapse
after glucocorticoid treatment is tapered, and in a number of such cases,
surgical removal of the spleen is ultimately required.
The Fc Receptor Technology is being developed under the guidance of
Alan D. Schreiber, M.D., Professor of Medicine and Assistant Dean for Research
at the University of Pennsylvania School of Medicine. The Fc Receptor Technology
consists of progesterone derivatives which do not appear to have the toxic side
effects of glucocorticoid hormone treatments. In addition, many of these
progesterone derivatives do not have the potentially undesirable hormonal
effects normally associated with traditional progesterone and other sex hormone
treatments.
The most advanced product candidates in the family of compounds comprising
the Fc Receptor Technology are Hematrol(TM), a potential treatment for ITP, and
Colirest(TM), a potential treatment for IBD. We believe that the results
2
from two Phase II clinical studies completed to date demonstrate that
Hematrol(TM) was safe and effective in the treatment of patients with ITP. In
March 1998, we initiated a Phase III pivotal trial of Hematrol(TM) at 38 sites
in the United States under a revised protocol. In June 1999, we announced, after
reviewing unaudited interim Phase III efficacy and safety data with the FDA,
that Hematrol(TM) appeared to benefit certain patients with ITP without the high
incidence of side effects that would normally be seen with the chronic
administration of "classical steroids," such as prednisone. Discussions with the
FDA regarding the data to date were favorable. In order to focus our efforts on
gastrointestinal products, we are currently considering sublicensing
Hematrol(TM) to other pharmaceutical companies which have a hematology focus. If
this strategy is not successful, we will consider resuming clinical development.
Due to the unique action of Hematrol(TM) on inflammatory mediators, Dr.
Schreiber conducted preclinical testing of Colirest(TM), a related compound, in
an accepted animal model of IBD. The results demonstrated that Colirest(TM) was
effective in decreasing lymphocyte infiltration into the bowel compared to the
buffer control. Due to good long-term safety data obtained in the ITP clinical
trials, we submitted a Phase II protocol to the FDA to evaluate Colirest(TM) for
the treatment of IBD, specifically Crohn's disease and ulcerative colitis. In
late 2000, we completed two Phase II multicenter clinical trials, which
demonstrated that Colirest(TM) was effective in treating patients with both
Crohn's disease and mild or moderate active ulcerative colitis.
In February 2001, we announced that the FDA had agreed that we could proceed
with a planned pivotal study of Colirest(TM) in patients with active Crohn's
disease. The FDA determined that our planned randomized, double blind,
placebo-controlled dose ranging study fulfills the requirements for the design
of a pivotal study and with positive results could count as one of the two
pivotal studies required for FDA approval of Colirest(TM). This pivotal trial
was launched in June 2001. We intend to initiate dialogue with the FDA to
determine the appropriate course to advance Colirest(TM) to later stage trials
for ulcerative colitis.
The Thrombospondin Technology. In November 1997, we acquired an
exclusive worldwide license to the Thrombospondin Technology, a cancer treatment
technology previously owned by MCP Hahnemann University (MCP).
Dr. George Tuszynski, Professor of Surgery, Medicine and Pathology at
MCP has found a specific amino acid sequence in Thrombospondin ("TSP-1") that is
believed to be responsible for promoting the effects of this molecule on tumor
cell adhesion and metastasis. From this discovery, Dr. Tuszynski invented a
series of peptide molecules for which a patent has been allowed in the United
States. These molecules significantly reduced metastasis of a mouse tumor cell
line and a human tumor cell line when injected into athymic mice.
Traditional methods of cancer treatment include surgery, radiation
therapy and chemotherapy, all of which remove or kill cancer cells (and normal
cells), but do not specifically prevent or inhibit metastasis. Dr. Tuszynski has
developed a murine polyclonal antibody against the TSP-1 receptor, which was
also shown to prevent or significantly reduce metastasis in athymic mice. We
filed a patent application directed to a novel sequence of the thrombospondin
receptor and antibodies directed to the same in June 1999.
More recently, Dr. Tuszynski has invented a novel soluble protein,
Angiocidin, which is a potent inhibitor of new blood vessel formation
(angiogenesis). Dr. Tuszynski discovered that Angiocidin is a receptor (docking
site) for TSP-1, and that Angiocidin specifically breaks up and kills blood
vessels in culture and when administered intravenously to animals bearing an
aggressive lung tumor implanted in their flank, significantly inhibited the
growth of the tumor. A patent application was filed in January 2000 directed to
the composition of matter for the novel soluble protein. (The peptide molecules,
the polyclonal antibody, the TSP-1 receptor and Angiocidin are referred to as
the "Thrombospondin Technology").
PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
The following table describes the diseases upon which we intend to focus the
majority of our research and product development efforts at least through
calendar year 2002, and also sets forth the current development status of
Visicol(TM) and our product candidates in each area:
3
PROGRAM THERAPEUTIC INDICATIONS DEVELOPMENT STATUS
------- ----------------------- ------------------
- -------------------------------------------------------------------------------------------------------------------------
Visicol(TM) o Cleansing of colon prior to colonoscopy FDA approved; marketed product
FDA approved SNDA
----------------------------------------------------- --------------------------------------
o Cleansing of colon prior to sigmoidoscopy Phase I completed
----------------------------------------------------- --------------------------------------
o Constipation Phase I completed
- ---------------------------- ----------------------------------------------------- --------------------------------------
IBStat(TM) o Immediate release acute care antispasmodic for To be marketed
a variety of indications, including spasm of
the colon
- ---------------------------- ----------------------------------------------------- --------------------------------------
Hematrol(TM) o Idiopathic Thrombocytopenic Purpura Phase II complete
Phase III (on hold)
Single dose pharmacokinetic
study complete
- ---------------------------- ----------------------------------------------------- --------------------------------------
Colirest(TM) o Crohn's and Ulcerative Colitis Phase II Crohn's disease complete
Phase II ulcerative colitis complete
Pivotal Phase IIb Crohn's disease
initiated
- ---------------------------- ----------------------------------------------------- --------------------------------------
Thrombospondin o Prevention of metastatic cancer Preclinical (lead compound identified)
Technology including but not limited to breast, Receptor cloned
lung, prostate, pancreas and squamous
cell cancer
- -------------------------------------------------------------------------------------------------------------------------
We spent $5,361,000, $7,060,000, $5,731,000 and $6,565,000 for research
and development during the year ended December 31, 2001, six-month period ended
December 31, 2000 and the years ended June 30, 2000 and 1999, respectively.
Included in the six-month period ended December 31, 2000 is $4,848,000 of
performance based stock expense that resulted from the vesting of options and
restricted stock in connection with the attainment of a previously set milestone
of FDA approval of Visicol(TM).
Visicol(TM)
Colorectal Cancer and Colonoscopies; Background and Statistics.
According to the American Cancer Society, 2002 Cancer Facts and Figures,
colorectal cancer is the second leading cause of cancer related deaths in the
United States, with approximately 148,300 new cases and 56,600 deaths estimated
for 2002. The incidence of colorectal cancer has increased on a yearly basis and
is higher in women (51% of all colorectal cancer cases in the United States are
in women) than men (49% of all cases). Other statistics of age-specific
incidence and mortality rates show that 90% of cases diagnosed are in patients
over 50 years of age with most patients (63% of all cases diagnosed) being
diagnosed with advanced disease. Although the 5-year case fatality rate is 39%,
if the disease can be diagnosed in an earlier localized stage the survival rate
approaches 90%.
Approximately 6% of Americans will develop colorectal cancer. The reported
risk of colorectal cancer increases after age 40, rises sharply at ages 50-55,
and doubles with each succeeding decade until it peaks at age 75. It is fairly
well established that colorectal cancer begins as a benign polyp or adenoma and
that a benign adenoma may exist for five or ten years before degenerating into
cancer. Therefore, with colonoscopic and sigmoidoscopic surveillance, along with
excision of the benign polyp or adenoma, colorectal cancer appears to be a
preventable disease. Many physicians believe that screening colonoscopy is
essential for high-risk groups, which include those with a family or personal
history of colorectal cancer. High-risk groups account for 15-20% of all
colorectal cancers.
The American Cancer Society's published guideline for colon cancer
screening recommends periodic screening for all persons over the age of 50
years. More intensive screening, often starting at an earlier age, is
recommended for various groups of persons at high risk of colon cancer,
including those with a family history or personal history of colon cancer.
Although, colonoscopy is one of several methods used to screen for colon cancer,
the American Cancer Society, along with many physicians, consider colonoscopy to
be the "gold standard" for colon cancer screening. This belief has been
strengthened by several large, recently published studies showing that
colonoscopy is better at detecting cancer than several other common screening
methods. Colonoscopy is widely used to screen patients at high risk for colon
cancer and is used to follow up most patients who have had suspicious findings
with other screening methods.
4
Estimates from the National Cancer Institute suggest that between
65-75% of early cancers can be detected by screening asymptomatic individuals
over 50 years of age with a 60-cm flexible sigmoidoscope, and the detection rate
increases dramatically when a 165-cm colonoscopy device is utilized. As a result
of such recommendations, colonoscopies have increased in the United States.
Additionally, in July 2001, Medicare began reimbursing for colonoscopy
procedures for the prevention and diagnosis of colon cancer. We believe that a
trend of increasing numbers of procedures will continue as the number of persons
in the United States over the age of 50 grows. Gastroenterologists and
colorectal surgeons comprise the substantial majority of professionals who
perform colonoscopy. However, we believe that flexible sigmoidoscopy is now
routinely done by many generalists (i.e., internists and family practitioners)
in the United States.
Competing Colon Cleansing Products. Cleansing the colon is necessary
prior to colonoscopy or sigmoidoscopy, especially when the procedure is being
used to screen for pre-cancerous lesions which may be 1 cm or smaller in size.
Ineffective cleansing can result in poor visualization, which in turn can cause
the screening physician to miss an adenoma or benign polyp.
The most frequently used products for cleansing the colon in the United
States contain either polyethylene glycol salt solution ("PEG") or sodium
phosphate. Both types of products work by drawing water from the body into the
gut via an osmotic effect. The accumulated fluid then passes through and flushes
the intestine causing a cleansing effect. Over the last 15 years, patient
intolerance to these methods of cleansing the colon has become a substantial
problem.
All purgative products, other than Visicol(TM), are currently
administered in liquid form. There are three dominant products which use PEG:
Golytely(R) and NuLYTELY(R), which are manufactured by Braintree Laboratories,
Inc. and Colyte(R) which is manufactured by Schwarz Pharma, Inc. Each product
requires the ingestion of 4 liters (over 1 gallon) of PEG in roughly 3.5 hours.
Additionally, PEG has an extremely salty taste. More recently, aqueous sodium
phosphate solution (Fleet's Phospho-soda, manufactured by C.B. Fleet Company,
Inc.) has been used as a purgatory alternative. Aqueous sodium phosphate
solution has been demonstrated to be as effective as the PEG-electrolyte purge
as a colonic cleanser. However, although a smaller volume of liquid is required
to be ingested for effective colonic cleansing with aqueous sodium phosphate
(between 1 and 2 liters of water), the taste of the solution is so foul that
nausea and vomiting frequently occur.
Advantages of the Visicol(TM) Bowel Preparation for Colonic Cleaning.
One of our Phase IIb and both of our Phase III clinical studies were designed to
determine the efficacy and safety and evaluate patient tolerance/preference of
Visicol(TM) tablets compared competing bowel evacuants. Our Phase IIb clinical
trial compared Visicol(TM) to Fleet's Phospho-soda and Colyte(R) and our Phase
III clinical trials compared Visicol(TM) to cherry flavored NuLYTELY(R). In each
study, Visicol(TM) was equal or better in terms of efficacy and safety than the
competing bowel preparation(s) included in the study. In terms of patient
tolerance and preference, the data from each of the studies significantly
favored Visicol(TM).
Specific results of the Visicol(TM) Phase IIb 342 patient single
blinded clinical trial is as follows:
o Over 40% of patients taking Fleet's Phospho-soda and over 10% of
the patients taking Colyte(R) found the taste unacceptable.
Conversely, all patients taking the sodium phosphate tablets found
that the tablets had no taste or a pleasant taste.
o Adverse effects included nausea and moderate to severe vomiting
occurring in greater than 6% of patients taking a liquid
preparation. Conversely, none of the patients taking the sodium
phosphate tablets experienced nausea or vomiting.
o 50% of the patients who took the Colyte(R) preparation and 20% of
the patients who took the Fleet's Phospho-soda preparation found
the respective liquid preparation to be satisfactory as compared to
80% of the patients who took the sodium phosphate tablets.
o Almost all patients who took the sodium phosphate tablets in the
study but who had previously taken liquid Colyte(R) or liquid
Fleet's Phospho-soda outside the study, preferred the sodium
phosphate tablets for future colonoscopies.
5
Specific results of the Visicol(TM) Phase III 800 patient randomized,
singled blinded pivotal clinical trials are as follows:
o 84% of Visicol(TM) patients were rated 'good' to 'excellent' for
colon cleansing as compared to 77% of NuLYTELY(R) patients.
o 43% of NuLYTELY(R)patients were unable to complete the prescribed
dose as compared to 6% for Visicol(TM).
o More than 90% of Visicol(TM) patients said they would use the
product again.
o 76% of NuLYTELY(R) patients said they would prefer Visicol(TM) for
future colonoscopy.
o Nausea, vomiting and bloating were each significantly less frequent
with Visicol(TM).
o More than 70% of the patients treated with Visicol(TM) found that
the tablets had either a pleasant taste or no taste at all.
o More than 90% of patients treated with Visicol(TM) found it 'easy'
or only 'slightly difficult' to drink the clear liquids associated
with the dosing regimen.
FDA Approval of Visicol(TM) Tablets. Following such favorable clinical
results, we submitted an NDA to the FDA in November 1999. Ten months later, in
September 2000, we received notification from the FDA that Visicol(TM) tablets
(brand of sodium phosphate) for cleansing of the bowel as a preparation for
colonoscopy was approved for marketing. The FDA's approval included full
labeling of the product. Visicol(TM) is the first and only tablet purgative
preparation indicated for bowel cleansing prior to colonoscopy.
Commercial Launch of Visicol(TM). Following the FDA's approval of
Visicol(TM), we immediately commenced marketing and sales efforts. We began
shipping Visicol(TM) to our customers in January 2001. In February 2001 we
entered into a co-promotion agreement with Procter & Gamble Pharmaceuticals to
promote Visicol(TM) to gastroenterologists and colorectal surgeons. See the
"Marketing and Sales" section for an overview of our marketing and sales
strategies.
During 2001, gastroenterologists reported the visualization of
microcrystalline cellulose (MCC) in certain patients receiving Visicol(TM)
tablets. MCC is a commonly used, inert, but highly insoluble substance that
binds and fills Visicol(TM) tablets. The presence of MCC deterred some
gastroenterologists from prescribing of Visicol(TM). Our strategy for overcoming
the issue of MCC visualization during colonoscopy has been twofold. First, we
supported a Phase IV clinical study to evaluate Visicol(TM)'s efficacy at a
reduced dosing regimen (20% and 30% less tablets and clear liquid volume). In
early 2002 we announced that colonic cleansing with the reduced regimen was
comparable to the labeled dose with reduced MCC visualization. Secondly, we were
able to reformulate Visicol(TM) to contain significantly less MCC. In December
2001 we submitted and in March 2002 the FDA approved an SNDA for a new
formulation of Visicol(TM). We expect to launch this new formulation in the
second quarter of 2002.
Other Applications for Visicol(TM). We believe there are several other
potential indications for the use of Visicol(TM). Colonic purgation is required
in all pre-operative colonic surgical procedures and therefore could be used as
a pre-operative preparation in lieu of NuLYTELY(R) which is currently used a
majority of the time. Colonic purgation is also required prior to other
visualization procedures such as barium enema examinations and flexible
sigmoidoscopy. Additionally, we believe that Visicol(TM) may be effective as a
laxative for chronic constipation. At this time, however, we do not intend to do
any further clinical studies to support these beliefs.
Proprietary Rights to Visicol(TM) Pursuant to License Agreement. In
February 1997, we entered into the ALW License with the ALW Partnership pursuant
to which we obtained an exclusive worldwide license, in perpetuity (subject to
expiration of underlying patents and rights of termination in the event of
breach by a party), to develop, use, market, sell, manufacture, have
manufactured and sub-license, in the field of colonic purgatives or laxatives
(the "Field of Use"), Visicol(TM) along with ALW Partnership's body of
proprietary technical information, trade secrets
6
and know-how related thereto. A U.S. patent Non-Aqueous Colonic Purgative
Formulations--as to Visicol(TM) (covering any solid form of administration of
sodium phosphate for use as a colonic cleansing agent or as a laxative) was
issued in April 1997. In December 2000, the U.S. Patent and Trademark Office
issued to us a patent for numerous other solid-dose colonic cleansing agents. In
June 2001, the Canadian Patent Office granted a Notice of Allowance. Patents for
Visicol(TM) tablets are presently pending in Europe.
Our rights under the ALW License automatically extend to improvements
developed by us and/or the ALW Partnership that are derivative of Visicol(TM).
In addition, we have a right of first refusal with respect to any new products
which relate to the Field of Use but which are not derivative of Visicol(TM).
IBStat(TM)
Irritable Bowel Syndrome (IBS); Background and Statistics. IBS is a
functional gastrointestinal disorder most commonly diagnosed in people in their
20's to 40's. A functional disorder does not show any evidence of an organic or
physical disease, and the cause of a functional gastrointestinal disorder does
not show up in a blood test or an x-ray. The disorders are diagnosed based on
symptoms, and often require tests to rule out the likelihood of another disease.
The symptoms of functional gastrointestinal disorders can cause discomfort,
ranging from inconvenience to deep personal distress. These symptoms include
abdominal pain or discomfort associated with a change in bowel pattern such as
loose or more frequent bowel movements, diarrhea or constipation. For those with
severe symptoms the disorders can be debilitating, leaving them unable to fully
participate in life and work. IBS is a leading cause of worker absenteeism,
second only to the common cold.
While the cause of IBS is not fully understood, it appears that IBS is a
disturbance in the interaction among the intestinal tract, the brain and the
nerves that regulate bowel motility (motor function) and sensory function.
Research has shown that the bowel in IBS sufferers is more sensitive than usual
and this sensitivity sets off a reaction that causes the symptoms. The bowel is
a muscular tube that propels food from mouth to anus, allowing nutrients to be
digested and absorbed along the way. Regular muscular contractions propel the
contents through the colon. If the bowel is overactive, the contents pass more
rapidly and the patient gets diarrhea, whereas sluggish activity causes
constipation. Muscle spasm in the bowel causes discomfort and cramping pain.
While IBS may cause pain and discomfort, it is not a life-threatening
disease. The life expectancy of patients with IBS is no different than that of
the general population. According to the International Foundation for Functional
Gastrointestinal Disorders (IFFGD), IBS affects 15-20% of adults and is the most
commonly presented gastrointestinal illnesses seen by physicians in primary care
or gastroenterology. While it is estimated that only 30% of people with IBS seek
medical assistance, these people account for 12% of primary care visits. Even
more compelling is the fact that IBS is the most common reason for referral to
gastroenterologists, constituting 20-50% of referred patients.
Treatment of IBS. Typical IBS treatment entails eliminating or diminishing
stressful situations, managing the patient's response to stress, modifying the
diet and using drugs to reduce the colonic spasm. To modify the diet physicians
often use high fiber diets and often recommend a fiber supplement. Fiber
supplements are often used for both constipation and diarrhea symptoms of IBS.
Drug treatment is administered to reduce abdominal pain, diarrhea and
constipation. Anticholinergic agents also called antispasmodic agents are very
effective when given before or at the onset of acute attacks of pain or before
meals. Antispasmodics produce their effect by blocking the autonomic nervous
system signals at the smooth muscle of the intestine. Other agents including
loperamide (Imodium(R)) can be used for diarrhea-predominant symptoms.
Marketing and Sales Agreement: IBStat(TM). In February 2001, we entered into
an agreement with Morton Grove Pharmaceuticals to develop, manufacture and
market IBStat(TM), an immediate release antispasmodic product. IBStat(TM) will
be the combination of an FDA approved generic drug and an FDA approved delivery
system. IBStat(TM) will be marketed to gastroenterologists for use as an acute
care product for a variety of indications, including IBS
7
and other related conditions that cause spasm of the colon. Under the agreement,
Morton Grove Pharmaceuticals will develop and supply the product and we will
market and sell IBStat(TM) through our commercial operations. We estimate that
IBStat(TM) may be available to patients in the second quarter of 2002. At this
time, we do not intend to conduct any preclinical or clinical studies on this
product in the future.
Fc Receptor Technology (Hematrol(TM)and Colirest(TM))
Autoimmune and Inflammatory Diseases: Background and Statistics. Millions of
patients in the United States suffer from a variety of serious autoimmune
disorders including rheumatoid arthritis, IBD, lupus, autoimmune hemolytic
anemia, Graves Disease, ITP and others. All of these disorders are
antibody-mediated and involve antibody-coated complexes, which are central to
disease pathophysiology. In almost all cases, the current therapy of choice is
to administer glucocorticoids, such as prednisone, at high doses and/or for
extended periods of time. Unfortunately there are many complications of
glucocorticoid treatment; adverse events are common and involve many major organ
systems.
In autoimmune diseases such as ITP, there is an increased clearance of
platelets by macrophages in the spleen. ITP is caused by antiplatelet
antibodies, frequently of the IgG class, which form IgG-containing complexes
with the platelets. In the spleen, these IgG-coated platelets bind to the
macrophage at Fc receptor sites on the macrophage surface. Observations of
patients having ITP, lupus and autoimmune hemolytic anemia suggest that
interactions of IgG-containing complexes with the macrophage Fc (IgG) receptors
lead to tissue destruction in these immunologic disorders.
Diseases characterized by interactions of IgG-containing immune
complexes with macrophage Fc receptors are often chronic, involve much suffering
and are generally treated with agents having serious side-effects.
The following is the estimated U.S. population for select autoimmune
diseases in the disease categories noted below:
--------------------------------------------------------------------------
Estimated U.S. Patient Population
--------------------------------------------------------------------------
Disorder Number of Patients
------------------------------------------------------- ------------------
ITP 30,000
------------------------------------------------------- ------------------
IBD (both Crohn's Disease and Ulcerative Colitis) 1,000,000
------------------------------------------------------- ------------------
Systemic Lupus Erythematosus 500,000
------------------------------------------------------- ------------------
Rheumatoid Arthritis 2,100,000
------------------------------------------------------- ------------------
Treatment Options; Glucocorticoid; Progesterone. We believe that a
number of autoimmune diseases may be treated by modulation of the Fc receptor.
For example, ITP, autoimmune hemolytic anemia, lupus and rheumatoid arthritis
are all antibody-mediated and generally responsive to steroids. We further
believe that by concentrating on careful elucidation of mechanisms of autoimmune
diseases and the role of macrophage Fc receptors in the pathophysiology of these
disorders, a series of useful therapeutic agents can be identified.
Glucocorticoid hormones are small molecules that rank among the most
effective therapeutic agents in the treatment of autoimmune disorders. It has
been established that one important mechanism for their efficacy is their
ability to inhibit macrophage Fc receptor expression by down-regulating the
transcription of these receptors. While glucocorticoids are used widely in
autoimmune diseases, substantial side effects limit their overall effectiveness.
Toxic effects observed include exacerbation of diabetes, hypertension,
electrolyte imbalance, weight gain, osteoporosis and increased susceptibility to
infection.
8
We have focused our development efforts on a search for agents that inhibit
the clearance of antibody complexes without the accompanying toxicities observed
by many glucocorticoids. For treatments of diseases characterized by
interactions of IgG-containing immune complexes with macrophage Fc receptors, we
have concentrated on progesterone derivatives that do not cause the toxicities
seen with glucocorticoids.
IBD (Crohn's Disease and Ulcerative Colitis).
Crohn's Disease. Crohn's disease is a serious inflammatory disease of
the gastrointestinal (GI) tract. It predominates in the intestine (ileum) and
the large intestine (colon), but may occur in any section of the GI tract.
Crohn's disease usually causes diarrhea, crampy abdominal pain, often fever, and
at times rectal bleeding. Loss of appetite and subsequent weight loss also may
occur.
Crohn's disease is a chronic disease, the cause of which is not known.
Medication currently available decreases inflammation and usually controls the
symptoms, but does not provide a cure. Because Crohn's disease behaves similarly
to ulcerative colitis, from which it may be difficult to differentiate, the two
disorders are grouped together as inflammatory bowel disease (IBD). Crohn's
disease affects all layers of the intestine in which there can be normal healthy
bowel in between patches of diseased bowel. Depending on where the involvement
occurs, Crohn's disease may also be referred to as Ileitis, regional enteritis
or colitis. It is referred to as Crohn's disease because Burrill B. Crohn was
the first name in the three-author landmark paper published in 1932 which
described the disease.
According to the Crohn's & Colitis Foundation of America, it is
estimated that there may be up to 500,000 Americans with Crohn's. Males and
females appear to be affected equally. While Crohn's disease afflicts people of
all ages, it is primarily a disease of the young. Most cases are diagnosed
before age 30, but the disease can occur in the sixth, seventh and later decades
of life. Because no medical cure for Crohn's disease exists, the goals of
medical treatment are to suppress the inflammatory response, permit healing of
tissue and relieve the symptoms of fever, diarrhea and abdominal pain. Several
groups of drugs form the mainstay of therapy for Crohn's disease today. They
are:
1. Aminosalicylates: These medications include aspirin-like
medications such sulfasalazine and mesalamine, administered both
orally and rectally.
2. Corticosteroids: These medications include prednisone and
methylprednisolone, available orally and rectally.
3. Immune modifiers: These medications include azathioprine,
6-mercaptopurine (6-MP), methotrexate and cyclosporine.
4. Antibiotics: metronidazole, ampicillin, ciprofloxacin and others.
5. Anti-TNF Inhibitor: infliximab.
Surgery becomes necessary in Crohn's disease when medication can no
longer control the symptoms, or when there is an intestinal obstruction or other
complication. In most cases, the diseased segment of bowel is removed and the
two ends of healthy bowel are joined together. It is not considered a cure for
Crohn's disease because the disease frequently recurs at or near the site of
anastomosis (i.e., the surgical reconnection of the bowel).
Research has shown that in IBD the body's defenses are operating
against some substances in the body, perhaps in the digestive tract, which they
recognize as foreign. These foreign substances (antigens) may themselves cause
the inflammation, or may stimulate the body's defenses to produce an
inflammation that continues without control.
Ulcerative Colitis. Ulcerative colitis is an inflammatory disease of
the colon, the large intestine, which is characterized by inflammation and
ulceration of the innermost lining of the colon. Symptoms characteristically
include diarrhea with or without rectal bleeding and often abdominal pain.
9
Ulcerative colitis differs from Crohn's disease since ulcerative colitis affects
only the colon. The inflammation is maximal in the rectum and extends up the
colon in a continuous manner without any "skip" areas of normal intestine.
Ulcerative colitis affects only the innermost lining of the colon,
whereas Crohn's disease can affect the entire thickness of the bowel wall. It is
estimated that there are up to 500,000 Americans with ulcerative colitis.
Ulcerative colitis is predominantly a disease of the young with most cases
generally beginning before age 30, although the disease can also occur in the
sixth, seventh and later decades of life.
Currently, no medical cure for ulcerative colitis exists, but effective
medical treatment can suppress the inflammatory process, permit healing of the
colon, and relieve the symptoms of diarrhea, rectal bleeding and abdominal pain.
As such, the treatment of ulcerative colitis involves medicines that decrease
the abnormal inflammation in the colon lining and thereby control the symptoms.
Three major classes of medication are used today to treat ulcerative colitis.
They are:
1. Aminosalicylates: These medications include aspirin-like
medications such as 5-aminosalicylic acid (5-ASA, mesalamine,
olsalazine) and sulfasalazine. These medications are effective in
the treatment of mild to moderate episodes of ulcerative colitis.
2. Corticosteroids: These medications include prednisone,
methylprednisolone and budesonide. These medications are used for
patients with moderate to severe disease.
3. Immunomodulatory medicines: These medications include
azathioprine, 6-mercaptopurine (6-MP) and cyclosporine. As a
group, they alter the body's immune cells from interacting with
the inflammatory process. These medications, however, can take as
long as three months to begin their beneficial effects.
In a small proportion of patients, medical therapy is not completely
successful or complications arise. Under these circumstances, surgery may be
considered. This surgery involves the removal of the entire colon and rectum
with the creation of an ileostomy or external stoma. Differing from Crohn's
disease, which can recur after surgery, ulcerative colitis is "cured" once the
colon is removed.
Although researchers do not know what causes this disease, they do not
believe it is caused by emotional stress or food, or that it is transmitted
directly from one person to another. Research has shown that in ulcerative
colitis, the body's defenses are operating against some substances in the body,
perhaps in the digestive tract, which the body recognizes as foreign. These
foreign substances (antigens) may themselves cause the inflammation to begin or
to stimulate the inflammatory process to continue without control.
Colirest(TM) and IBD. Colirest(TM) is being evaluated for the treatment
of IBD, specifically, Crohn's disease and ulcerative colitis. Colirest(TM)
inhibits pro-inflammatory mediators while possibly offering distinct safety
advantages over traditional steroid therapy. In early 2000, we initiated two
Phase II multi-center clinical trials to determine if Colirest(TM) was effective
in treating both Crohn's disease and ulcerative colitis.
Summary of Clinical Data. To date there have been two studies completed in
humans that have assessed the effects of Colirest(TM) on Crohn's disease and
ulcerative colitis, respectively. The results of the Phase II studies indicate
that Colirest(TM) appears safe and effective in the treatment of patients with
both Crohn's disease and ulcerative colitis. The results of the studies were as
follows:
Crohn's Disease Study.
A multicenter open-labeled, clinical trial of Colirest(TM) was
conducted in the treatment of patients with mild or moderate Crohn's disease.
Patients with an established diagnosis of Crohn's disease, currently taking
medications such as aminosalicylates, cyclosporine, 6-mercaptopurine,
azathioprine and/or systemic corticosteroids (<= 20 mg/day), and experiencing
increased gastrointestinal symptoms confirmed by a baseline Crohn's Disease
Activity Index (CDAI) between 200 and 400 were eligible to receive Colirest(TM)
tablets in a loading dose of 4 grams per day for the first two days followed by
a daily maintenance dose of 1000 mg (500 mg every 12 hours) for up to 2 months.
Ninety-one percent (10 of 11) of patients completed 2 months of treatment and 1
additional patient remained on therapy and is included on the 4-week analysis.
Of the 12 patients enrolled, only 1 patient discontinued therapy, and this was
due to "fatigue." Key results of the study included:
10
o 80% of patients who completed the study responded to treatment
with Colirest(TM) using endpoints that were previously defined by
the FDA for a recently approved drug indicated for Crohn's
(defined as a decrease in the CDAI at 8 weeks compared to
baseline => 70 or a CDAI score of <= 150).
o 70% of the patients were in remission (CDAI <= 150) at the
completion of the study.
o 73% of the patients responded after 4 weeks, with a remission
rate of 64%.
o Response at two months was accompanied by a decrease in
C-reactive protein in every case where this protein could be
detected at baseline, consistent with reduced inflammation.
o No serious adverse events occurred during the study.
o Transient elevations in serum transaminases were observed in some
patients but all values returned to normal while patients
remained on therapy.
To put our results in perspective, published studies of currently
marketed products for acute flares of Crohn's disease have produced remission
rates ranging from 25% to 80%. The upper range of remission rates were seen with
traditional glucocorticoids (e.g., prednisone), which are poorly tolerated when
chronically administered.
In February 2001, we announced that the FDA had agreed that we could
proceed with a planned pivotal study of Colirest(TM) in patients with active
Crohn's disease. The FDA determined that our planned randomized, double blind,
placebo-controlled dose ranging study fulfills the requirements for the design
of a pivotal study and with positive results could count as one of the two
pivotal studies required for FDA approval of Colirest(TM). This pivotal trial
was launched in June 2001 and we currently have 38 centers enrolling patients in
the United States. We anticipate initiating the second pivotal study in 2003.
Ulcerative Colitis Study.
A multicenter open-labeled clinical trial of Colirest(TM) was
conducted in the treatment of patients with mild or moderate active ulcerative
colitis. Patients with an established diagnosis of ulcerative colitis, active
disease on sigmoidoscopy and a baseline DAI (Disease Activity Index) between
three and ten received Colirest(TM) tablets in a loading dose of 4 grams per day
for the first two days followed by a daily maintenance dose of 1000 mg (500 mg
every 12 hours) for up to two months. During the study, patients were permitted
to continue medications such as Asacol(R), 6-mercaptopurine, cyclosporine,
azathioprine and/or systemic corticosteroids (<= 20 mg/day). The primary
efficacy endpoints were defined as => 2-point decrease in the DAI, or any
improvement in the Investigator Global Assessment (IGA).
Key results of the study included:
o Eleven patients were evaluable for efficacy; 9 completed 8 weeks
of Colirest(TM)treatment.
o 78% (7 of 9) of patients who completed the study responded to
treatment with Colirest(TM)in the DAI and IGA evaluations.
o 64% (7 of 11) of the evaluable patients responded to treatment.
o Two patients discontinued for an adverse event; an allergic drug
reaction in one patient, and hospitalization for jaundice and
increased abdominal pain in a second patient, who had
pre-existing sclerosing cholangitis. In the later case, symptom
onset occurred prior to study drug administration.
We intend to initiate dialogue with the FDA to determine the
appropriate course to advance Colirest(TM) to later stage clinical trials for
ulcerative colitis.
11
ITP. ITP is one of several autoimmune disorders in which (a) the
pathophysiology involves the deposition of immune complexes in key organs and
(b) patients respond to treatment with glucocorticoids such as prednisone.
ITP, an orphan disease (a disease with less than 200,000 cases), is a
disorder that stems from Fc receptor-mediated macrophage phagocytosis of
antibody-coated platelet complexes. The purpura, when produced, is severe and
marked by copious hemorrhage from mucus membranes. If platelets are severely
depleted, hemorrhage into the brain can occur, which is often fatal. ITP is seen
alone (i.e., without concomitant autoimmune disease) as well as in up to 20% of
lupus patients and in HIV-infected patients.
Treatment of ITP typically begins with prednisone for variable periods
of one month or longer. A substantial number of patients respond to treatment.
Patient tolerance is limited and most patients relapse as prednisone treatment
is tapered. Eventually the majority of patients advance to splenectomy to which,
again, a substantial portion respond.
Intravenous immunoglobulin ("IVIG") is used occasionally in very ill
patients or those refractory to prednisone, either before or following
splenectomy. IVIG treatment is believed to cause an antibody blockade of the Fc
receptor, inhibiting the clearance of IgG-coated platelets. Response rates are
similar to glucocorticoid therapy but immunoglobulin treatment is expensive and
relapse typically follows discontinuation of treatment. WinRho SD, a polyclonal
antibody product which appears to work by inhibiting macrophage Fc receptor
mediated clearance of the IgG-coated platelet, is intended to be a more
convenient option to IVIG treatment in that WinRho SD can be rapidly infused
while IVIG cannot. WinRho SD still must be repeatedly administered parenterally
for this chronic disease, thus offering only modest benefit over IVIG as well as
continuing to raise certain safety issues regarding the product.
Hematrol(TM) and ITP. Hematrol(TM) is being evaluated for treatment of
ITP. Hematrol(TM)'s mechanism of action for ITP is similar to that of
glucocorticoids on the regulation of macrophage Fc receptor production and
results in diminution of IgG-containing complex engulfment. Given this insight,
we believe that exploring related compounds with an improved safety profile over
glucocorticoids and progestins in lupus and rheumatoid arthritis has merit.
Upon successful development of Hematrol(TM), we anticipate that ITP
patients will more readily accept Hematrol(TM) because it will be better
tolerated and available as an oral formulation with a reduced side effect
profile as compared to IVIG, WinRho, or prednisone, although no assurance as to
successful development or patient acceptance can be given. Hematrol(TM) is a
progesterone molecule, demonstrating glucocorticoid properties but without the
side-effect profile commonly associated with glucocorticoids. An extensive body
of experience in human use exists and the drug is well characterized. No
significant estrogenic activity has been observed to date with Hematrol(TM).
Summary of Clinical Data. To date there have been two studies completed
that have assessed the effects of Hematrol(TM) on the platelet count of patients
with ITP. The results of the two studies indicate that Hematrol(TM) appears safe
and effective in the treatment of patients with ITP. A positive response, as
indicated by an increase in platelet count of at least 20,000/mm3 over baseline
was noted in 14 of 19 treated patients, while adverse events were transient in
nature and did not, with few exceptions, cause the patients to discontinue from
the trial.
Phase III (Pivotal) Trials Program; Trial Design. A United States pivotal
trial was initiated calling for 100 evaluable ITP patients to be enrolled at
approximately 38 sites. Patients must be newly diagnosed or previously
responsive to prednisone. Patients will be required to have a mean platelet
count between 15,000 and 75,000/mm(3) at entry. The primary efficacy endpoint
was defined as an increase in baseline platelet count of at least 20,000/mm(3).
Dosing in this open-label, historically controlled, 42-day course of treatment,
commenced in March 1998.
Responders in the active disease phase would then be randomized in a
double-blind fashion, to one of three groups for an additional 42 days to assess
maintenance of effect: placebo, Hematrol(TM) at half-strength and Hematrol(TM)
at full-strength. The primary efficacy endpoint in this phase is maintenance of
the therapeutic effect, e.g., by a sustained increase in baseline platelet count
of > 20,000/mm(3).
12
Interim Results of Phase III Data of Hematrol(TM). In June 1999, we
announced after reviewing unaudited interim Phase III efficacy and safety data
with the FDA that Hematrol(TM) appeared to benefit certain patients with ITP
without the side effects that would normally be seen with the chronic
administration of "classical steroids," such as prednisone. Discussions with the
FDA regarding the data to date were favorable.
In order to focus our efforts on gastrointestinal products, we are
currently considering sublicensing Hematrol(TM) to other pharmaceutical
companies which have a hematology focus. If this strategy is not successful, we
will consider resuming clinical development.
Additional Therapeutic Opportunities Identified in the Fc Receptor
Program. In addition to the autoimmune program, we may pursue two other novel
programs: serious infection and asthma/allergy.
Alan D. Schreiber, M.D., who is conducting sponsored research for us,
demonstrated and published in peer-reviewed journals the feasibility of
conferring engulfment (phagocytic) properties to cells that are not normally
capable of phagocytosis by nature. In collaboration with a leading gene therapy
researcher, this conversion was possible by administering Fc receptor gene cDNA
to the cells of interest. The feasibility of converting a non-phagocytic cell to
a phagocytic cell could represent a critical step in the body's fight against
infectious microorganisms. Dr. Schreiber has developed novel therapeutic
strategies to facilitate the removal of bacteria from the lung and from the
systemic circulation (via the liver). Such new therapies might be used in
association with antibiotics for the treatment of serious pulmonary or systemic
infections and in the prevention of the onset of infection in disorders
predisposed to bacterial or opportunistic infections.
Cellular receptors in the lung, (the IgE receptors), induce the release
of histamine and other biologically active products important in the
pathophysiology of asthma and other allergic disorders. Dr. Schreiber has
developed strategies for the local and systemic administration of therapies to
potentially prevent and treat these disorders. Two distinct novel targets which
have been characterized in detail are: (1) the Fc receptor domain responsible
for initiating the downstream signaling events resulting in mast cell histamine
release and subsequent bronchoconstriction and (2) the kinase responsible for an
initial step in the signal transduction process. A peptide inhibitor which binds
to the intracellular Fc receptor domain has been made and delivery issues are
currently being addressed. Several oligonucleotide inhibitors of the second
signal kinase have been made and can suppress histamine release in-vitro and
in-vivo. Animal feasibility efficacy studies have commenced for oligonucleotide
therapies. This research is at the very early stages of development and we do
not know if, when or in what form this work would advance to clinical studies.
A number of United States and foreign patent applications have been
filed, eight of which have been allowed in the United States which describe
methods of inhibiting or stimulating phagocytosis and methods of modulating
clearance of immune complexes. If the patents are issued, they will relate to
therapies for infectious diseases, inflammation, asthma/allergy and autoimmune
diseases.
We have also filed a patent describing the novel activity of
Colirest(TM) and related analogs on IBD.
License of Proprietary Rights. Rights to the Fc Receptor Technology are
owned by the University of Pennsylvania, pursuant to which we have obtained an
exclusive worldwide license for the term of the patents covered thereunder, to
make, have made, use, sell and to exploit all patent and other rights under this
license.
Thrombospondin Technology
Cancer and Metastasis; Background and Statistics. Cancerous tumors are
believed to form when cancer cells multiply at a rate that is greater than the
rate at which the host defense system can destroy the cells. Traditional methods
of treating cancer generally include surgery, radiation therapy and
chemotherapy. Presently, chemotherapeutic approaches to cancer generally involve
the use of broad-based cytotoxic agents that kill many rapidly growing normal
cells in addition to cancer cells. Significant side effects result from
cytotoxic therapy. Most cancer will spread beyond its original site and invade
surrounding tissue, and may also metastasize to more distant sites and
13
ultimately cause death in the patient unless effectively treated. To be
effective, cancer treatment must not only target the primary site but also its
metastasis.
Tumor metastasis is a multi-step process involving cell adhesion,
migration, invasion, colonization of distant organs and angiogenesis. TSP-1 is a
large glycoprotein secreted by platelets and synthesized by many cell types,
including endothelial and tumor cells. TSP-1 has been implicated as a promoter
of tumor progression and angiogenesis. A number of studies have demonstrated
that TSP-1 can bind to multiple surface receptors on the same cell or bind to
different receptors on different cells, including carcinoma cells. We believe
that blocking the TSP-1 receptor may represent a novel approach for the
treatment and prevention of metastasis by uniquely acting on certain steps of
the metastatic cascade. By antagonizing TSP-1, cancer cell adhesion, migration,
invasion and angiogenesis may all be inhibited.
The Thrombospondin Technology and its Applications. Dr. George
Tuszynski has performed laboratory studies suggesting that TSP-1 promotes tumor
progression. In 1987, it was first shown that TSP-1 functioned as a tumor cell
and platelet adhesive protein. Subsequently, four adhesive domains in the TSP-1
molecule were identified. Several laboratories have demonstrated that TSP-1
stimulated the migration of several types of human cancer. The interpretation
that TSP-1 promotes tumor metastasis is further supported by the observation
that TSP-1 injected intravenously into mice enhanced lung tumor colony formation
three-fold.
Dr. Tuszynski has found a specific amino acid sequence in TSP-1 that is
believed to be responsible for promoting the effects of this molecule on tumor
cell adhesion and metastasis. From this discovery, Dr. Tuszynski invented a
series of peptide molecules, and a patent for the molecules has been allowed in
the United States. These molecules significantly reduce metastasis of a mouse
tumor cell line and a human tumor cell line when injected into athymic mice. Dr.
Tuszynski has also developed a murine polyclonal antibody against the TSP-1
receptor that was also shown to prevent or significantly reduce metastasis in
athymic mice. In June 1999 we filed a patent application directed to a novel
sequence of the thrombospondin receptor and monoclonal antibodies directed to
the same. Dr. Tuszynski investigated the pattern of distribution of the TSP-1
receptor in breast carcinoma cell lines and squamous cell carcinomas of the head
and neck. His laboratory study showed strong localization of TSP-1 in the stroma
of malignant tumors with little or none in benign tissue. Importantly, the
receptor was expressed in carcinoma cells but was absent in normal cells. More
recently, similar observations were made in prostate, pancreatic and
hepatocellular carcinomas.
Research and Development Activities. Dr. Tuszynski has identified a
hexapeptide structure that appears to prevent the spread of human tumors in
animals by blocking the TSP-1 receptor. Preclinical testing is to be conducted
to determine if the pharmacokinetics and safety profile warrant the introduction
of this molecule into humans. We believe that because the lead compound contains
a hexapeptide, manufacturing would be inexpensive relative to other peptide
therapies. The prevention of the spread of small cell lung carcinoma has been
tentatively chosen as the initial target cancer. The survival term (generally
six months) for this type of cancer is extremely poor and should provide us with
an early indication of the compound's effectiveness.
More recently, Dr. Tuszynski has invented a novel soluble protein,
Angiocidin, which is a potent inhibitor of new blood vessel formation
(angiogenesis). Dr. Tuszynski discovered that Angiocidin is a receptor (docking
site) for TSP-1, and that Angiocidin specifically breaks up and kills blood
vessels in culture. When administered intravenously to animals bearing an
aggressive lung tumor implanted in their flank, Angiocidin significantly
inhibited the growth of the tumor.
To date Dr. Tuszynski has conducted approximately 50 preclinical
studies in mice with either Angiocidin or the hexapeptide. These early studies
have been conducted to prove our theory that the TSP-1 receptor has a role in
potential cancer prevention. These studies did not demonstrate any adverse
effects on the mice from our compounds. We need to conduct a substantial number
of additional preclinical studies in other animals in order to progress to human
clinical studies. Since we have not selected our final product candidate to move
forward into clinical studies, we cannot predict at this time the number of
studies or the time it would take to complete these studies.
To develop this technology, we intend to explore corporate partnerships
because of the expense involved in developing an agent used to treat or prevent
14
the spread of cancer. We have begun preliminary discussions with several
multinational pharmaceutical companies but there can be no assurance that a
corporate partnership or any cooperative agreement will be consummated.
License of Proprietary Rights. We have licensed the rights to all the
U.S. and foreign patents and patent applications relating to Thrombospondin
Technology and the rights to all future research and development of the
Thrombospondin Technology conducted in Dr. Tuszynski's laboratory from Dr.
Tuszynski and MCP. The patents, pending patent applications and future patent
applications cover or are expected to cover areas such as composition of matter
for a number of peptides with anti-metastatic activity, a novel cell surface
receptor which is important to the metastatic process, monoclonal antibodies to
such cell surface receptor and cancer diagnostic applications, a soluble protein
which is a potent inhibitor of angiogenesis, in addition to potential
applications and methods of inhibiting thrombotic activity and enhancing wound
healing, among other indications.
MANUFACTURING
We do not have the resources, facilities or capabilities to manufacture
Visicol(TM) and any of our proposed products. We have no current plans to
establish a manufacturing facility. We expect that we will be dependent to a
significant extent on contract manufacturers for commercial scale manufacturing
of Visicol(TM) and our proposed products in accordance with regulatory
standards.
Contract manufacturers may utilize their own technology, technology
developed by us, or technology acquired or licensed from third parties. When
contract manufacturers develop proprietary process technology and have ownership
of the Drug Master File, or DMF, our reliance on such contract manufacturer is
increased, and we may have to obtain a license from such contract manufacturer
to have our products manufactured by another party. Technology transfer from the
original contract manufacturer may be required. Any such technology transfer may
also require transfer of requisite data for regulatory purposes, including
information contained in a proprietary Drug Master File held by a contract
manufacturer. FDA approval of the new manufacturer and manufacturing sight would
also be required.
We have contracted with Mallinckrodt, Inc., a commercial supplier of
pharmaceutical chemicals to supply us with active pharmaceutical ingredients of
mainly monobasic and dibasic sodium phosphate, which comprises a significant
portion of the Visicol(TM) tablet in a manner that meets FDA requirements. We
have contracted with Pharmaceutical Manufacturing Research Services, Inc.
(PMRS), a manufacturing development company, to supply commercial quantities of
Visicol(TM) in a manner which meets FDA requirements. The FDA has approved the
manufacturing processes of PMRS.
We have contracted with an appropriate secondary manufacturer of Visicol(TM)
and an appropriate manufacturer to produce Colirest(TM). Neither of these
manufacturers has been approved by the FDA. We have contracted with Fisher
Clinical Services, Inc. to package Visicol(TM) on our behalf. This facility has
been FDA approved for the packaging of Visicol(TM).
MARKETING & SALES
Our internal sales and marketing management team has set our strategies for
the sales and marketing organization. Since Visicol(TM) is the first of our
proposed products to be sold, the following strategy for our sales
infrastructure has been put into place:
1. To minimize our internal infrastructure and the cost required for
product commercialization while maximizing product exposure and
reach, we have established numerous outsourced agreements with
experienced suppliers. These suppliers will assist us in
maintaining the sales, customer service and distribution arms of
our commercial operations, allowing us to realize certain
efficiencies and expertise we would not realize with start-up
internal operations. Our internal management structure will
oversee and support these outsourced operations, maintain control
over all marketing and strategic planning issues and eventually
manage the transition to an internal risk-minimizing structure.
15
2. The promotion of Visicol(TM) to gastroenterologists and
colorectal surgeons is achieved through our co-promotion
agreement with Procter & Gamble Pharmaceuticals (P&GP). The P&GP
gastrointestinal sales force, which began promoting Visicol(TM)
in March 2001, covers over 90% of gastroenterologists in the U.S.
and was rated one of the top gastrointestinal sales forces for
the year 2000 by Scott-Levin, a leading pharmaceutical consulting
firm. In March 2002, we amended our agreement with P&GP to
provide for incentives tied to prescription growth and to extend
the term of the agreement to December 31, 2002.
3. We have authorized Integrated Commercialization Solutions, Inc.
(ICS), a leader in supply chain management for the pharmaceutical
industry, to implement third-party logistics. This involves
handling customer service, order management, distribution,
accounts receivables, and contract charge back administration for
Visicol(TM). ICS is in all ways represented to the customer as
InKine.
COLLABORATIVE ARRANGEMENTS; RESEARCH AND LICENSE AGREEMENTS
Collaborations may allow us to leverage our scientific and financial
resources and gain access to markets and technologies that would not otherwise
be available to us. In the long term, development and marketing arrangements
with established companies in the markets in which potential products will
compete may allow our products more efficient access to intended markets and
may, accordingly, conserve our resources. We expect that we will enter into
development and marketing arrangements for some of the products we may develop.
From time to time, we hold discussions with various potential partners.
We have entered into an agreement with Morton Grove Pharmaceuticals to
develop, manufacture and market IBStat(TM), an immediate release antispasmodic
product. IBStat(TM) will be marketed to gastroenterologists for use as an acute
care product for a variety of indications, including spasm of the colon. Under
the agreement, the Morton Grove Pharmaceuticals will develop and supply the
product and we will market and sell IBStat(TM) through our commercial
operations.
We have entered into an license agreement with Zeria Pharmaceutical
Company, Ltd. of Tokyo, Japan to develop, manufacture, market and sell
Visicol(TM) for use in Japan. Under the agreement, Zeria will develop
Visicol(TM) as a bowel cleansing agent. As compensation for the license granted
to Zeria, we received an up-front license fee of $500,000 and will receive an
additional $2,000,000 in fixed license fees upon the attainment of reaching
certain development milestones. In addition, we will receive royalty payments
based on net sales of Visicol(TM) in Japan. Zeria is responsible for all
development costs.
We have rights under license agreements to several patents and patent
applications under which we expect to owe milestone payments and royalties on
sales of certain of our proposed products. Additionally, certain of these
agreements also provide that if we elect not to pursue the commercial
development of any licensed technology, or do not adhere to an acceptable
schedule of commercialization, then our exclusive rights to such technology
would terminate. We also fund research at certain institutions, and these
relationships may provide us with an option to license any results of the
research.
GOVERNMENT REGULATION
The production and marketing of our products and our research and
development activities are subject to regulation by numerous governmental
authorities in the United States and other countries. In the United States,
biological products, drugs and diagnostic products are subject to rigorous
review by the FDA. The Federal Food, Drug, and Cosmetic Act, the Public Health
Service Act and other federal statutes and regulations govern or influence the
testing, manufacture, safety, efficacy, labeling, storage, recordkeeping,
approval, advertising and promotion of such products. Noncompliance with
applicable requirements can result in fines, recall or seizure of products,
refusal of the government to approve product and/or license applications or to
allow us to enter into government supply contracts, the withdrawal of previously
approved applications and criminal prosecution.
16
In order to obtain FDA approval of a new drug product, we must submit
proof of safety and efficacy. Such proof entails extensive and time-consuming
preclinical and clinical testing. The results of preclinical studies are
submitted to the FDA as part of an Investigational New Drug Application (IND).
Preclinical studies involve laboratory evaluation of product characteristics and
animal studies to assess the efficacy and safety of the product. Once the IND is
reviewed, human clinical trials may be conducted. Human clinical trials are
typically conducted in three sequential phases, but the phases may overlap.
Phase I trials consist of testing the product in a small number of patients or
healthy volunteer subjects primarily for safety at one or more doses. During
Phase II, in addition to safety, the efficacy of the product is evaluated in a
patient population somewhat larger than Phase I trials. Phase III trials
typically involve additional testing for safety and clinical efficacy in an
expanded population at geographically dispersed test sites. A clinical plan, or
"protocol," accompanied by the approval of the Institutional Review Board
reviewing and monitoring the trials, must be submitted to the FDA prior to
commencement of each clinical trial. Various reports must be submitted to the
FDA during the course of the trials, and the FDA may order the temporary or
permanent discontinuation of a clinical trial at any time.
The results of the clinical trials are submitted to the FDA as part of
an NDA. Following extensive review of an NDA, the FDA may grant marketing
approval, require additional testing or information, or deny the application.
Sales of a new drug may commence following FDA approval of an NDA and
satisfactory completion of a pre-approval review of the manufacturing facility
and pertinent production records. If there are any modifications to the drug,
including any changes in indication, manufacturing process, labeling or
manufacturing facility, an NDA supplement may be required by the FDA.
The FDA may also require post-marketing testing and surveillance to
monitor the effects of approved products or place conditions on any approvals
that could restrict the commercial applications of such products. Product
approvals may be withdrawn if compliance with regulatory standards is not
maintained. Continued compliance with all FDA requirements and conditions in an
approved application, including those concerning product specification,
manufacturing process, validation, labeling, promotional material, recordkeeping
and reporting requirements, is necessary for all products. Failure to comply
could lead to product recall or other FDA-initiated actions, which could delay
further marketing until the products are brought into compliance. Even after any
approval by the FDA and foreign regulatory authorities, products may later
exhibit adverse effects that could prevent their widespread use or necessitate
their withdrawal from the market.
Sales of pharmaceutical products outside the United States are subject
to foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval by comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing in those countries. The time required to obtain such approval may be
longer or shorter than that required for FDA approval.
COMPETITION
The biopharmaceutical industry is highly competitive, including the industry
segments relating to: (i) purgative agents for cleansing the colon, which
include Visicol(TM); (ii) antispasmodics, which include IBStat(TM); (iii)
receptor based technologies, which include the Fc Receptor Technology, which
includes Colirest(TM) and Hematrol(TM); and (iv) the treatment and prevention of
cancer, which includes the Thrombospondin Technology. We are likely to encounter
significant competition with respect to Visicol(TM), IBStat(TM) and our product
candidates currently under development, including, but not limited to,
competition from: (a) Braintree Laboratories, Inc., Schwarz Pharma Inc. and C.B.
Fleet Company, Inc. with respect to the product applications targeted by
Visicol(TM); (b) Schwarz Pharma Inc among others with respect to IBStat(TM); (c)
AstraZeneca, Salix Pharmaceuticals, IDEC Pharmaceuticals Corporation, Procter &
Gamble Company, Solvay S.A., Centocor, Inc., Immune Response Corporation,
Autoimmune, Inc. and NABI with respect to the treatment of diseases targeted by
the Fc Receptor Technology; and (d) Boston Life Sciences, Inc., Entremed, Inc.
and Human Genome Sciences, among others with respect to the treatment of
diseases targeted by the Thrombospondin Technology. Most of these entities have
substantially greater financial, technical, manufacturing, marketing,
distribution and other resources. We may also face competition from companies
using different or advanced technologies that could render our products
obsolete.
17
OTHER FACTORS TO BE CONSIDERED
Risks Related To Our Business, Industry And Strategy
We have generated significant losses to date. If we continue to incur
substantial losses, then the value of our common stock is likely to be reduced.
Also, we may never achieve a profitable level of operation.
To date, we have engaged mostly in the research and development of proposed
drug products. We have not generated significant revenue from product sales or
royalties. As of December 31, 2001, we have had total product sales for
Visicol(TM) of $4.3 million. We have incurred losses in each year since our
inception on July 1, 1993. As of December 31, 2001, we had an accumulated
deficit of approximately $60.0 million.
Visicol(TM) and our proposed products are in various stages of marketing or
development and require significant research, development and testing. We must
obtain all of the necessary government approvals for our proposed products
before we can sell any proposed product. As a result, we believe our losses will
continue in the foreseeable future as we develop our products.
If our research spending in the foreseeable future is greater than
Visicol(TM) earnings, then we may never conduct our operations at a profit. Our
common stock is likely to decrease in value if we fail to generate profits or if
the market believes that we are unable to generate profits.
We have granted or committed to grant shares and options to founding
scientists and others when we achieve agreed upon product development goals.
These goals relate to our filing applications with the FDA and achieving agreed
upon sales targets. As a result, our potential earnings per share will decrease
because of the necessary accounting treatment of these shares and options.
If the owners of technology licensed to us terminate our license agreements,
then these owners could prevent us from developing, manufacturing or selling the
product covered by that license.
We have acquired the worldwide exclusive right to market Visicol(TM),
IBStat(TM), the Fc Receptor Technology and the Thrombospondin Technology under
various license agreements. Each of the owners of the technology licensed to us
may terminate the license prior to its expiration date under certain
circumstances, including our failure to comply with commitments related to the
development of the products specified in the licenses. For example, some of our
licensing agreements require us to spend specific amounts for research and
development of our products. If we do not comply with the terms of these
agreements, the owners of the licensed technology could demand the return of all
rights to the licensed technology, and force us to cease developing,
manufacturing or selling the products covered by that license.
Risks Relating To Clinical And Regulatory Matters
If we do not obtain required approvals from the government, then we may not
successfully market or sell our proposed products.
The FDA requires multiple stages of tests, known as phase I, II and III
clinical trials, on all pharmaceutical products. In addition, the FDA must
confirm that drug manufacturers comply with applicable federal regulations. The
process to obtain government approvals of a pharmaceutical product takes many
years and requires substantial resources.
The FDA may delay or halt the clinical development of our proposed products
at any stage, or may deny us approval to market a product. If the FDA takes any
of these adverse actions, we may delay or stop the development of a product or
may be unable to sell such product. We do not believe we are subject to risks
which are materially different than other pharmaceutical companies seeking FDA
approval. The process of obtaining FDA approval is expensive, time-consuming and
often filled with unexpected hurdles. Even if we receive approval of a product
candidate, the FDA may limit and restrict the drug's use and may subject our
products to continuous review. If we fail to comply with any applicable
regulatory requirements, the FDA could impose penalties on us, including:
18
o warning letters;
o fines;
o withdrawal of regulatory approval;
o product recalls;
o operating restrictions;
o injunctions; and/or
o criminal prosecution.
1. Status of our products in the FDA approval process:
Visicol(TM) and our proposed products are in various stages of development
and in various stages of the FDA approval process, as set forth below:
o Visicol(TM). We obtained FDA approval to begin marketing
Visicol(TM) in September 2000. We are currently manufacturing,
marketing and selling Visicol(TM). In December 2001 we submitted and
in March 2002 the FDA approved our SNDA for a new formulation of
Visicol(TM). We expect to launch this new formulation in the second
quarter of 2002.
o IBStat(TM). In February 2001 we entered into an agreement with
an established pharmaceutical manufacturer to develop and market
IBStat(TM). IBStat(TM) is the combination of a previously approved
generic drug and an FDA approved delivery system. We anticipate that
IBStat(TM) will be available to patients in the second quarter of
2002.
o Fc Receptor Technology Products.
-> Colirest(TM). We are developing Colirest(TM) as a
compound for the treatment of inflammatory bowel disease, commonly
known as IBD. IBD is an autoimmune disease that causes inflammation and
ulceration of the bowel. IBD includes both Crohn's disease and
ulcerative colitis. In September 2000, we announced positive results of
our Phase II study on Crohn's disease and in December 2000, we
announced positive results of our Phase II study in ulcerative colitis.
We have reached an agreement with the FDA for the advancement of
Colirest(TM) to a Pivotal Phase IIb dose ranging study for Crohn's
disease. We are currently enrolling patients in this study.
-> Hematrol(TM). We are developing Hematrol(TM)as
a compound for the treatment of ITP. ITP is an autoimmune disease that
causes spontaneous bleeding. Hematrol(TM)is currently on hold in
phase III clinical trials for ITP.
o Thrombospondin Technology Products. We have acquired an
exclusive worldwide license to a cancer treatment technology known as
the Thrombospondin Technology. We are evaluating a number of product
opportunities utilizing the Thrombospondin Technology in the area of
cancer treatment. Each of these product opportunities is in the early
stages of development (before phases I, II and III). We have not begun
human clinical trials for these products.
We may never receive FDA approval for any of these products (other than
Visicol(TM), which has been approved and IBStat(TM), which does not require
separate approval), and without FDA approval, we cannot manufacture, market or
sell these products.
2. FDA manufacturing approval:
The FDA requires pharmaceutical companies to include detailed manufacturing
information in an NDA. The FDA has mandated that all manufacturing facilities
and processes comply with good manufacturing practices, commonly known as GMP.
GMP is a body of federal regulations and guidelines that govern the manufacture
19
of drugs for human use. For example, all manufacturers must pass manufacturing
plant inspections and provide records of detailed manufacturing processes. Among
other things, drug manufacturers must demonstrate that:
o the drug product can be consistently manufactured at the same
quality standard;
o the drug product is stable over time; and
o the level of chemical impurities in the drug product are under a
designated level.
The FDA has approved our manufacturing process for Visicol(TM). The FDA may
still, however, prevent us from continuing to market Visicol(TM) if we:
o do not continue to consistently manufacture appropriate amounts
of Visicol(TM)or
o cannot continue to repeat the manufacturing process used to
manufacture the phase III clinical trial batches of Visicol(TM).
We currently have only one approved manufacturer of Visicol(TM) and one
manufacturer for IBStat(TM). We have, however, initiated the process to obtain a
qualified secondary manufacturer of Visicol(TM).
3. FDA oversight after product approval:
After the FDA approves a product, the FDA continues to regulate the product.
In particular, the FDA may require post-marketing testing and surveillance to
monitor the effects of an approved drug product. In addition, the FDA may place
conditions on any approvals that could restrict the sale or use of a product.
If we cannot develop and market our products as rapidly or cost-effectively as
our competitors, then we will not be able to conduct our operations at a profit.
We are developing products that will compete in five very competitive
segments of the pharmaceutical industry. These include: (i) Visicol(TM); (ii)
IBStat(TM), (iii) Colirest(TM), (iv) Hematrol(TM) and (v) the Thrombospondin
Technology. Based on total assets and revenues, we are significantly smaller
than the majority of our competitors in these segments. Therefore, we may
encounter significant competition with Visicol(TM) and each of our potential
products, primarily from the following competitors:
---------------------------------------------------------------------------------------------------------------
Product Candidates
---------------------------------------------------------------------------------------------------------------
Visicol(TM) IBStat(TM) Colirest(TM) Hematrol(TM) Thrombospondin
Technology
- ----------------------------------------------------------------------------------------------------------------------
Braintree Schwarz Pharma Inc. AstraZeneca plc Immune Response Boston Life
Laboratories, Inc. Corporation Sciences, Inc.
--------------------- ---------------------- --------------------- --------------------- ----------------------
C.B. Fleet Company, Salix Autoimmune, Inc. Entremed, Inc.
Inc. Pharmaceuticals,
C Ltd.
o --------------------- ---------------------- --------------------- --------------------- ----------------------
m Schwarz Pharma Inc. IDEC NABI Human Genome
p Pharmaceuticals Sciences, Inc.
e Corporation
t --------------------- --------------------- --------------------- ----------------------
i Procter & Gamble
t Pharmaceuticals
o --------------------- --------------------- ----------------------
r Solvay S.A.
s ---------------------
Centocor, Inc.
(Johnson & Johnson)
- ----------------------------------------------------------------------------------------------------------------------
The financial strength of competitors is particularly important in the
pharmaceutical industry, where technological innovations occur rapidly. These
technological innovations can dramatically affect the price and effectiveness of
20
a product line and can render a competing product line obsolete. Our competitors
that have strong financial resources may develop competitive products that are
cheaper and more effective than our products. These competitive products may
render our products unmarketable or non-competitive. Even if our competitors do
not develop better and more cost effective products, they may manufacture and
market their products more successfully than us. Therefore, our competitors may
capture all or a large segment of our market, severely restricting our ability
to achieve a profitable level of product sales.
The FDA could prevent us from marketing IBStat.
IBStat(TM) is the combination of an FDA approved generic drug (hyoscyamine
sulfate) and an FDA approved delivery system. Hyoscyamine sulfate was a marketed
product prior to 1962. The FDA allows products that were marketed prior to 1962
to continue to be marketed without an approved NDA. There is no guarantee that
the FDA will continue to allow hyoscyamine sulfate or many other pre-1962
marketed products to continue to be marketed. In addition, the FDA could
determine that hyoscyamine sulfate is unsafe or that additional data needs to be
submitted to the FDA in order to determine the drug's safety and efficacy. The
FDA could also determine that IBStat(TM) is not similar enough to the pre-1962
marketed hyoscyamine sulfate, and as a result cannot be marketed without an FDA
approved NDA.
Risks Relating To Financing Our Business
We may need additional capital in the future in order to continue our
operations.
We may need additional capital to develop, manufacture and market
Visicol(TM) and our product candidates if the future revenues from Visicol(TM)
fall short of current assumptions. The revenues from Visicol(TM) in 2001 were
significantly less than our expectations. Specifically, we will spend funds for
the following:
o Researching and developing our product candidates, including
participating in human clinical trials and animal studies
conducted before clinical trials;
o Seeking necessary approvals from the government;
o Developing manufacturing and distribution capabilities; and
o Funding our growth as a company.
We believe that our current capital resources will continue to fund our
operations for at least the next 12 months. Visicol(TM) is our first and only
product at this time and the success of Visicol(TM) directly impacts our need
for additional capital. Our future capital requirements will depend on a variety
of factors. For example, if we experience continued progress in our research and
development activities, or if we determine that it is necessary to prosecute and
enforce our patents, we may require additional capital. In addition, our current
and future marketing activities will affect our future capital requirements.
Because we have limited experience in marketing Visicol(TM), we have limited
experience in predicting how much capital will be necessary to successfully
complete our marketing plans. If we inaccurately predict our future capital
requirements, we may be unable to continue our operations.
We regularly seek funding for our operations from a variety of sources,
including public and private securities offerings, loans and joint arrangements
with partners. We currently do not possess a commitment to obtain additional
funding, and we may never receive additional funding in the future. If we need
additional capital and we fail to obtain additional funding, we will delay,
scale back or eliminate our research and development activities or enter into
arrangements with others to develop and market certain proposed products that we
may otherwise have developed ourselves. For example, when Visicol(TM) revenues
fell short of expectations in 2001, in order to reduce some of the shortfall we:
(i) scaled back our budgeted spending on the Thrombospondin Technology; and (ii)
reduced our staff by 35%.
21
If we are unable to meet our debt service obligations related to our outstanding
convertible subordinated notes, our operations could be adversely affected. In
addition, even if we are able to meet our debt service obligations, the amount
of debt outstanding could impede our operations and capital flexibility.
Our outstanding convertible subordinates notes are due in June 2003 and are
convertible at a conversion price of $4.52 per share, subject to adjustment in
certain circumstances. If the future market price of our common stock is such
that it is not attractive for note holders to convert their notes to common
stock by the time the notes become due, we are obligated to settle the notes for
cash. If we are unable to generate sufficient cash flow or otherwise obtain
funds necessary to service our outstanding convertible notes, we will be in
default under the terms of the notes. Even if we are able to meet our debt
service obligations, our outstanding debt could adversely affect us in a number
of ways, including by:
o Limiting our ability to obtain any necessary financing in the
future for working capital, capital expenditures, debt service
requirements or other purposes;
o Limiting our flexibility in planning for, or reacting to, changes
in our business;
o Placing us at a competitive disadvantage relative to our
competitors that have lower levels of debt;
o Making us more vulnerable to a downturn in our business, industry
or the economy generally; and/or
o Requiring us to use a substantial potion of our cash to pay
unconverted debt principal, instead of applying these funds to
operations.
Under the current terms of our convertible subordinates notes, an event of
default will occur if we fail to maintain our listing on the Nasdaq National
Market. Although we are not currently in default, as discussed below in a later
risk factor, we are currently out of compliance with the minimum bid price
requirement for continued listing on the Nasdaq National Market. We are actively
considering ways to preserve our Nasdaq National Market listing and other ways
to remedy this potential default.
Risks Related To Ongoing Operations
If we do not have adequate insurance for product liability claims, we may be
subject to significant expenses relating to these claims.
We are subject to significant product liability risks relating to the
testing, manufacturing and sale of the products we are developing. These risks
include:
o Our products could cause undesirable side effects or injury when
sold;
o Our proposed products could cause undesirable side effects or
injury during clinical trials; and
o We may agree to reimburse others that incur liability relating to
our product.
We currently maintain insurance for product liability claims in the amount
of $10,000,000 per occurrence and $10,000,000 in the aggregate. We have no way
of knowing if these amounts will be adequate to cover any product liability
claims filed against us. If we do not or cannot maintain adequate insurance
coverage, we may incur a significant liability if a product liability claim
arises.
Risks Relating To Product Manufacturing And Sales
If we do not develop and maintain relationships with manufacturers, then we may
not successfully manufacture and sell our products.
We do not possess the capabilities, resources or facilities to manufacture
Visicol(TM) and any of our product candidates. We must contract with
manufacturers to produce Visicol(TM) and our product candidates according to
government regulations. Our future development and delivery of Visicol(TM) and
our product candidates depends on the timely, profitable and competitive
performance of these manufacturers. A limited number of manufacturers exist
which are capable of manufacturing Visicol(TM) and our product candidates. We
may fail to contract with the necessary manufacturers or we may contract with
manufacturers on terms that may not be entirely acceptable to us.
22
We have contracted with Mallinckrodt, Inc., a commercial supplier of
pharmaceutical chemicals to supply us with active pharmaceutical ingredients for
Visicol(TM). A significant portion of the Visicol(TM) tablet is monobasic and
dibasic sodium phosphate. Mallinckrodt has agreed to supply these ingredients in
a manner which meets FDA requirements. The FDA has approved the manufacturing
process for these active ingredients, but the Drug Master File for the sodium
phosphate is only for one location at Mallinckrodt. If this location were to
shut down for any reason, a delay in the delivery of our active pharmaceutical
ingredients would occur and could impact future sales of Visicol(TM). We are
currently working towards submitting a Drug Master File with the FDA for another
Mallinckrodt facility in order to minimize this risk.
We have contracted with PMRS, a manufacturing development company, to supply
commercial quantities of Visicol(TM) in a manner that meets FDA requirements.
The FDA has approved the manufacturing processes of PMRS. PMRS must maintain
compliance with FDA standards regarding the manufacturing of Visicol(TM) at all
times. The failure to maintain compliance with FDA standards could result in the
loss of "approved status" at PMRS. Any such loss would have a significant
negative impact on us since we do not have an approved secondary manufacturer
for Visicol(TM). We are currently working with an appropriate secondary
manufacturer of Visicol(TM) and an appropriate primary manufacturer to produce
Colirest(TM). Neither of these manufacturers has been approved by the FDA.
We have contracted with Fisher Clinical Services, Inc. to package
Visicol(TM) in a manner that meets FDA requirements. The FDA has approved this
facility for the packaging of Visicol(TM). Any subsequent switch to a new
package facility could cause a delay in the delivery of Visicol(TM) to our
distributors and customers.
If we do not develop and maintain either internal or external sales, marketing
and distribution capabilities, then we may not successfully sell our products.
We have marketed, distributed and sold one pharmaceutical product under the
InKine name for a limited time period. We rely significantly on sales, marketing
and distribution arrangements with third parties for Visicol(TM) and other
products we are developing. In particular, we have entered into the following
significant agreements:
o Co-promotion Agreement with Procter & Gamble Pharmaceuticals. We
have entered into a co-promotion agreement with Procter & Gamble
Pharmaceuticals to sell and promote Visicol(TM) through their
experienced gastrointestinal sales force.
o We have retained Integrated Commercialization Solutions to act as
our exclusive outsourcing supplier for warehousing and
distribution of Visicol(TM) and other products we designate in
the future, in the United States and Guam. Integrated
Commercialization Solutions' distribution responsibilities
include invoicing, accounts receivable, customer service, order
process management and chargeback management.
Each of these agreements expires after a fixed period of time. If anyone of
these agreements is terminated or not renewed and if we do not establish
alternative agreements, our products may not be sold and our revenues will be
reduced. Although we believe our collaborators have an economic motivation to
succeed in performing their contractual responsibilities, we have limited or no
control over the resources that any collaborator may devote to our products. Any
of our collaborators may breach or terminate their agreements with us or
otherwise fail to conduct their collaborative activities successfully and in a
timely manner. Further, our collaborators may not devote sufficient resources to
the marketing, sale or distribution of our products. If any of these events
occur, we may not be able to effectively sell our products.
23
In the future, we may internally perform certain sales, marketing and
distribution functions which are currently outsourced. If we do so, we would
face a number of additional risks, including:
o we may not be able to build sales, marketing and distribution
operations effectively;
o the cost may not be justifiable in light of product revenues; and
o we may not be able to manage internal sales, marketing and
distribution functions effectively.
If we do not receive adequate reimbursement from the government, managed care
organizations and private insurance plans, then some patients may be unable or
unwilling to purchase our products and we will achieve less revenue from product
sales.
Successful sales of our products in the United States and other countries
depend on the availability of adequate reimbursement from the government,
managed care organizations and private insurance plans. Pharmaceutical companies
often use reimbursement as the basis for determining their sales. In the
pharmaceutical industry, unlike other consumer product industries, insurance
companies, including managed care organizations, often pay drug manufacturers
and distributors directly for their products. In fact, pharmaceutical companies
make a majority of their sales to insurance companies and not to consumers.
These organizations provide for reimbursement only after considering a number of
factors, including product features such as safety, medical necessity, cost and
the experimental nature of the product. We will spend significant amounts of
time and other resources to obtain reimbursement for our products. The
organizations that provide reimbursement routinely limit reimbursement and
attempt to exert significant pressure on medical suppliers to lower their
prices. Visicol(TM) is premium priced compared to its competitors. We do not
know what impact, if any at all, this will have on the reimbursement for
Visicol(TM) by these third party payers.
Visicol(TM) and any of our other product candidates that the FDA or foreign
regulatory agencies may approve may not be accepted by doctors, hospitals,
insurers or patients.
If Visicol(TM) or any of our product candidates which may in the future be
approved by the FDA or foreign regulatory agencies, fail to achieve market
acceptance, our ability to become profitable in the future will be adversely
affected. We believe that market acceptance will depend on our ability to
provide acceptable evidence of safety, efficacy and cost effectiveness. In
addition, market acceptance depends on the effectiveness of our marketing
strategy and the availability of reimbursement for such products.
Risks Related To Our Common Stock Outstanding
If we continue to fail to comply with the continued listing standards of the
Nasdaq National Market, we may be delisted from the Nasdaq National Market.
We are currently out of compliance with the minimum bid price requirement
for continued listing on the Nasdaq National Market. If we fail to achieve and
maintain the continued listing minimum bid price we could be delisted from the
Nasdaq National Market. Under the current terms of our convertible subordinates
notes, an event of default will occur if we fail to maintain our listing on the
Nasdaq National Market. We are actively considering ways to preserve our Nasdaq
National Market listing. If we are unable to maintain our listing on the Nasdaq
National Market, it is likely that we will file an application to be listed on
the Nasdaq Small Cap Market. Upon being listed on the Nasdaq Small Cap Market,
we would become subject to the continued listing requirements of the Nasdaq
Small Cap Market. Certain investor funds have internal requirements that could
preclude them from holding or purchasing Small Cap listings. If an investor fund
with such internal requirements currently owns or if future prospective
investors are precluded from purchasing our common stock, the price of our
common stock could be adversely affected.
24
If the holders of our outstanding options and warrants exercise such options and
warrants, then the market price of the common stock may drop.
We had a total of approximately 7.6 million options and warrants outstanding
at December 31, 2001. Options and warrants give the holder the right to purchase
shares of a company's stock in the future for a predetermined price which may or
may not be below the current market value of such company's stock at the time
the option or warrant is exercised. In addition, we can issue an additional 1.2
million options pursuant to our option plans. To date, option and warrant
holders have exercised approximately 6.4 million options and warrants in the
aggregate at prices ranging from $0.50 to $5.56. The exercise of these
outstanding warrants and options and the sale of the related shares may cause
our common stock price to drop.
If our common stock continues to be volatile and thinly traded, then our
shareholders may not be able to sell their shares when desired.
The market price of our common stock, similar to other public pharmaceutical
or biotechnology companies, has been volatile and may remain volatile for the
foreseeable future. Our shareholders may not sell their shares when they desire
because the stock price is highly volatile and the stock is not widely traded.
For example, the number of our shares theoretically available for sale in any
one day is approximately 35 million shares and our average daily trading volume
for the twelve-month period ended December 31, 2001 has been approximately
254,000 shares. If our stock continues to trade thinly, our shareholders may not
be able to sell their shares when desired.
Risks Relating To Intellectual Property
If we are unable to protect our intellectual property, then our competitors may
develop similar products that could render our products obsolete.
Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other protections, other companies
could offer substantially identical products for sale without incurring the
sizeable development and testing costs that we have incurred. Our ability to
recoup these expenditures and realize profits upon sale of product could be
diminished.
Visicol(TM) and our product candidates are in various stages of patent
protection as summarized below.
o In 1997, the U.S. Patent and Trademark Office issued a patent
covering the use of Visicol(TM) as a colonic cleansing agent or
as a laxative. In December 2000, the U.S. Patent and Trademark
Office issued to us a patent for numerous solid-dose colonic
cleansing agents and in June 2001, the Canadian Patent Office
granted a Notice of Allowance for Visicol(TM). We have also filed
an application for Visicol(TM) under the Patent Cooperation
Treaty that designates Europe.
o IBStat(TM)is not patentable.
o In October of 1999, we filed a U.S. patent application to treat
IBD with Colirest(TM) and other similar compounds. The U.S.
Patent and Trademark Office has not yet issued this patent.
o Hematrol(TM) (within the Fc Receptor Technology), is not
patentable for use in ITP. Instead of a patent, we will receive
protection based on the recent FDA designation of Orphan Drug
Status for ITP. Orphan Drug Status means the FDA has determined
that the number of people affected by the disease which the drug
treats is less than 200,000, and that having numerous companies
compete for the market is unrealistic and likely to harm, rather
than help, prospective users of the product. Since we have
received this designation, we will have an exclusive right to
sell Hematrol(TM) for ITP for seven years after development is
complete.
25
o Patents or patent applications are pending for our TSP-1 peptide
and angiocidin, two of the Thrombospondin Technology compounds.
The area of cancer technology is complex and the patents covering
our TSP-1 peptide and angiocidin may not be adequate.
We have also obtained the rights to foreign patents, and intend to apply for
additional foreign patents, for other products and technologies. Competitors
could challenge or develop around the patents, or the scope of the patents may
not be adequate to protect the patented product from competitors. The commercial
success of our products will also depend upon our ability to make sure the
products do not infringe on patents issued to competitors. We have not conducted
a search to determine if there are any patents similar to those covering
Visicol(TM), Colirest(TM), Hematrol(TM) or the TSP-1 peptide and angiocidin.
Our employees or scientific consultants may develop inventions or processes
independently that may be related to our products. These employees or
consultants could claim ownership of these inventions or processes, and these
claims could succeed. We may need to enter into protracted and costly litigation
to enforce or determine the scope of our proprietary rights.
Government agencies and academic institutions have funded the development of
some of our patented technologies, in particular the Fc Receptor Technology and
the Thrombospondin Technology. Although we have acquired the rights to use such
technology, these agencies or institutions may have rights to the technology or
inventions, including rights to the royalty-free use, but not sale, of the
invention or technology for their own purposes.
EMPLOYEES
As of December 31, 2001, we had 12 full-time employees. No employees
are covered by collective bargaining agreements, and we consider relations with
our employees to be good.
ITEM 2. PROPERTIES.
We occupy an aggregate of approximately 8,000 square feet of space in Blue
Bell, Pennsylvania, which is used as office space. We lease this space pursuant
to a lease expiring in November 2005, which provides for minimum annual rent
payments of approximately $200,000 for the remaining term of the lease.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Our common stock currently trades on the Nasdaq National Market under
the symbol INKP. The quarterly range of high and low closing sales prices of our
common stock, as reported on the Nasdaq Stock Market, are shown below. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Year Ended December 31, 2001 High Low
---------------------------- ---- ---
1st Quarter.............................................. $9.00 $3.31
2nd Quarter.............................................. $5.28 $2.95
3rd Quarter.............................................. $4.92 $0.72
4th Quarter.............................................. $2.30 $0.79
Six-Month Period Ended December 31, 2000 High Low
---------------------------------------- ---- ---
1st Quarter.............................................. $10.75 $5.00
2nd Quarter.............................................. $ 9.88 $5.81
Year Ended June 30, 2000 High Low
------------------------ ---- ---
1st Quarter.............................................. $2.19 $1.56
2nd Quarter.............................................. $3.19 $1.50
3rd Quarter.............................................. $10.00 $3.06
4th Quarter.............................................. $6.28 $3.81
Dividends
We have not paid any cash dividends since our inception and do not
anticipate paying any cash dividends in the foreseeable future. It is the
present policy of the Board of Directors to retain all earnings, if any, to
finance the development of our business.
Number of Holders of Common Stock
At March 28, 2002 there were approximately 350 shareholders of record and
approximately 21,000 beneficial holders of our Common Stock.
27
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected financial data. The
selected financial data is derived from, and is qualified by reference to, our
financial statements included herein (amounts expressed in thousands, except per
share amounts).
Years Ended Six-Months Ended
December 31, December 31, Years Ended June 30,
----------------------------------------------------------------------------------
2001 2000 2000 1999 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)
Statement of Operations Data:
Product revenue....................... $ 4,338 $ --- $ --- $ --- $ --- $ --- $ --- $ ---
Other revenue......................... 523 --- --- --- --- --- --- ---
--------- --------- --------- --------- --------- --------- --------- ---------
Revenue............................ 4,861 --- --- --- --- --- --- ---
Cost of goods sold.................... 1,881 --- --- --- --- --- --- ---
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit....................... 2,980 --- --- --- --- --- --- ---
Cost and expenses:
Research and development............ 5,361 9,397 7,060 3,395 5,731 6,565 2,270 743
Purchased research and development.. --- --- --- --- --- --- 3,952 ---
Sales and marketing................. 8,944 1,457 1,457 --- --- --- --- ---
General and administrative.......... 3,689 5,509 3,900 1,897 3,506 3,593 3,782 1,011
Separation agreement and accelerated
vesting of options............. --- --- --- 835 835 --- --- ---
--------- --------- --------- --------- --------- --------- --------- ---------
Loss from operations.............. (15,014) (16,363) (12,417) (6,127) (10,072) (10,158) (10,004) (1,754)
Interest income....................... 475 726 471 144 399 525 515 104
Interest expense...................... (713) (47) (9) --- (39) --- --- ---
Other ................................ (6) --- --- --- --- --- --- ---
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss............................ (15,258) (15,684) (11,955) (5,983) (9,712) (9,633) (9,489) (1,650)
========= ========= ========= ========= ========= ========= ========= =========
Net loss per share - basic and diluted (0.45) (0.50) (0.36) (0.24) (0.36) (0.42) (0.60) (0.51)
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares outstanding-
basic and diluted................ 34,285 31,586 33,254 24,678 27,300 22,762 15,783 3,260
As of December 31, As of June 30,
---------------------------------------------------------------------------------------
2001 2000 1999 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(unaudited)
Balance Sheet Data:
Cash and investments.............. $ 12,166 $ 11,520 $ 6,041 $ 16,025 $ 6,862 $ 12,962 $ 1,176
Total assets...................... 13,865 13,400 6,403 16,435 7,162 13,366 1,785
Total current liabilities......... 5,951 2,375 1,525 1,561 1,449 246 188
Convertible subordinated notes.... 9,801 --- --- --- --- --- ---
Accumulated deficit............... (60,040) (44,782) (29,098) (32,827) (23,115) (13,482) (3,993)
Shareholders' (deficit) equity ... (1,887) 11,025 4,878 14,874 5,713 13,120 1,597
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Report contains, in addition to historical information, our statements
with regard to our expectations as to financial results and other aspects of our
business that involve risks and uncertainties and may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements reflect management's current views and are based on
certain assumptions. Actual results could differ materially from those currently
anticipated as a result of a number of factors, including, but not limited to,
the risks and uncertainties discussed under the caption "Other Factors to be
Considered" in Part I of this Report. Given these uncertainties, current or
prospective investors are cautioned not to place undue reliance on any such
forward-looking statements. Furthermore, we disclaim any obligation or intent to
update any such factors or forward-looking statements to reflect future events
or developments.
General
We are a biopharmaceutical company engaged in the research, development and
commercialization of products that may be used in the diagnosis and treatment of
cancer and autoimmune diseases. We pursue these objectives through a technology
platform consisting of Visicol(TM), IBStat(TM), the Fc Receptor Technology and
the Thrombospondin Technology. With the exception of our February 2001 agreement
to market and sell IBStat(TM), we acquired our platform technologies in 1997. We
have funded operations primarily from the proceeds of public and private
placements of securities. We have incurred net losses in each year since our
inception in 1993, and expect to incur additional losses for the near future. We
expect that losses will fluctuate from quarter to quarter, and that such
fluctuations may be substantial. At December 31, 2001, our accumulated deficit
was approximately $60 million.
Critical Accounting Policies and Practices
In "Cautionary Advice Regarding Disclosures about Critical Accounting
Policies" (SEC Release No. 33-8040, December 12, 2001), the SEC advised
registrants to provide more information about a company's most critical
accounting policies, i.e., the specific accounting policies that have the most
impact on a company's results and require the most difficult, subjective or
complex judgments by management. We have identified two of our accounting
policies that may constitute "critical accounting policies," under the guidance
provided by this Release. First, is our policy, which is consistent with most
public company policies, to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", to account for our stock option
plans rather than Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"). Had we applied SFAS
No. 123, our net loss for the year ended December 31 2001, the six-months ended
December 31, 2000 and the year ended June 30, 2000 would have been increased by
approximately $2,833,000, $568,000 and $399,000, respectively (see Note 11 to
the footnotes to our financial statements). Second, is our estimate for product
returns in connection with our sales of Visicol(TM). We have applied a return
rate to our unit sales to provide an allowance for future product returns under
our product return policy. This return rate is calculated based on actual return
experience and our monitoring of distribution channels taking into account the
expiration dating of Visicol(TM). The product return rate is periodically
updated to reflect actual experience and changes to other factors affecting
future product returns.
Results of Operations
Comparison of the Years Ended December 31, 2001 and 2000
We incurred losses of $15,258,000 and $15,684,000 for the years ended
December 31, 2001 and 2000, respectively. The basic and diluted per share loss
was $0.45 and $0.50 per share for the years ended December 31, 2001 and 2000,
respectively. Losses are expected to continue for the forthcoming year as we
continue to develop our technologies and introduce our newly formulated
Visicol(TM) tablets.
Our gross profit was $2,980,000 for the year ended December 31, 2001, as
compared to no gross profit for the same period a year ago. Included in cost of
goods sold are both distribution and royalty costs totaling $369,000.
29
Distribution cost includes expenses related to contract warehousing, tracking,
and shipping of product to our customers. Royalty cost represents amounts due to
the inventor of Visicol based on product sales. Gross profit and gross profit as
a percent of sales are expected to increase in 2002 due to the introduction of
the newly formulated Visicol(TM) and decreased manufacturing costs.
We incurred research and development expenses of $5,361,000 and $9,397,000
for the years ended December 31, 2001 and 2000, respectively. The decrease is
mostly attributable to a one-time performance based stock charge in 2000 of
$4,848,000, partially offset by costs related to our ongoing Colirest(TM)
pivotal study. For 2002, we expect to continue to incur significant costs
associated with our Colirest(TM) pivotal study.
Sales and marketing costs of $8,944,000 and $1,457,000 were incurred for the
years ended December 31, 2001 and 2000, respectively. During 2001, we incurred
$4,000,000 in expenses related to our former contract sales organization,
$2,000,000 related to our co-promotion agreement with Procter and Gamble
Pharmaceuticals and the balance of sales and marketing costs for internal sales
operations and marketing activities associated with Visicol(TM). Sales and
marketing costs for the year ended December 31, 2000 were for pre-launch
activities associated with the January 2001 product launch of Visicol(TM). Sales
and marketing costs are expected to decrease due to the termination of our
Innovex sales force in the fourth quarter of 2001 and other cost control
measures.
General and administrative expenses were $3,689,000 and $5,509,000 for the
years ended December 31, 2001 and 2000, respectively. The decrease is the result
of significant payroll reductions, reduced fees paid to outside vendors and
consultants and reduced non-cash stock based compensation. Included in general
and administrative expenses is amortization of deferred compensation and
performance based stock expense of $1,018,000 and $2,445,000 for the years ended
December 31, 2001 and 2000, respectively
The $251,000 decrease in interest income is the result of decreased average
cash and investment balances for the year ended December 31, 2001 compared to
the same period a year ago. The $666,000 increase in interest expense is the
result of interest related to our June 2001 placement of $10,000,000 in
convertible subordinated notes.
Comparison of the Six-Months Ended December 31, 2000 and 1999
We incurred losses of $11,955,000, and $5,983,000 for the six-month periods
ended December 31, 2000 and 1999, respectively. The basic and diluted per share
loss was $0.36 and $0.24 for the six-months ended December 31, 2000 and 1999,
respectively.
Research and development for the six-months ended December 31, 2000 and 1999
was $7,060,000 and $3,395,000, respectively. Included in research and
development for the period ended December 31, 2000 was a $4,848,000 performance
based stock charge related to research and development activities. This non-cash
charge was attributable to the attainment of a previously set milestone of FDA
approval of Visicol(TM), which triggered the vesting of options and restricted
stock awards granted in connection with the Company's equity compensation plans.
Net of the non-cash performance based stock expense, research and development
expenses decreased by $1,183,000 for the six-month period ended December 31,
2000 from the same period a year ago. This decrease was the result of decreased
development costs associated with Visicol(TM) partially offset by costs
associated with the Phase II clinical trials of Colirest(TM) in Crohn's disease
and ulcerative colitis.
Sales and marketing costs of $1,457,000 were incurred for the six-month
period ended December 31, 2000, as compared with no sales and marketing costs
for the same period a year ago. The increase was the result of new personnel and
marketing activities associated with Visicol(TM).
General and administrative expenses were $3,900,000 and $1,897,000 for the
six-months ended December 31, 2000 and 1999, respectively. Included in general
and administrative for the period ended December 31, 2000 was a $1,160,000
performance based stock charge. This non-cash charge was attributable to the
attainment of a previously set milestone of FDA approval of Visicol(TM), which
triggered the vesting of options and restricted stock awards granted in
connection with the Company's equity compensation plans. Net of the non-cash
performance based stock expense, general and administrative expenses increased
by $843,000 for the six-month period ended December 31, 2000 from the same
30
period a year ago. This increase is principally attributable to personnel
additions, increased spending on public and investor relations and overall
expanded operations resulting from the launch of Visicol(TM). Included in
general and administrative expenses is amortization of options and restricted
stock of $707,000 and $1,829,000 for the six-month periods ended December 31,
2000 and 1999, respectively.
A one-time charge resulted from a separation agreement with the former
President and Chief Operating Officer due to his resignation from the Company in
November 1999. The contract required the immediate vesting of all outstanding
unvested options which resulted in a non-cash charge of $535,000 and the
continuation of his salary and other benefits for a period of several months
resulting in an additional charge of approximately $300,000.
The $327,000 increase in interest income is the result of increased average
cash and investment balances for the six-months ended December 31, 2000 compared
to the same period a year ago. The increase in average cash, cash equivalent and
investment balances are due to the receipt of net proceeds of $9,900,000 from a
private placement of common stock in May 2000.
The Company incurred interest expense of $9,000 and $0 for the six-months
ended December 31, 2000 and 1999, respectively. The increase is the result of
the Company securing a line of credit in December 1999.
Comparison of the Years Ended June 30, 2000 and 1999
We incurred losses of $9,712,000 and $9,633,000 for the years ended June 30,
2000 and 1999, respectively. The basic and diluted per share loss was $0.36, and
$0.42 for the years ended June 30, 2000 and 1999, respectively.
Research and development expenses fluctuated from the fiscal year ended June
30, 1999 through fiscal year ended June 30, 2000 due to changes in manufacturing
development expenses and clinical and preclinical testing costs associated with
Visicol(TM), Hematrol(TM), Colirest(TM) and the Thrombospondin Technology. More
specifically, the decrease in research and development expenses from fiscal year
ended June 30, 1999 to fiscal year ended June 30, 2000 of $834,000 is
principally due to the reduction in clinical development costs being partially
offset by increases in costs associated with manufacturing development and NDA
submission costs for Visicol(TM).
General and administrative expenses amounted to $3,506,000 and $3,593,000
for the years ended June 30, 2000 and 1999, respectively. The decrease in
general and administrative expenses was due to reduced amortization of deferred
compensation from options previously granted to certain executive officers of
$1,273,000 in fiscal year ended June 30, 2000, as compared to $1,616,000 for the
same period a year ago. This decrease was offset by an increase in marketing
costs and an increase in head count in fiscal year ended June 30, 2000.
A one-time charge resulted from a separation agreement with the former
President and Chief Operating Officer due to his resignation from the Company in
November 1999. The contract required the immediate vesting of all outstanding
unvested options, which resulted in a non-cash charge of $535,000 and the
continuation of his salary and other benefits for a period of several months.
This resulted in an additional charge of approximately $300,000.
The decrease in interest income of $126,000 from fiscal year ended June 30,
1999 to fiscal year ended June 30, 2000 was due to earnings on a lower
investment balance as compared to the previous year, partially offset by an
increase in the effective interest rate earned during 2000.
Liquidity and Capital Resources
At December 31, 2001, we had cash and cash equivalents of $12,166,000. The
cash and cash equivalents balance at December 31, 2001 includes net proceeds
from a private placement of convertible subordinated notes of approximately
$9,250,000 and warrant and option exercises of $713,000.
We believe that our financial resources are adequate for our operations for
at least the next 12 months. Our future short and long-term capital requirements
will depend on numerous factors, including the timing and marketplace acceptance
of our new formulation of Visicol(TM).
31
In addition to the introduction of our newly formulated Visicol(TM) tablets,
other factors which cannot be quantified and many of which we cannot control
will also impact our short and long-term capital requirements, including:
continued commercial costs of Visicol(TM), continued progress in our research
and development activities, progress with pre-clinical studies and clinical
trials, prosecuting and enforcing patent claims, technological and market
developments, the ability to establish product development arrangements, the
cost of manufacturing development, effective marketing activities and
arrangements, and licensing or acquisition activity.
We are currently conducting a pivotal trial of Colirest(TM) in Crohn's
disease, recently completed a Phase IV dose ranging study of Visicol(TM), and
continue to market and sell Visicol(TM) to distributors and drug store chains.
During 2002, we expect to spend approximately $150,000 on the Visicol(TM) study,
$4 million on the Colirest(TM) study, and $5 million on Visicol(TM) sales and
marketing costs. These activities will be funded by our current cash balance and
future Visicol(TM) sales. If Visicol(TM) sales fall short of current
expectations or other factors negatively impact our cash balance, we may seek to
obtain additional funds through equity or debt financing, collaborative or other
arrangements with corporate partners, and from other sources. No assurance can
be given that necessary additional financing will be available on terms
acceptable to us, if at all. If adequate additional funds are not available when
required, we may have to delay, scale-back or eliminate certain of our research,
drug discovery or development activities or certain other aspects of our
operations and our business will be materially and adversely affected.
We anticipate incurring additional losses in the foreseeable future as we
expand our commercial activities relating to Visicol(TM) and IBStat(TM), and
research and development activities relating to the Fc Receptor Technology and
the Thrombospondin Technology. To achieve profitability, we, alone or with
others, must successfully develop and commercialize our technologies and
products, conduct pre-clinical studies and clinical trials, obtain required
regulatory approvals and successfully manufacture, introduce and market such
technologies and products. The time required to reach profitability is highly
uncertain, and there can be no assurance that we will be able to achieve
profitability on a sustained basis, if at all.
The following are contractual commitments at December 31, 2001 associated
with lease obligations, debt obligations and research and development projects:
Contractual Commitments (1) Total 1 Year 2 Years 3 Years 4 Years
--------------------------- ----- ------ ------- ------- -------
Convertible subordinated notes (2)...... $ 10,000,000 $ --- $ 10,000,000 $ --- $ ---
Leased office space (3)................. 811,000 206,000 210,000 214,000 181,000
Research and development (4)............ 3,450,000 2,537,000 913,000 --- ---
------------ ------------ ------------ ---------- ---------
Total contractual commitments........ $ 14,261,000 $ 2,743,000 $ 11,337,000 $ 181,000 $ ---
============ ============ ============ ========== =========
- -----------------
(1) This table does not include any milestone payments under
agreements we have entered into in relation to our licensed
technology, as the timing and likelihood of such payments are not
known.
(2) Includes principal on convertible subordinated notes that will
become due in the event that the principal balance is not
converted to our common stock by June 2003 (see Note 10 to the
footnotes to our financial statements).
(3) November 2000, we entered into a five-year operating lease
agreement for office space for our corporate headquarters. The
above table includes minimum lease payments remaining in
connection with this lease agreement.
(4) Included are direct costs associated with our contract with a
contract research organization in connection with our ongoing
Colirest(TM) pivotal trial. We will incur additional pass through
costs based on the number of clinical sites used and the timing
of patient enrollment. Also, minimum annual research expenditures
pursuant to our technology license agreements have been excluded
from this table as we expect to spend those amounts as we
progress the development of the underlying technologies. In the
aggregate these minimum annual research expenditures are
approximately $250,000 and typically apply to all years prior to
regulatory approval of a product incorporating the licensed
technology.
32
Research and Development Programs
We have three significant research and development projects relating to: (i)
Visicol(TM); (ii) the Fc Receptor Technology (which includes Colirest(TM) and
Hematrol(TM)); and (iii) the Thrombospondin Technology.
Visicol(TM). We have focused our Visicol(TM) research and development on
cleansing of colon prior to colonoscopy. In addition, we are also developing
Visicol(TM) for cleansing of colon prior to sigmoidoscopy and treating
constipation. The current status of these projects are as follows: (i) for
cleansing of colon prior to colonoscopy, the FDA has approved both our NDA as
well as our SNDA; (ii) for cleansing of colon prior to sigmoidoscopy, we have
completed a Phase I study; and (iii) for treating constipation, we have
completed a Phase I study. We are presently marketing Visicol(TM) for cleansing
of colon prior to colonoscopy. At this time, we do not intend to do any further
clinical studies regarding to use of Visicol(TM) for cleansing of colon prior to
sigmoidoscopy and treating constipation. As of December 31, 2001, we have
incurred total costs of approximately $10,800,000 in connection with our
Visicol(TM) research and development. During the fiscal year ended December 31,
2001, we incurred an aggregate of $5,361,000 in research and development
expenses, approximately $1,300,000 of which is attributable to Visicol(TM).
Fc Receptor Technology. We are developing Colirest(TM) for treatment of IBD
and Hematrol(TM) for treatment of ITP. With respect to Colirest(TM), we have
completed a Phase II study of Crohn's disease and a Phase II study of ulcerative
colitis. In June 2001, we began a Colirest(TM) Pivotal Phase IIb study of
Crohn's disease. We anticipate completion of the studies and submission of an
NDA for Colirest(TM) to the FDA in 2004. With respect to Hematrol(TM), we have
completed a Phase II and a single dose pharmacokinetic study. Our Phase III
study of Hematrol(TM) is presently on hold. In order to focus our efforts on
gastrointestinal products, we are currently considering sublicensing
Hematrol(TM) to other pharmaceutical companies which have a hematology focus. If
this strategy is not successful, we will consider resuming clinical development
of Hematrol(TM). As of December 31, 2001, we have incurred total costs of
approximately $4,600,000 in connection with our Fc Receptor Technology research
and development. During the fiscal year ended December 31, 2001, we incurred an
aggregate of $5,361,000 in research and development expenses, approximately
$2,100,000 of which is attributable to the Fc Receptor Technology.
Thrombospondin Technology. We are developing the Thrombospondin Technology
for prevention of metastatic cancer including but not limited to breast, lung,
prostate, pancreas and squamous cell cancer. We are in the pre-clinical stage of
our research and development relating to the Thrombospondin Technology. We have
identified a hexapeptide structure that appears to prevent the spread of human
tumors in animals by blocking the TSP-1 receptor. In addition, we have cloned
the TSP-1 receptor, thus providing us with chemical screening capability that
did not previously exist. Preclinical testing is to be conducted to determine if
the pharmacokinetics and safety profile warrant the introduction of this
molecule into humans. In order to develop the Thrombospondin Technology, we
intend to explore corporate partnerships because of the expense involved in
developing an agent used to treat or prevent the spread of cancer. Due to the
early stage of development of the Thrombospondin Technology, we are unable to
estimate a completion date for research and development of the Thrombospondin
Technology. As of December 31, 2001, we have incurred total costs of
approximately $2,000,000 in connection with the Thrombospondin Technology
research and development. During the fiscal year ended December 31, 2001, we
incurred an aggregate of $5,361,000 in research and development expenses,
approximately $400,000 of which is attributable to the Thrombospondin
Technology.
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), Goodwill and
Other Intangible Assets. SFAS 142 requires goodwill and other intangible assets
with indefinite lives to no longer be amortized; but instead tested for
impairment at least annually. In addition, the standard includes provisions for
the reclassification of certain existing intangibles as goodwill and
reassessment of the useful lives of existing recognized intangibles. The
standard is effective for fiscal years beginning after December 15, 2001. We do
not believe the adoption of SFAS 142 will have any immediate impact on our
financial statements.
33
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"). SFAS 143 required the recognition of a liability for
an asset retirement in the period in which it is incurred. A retirement
obligation is defined as one in which a legal obligation exists in the future
resulting from existing laws, statutes or contracts. The standard is effective
for fiscal years beginning after June 15, 2002. We do not believe the adoption
of SFAS 143 will have any immediate impact on our financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS 144"), which supercedes both SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ("SFAS 121"), and the accounting and reporting
provisions of Accounting Principles Board ("APB") Opinion No. 30, Reporting the
Results of Operations- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions ("APB 30"), for the disposal of a business segment (as previously
defined in that Opinion). SFAS 144 retains the fundamental provisions in SFAS
121 for recognizing and measuring impairment losses on long-lived assets held
for use and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with SFAS 121. For example, SFAS
144 provides guidance on how long-lived assets that are used as part of a group
should be evaluated for impairment, establishes criteria for when a long-lived
asset is held for sale, and prescribed the accounting for a long-lived asset
that will be disposed of other than by sale. SFAS 144 retains the basic
provisions of APB 30 on how to present discontinued operations in the income
statement but broadens that presentation to include a component of an entity
(rather than a segment of a business). Unlike SFAS 121, an impairment assessment
under SFAS 144 will never result in a write-down of goodwill. Rather, goodwill
is evaluated for impairment under SFAS 142, Goodwill and Other Intangible
Assets.
We are required to adopt SFAS 144 no later than the year beginning after
December 15, 2001, and plan to adopt its provisions for the quarter ending March
31, 2002. We do not expect the adoption of SFAS 144 for assets held for use to
have a material impact on our financial statements because the requirement for
the assessment of impairment under SFAS 144 is largely unchanged from SFAS 121.
The provisions of the new standard for assets held for sale or disposal
generally are required to be applied prospectively after the adoption date to
newly initiated disposal activities. Therefore, we cannot determine the
potential effects that the adoption of these provisions of SFAS 144 will have on
our financial statements.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk associated with changes in interest rates on
our line of credit and certain investments. We do not manage the risk of
fluctuations in interest rates associated with the line of credit, as it is a
short-term borrowing with a maturity date in 2003. The interest rate on our line
of credit has fluctuated from 8.85% to 3.95% over the past year and the
outstanding balance at December 31, 2001 was approximately $2,401,000.
Typically, a substantial portion of our assets are investment grade debt
instruments such as direct obligations of the U.S. Treasury, securities of
federal agencies which carry the direct or implied guarantee of the U.S.
government and bank certificates of deposit. The market value of such
investments fluctuates with current market interest rates. In general, as rates
increase, the market value of a debt instrument would be expected to decrease.
The opposite is also true. To minimize such market risk, we have in the past
and, to the extent possible, will continue in the future to hold such debt
instruments to maturity at which time the debt instrument will be redeemed at
its stated or face value. Due to the short duration and nature of these
instruments, we do not believe that we have a material exposure to interest rate
risk related to our investment portfolio.
We do not anticipate any material changes in our primary market risk
exposures in 2002. We do not hold or issue any derivatives.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is set forth beginning on pages F-1
through F-18 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated herein by reference to
the similarly named section in our Proxy Statement for the 2002 Annual Meeting
of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by reference to
the similarly named section in our Proxy Statement for the 2002 Annual Meeting
of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by reference to
the similarly named section in our Proxy Statement for the 2002 Annual Meeting
of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by reference to
the similarly named section in our Proxy Statement for the 2002 Annual Meeting
of Shareholders.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Financial Statements
The information required by this item is set forth in the Table of Contents
to Financial Statements on page F-1 hereof.
Financial Statement Schedules
All schedules have been omitted because they are not applicable, or not
required, or the information is shown in the Financial Statements or Notes
thereto.
Reports on Form 8-K
None
Exhibits
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated by footnote, exhibits that were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated parenthetically,
together with a reference to the filing indicated by footnote.
Exhibit No. Title
- ----------- -----
3.1 Certificate of Incorporation, as amended. (Exhibit 3.1)(1)
3.2 By-laws. (Exhibit 3.2)(2)
4.1 Form of Common Stock Purchase Warrant, dated September 20, 1999.
(In accordance with Item 601 of Regulation S-K, similar warrants
granted to investors have not been filed because they are
identical in all material respects except for the number of
warrants granted to each investor.) (Exhibit 4.3)(3)
4.2 Common Stock Purchase Warrant, dated May 5, 2000, granted to the
placement agent, Leerink, Swann, Garrity, Sollami, Yaffe & Wynn,
Inc. (Exhibit 4.2)(4)
4.3 Registration Rights Agreement dated June 15, 2001 among InKine,
Bank of Canada and S.A.C. Capital Associates, LLC. (Exhibit
4.2)(5)
4.4 Form of 5.5% Convertible Subordinated Notes due June 2003. (In
accordance with Item 601 of Regulation S-K, similar notes issued
to the investors have not been filed because they are identical
in all material respects.) (Exhibit 4.3)(5)
4.5 Form of Common Stock Purchase Warrant, dated June 15, 2001. (In
accordance with Item 601 of Regulation S-K, similar warrants
granted to investors have not been filed because they are
identical in all material respects except for the number of
warrants granted to each investor.) (Exhibit 4.4)(5)
10.1 Agreement and Plan of Reorganization among Panax Pharmaceutical
Company, Ltd., CorBec Pharmaceuticals, Inc. and certain Security
Holders of CorBec Pharmaceuticals, Inc., dated October 31, 1997.
(Exhibit 10.1)(6)
37
10.3 Stock Purchase Agreement by and between Panax Pharmaceutical
Company, Ltd. and Leonard S. Jacob dated September 3, 1997.
(Exhibit 10.3)(6)
10.4 Employment Agreement between InKine Pharmaceutical Company, Inc.
and Leonard S. Jacob, dated November 6, 1997. (Exhibit 10.4)(6)
10.5 Employment Agreement between InKine Pharmaceutical Company, Inc.
and Robert F. Apple, dated November 2, 1998. (Exhibit 10.6)(7)
10.6 Option to Purchase Shares of Common Stock of InKine
Pharmaceutical Company, Inc. dated November 6, 1997, issued to
Leonard S. Jacob. (Exhibit 10.6)(6)
10.7 Common Stock Purchase Option, dated November 6, 1997 issued to
Allegheny University of the Health Sciences. (Exhibit 10.7)(6)
10.8 Non-Milestone Common Stock Purchase Option, dated November 6,
1997 issued to George Tuszynski. (Exhibit 10.8)(6)
10.9 Common Stock Purchase Option, dated November 6, 1997 issued to
George Tuszynski. (Exhibit 10.9)(6)
10.10 Stock Option Plan, as amended. (Exhibit 99)(8)
10.11 1997 Consultant Stock Option Plan. (Exhibit 99)(9)
10.12 Form of Stock Option Agreement. (Exhibit 10(b))(10)
10.13 License Agreement with ALW Partnership. (Exhibit 10(1))(11)
10.14 Form of Option granted to Partners of ALW Partnership. (Exhibit
10(n))(11)
10.15 Amendment to Employment Agreement, dated November 4, 1999,
between the Company and Leonard S. Jacob. (Exhibit 10.18)(12)
10.16 1999 Equity Compensation Plan(13)
23* Consent of KPMG LLP.
- -----------------------
* Filed herewith.
(1) Filed as an Exhibit to InKine's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001, with the Securities and Exchange
Commission.
(2) Filed as an Exhibit to InKine's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, with the Securities and
Exchange Commission.
(3) Filed as an Exhibit to InKine's Form S-3 (SEC File No.
333-89365), dated October 20, 1999, with the Securities and
Exchange Commission.
(4) Filed as an Exhibit to InKine's Form S-3 (SEC File No.
333-37254), dated May 17, 2000, with the Securities and Exchange
Commission.
38
(5) Filed as an Exhibit to InKine's Current Report on Form 8-K dated
June 19, 2001, with the Securities and Exchange Commission.
(6) Filed as an Exhibit to InKine's Current Report on Form 8-K, dated
November 6, 1997 (as amended by Form 8-K/A filed on December 3,
1997), with the Securities and Exchange Commission.
(7) Filed as an Exhibit to InKine's Annual Report on Form 10-K for
the year ended June 30, 1999, with the Securities and Exchange
Commission.
(8) Filed as an Exhibit to InKine's Form S-8 (SEC File No.
333-58063), dated June 29, 1998, with the Securities and Exchange
Commission.
(9) Filed as Exhibit to InKine's Form S-8 (SEC File No. 333-58065)
dated June 29, 1998, with the Securities and Exchange Commission.
(10) Filed as an Exhibit to InKine's Annual Report on Form 10-KSB for
the year ended June 30, 1995, with the Securities and Exchange
Commission.
(11) Filed as an Exhibit to InKine's Current Report on Form 8-K dated
February 14, 1997, with the Securities and Exchange Commission.
(12) Filed as an Exhibit to InKine's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1999, with the Securities and
Exchange Commission.
(13) Filed as an Exhibit to InKine's Form S-8 (SEC File No. 333-47088)
dated September 29, 2000, with the Securities and Exchange
Commission.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INKINE PHARMACEUTICAL COMPANY, INC.
Date: March 29, 2002 By: /S/ Leonard S. Jacob, M.D., Ph.D.
-------------------------------------
Leonard S. Jacob, M.D., Ph.D.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ Leonard S. Jacob, M.D., Ph.D. Chairman and Chief March 29, 2002
- ------------------------------------------ Executive Officer and
Leonard S. Jacob, M.D., Ph.D. Director
/S/ Robert F. Apple Executive Vice President and March 29, 2002
- ------------------------------------------ Chief Financial Officer
Robert F. Apple (principal financial and
accounting officer)
/S/ J. R. LeShufy Director March 29, 2002
- ------------------------------------------
J. R. LeShufy
/S/ Steven B. Ratoff Director March 29, 2002
- ------------------------------------------
Steven B. Ratoff
/S/ Thomas P. Stagnaro Director March 29, 2002
- ------------------------------------------
Thomas P. Stagnaro
/S/ Robert A. Vukovich, Ph.D. Director March 29, 2002
- ------------------------------------------
Robert A. Vukovich, Ph.D.
/S/ Jerry Weisbach, Ph.D. Director March 29, 2002
- ------------------------------------------
Jerry Weisbach, Ph.D.
40
INKINE PHARMACEUTICAL COMPANY, INC.
TABLE OF CONTENTS
PART II - FINANCIAL INFORMATION
Page
----
Independent Auditors' Report .............................................. F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Changes in Shareholders' Equity.............................. F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
F-1
Independent Auditors' Report
The Board of Directors and Shareholders
InKine Pharmaceutical Company, Inc.
We have audited the accompanying balance sheets of InKine Pharmaceutical
Company, Inc. as of December 31, 2001 and 2000 and the related statements of
operations, shareholders' equity and cash flows for the year ended December 31,
2001, the six-month period ended December 31, 2000 and for each of the years in
the two year period ended June 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the 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 InKine
Pharmaceutical Company, Inc. as of December 31, 2001 and 2000 and the results of
its operations and its cash flows for the year ended December 31, 2001, the
six-month period ended December 31, 2000 and each of the years in the two year
period ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States.
/S/ KPMG LLP
Philadelphia, Pennsylvania
January 25, 2002
F-2
INKINE PHARMACEUTICAL COMPANY, INC.
BALANCE SHEETS
(in thousands)
December 31 December 31,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 7,379 $ 2,240
Short-term investments....................................... 4,787 9,280
Accounts receivable.......................................... 400 ---
Inventory.................................................... 204 686
Prepaid expenses and other current assets.................... 89 34
------------- -------------
Total current assets..................................... 12,859 12,240
Deposits and other assets......................................... 607 709
Fixed assets...................................................... 399 451
------------- -------------
Total assets............................................. $13,865 $13,400
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................ $ 3,550 $ 623
Line of credit............................................... 2,401 1,752
------------- -------------
Total current liabilities................................ 5,951 2,375
Convertible subordinated notes.................................... 9,801 ---
------------- -------------
Total liabilities........................................ 15,752 2,375
Commitments and contingencies.....................................
Shareholders' (deficit) equity:
Preferred stock, $.0001 par value; authorized 5,000,000
shares; none issued and outstanding............................... --- ---
Common stock, $.0001 par value; authorized 75,000,000
shares; issued 34,777,720 and 33,740,802 shares, respectively..... 3 3
Less: common stock held in treasury (16,515 shares) .............. (37) (37)
Additional paid-in capital........................................ 58,302 56,692
Deferred compensation............................................. (115) (851)
Accumulated deficit............................................... (60,040) (44,782)
------------- -------------
Total shareholders' (deficit) equity .................... (1,887) 11,025
------------- -------------
Total liabilities and shareholders' (deficit) equity .... $ 13,865 $ 13,400
============= =============
The accompanying notes are an integral part of these financial statements.
F-3
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Six-Months
Year Ended Ended
December 31, December 31, Years Ended June 30,
------------ ------------ --------------------
2001 2000 2000 1999
Product revenue............................. $ 4,338 $ --- $ --- $ ---
Other revenue............................... 523 --- --- ---
----------- ---------- ---------- ----------
Revenue.................................. 4,861 --- --- ---
Cost of goods sold.......................... 1,881 --- --- ---
----------- ---------- ---------- ----------
Gross profit............................. 2,980 --- --- ---
Cost and expenses:
Research and development................. 5,361 7,060 5,731 6,565
Sales and marketing...................... 8,944 1,457 --- ---
General and administrative............... 3,689 3,900 3,506 3,593
Separation agreement and accelerated
vesting of options.................. --- --- 835 ---
----------- ---------- ---------- ----------
Operating expenses.......................... 17,994 12,417 10,072 10,158
----------- ---------- ---------- ----------
Loss from operations........................ (15,014) (12,417) (10,072) (10,158)
Interest income............................. 475 471 399 525
Interest expense............................ (713) (9) (39) ---
Losses on sale of fixed assets.............. (6) --- --- ---
----------- ---------- ---------- ----------
Net loss............................. $ (15,258) $ (11,955) $ (9,712) $ (9,633)
=========== ========== ========== ==========
Net loss per share - basic and diluted $ (0.45) $ (0.36) $ (0.36) $ (0.42)
=========== ========== ========== ==========
Weighted average shares outstanding -
basic and diluted................. 34,285 33,254 27,300 22,762
The accompanying notes are an integral part of these financial statements.
F-4
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Unrealized Total
Common Stock Additional Treasury Stock Gain(Loss) Shareholders'
--------------- Paid-In Deferred Accumulated --------------- on Equity
Shares Amount Capital Compensation Deficit Shares Amount Investments (Deficiency)
------ ------ -------- ------------ ----------- ------ ------ ----------- ----------
Balance - June 30, 1998 22,720 $ 2 $ 30,954 $ (4,320) $ (13,482) (17) $ (37) $ 3 $ 13,120
Value of option and warrants
granted 122 (122) ---
Proceeds from options and
warrants 397 351 351
Amortization of deferred
compensation 1,882 1,882
Unrealized loss on investments (7) (7)
Net Loss (9,633) (9,633)
------ ------ -------- -------- --------- -- -------- -------- --------
Balance - June 30, 1999 23,117 $ 2 $ 31,427 $ (2,560) $ (23,115) (17) $ (37) $ (4) $ 5,713
Common stock issued pursuant to
private placement 5,147 1 12,649 12,650
Value of options, warrants and
restricted stock granted 320 (320) ---
Proceeds from options and
warrants 4,431 3,822 3,822
Amortization of deferred
compensation 2,407 2,407
Unrealized loss on investments (6) (6)
Net Loss (9,712) (9,712)
------ ------ -------- -------- --------- -- -------- -------- --------
Balance - June 30, 2000 32,695 $ 3 $ 48,218 $ (473) $ (32,827) (17) $ (37) $ (10) $ 14,874
Value of options, warrants and
restricted stock granted 7,600 (7,600) ---
Proceeds from options and
warrants 927 874 874
Vesting of restricted stock 119 ---
Amortization of deferred
compensation 7,222 7,222
Unrealized gain on investments 10 10
Net Loss (11,955) (11,955)
------ ------ -------- -------- --------- -- -------- -------- --------
Balance - December 31, 2000 33,741 $ 3 $ 56,692 $ (851) $ (44,782) (17) $ (37) $ --- $ 11,025
Common stock issued pursuant to
convertible notes 61 275 275
Value of options, warrants and
restricted stock granted 622 (349) 273
Proceeds from options and
warrants 737 713 713
Vesting of restricted stock 239 ---
Amortization of deferred
compensation 1,085 1,085
Net Loss (15,258) (15,258)
------ ------ -------- -------- --------- -- -------- -------- --------
Balance - December 31, 2001 34,778 $ 3 $ 58,302 $ (115) $ (60,040) (17) $ (37) $ --- $ (1,887)
====== ====== ======== ======== ========= == ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-5
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Six-Months
Year Ended Ended
December 31, December 31, Years Ended June 30,
------------ ------------ --------------------
2001 2000 2000 1999
---- ---- ---- ----
Operating activities:
Net loss ......................................... $ (15,258) $ (11,955) $ (9,712) $ (9,633)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation.................................... 167 63 99 59
Amortization of deferred compensation .......... 1,085 1,167 2,407 1,882
Stock issued for interest earned on
convertible subordinated note .............. 275 --- --- ---
Amortization of warrant value .................. 74 --- --- ---
Performance based stock expense ................ --- 6,055 --- ---
Loss on sale of fixed asset .................... 6 --- --- ---
Changes in operating assets and liabilities:
(Increase) in accounts receivable............... (400) --- --- ---
Decrease (increase) in inventory ............... 482 (686) --- ---
Decrease (increase) in prepaid expenses
and other assets ........................... 47 (665) 22 114
Increase (decrease) in accounts payable and
accrued expenses ........................... 2,927 83 (909) 1,203
------------ ------------ ------------ ------------
Net cash used in operating activities................ (10,595) (5,938) (8,093) (6,375)
Investing activities:
Purchases of investments ....................... (5,280) (4,774) (14,446) (10,968)
Proceeds from maturities and sales of
investments............................... 9,773 5,900 8,938 17,914
Proceeds from sale of fixed asset............... 12 --- --- ---
Capital expenditures ........................... (133) (182) (231) (69)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities.. 4,372 944 (5,739) 6,877
Financing activities:
Proceeds from sale of stock and exercise of
options and warrants - net of expenses ..... 713 874 16,472 351
Net borrowings on line of credit ............... 649 731 1,021 ---
Proceeds from sale of convertible subordinated
notes....................................... 10,000 --- --- ---
------------ ------------ ------------ ------------
Net cash provided by financing activities ........... 11,362 1,605 17,493 351
Net increase (decrease) in cash and cash equivalents 5,139 (3,389) 3,661 853
Cash and cash equivalents - beginning of period ..... 2,240 5,629 1,968 1,115
------------ ------------ ------------ ------------
Cash and cash equivalents - end of period ........... $ 7,379 $ 2,240 $ 5,629 $ 1,968
============ ============ ============ ============
Non cash:
Warrant issued in connection with
convertible subordinated notes.............. 273 --- --- ---
The accompanying notes are an integral part of these financial statements.
F-6
INKINE PHARMACEUTICAL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY:
InKine Pharmaceutical Company, Inc. (the "Company") is a biopharmaceutical
company that was incorporated in July 1993. The Company's first FDA approved
product, Visicol(TM), is currently being marketed and is the first and only
tablet purgative preparation indicated for bowel cleansing prior to colonoscopy.
The Company's portfolio also includes IBStat(TM), an immediate release
antispasmodic product to be marketed to gastroenterologists for use as an acute
care product for a variety of indications. The Company is also developing
product candidates Hematrol(TM) and Colirest(TM), steroid molecules for the
treatment of idiopathic thrombocytopenic purpura (ITP) and inflammatory bowel
disease (IBD), respectively. In addition, the Company is developing compounds
including Angiocidin, a potent and specific angiogenesis inhibitor for potential
use in cancer patients. The Company is focused on the diagnosis and treatment of
cancer and autoimmune diseases, and has the additional strategy of acquiring
drug candidates that are close to commercialization.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation - Effective July 1, 2000, the Company changed its
fiscal year from a twelve-month period ending June 30, to a twelve-month period
ending December 31. The consolidated financial statements include presentation
of the transition period beginning July 1, 2000 and ending on December 31, 2000.
The following table presents certain financial information for the
twelve-months ended December 31, 2001 and 2000, and the six-months ended
December 31, 2000 and 1999, respectively (in thousands, except per share
amounts):
Year Ended December 31, Six-Months Ended December 31,
----------------------- -----------------------------
2001 2000 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
Product revenue............................. $ 4,338 $ --- $ --- $ ---
Other revenue............................... 523 --- --- ---
------------ ------------ ------------ ------------
Revenue.................................. 4,861 --- --- ---
Cost of goods sold.......................... 1,881 --- --- ---
------------ ------------ ------------ ------------
Gross profit............................. 2,980 --- --- ---
Research and development.................... 5,361 9,397 7,060 3,395
Sales and marketing......................... 8,944 1,457 1,457 ---
General and administrative.................. 3,689 5,509 3,900 1,897
Separation agreement and accelerated
vesting of options....................... --- --- --- 835
------------ ------------ ------------ ------------
Operating Expenses....................... 17,994 16,363 12,417 6,127
------------ ------------ ------------ ------------
Loss from operations................... (15,014) (16,363) (12,417) (6,127)
Interest income............................. 475 726 471 144
Interest expense............................ (713) (47) (9) ---
Other....................................... (6) --- --- ---
------------ ------------ ------------ ------------
Net loss............................... $ (15,258) $ (15,684) $ (11,955) $ (5,983)
============ ============ ============ ============
Net loss per share - basic and diluted. $ (0.45) $ (0.50) $ (0.36) $ (0.24)
============ ============ ============ ============
Weighted average shares outstanding -
basic and diluted.................. 34,285 31,586 33,254 24,678
Cash and Cash Equivalents -- The Company considers all highly liquid
investment instruments purchased with a maturity of three months or less to be
cash equivalents.
Short-term Investments -- Investments purchased with a maturity of more than
three months, and which mature less than twelve months from the balance sheet
F-7
date, are classified as short-term investments. The Company generally holds
investments to maturity, however, since the Company may, from time to time, sell
securities to meet cash requirements, the Company classifies its investments as
available-for-sale as defined by Statement of Financial Accounting Standards
("SFAS"), No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Available-for-sale securities are carried at market value with
unrealized gains and losses reported as a separate component of Shareholders'
Equity.
Inventories -- Inventories are stated at the lower of first-in, first-out
("FIFO") cost or market.
Concentration of Credit-- The Company invests generally in securities of
the U.S. Treasury, U.S. government agencies, and U.S. government security-based
money market funds. The Company has not experienced any losses on its
investments.
The Company has an exposure to credit risk in its trade accounts receivable
from sales of Visicol(TM). The Company began selling Visicol(TM) on January 1,
2001, primarily in the United States, to wholesalers and large drug store
chains.
Deposits and Other Assets -- Deposits were made for both our terminated
contract sales force and our leased office space in 2000. The deposit for the
terminated contract sales force was refunded in full during 2001 and the deposit
for the leased office space will be refunded in full at the end of the lease
term. Other assets consist primarily of deferred financing costs incurred in
connection with our June 2001 placement of convertible subordinated notes, which
are being amortized over the life of the notes.
Fixed Assets and Depreciation -- Fixed assets are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets, including: (i) three (3) years for computers/software; (ii) five (5)
years for office equipment and manufacturing equipment (located at the Company's
contract manufacturer); and (ii) seven (7) years for furniture and fixtures.
Leasehold improvements are amortized using the straight-line method over the
term of the respective lease, or their estimated useful lives, whichever is
shorter. Expenditures for maintenance and repairs are charged to expense as
incurred.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date(s)
of the financial statements and the reported amounts of revenues and expenses
during the reporting period(s). Actual results could differ from those
estimates.
Reclassification -- Certain prior period amounts have been reclassified to
conform to current year financial statement presentation.
Revenue Recognition -- The Company recognizes revenue pursuant to Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements."
Accordingly, revenue is recognized when all four of the following criteria are
met: (i) persuasive evidence of the arrangement exists; (ii) delivery of the
products and/or services has occurred; (iii) the selling price is both fixed and
determinable and; (iv) collectibility is reasonably probable.
The Company generally recognizes revenue upon customer receipt of the
product (F.O.B. destination). Revenue from service obligations is recognized
when the services have been performed. Any revenues from research and
development arrangements are recognized pursuant to the terms of the related
agreements as work is performed, or as milestones are achieved.
Research and Development -- Research and development costs are expensed as
incurred.
Stock Based Compensation -- The Company accounts for stock-based employee
compensation under Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. The Company adopted
the disclosure-only provisions of Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123").
F-8
The Company accounts for stock-based compensation granted to non-employees
based on the fair value of the consideration received or the fair value of
instrument issued, whichever is more reliably measurable. The fair value is
amortized over the period of the respective services provided.
Income Taxes -- The Company accounts for income taxes using the liability
method as prescribed by Financial Accounting Standards Board ("FASB") Statement
No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The
measurement of deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits that are not expected to be realized. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that such tax rate changes are enacted.
Loss Per Share -- The Company calculates its loss per share under the
provisions of Statement of Financial Accounting Standard No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 requires a dual presentation of "basic" and
"diluted" loss per share on the face of the income statement. Basic loss per
share is computed by dividing loss by the weighted average number of shares of
common stock outstanding during each period. Diluted loss per share includes the
effect, if any, from the potential exercise or conversion of securities, such as
stock options and warrants, which would result in the issuance of incremental
shares of common stock. Only basic loss per share amounts have been presented on
the face of the statements of operations as the inclusion of incremental shares
would have been anti-dilutive.
Comprehensive Income - SFAS No. 130 "Reporting Comprehensive Income"
establishes standards for the reporting of comprehensive income and its
components. Comprehensive income consists of reported net income or loss and
"other comprehensive income" (i.e. other gains and losses affecting
stockholders' equity that, under generally accepted accounting principles, are
excluded from net income or loss as reported on the statement of operations).
With regard to the Company, other comprehensive income consists of unrealized
gains and losses on marketable securities. The comprehensive loss for each of
the periods presented approximates the net loss in the statement of operations.
3. ACCOUNTS RECEIVABLE:
Accounts receivable balances consist of the following (in thousands):
December 31, December 31,
2001 2000
---- ----
Accounts receivable - gross.................... $ 412 $ ---
Less: allowance for cash discounts............. (12) ---
----------- -----------
Accounts receivable....................... $ 400 $ ---
=========== ===========
4. INVESTMENTS:
The Company invests in U.S. Treasury and U.S. Government agency securities.
Excess cash is invested on a short-term basis in U.S. government based money
market funds. The Company had no unrealized losses at December 31, 2001 and
2000. The Company has not realized any losses on its investments.
F-9
5. INVENTORIES:
Inventories balances consist of the following (in thousands):
December 31, December 31,
2001 2000
---- ----
Raw materials................................... $ 137 $ 80
Work in process................................. --- 606
Finished goods.................................. 67 ---
----------- -----------
Inventory.................................. $ 204 $ 686
=========== ===========
6. FIXED ASSETS:
Fixed assets are stated at cost and consist of the following (in
thousands):
December 31, December 31,
2001 2000
---- ----
Manufacturing equipment.......................... $ 220 $ 259
Office equipment and furniture................... 489 437
Total............................................ 709 696
Less accumulated depreciation.................... (310) (245)
=========== ===========
Fixed assets, net........................... $ 399 $ 451
=========== ===========
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following (in
thousands):
December 31, December 31,
2001 2000
---- ----
Accounts payable................................. $ 2,027 $ 306
Sales and marketing costs........................ 604 71
Allowance for returns and third-party rebates.... 534 ---
Professional fees................................ 170 75
Accrued severance................................ 138 ---
Other............................................ 77 171
----------- -----------
Accounts payable and accrued expenses....... $ 3,550 $ 623
=========== ===========
8. ALLOWANCE FOR SALES RETURNS:
The Company maintains an allowance for potential future sales returns.
This allowance is evaluated on a quarterly basis based on product
characteristics, industry averages, wholesaler stocking patterns, and
prescription trends. At December 31, 2001, the Company had a $441,000 returns
allowance that was included in accounts payable and accrued expenses on the
balance sheet. The following is an analysis of the sales returns allowance:
December 31, December 31,
2001 2000
---- ----
Beginning allowance for sales returns............ $ --- $ ---
Provision for estimated sales returns............ 524 ---
Actual sales returns............................. (83) ---
----------- -----------
Ending allowance for sales returns.......... $ 441 $ ---
=========== ===========
F-10
9. LINE OF CREDIT:
The Company secured a $2,000,000 line of credit with a financial institution
in December 1999. This credit line was increased to $5,000,000 in December 2000.
Under the amended terms of this arrangement, the Company makes monthly
interest-only payments at a variable per annum rate of 2.20%, plus the 30-day
Dealer Commercial Paper Rate, with principal due on January 31, 2003. The
Company maintains investments of at least 100% of the amount outstanding at the
institution as collateral for the line of credit. At December 31, 2001 and 2000
$2,401,000 and $1,752,000, respectively, was outstanding under this line of
credit at average interest rates of 6.06% and 8.75%, respectively.
10. CONVERTIBLE SUBORDINATED NOTES:
In June 2001, the Company completed a private placement of $10,000,000 of
5.50% convertible subordinated notes due June 2003 together with 265,487
warrants. The notes are convertible into the Company's common stock at a
conversion price of $4.52 per share and the warrants have an exercise price of
$5.42 per share. The conversion price is subject to weighted average
anti-dilution provisions if the Company were to issue or sell its common stock
below the conversion price. In accordance with APB Opinion No. 14, the Company
allocated the fair value of the proceeds to the debt and warrants issued. The
warrants were valued using the Black-Scholes valuation methodology. The
allocation was determined based upon the relative fair values of the two
securities at the time of issuance. In addition, the Company incurred debt
issuance costs that has been deferred and included in Deposits and other assets
on the balance sheet. The Company will incur non-cash charges to interest
expense over the life of the note related to the amortization of the fair value
of the warrants and the deferred issuance costs. When considering the
amortization of the warrant value and deferred issuance costs, the effective
interest rate on this note payable is approximately 10.79%. At December 31,
2001, the Company had $10,000,000 of these notes outstanding, net of $199,000 of
deferred warrant costs. In addition, unamortized deferred issuance costs were
$573,000 at December 31, 2001.
11. SHAREHOLDERS' EQUITY:
Preferred Stock
The Company's certificate of incorporation provides the board of directors
the power to issue shares of preferred stock without shareholder approval. This
preferred stock could have voting rights, including voting rights that could be
superior to that of our common stock, and the board of directors has the power
to determine these voting rights.
Common Stock
In November 1997, the Company completed a private placement of 17,000,000
shares of common stock, together with underwriter warrants as described below,
with net proceeds to the Company of approximately $15.8 million.
Also, in November 1997, in connection with the purchase of certain
technologies 875,000 shares of common stock were issued.
In September 1999, the Company completed a private placement of 2,307,691
shares of common stock, together with warrants as described below, with net
proceeds to the Company of $2,750,000.
In May 2000, the Company completed a private placement of 2,838,871 shares
of common stock, together with placement agent warrants as described below, with
net proceeds to the Company of $9,900,000.
Throughout year ended June 30, 2000 the Company issued approximately
4,431,000 shares of common stock from the exercise of warrants and stock options
with net proceeds to the Company of $3,822,000.
Throughout the six-months ended December 31, 2000 the Company issued
approximately 1,046,000 shares of common stock from the exercise or vesting of
warrants, stock options and restricted stock with net proceeds to the Company of
$874,000.
F-11
Throughout the year ended December 31, 2001 the Company issued approximately
976,000 shares of common stock from the exercise or vesting of warrants, stock
options, and restricted stock with net proceeds to the Company of $713,000. In
addition, the Company issued approximately 61,000 shares of common stock in
connection with semi-annual coupon interest charges for the Company's
outstanding convertible subordinated notes.
Warrants
In connection with the November 1997 private placement, the Company issued
warrants to the placement agents to purchase an aggregate of 2,044,843 shares of
common stock, exercisable at $1.00 per share (subject to antidilution
adjustment). These warrants expire in November 2002. At December 31, 2001,
28,000 of these warrants were outstanding.
In connection with the September 1999 private placement the Company issued
warrants to the investors to purchase an aggregate of 761,538 shares of common
stock. The warrants are exercisable at $1.78 per share. The warrants are subject
to certain provisions that may increase the issuable shares and decrease the
exercise price for the warrants, upon certain events that may have a dilutive
effect on the investor's warrants. These warrants expire in September 2003. At
December 31, 2001, 407,692 of these warrants are outstanding.
In connection with the May 2000 private placement the Company issued
warrants to the placement agents to purchase an aggregate of 283,887 shares of
common stock, exercisable at $5.13 per share. These warrants expire in May 2005.
At December 31, 2001, 283,887 of these warrants are outstanding.
In connection with the June 2001 private placement of June 2003 convertible
subordinated notes, the Company issued warrants to the noteholders to purchase
an aggregate of 265,487 shares of common stock, exercisable at $5.42 per share.
These warrants expire in June 2003. At December 31, 2001, 265,487 of these
warrants are outstanding.
Treasury Stock
In May 1997, a shareholder/officer transferred to the Company 16,515 shares
previously issued in payment of accrued salary; such transfer was made in
satisfaction of obligations to the Company arising from the payment of
withholding tax relating to the issuance. The Company is holding the repurchased
shares as treasury shares.
Stock Option Plans
In October 1997, the shareholders of the Company approved the amended Stock
Option Plan (the "1993 Plan"), which as amended provides for the granting of up
to 4,200,000 shares of common stock, pursuant to which directors, employees,
non-employees, consultants and advisors are eligible to receive stock options.
Options granted under the 1993 Plan are exercisable for a period of up to 10
years from the date of grant at an exercise price which is not less than the
fair value on date of grant, except that the exercise period of options granted
to a stockholder owning more than 10% of the outstanding capital stock may not
exceed five years and their exercise price may not be less than 110% of the fair
value of the common stock at date of grant.
In October 1997, the shareholders approved the 1997 Consultant Stock Option
Plan (the "1997 Plan"), which provides for the granting of up to 2,500,000
shares of Common Stock, pursuant to which consultants and advisors to the
Company are eligible to receive stock options. Options granted under the 1997
Plan are exercisable for a period not to extend beyond February 14, 2007 and at
an exercise price determined by the Board or Plan Administrator.
In November 1999, the shareholders approved and in November 2000, the
shareholders amended the InKine Pharmaceutical Company, Inc. 1999 Equity
Compensation Plan (the "1999 Plan") which as amended provides for grants of
stock options and restricted stock of up to 2,500,000 shares of common stock to
selected employees and non-employee directors of the Company. Options granted
under the 1999 Plan are exercisable for a period of up to 10 years from the date
of grant at an exercise price which is not less than the fair value on the date
of grant.
In addition to the shares of common stock issuable upon exercise of options
granted under the Company's stock option plans, 2,056,773 shares of common stock
F-12
are issuable upon exercise of outstanding options granted to an officer and a
consultant pursuant to other written agreements. The exercise price for these
options was set by the Board of Directors, or a committee designated by the
Board, based upon an evaluation of the fair market value of the Company's common
stock on the date of grant. The options vest over various periods, not exceeding
three years, and expire no later than ten years from the date of grant.
A summary of the status of the Company's stock options as of December 31,
2001 and 2000, and June 30, 2000 and 1999, and changes during the periods ending
on those dates is presented below (in thousands, except per share data):
Year Ended Six-Months Ended
December 31, December 31, Years Ended June 30,
------------ ---------------- --------------------
2001 2000 2000 1999
---- ---- ---- ----
Weighted Weighted Weighted Weighted
Average Average Average Average
Shares Exercise Shares Exercise Shares Exercise Shares Exercise
Options (000) Price (000) Price (000) Price (000) Price
- ------- ----- ----- ----- ----- ----- ----- ----- -----
Outstanding at
beginning of period.. 6,443 $2.09 6,661 $1.30 8,246 $0.92 6,927 $0.84
Granted................. 1,116 $2.82 809 $7.10 962 $3.58 1,339 $1.32
Exercised............... (596) $0.66 (827) $0.82 (2,420) $0.92 (1) $0.50
Forfeited............... (374) $1.51 (200) $1.00 (127) $0.72 (19) $0.84
------ ------ ------- ------
Outstanding at end of
period............... 6,589 $2.16 6,443 $2.09 6,661 $1.30 8,246 $0.92
Exercisable at end of
period............... 4,764 $1.64 4,486 $1.28 4,100 $0.86 5,206 $0.84
The following table summarizes information about stock options outstanding
at December 31, 2001 (in thousands, except per share data):
Options Outstanding Options Exercisable
------------------- -------------------
Options Weighted Average Options
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 12/31/01 Contractual Life Exercise Price at 12/31/01 Exercise Price
--------------- ----------- ---------------- ---------------- ----------- ----------------
$0.61-$3.00............... 4,833 6.51 years $0.94 4,092 $0.96
$3.01-$6.00............... 1,136 8.35 years $4.21 468 $4.92
$6.01-$8.50............... 620 8.91 years $7.76 204 $7.73
------ ------
$0.61-$8.50............... 6,589 7.10 years $2.15 4,764 $1.64
During the six-months ended December 31, 2000, the Company incurred
approximately $5,301,000 of performance based stock expense resulting from the
attainment of certain milestones that triggered the vesting of options granted
in connection with the Company's equity compensation plans.
F-13
The Company applies APB Opinion 25 and related Interpretations in accounting
for its options. Accordingly, no compensation cost has been recognized for its
non-performance stock option grants to employees. Had compensation costs for the
Company's stock option grants to employees been determined based on the fair
value at the grant dates for awards consistent with the method of SFAS 123, the
Company's net loss per share would have been increased to the pro forma amounts
indicated below (in thousands, except per share data):
For the Year For the
Ended Six-Months Ended For the Years Ended
December 31 December 31, June 30,
----------- ------------ -------------------
2001 2000 2000 1999
---- ---- ---- ----
Net Loss As reported $(15,258) $(11,955) $(9,712) $(9,633)
Pro forma $(18,091) $(12,523) $(10,111) $(9,760)
Net Loss Per
Share-basic and
diluted As reported $(0.45) $(0.36) $(0.36) $(0.42)
Pro forma $(0.53) $(0.38) $(0.37) $(0.43)
The resulting effect on pro forma net loss and net loss per share disclosed
above may not likely be representative of the effects on net loss and net loss
per share on a pro forma basis in future years, because 1999 pro forma results
include the impact of only three years of grants and related vesting, while
subsequent years will include additional years of grants and vesting.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
For the Year For the
Ended Six-Months Ended For the Years Ended
December 31, December 31, June 30,
------------ ---------------- -------------------
2001 2000 2000 1999
---- ---- ---- ----
Range of risk free interest rates. 3.57% 6.24% 5.5% 5.0%
Dividend yield.................... 0% 0% 0% 0%
Volatility factor................. 202% 172% 159% 120%
Expected life of options (in years) 5 5 5 6
The weighted average fair value of options granted was $4.06 for the year
ended December 31, 2001, $6.77 for the six-months ended December 31, 2000 and
$2.80 and $1.10 for the years ended June 30, 2000 and 1999, respectively.
Restricted Stock
In connection with the 1999 Plan, the Company is authorized to award shares
of restricted stock. The maximum number of restricted shares issuable or
transferable under the amended 1999 Plan is 25% of the aggregate number of
shares issuable or transferable under the amended 1999 Plan. During the year
ended December 31, 2001, the six-month period ended December 31, 2000 and the
year ended June 30, 2000, 35,000, 100,000 and 228,000 shares, respectively, of
restricted common stock were awarded to selected employees and non-employee
directors of the Company. The restriction period for these awards was either a
one to two year vesting period or upon the attainment of certain business
related milestones, commencing from the grant date.
During the six-months ended December 31, 2000, the Company incurred
approximately $754,000 of performance based stock expense resulting from the
attainment of certain milestones that triggered the removal of restrictions on
restricted stock awards granted in connection with the Company's equity
compensation plans.
12. INCOME TAXES:
The Company has approximately $36,495,000 of net operating loss ("NOL")
carryforwards available to offset future federal taxable income and
approximately $36,367,000 of net operating loss carryforwards available to
offset future state taxable income subject to a $2,000,000 annual limitation.
The NOL carryforwards are subject to examination by the tax authorities and
expire in various years from 2005 through 2021. The NOL carryforward differs
F-14
from the accumulated deficit due principally to differences in the recognition
of certain research and development expenses for financial and federal income
tax reporting. The Company is also entitled to approximately $1,242,000 of
research and experimentation credits to offset future federal income tax
liability and approximately $45,000 of research and experimentation credits to
offset state income or franchise tax liability.
The Tax Reform Act of 1986 contains provisions that may limit the NOL and
research and experimentation credit carryforwards available to be used in any
given year upon the occurrence of certain events, including significant changes
in ownership interest. Generally, a change in ownership of a company of greater
than 50% within a three year period results in an annual limitation on that
company's ability to utilize its NOL carryforwards and tax credits from the tax
periods prior to the ownership change. The rules providing for the definition of
an ownership change are complex and a study needs to be performed to determine
if the Company has undergone a change in ownership. The Company believes that it
has undergone an ownership change and is subject to an annual limitation on the
use of its NOL carryforwards pursuant to these provisions. The Company does not
believe that such limitation will have a material adverse impact on the
utilization of its carryforwards. The Company's NOL carryforwards and temporary
differences represent a previously unrecognized tax benefit. Recognition of
these benefits requires future income. Because the attainment of future income
is uncertain, the Company has established a valuation allowance, which increased
by approximately $4,037,000 during the year ended December 31, 2001, for the
entire amount of the tax benefit.
Significant components of the Company's deferred tax assets as of December
31, 2001 and 2000 are as follows (in thousands):
December 31, December 31,
2001 2000
------------ ------------
Net operating loss carryforwards and credits......... $ 16,095 $ 10,881
Research and development costs....................... 11,867 11,542
Compensation......................................... --- 2,077
Other................................................ 582 7
--------- ---------
Net deferred tax assets........................ 28,544 24,507
Valuation allowance for deferred tax assets.......... (28,544) (24,507)
--------- ---------
Total deferred tax assets....................... $ --- $ ---
========= =========
13. 401(k) PLAN
The Company maintains a 401(k) retirement plan available to all full-time,
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company, at its discretion, may make certain contributions to
the plan. During the year ended December 31, 2001, the six-months ended December
31, 2000 and the years ended June 30, 2000 and 1999 the Company provided a
contribution equal to 50% of the first 4% contributed by the employee. An
expense of approximately $37,000, $15,000, $26,000 and $23,000 was recognized
for the same periods, respectively.
14. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
License Agreements
The Company's rights to Visicol(TM), its rights to certain compounds
comprising the Fc Receptor Technology and its rights to the Thrombospondin
Technology are held pursuant to license agreements. In addition, the Company
anticipates entering into licenses for other product candidates and technologies
that may be limited in scope and duration, and may authorize the development and
marketing of specified licensed products or technologies for a limited period of
time. The license agreements may be terminated prior to their expiration date
under certain circumstances, including the Company's failure to comply with
product development commitments specified therein.
The success of licensing arrangements depends on many factors, including the
reasonableness of license fees in relation to revenue generated by sales of the
F-15
licensed products and the viability and potential developmental success of the
licensed products. Certain of the Company's licensing arrangements require, and
future licensing arrangements may require, specified levels of research and
development expenditures by the Company. The inability of the Company to finance
any or all of such expenditures could result in the termination of affected
licenses, and the termination, cancellation or inability to renew any of its
existing licensing arrangements, coupled with the inability to develop and enter
into new licensing arrangements, could have a material adverse effect on the
Company's financial condition and results of operation.
The ALW License, entered into February 1997, which covers Visicol(TM), may
be terminated by the licensor if (a) the Company fails to pay, commencing in
February 2003, minimum royalties of $100,000 per year whether or not any sales
have occurred, or (b) there is no commercial sale of Visicol(TM) or any product
under the ALW License by February 2005. In addition, the Company's rights under
the ALW License will no longer be exclusive, and the minimum royalty payment
will no longer be due (although decreased actual royalty payments will be due)
if there is no valid or enforceable patent on Visicol(TM) or any other product
under the ALW License.
In September 2001, the Company entered into an license agreement with Zeria
Pharmaceutical Company, Ltd. of Tokyo, Japan to develop, manufacture, market and
sell Visicol(TM) for use in Japan. Under the agreement, Zeria will develop
Visicol(TM) as a bowel cleansing agent. As compensation for the license granted
to Zeria, the Company received an up-front license fee of $500,000 and will
receive an additional $2,000,000 in fixed license fees upon the attainment of
reaching certain development milestones. In addition, the Company will receive
royalty payments based on net sales of Visicol(TM) in Japan. Zeria is
responsible for all development costs.
In February 2001, the Company entered into an agreement with Morton Grove
Pharmaceuticals to develop, manufacture and market IBStat(TM), an immediate
release antispasmodic product. IBStat(TM) will be marketed to
gastroenterologists for use as an acute care product for a variety of
indications, including spasm of the colon. Under the agreement, the Morton Grove
Pharmaceuticals will develop and supply the product and the Company will market
and sell IBStat(TM) through its commercial operations.
Terms of the acquisition of the Fc Receptor Technology on November 6, 1997,
required the Company to pay the CorBec shareholders an aggregate of $750,000 and
issue to them an aggregate of 750,000 shares of Common Stock. Additional cash
payments in the aggregate amount of $16,580,000 and additional issuances of an
aggregate of 720,000 shares of Common Stock are to be made upon the achievement
of the following milestones and targets: (i) $500,000 and 180,000 shares upon
the Company's receipt of a letter of approval from the FDA allowing for the
commercial sale of CBP-1011 (the compound from which Hematrol(TM) and
Colirest(TM) are derived); (ii) 80,000 shares following the first fiscal year
net revenues from CBP-1011 sales equals or exceeds $20,000,000; (iii) $7,500,000
(payable in five equal annual installments) following the first fiscal year net
revenues from CBP-1011 equals or exceeds $30,000,000; (iv) 180,000 shares
following the first fiscal year net revenues from CBP-1011 sales equals or
exceeds $40,000,000; (v) $500,000 and 30,000 shares upon the Company's filing of
an IND with the FDA with respect to a second generation compound (a "Second
Drug"); (vi) $80,000 upon the successful completion of Phase II clinical trials
with respect to a Second Drug; (vii) 120,000 shares upon the Company's filing of
an NDA with respect to a Second Drug; (viii) $500,000 and 130,000 shares upon
receipt of a letter of approval from the FDA allowing for the commercial sale of
a Second Drug; and (ix) $7,500,000 (payable in five equal annual installments)
following the first fiscal year net revenues from the Second Drug equals or
exceeds $75,000,000. Since the acquisition of CorBec, the Company has retained
Dr. Alan Schreiber, the inventor, as a consultant to the Company. Most recently,
in November 2000, the Company entered into a two-year consulting agreement with
Dr. Schreiber. In connection with this agreement, Dr. Schreiber received an
option to purchase 274,000 shares at the market price on the date of grant. The
agreement also requires the Company to fund Dr. Schreiber's lab over the course
of two years.
The Company has licensed rights from MCP Hahnemann University (MCP) and Dr.
Tuszynski pursuant to an exclusive, worldwide license, dated November 6, 1997,
to make, have made, use, sell, import, offer for sale and sublicense the
Thrombospondin Technology and to utilize and exploit the related patents and
proprietary information. The license agreement is to terminate, unless earlier
for breach or for failure of the Company to achieve certain FDA product approval
milestones within seven years, upon the expiration or abandonment of the last
patent related to the Thrombospondin Technology. The license required the
Company to issue to MCP 125,000 shares of Common Stock and options to purchase
125,000 shares, issue to Dr. Tuszynski ten-year options to purchase 250,000
F-16
shares of Common Stock, to pay MCP royalties of 2% of net sales of licensed
products, to provide MCP funding ranging from $150,000 (in the first year) to
$1,350,000 (over seven years, inclusive) for sponsored research.
The termination of any license or the loss of exclusivity thereunder could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Rent
In November 2000 the Company entered into a lease for office space of
approximately 8,000 square feet, in Blue Bell, Pennsylvania. This lease will
expire five years from the effective date and minimum annual rent payments are
as follows:
2002 $ 206,000
2003 210,000
2004 214,000
2005 181,000
--------------
$ 811,000
==============
Rent expense was approximately $205,000, $79,000, $108,000 and $100,000 for
the year ended December 31, 2001, the six-month period ended December 31, 2000
and the years ended June 30, 2000 and 1999, respectively.
F-17
15. INTERIM FINANCIAL RESULTS (UNAUDITED):
The following tables set forth certain unaudited financial information for
each of the four quarters in the years ended December 31, 2001, June 30, 2000
and 1999 and for each of the two quarters in the six-months ended December 31,
2000. In management's opinion, this unaudited quarterly information has been
prepared on the same basis as the audited financial statements and includes all
necessary adjustments, consisting only of normal recurring adjustments, that
management considers necessary for a fair presentation of the unaudited
quarterly results when read in conjunction with the Financial Statements and
Notes. The Company believes that quarter-to-quarter comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. (in thousands, except per share amounts.)
Three-Month Periods Ended
------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
---------------- ---------------- ---------------- ------------------
Revenue...................................... $ 1,601 $ 1,754 $ 965 $ 541
Cost of goods sold........................... 767 657 226 231
Gross profit................................. 834 1,097 739 310
Research and development..................... 894 1,045 1,576 1,846
Sales and marketing.......................... 1,917 2,310 2,732 1,985
General and administrative................... 1,015 969 887 818
Loss from operations......................... (2,992) (3,227) (4,456) (4,339)
Net loss..................................... $ (2,879) $ (3,201) $ (4,623) $ (4,555)
Net loss per share - basic and diluted....... $ (0.08) $ (0.09) $ (0.13) $ (0.13)
Three-Month Periods Ended
-------------------------------------
September 30, December 31,
2000 2000
---------------- ----------------
Research and development..................... $ 5,772 $ 1,288
Sales and marketing.......................... 322 1,135
General and administrative................... 2,391 1,509
Loss from operations......................... (8,485) (3,932)
Net loss..................................... $ (8,225) $ (3,730)
Net loss per share - basic and diluted....... $ (0.25) $ (0.11)
Three-Month Periods Ended
----------------------------------------------------------------------------
September 30, December 31, March 31, 2000 June 30,
1999 1999 2000
---------------- ---------------- ---------------- ----------------
Research and development..................... $ 1,411 $ 1,984 $ 1,100 $ 1,236
General and administrative................... 915 982 722 887
Separation agreement and accelerated vesting
of options............................... --- 835 --- ---
Loss from operations......................... (2,326) (3,801) (1,822) (2,123)
Net loss..................................... $ (2,263) $ (3,720) $ (1,760) $ (1,969)
Net loss per share - basic and diluted....... $ (0.10) $ (0.14) $ (0.06) $ (0.06)
Three-Month Periods Ended
------------------------------------------------------------------------------
September 30, December 31, March 31, 1999 June 30,
1998 1998 1999
---------------- ---------------- ---------------- ----------------
Research and development..................... $ 1,267 $ 1,017 $ 1,768 $ 2,513
General and administrative................... 854 974 849 916
Loss from operations......................... (2,121) (1,991) (2,617) (3,429)
Net loss..................................... $ (1,951) $ (1,846) $ (2,501) $ (3.335)
Net loss per share - basic and diluted....... $ (0.09) $ (0.08) $ (0.11) $ (0.14)
F-18
EXHIBIT INDEX
3.1 Certificate of Incorporation, as amended. (Exhibit 3.1)(1)
3.2 By-laws. (Exhibit 3.2)(2)
4.1 Form of Common Stock Purchase Warrant, dated September 20, 1999.
(In accordance with Item 601 of Regulation S-K, similar warrants
granted to investors have not been filed because they are
identical in all material respects except for the number of
warrants granted to each investor.) (Exhibit 4.3)(3)
4.2 Common Stock Purchase Warrant, dated May 5, 2000, granted to the
placement agent, Leerink, Swann, Garrity, Sollami, Yaffe & Wynn,
Inc. (Exhibit 4.2)(4)
4.3 Registration Rights Agreement dated June 15, 2001 among InKine,
Bank of Canada and S.A.C. Capital Associates, LLC. (Exhibit
4.2)(5)
4.4 Form of 5.5% Convertible Subordinated Notes due June 2003. (In
accordance with Item 601 of Regulation S-K, similar notes issued
to the investors have not been filed because they are identical
in all material respects.) (Exhibit 4.3)(5)
4.5 Form of Common Stock Purchase Warrant, dated June 15, 2001. (In
accordance with Item 601 of Regulation S-K, similar warrants
granted to investors have not been filed because they are
identical in all material respects except for the number of
warrants granted to each investor.) (Exhibit 4.4)(5)
10.1 Agreement and Plan of Reorganization among Panax Pharmaceutical
Company, Ltd., CorBec Pharmaceuticals, Inc. and certain Security
Holders of CorBec Pharmaceuticals, Inc., dated October 31, 1997.
(Exhibit 10.1)(6)
10.3 Stock Purchase Agreement by and between Panax Pharmaceutical
Company, Ltd. and Leonard S. Jacob dated September 3, 1997.
(Exhibit 10.3)(6)
10.4 Employment Agreement between InKine Pharmaceutical Company, Inc.
and Leonard S. Jacob, dated November 6, 1997. (Exhibit 10.4)(6)
10.5 Employment Agreement between InKine Pharmaceutical Company, Inc.
and Robert F. Apple, dated November 2, 1998. (Exhibit 10.6)(7)
10.6 Option to Purchase Shares of Common Stock of InKine
Pharmaceutical Company, Inc. dated November 6, 1997, issued to
Leonard S. Jacob. (Exhibit 10.6)(6)
10.7 Common Stock Purchase Option, dated November 6, 1997 issued to
Allegheny University of the Health Sciences. (Exhibit 10.7)(6)
10.8 Non-Milestone Common Stock Purchase Option, dated November 6,
1997 issued to George Tuszynski. (Exhibit 10.8)(6)
10.9 Common Stock Purchase Option, dated November 6, 1997 issued to
George Tuszynski. (Exhibit 10.9)(6)
10.10 Stock Option Plan, as amended. (Exhibit 99)(8)
10.11 1997 Consultant Stock Option Plan. (Exhibit 99)(9)
10.12 Form of Stock Option Agreement. (Exhibit 10(b))(10)
Page 1 of Exhibit Index
10.13 License Agreement with ALW Partnership. (Exhibit 10(1))(11)
10.14 Form of Option granted to Partners of ALW Partnership. (Exhibit
10(n))(11)
10.15 Amendment to Employment Agreement, dated November 4, 1999,
between the Company and Leonard S. Jacob. (Exhibit 10.18)(12)
10.16 1999 Equity Compensation Plan(13)
23* Consent of KPMG LLP.
- -----------------------
* Filed herewith.
(1) Filed as an Exhibit to InKine's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001, with the Securities and Exchange
Commission.
(2) Filed as an Exhibit to InKine's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, with the Securities and
Exchange Commission.
(3) Filed as an Exhibit to InKine's Form S-3 (SEC File No.
333-89365), dated October 20, 1999, with the Securities and
Exchange Commission.
(4) Filed as an Exhibit to InKine's Form S-3 (SEC File No.
333-37254), dated May 17, 2000, with the Securities and Exchange
Commission.
(5) Filed as an Exhibit to InKine's Current Report on Form 8-K dated
June 19, 2001, with the Securities and Exchange Commission.
(6) Filed as an Exhibit to InKine's Current Report on Form 8-K, dated
November 6, 1997 (as amended by Form 8-K/A filed on December 3,
1997), with the Securities and Exchange Commission.
(7) Filed as an Exhibit to InKine's Annual Report on Form 10-K for
the year ended June 30, 1999, with the Securities and Exchange
Commission.
(8) Filed as an Exhibit to InKine's Form S-8 (SEC File No.
333-58063), dated June 29, 1998, with the Securities and Exchange
Commission.
(9) Filed as Exhibit to InKine's Form S-8 (SEC File No. 333-58065)
dated June 29, 1998, with the Securities and Exchange Commission.
(10) Filed as an Exhibit to InKine's Annual Report on Form 10-KSB for
the year ended June 30, 1995, with the Securities and Exchange
Commission.
(11) Filed as an Exhibit to InKine's Current Report on Form 8-K dated
February 14, 1997, with the Securities and Exchange Commission.
(12) Filed as an Exhibit to InKine's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1999, with the Securities and
Exchange Commission.
(13) Filed as an Exhibit to InKine's Form S-8 (SEC File No. 333-47088)
dated September 29, 2000, with the Securities and Exchange
Commission.
Page 2 of Exhibit Index
The Board of Directors
InKine Pharmaceutical Company, Inc.
We consent to incorporation by reference in the registration statements Nos.
333-64658, 333-42647, 333-37254 and 333-89365 on Form S-3 and Nos. 333-33898,
333-58063, 333-58065, 333-54530, 333-50022, 333-49992 and 333-47088 on Form S-8
of InKine Pharmaceutical Company, Inc. of our report dated January 25, 2002,
relating to the balance sheets of InKine Pharmaceutical Company, Inc. as of
December 31, 2001 and 2000 and the related statements of operations, changes in
shareholders' equity and cash flows for the year ended December 31, 2001, the
six-month period ended December 31, 2000 and for each of the years in the two
year period ended June 30, 2000, which report appears in the annual report on
Form 10-K of InKine Pharmaceutical Company, Inc.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 28, 2002