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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, 2002
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
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
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(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
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(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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES __ NO _X_
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $28,708,000. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the NASDAQ Small Cap Market of The Nasdaq Stock Market on June 30, 2002. For
purposes of this calculation only, the registrant has defined affiliates as
including all directors and executive officers. In making such calculation, the
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
20, 2003 was 37,795,943.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the registrant's 2003 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
PART I
ITEM 1. BUSINESS................................................... 1
ITEM 2. PROPERTIES................................................. 20
ITEM 3. LEGAL PROCEEDINGS.......................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS........................................ 21
ITEM 6. SELECTED FINANCIAL DATA.................................... 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ....................... 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................ 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 31
ITEM 11. EXECUTIVE COMPENSATION..................................... 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 31
ITEM 14. CONTROLS AND PROCEDURES.................................... 31
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K................................................ 32
SIGNATURES ........................................................... 36
CERTIFICATIONS .......................................................... 37
TABLE OF CONTENTS TO FINANCIAL STATEMENTS...................................F-1
PART I
ITEM 1. BUSINESS.
FORWARD LOOKING STATEMENTS
In addition to historical facts or statements of current condition, this
report contains 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. is a biopharmaceutical company focused
on the diagnosis and treatment of gastrointestinal disorders, including: colon
cancer, irritable bowel syndrome, or IBS, and inflammatory bowel disease, or
IBD. Our development strategy has been to acquire late-stage drug candidates
with short time lines to commercialization. We currently market and sell two
pharmaceutical products, Visicol(TM) and IBStat(TM). These products are further
described below in the "Marketed Products" section. In addition to our marketed
products, we have identified two product candidates, Colirest(TM) and
Hematrol(TM). These product candidates are further described below in the
"Product Development and Research Programs" section.
The following table outlines our product pipeline from which we intend to
focus the majority of our research, development, marketing and sales efforts at
least through calendar year 2003 and also sets forth the current development
status of our products and product candidates in each targeted therapeutic
indication:
PRODUCT THERAPEUTIC INDICATIONS DEVELOPMENT STATUS
- --------------------- --------------------------------------------------- -------------------------------------
Visicol(TM) o Cleansing of colon prior to colonoscopy FDA approved; marketed product
FDA approved SNDA for new
formulation
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o Constipation Post marketing study commenced
Phase IV will commence in 2003
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o Pre-operative colonic surgical procedures Phase IV will commence in 2003
- --------------------- --------------------------------------------------- -------------------------------------
IBStat(TM) o Acute antispasmodic product immediately Marketed product
available for a variety of indications,
including spasm of the colon
- --------------------- --------------------------------------------------- -------------------------------------
Colirest(TM) o Crohn's and Ulcerative Colitis, Phase II Crohn's disease complete
collectively IBD Phase II ulcerative colitis complete
Phase IIb Crohn's disease ongoing
- --------------------- --------------------------------------------------- -------------------------------------
Hematrol(TM) o Idiopathic Thrombocytopenic Purpura, or ITP Phase II complete
Phase III on hold
- --------------------- --------------------------------------------------- -------------------------------------
1
MARKETED PRODUCTS
We currently market and sell two pharmaceutical products listed below:
Visicol(TM) (brand of Sodium phosphate tablets) is the first and only
tablet purgative preparation that is currently indicated for bowel cleansing
prior to colonoscopy.
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 five-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 between 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 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.
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 many generalists (i.e., internists
and family practitioners) routinely perform flexible sigmoidoscopy in the United
States.
Competition. 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 one centimeter 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.
2
The most frequently used products for cleansing the colon in the United
States contain either polyethylene glycol salt solution, or 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 an impediment to
the initiation of colon screening.
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 four liters (over one 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 one and two liters of water), the taste of the solution is so foul that
nausea and vomiting frequently occur.
The Visicol(TM) Advantage. 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 to 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 305 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 Nausea and moderate to severe vomiting were significantly less
frequent with the sodium phosphate tablets than with the liquid
preparation.
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.
Specific results of the Visicol(TM) Phase III 886 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.
3
FDA Approval. Following such favorable clinical results, we submitted a new
drug application, or NDA, to the FDA, in November 1999 and 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. Following the FDA's approval of Visicol(TM), we
immediately commenced marketing and sales efforts and began shipping Visicol(TM)
to our customers in January 2001. See the "Marketing and Sales" section for an
overview of our marketing and sales strategies.
During 2001, gastroenterologists reported the visualization of
microcrystalline cellulose, or 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 Visicol(TM). Our strategy for overcoming
the issue of MCC visualization during colonoscopy was 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).
Secondly, we were able to reformulate Visicol(TM) to contain significantly less
MCC.
Reduced Dose. In October 2001, we announced the results of a dosing study
performed by Douglas K. Rex, M.D., Professor of Medicine at Indiana University
School of Medicine. In this trial, patients scheduled for a colonoscopy took 20
Visicol(TM) tablets over one hour the evening before their procedure. On the
morning of the procedure, they took either eight tablets over 15 minutes or
twelve tablets over 30 minutes. With either of these regimens, there was a
significant reduction in the time to dose completion and in required liquid
volume compared to the labeled dosing regimen for Visicol(TM) (20 tablets over 1
1/2 hours the evening before the procedure and another 20 tablets the morning of
the procedure). Colonic cleansing with the reduced regimen was comparable to the
labeled dose with significantly reduced MCC visualization.
Reformulation. In March 2002, the FDA approved a supplemental new drug
application, or SNDA, for the new formulation of Visicol(TM) and we began
shipping this new formulation to customers in May 2002. The new formulation
contains approximately 50% less MCC. As of December 31, 2002, approximately
350,000 Visicol(TM) prescriptions have been filled, which include old and new
formulation prescriptions.
In October 2002, a patient preference study was completed by a group led by
Michael D. Brown, M.D., Associate Professor of Medicine, Rush Medical College,
Chicago, Illinois. The study, which included 117 patients undergoing
colonoscopy, compared patient preference in patients receiving either
Visicol(TM) tablets or a polyethylene glycol product as a purgative. Following
their procedure, patients were asked whether they would prefer to have their
next colonoscopy with Visicol(TM) or one of two liquid preparations - sodium
phosphate solution or a PEG preparation. The study demonstrated that 92% of
patients taking Visicol(TM) tablets would take the preparation again compared to
only 12% of patients who took the PEG comparator. Additionally, 66% of patients
who took PEG would prefer to take Visicol(TM) tablets. Further data indicated
that 94% of patients would prefer to have a choice of colonoscopy preparation at
a future colonoscopy, and 61% felt that providing different options for
preparations would influence their choice of gastroenterologist.
Additional Indications. 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 constipation. We are currently conducting studies for the use of
Visicol(TM) in constipation and plan to initiate studies in pre-operative
colonic surgical procedures.
4
Proprietary Rights. In February 1997, we entered into a 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 and
related know-how. 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. Similar patents have also
been granted in Canada and 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) (brand of hyoscyamine sulfate oral spray) is an acute
antispasmodic product that is immediately available for a variety of
indications, including IBS and other related conditions that cause spasm of the
colon.
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 individuals 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, 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.
5
Marketing and Sales Agreement for IBStat(TM). In February 2001, we entered
into an agreement with Morton Grove Pharmaceuticals, Inc. to develop and
manufacture IBStat(TM), an acute immediately available antispasmodic product.
IBStat(TM) is the combination of an FDA approved generic drug and an FDA
approved delivery system. We began shipping IBStat(TM) to customers in June
2002. IBStat(TM) is currently marketed to gastroenterologists for use as an
acute care product for a variety of indications, including IBS and other related
conditions that cause spasm of the colon. Under the agreement, Morton Grove
developed and continues to supply the product, and we market and sell IBStat(TM)
through our commercial operations. At this time, we do not intend to conduct any
preclinical or clinical studies on this product.
PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
Colirest(TM). We are currently evaluating Colirest(TM) for the treatment of
IBD, specifically, Crohn's disease and ulcerative colitis. Colirest(TM) is a
progesterone molecule that inhibits pro-inflammatory mediators while possibly
offering distinct safety advantages over traditional glucocorticoid steroid
therapy.
Glucocorticoid hormones are small molecules that rank among the most
effective therapeutic agents in the treatment of IBD. While glucocorticoids are
used widely in autoimmune diseases such as IBD, 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.
Background and Statistics.
Crohn's Disease. Crohn's disease is a serious inflammatory disease of the
gastrointestinal, or 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 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 a three-author
landmark paper published in 1932 that 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 disease. 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).
6
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, 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. 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.
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, or CDAI, between 200 and 400 were eligible to receive Colirest(TM)
tablets in a loading dose of four 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. Ninety-one percent (10 of 11) of patients completed two months of
treatment and one additional patient remained on therapy and is included on the
four-week analysis. Of the 12 eligible patients enrolled, only one patient
discontinued therapy, and this was due to "fatigue."
7
Key results of the study included:
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 disease
(defined as a decrease in the CDAI at eight 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 four 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 (i.e., prednisone), which are poorly tolerated when
chronically administered.
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 Disease Activity Index, or DAI, between three and
ten received Colirest(TM) tablets in a loading dose of four 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 => two-point decrease in the DAI, or any
improvement in the Investigator Global Assessment, or IGA.
Key results of the study included:
o Eleven patients were evaluable for efficacy; nine completed eight
weeks of Colirest(TM) treatment.
o 78% (seven of nine) of patients who completed the study responded
to treatment with Colirest(TM) in the DAI and IGA evaluations.
o 64% (seven of eleven) 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.
In February 2001, we announced that the FDA had agreed that we could
proceed with a planned clinical study of Colirest(TM) in Crohn's disease and we
currently have approximately 50 patients enrolled in that study. We anticipate
having interim data by late 2003 to early 2004 and if interim results are
positive, we will look for a development partner to assist us with furthering
the development of Colirest(TM).
8
License of Proprietary Rights. Rights to Colirest(TM) are owned by the
University of Pennsylvania, pursuant to which we have obtained an exclusive
worldwide license for the term of the patents covered, to make, have made, use,
sell and to exploit all patent and other rights under this license. We have
filed a patent describing the novel activity of Colirest(TM) and related analogs
on IBD and expect that the patent will be issued during 2003.
Hematrol(TM). We are currently evaluating Hematrol(TM) for treatment of
ITP. Hematrol(TM), a compound related to Colirest(TM), is a progesterone
molecule that inhibits pro-inflammatory mediators while possibly offering
distinct safety advantages over traditional glucocorticoid steroid therapy.
Background and Statistics. 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, or 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.
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 SD, 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/mm3 at entry. The primary efficacy endpoint was
defined as an increase in baseline platelet count of at least 20,000/mm3. Dosing
in this open-label, historically controlled, 42-day course of treatment,
commenced in March 1998.
9
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/mm3.
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 looking to sublicense Hematrol(TM) to a hematology focused
pharmaceutical company. The Phase III trial is currently on hold.
MANUFACTURING
We do not have the resources, facilities or capabilities to manufacture
Visicol(TM) or any of our product candidates. 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 product candidates 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 DMF 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
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., 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 Pharmaceutical Manufacturing Research Services.
We have contracted with an appropriate secondary manufacturer of
Visicol(TM) and an appropriate manufacturer to produce Colirest(TM). Neither of
these manufacturers has yet been approved by the FDA. We have contracted with
Fisher Clinical Services, Inc. and PCI Services (a division of Cardinal Health)
to package Visicol(TM) on our behalf. These facilities have been FDA approved
for the packaging of Visicol(TM).
MARKETING & SALES
We have a pharmaceutical marketing, sales and distribution organization. Our
sales efforts are focused on specialist physicians in private practice or at
major medical centers in the United States. In general, our products are sold
largely to wholesalers and large drug store chains. We utilize common
pharmaceutical company marketing techniques, including sales representatives
calling on individual physicians and pharmacies, advertisements, professional
symposia, direct mail, public relations and other methods.
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.
10
We have entered into an agreement with Morton Grove Pharmaceuticals to
develop and manufacture 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, Morton Grove Pharmaceuticals will develop and supply the product and
we will market and sell IBStat(TM) through our commercial operations.
We entered into a license agreement in September 2001 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 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 entered into a license agreement in September 2002 with Global Damon
Pharm., a multi-national pharmaceutical company of Seoul, Korea, to develop,
register, market and sell Visicol(TM) for use in Korea. As compensation for the
license granted, Global Damon is to pay an upfront milestone payment with
additional payments due based on future milestones and sales in Korea. To date,
Global Damon has not paid the upfront payment and is therefore in default under
the license agreement. We are currently looking for a new partner to replace
Global Damon in the event that Global Damon does not honor their contract with
us.
In March 2001, we entered into a co-promotion agreement with Procter &
Gamble Pharmaceuticals to promote Visicol(TM) to gastroenterologists and
colorectal surgeons. Our agreement with Procter & Gamble was amended in March
2002 to, among other things, extend the term of the agreement to December 31,
2002. As per our amended contract, our co-promotion agreement with Procter &
Gamble expired on December 31, 2002.
In July 2002, we granted ZaBeCor Pharmaceutical Company the exclusive right
to develop, manufacture, market and sell products and technologies covered by
our patents relating to inflammatory disease. As compensation for the license
granted to ZaBeCor, we received a percentage ownership in ZaBeCor, subject to
adjustment in the event that ZaBeCor were to receive additional funding.
Additionally, ZaBeCor shall pay us a royalty based on net sales of all products
discovered or developed by ZaBeCor or its partners. ZaBeCor will be responsible
for all development costs. We, however, will retain all rights to Colirest(TM)
and Hematrol(TM).
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 product candidates. 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.
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.
11
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, or 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); and
receptor based technologies which includes product candidates (iii)
Colirest(TM)and (iv) Hematrol(TM). 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 Visicol(TM); (b) Schwarz Pharma Inc. among others with
respect to IBStat(TM); (c) AstraZeneca plc, Salix Pharmaceuticals, IDEC
Pharmaceuticals Corporation, Procter & Gamble Pharmaceuticals, Solvay S.A.,
Centocor, Inc. (Johnson & Johnson) and Shire Pharmaceuticals Group plc with
respect to Colirest(TM); and (d) Immune Response Corporation, Autoimmune, Inc.
and Nabi Biopharmaceuticals with respect to Hematrol(TM). 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.
12
RESEARCH AND DEVELOPMENT
A major portion of our operating expenses to date is related to the
research and development of products incurred either by us alone or under
contracts with our collaborative partners. We spent $3,259,000, $5,361,000,
$7,060,000, and $5,731,000 for research and development during the years ended
December 31, 2002 and 2001, the six-month period ended December 31, 2000 and the
year ended June 30, 2000, 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).
OTHER FACTORS TO BE CONSIDERED
Risks Related To Our Operations
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.
Our first sale of Visicol(TM) occurred in January 2001 and our first
shipment of IBStat(TM) occurred in June 2002. We have not generated significant
revenue from product sales or royalties. We have a significant accumulated
deficit and have incurred losses in each year since our inception on July 1,
1993.
Visicol(TM), IBStat(TM) and our product candidates are in various stages of
marketing or development and require significant research, development and
testing.
If our sales, marketing, and research spending in the foreseeable future is
greater than product sales, 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 to a founding scientist and
others when we achieve agreed upon product development goals for Colirest(TM)
and Hematrol(TM). 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.
We do not have extensive experience with sales, marketing and distribution;
therefore we may not successfully sell our products.
We have marketed, distributed and sold two pharmaceutical products under
the InKine name for a limited time period. We had traditionally relied on sales,
marketing and distribution arrangements with third parties for Visicol(TM) and
other products we were developing. Prior to May 31, 2002, we solely utilized
Procter & Gamble Pharmaceuticals to sell and promote Visicol(TM). As of December
31, 2002, our agreement with Procter & Gamble expired. As a result we are
currently utilizing our internal sales and marketing personnel to sell and
market Visicol(TM).
Prior to May 2002, we relied on Integrated Commercialization Solutions to
act as our exclusive outsourcing supplier for warehousing and distribution of
Visicol(TM). Since May 2002, our agreement with Integrated Commercialization
Solutions expired and we have been satisfying our distribution responsibilities
by using in-house personnel to handle the following matters related to
Visicol(TM) and IBStat(TM): invoicing, accounts receivable, customer service,
order process management and chargeback management. We do not have extensive
experience in the areas of sales, marketing or distribution. If we cannot
perform these roles as well as our former partners, including Procter & Gamble
and Integrated Commercialization Solutions, we may not successfully sell our
products. We conduct our sales, marketing and distribution with limited
personnel. As a result we face a number of risks, including:
o we may not be able to build sales, marketing and distribution
operations effectively;
o the costs to operate these functions may not be justifiable in
light of product revenues; and
13
o we may not be able to successfully manage internal sales, marketing
and distribution functions.
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 rely on reimbursement from third parties as the basis for the sales of
their products. In the pharmaceutical industry, unlike other consumer product
industries, insurance companies, including managed care organizations, often pay
drug stores directly for pharmaceutical products. In fact, pharmaceutical
companies make a majority of their sales to covered individuals of health
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 and we have not specifically contracted with
any third party to date to give rebates for its use. We do not know what impact,
if any at all, this will have on the coverage of Visicol(TM) by these third
party payers.
Visicol(TM) and IBStat(TM) may not be accepted by doctors, hospitals, insurers
or patients.
If Visicol(TM) and IBStat(TM) 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.
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 sale,
manufacturing and further testing of the products on the market and the ones we
are developing. These risks include:
o our products could cause undesirable side effects or injury when
sold;
o our product candidates 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 and product candidates.
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.
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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), IBStat(TM) and any of our product candidates. We must contract with
manufacturers to produce Visicol(TM), IBStat(TM) and our product candidates
according to government regulations. Our future development and delivery of our
marketed products 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 our marketed products 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.
We have contracted with Mallinckrodt, Inc. 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 Pharmaceutical Manufacturing Research Services,
Inc., a manufacturing development company, to supply commercial quantities of
Visicol(TM) and Morton Grove Pharmaceutical, a generic drug manufacturer to
supply IBStat(TM) in a manner that meets FDA requirements. The FDA has approved
the manufacturing processes of Pharmaceutical Manufacturing Research Services
and Morton Grove. Pharmaceutical Manufacturing Research Services and Morton
Grove must maintain compliance with FDA standards regarding the manufacturing of
Visicol(TM) and IBStat(TM) at all times. The failure to maintain compliance with
FDA standards could result in the loss of "approved status" at Pharmaceutical
Manufacturing Research Services and Morton Grove. Any such loss would have a
significant negative impact on us since we do not have an approved secondary
manufacturer for Visicol(TM) or IBStat(TM). We are currently working with an
appropriate secondary manufacturer of Visicol(TM), which has not yet been
approved by the FDA.
We have contracted with PCI Services to package Visicol(TM) in a manner
that meets FDA requirements. The FDA has approved this facility for the
packaging of Visicol(TM). In the event that PCI were unable to package
Visicol(TM) for us, the FDA has also approved Fisher Clinical Services, Inc. for
packaging of Visicol(TM). IBStat(TM) is packaged at Morton Grove.
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), Colirest(TM) and Hematrol(TM) 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.
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 have products and product candidates that compete in four very
competitive segments of the pharmaceutical industry. These include: (i)
purgative agents for cleansing the colon, which include Visicol(TM); (ii)
antispasmodics, which include IBStat(TM); and receptor based technologies which
includes product candidates (iii) Colirest(TM) and (iv) Hematrol(TM). 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 Visicol(TM); (b)
Schwarz Pharma Inc among others with respect to IBStat(TM); (c) AstraZeneca plc,
Salix Pharmaceuticals, IDEC Pharmaceuticals Corporation, Procter & Gamble
Pharmaceuticals, Solvay S.A., Centocor, Inc. (Johnson & Johnson) and Shire
Pharmaceuticals Group plc with respect to Colirest(TM); and (d) Immune Response
Corporation, Autoimmune, Inc. and Nabi Biopharmaceuticals with respect to
Hematrol(TM).
15
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
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.
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), IBStat(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 and in December 2000, the U.S. Patent and Trademark
Office issued to us a patent for numerous solid-dose colonic
cleansing agents. Similar patents have been issued in Canada and
are presently pending in 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. We expect that the
U.S. Patent and Trademark Office will issue this patent in 2003.
o Hematrol(TM)is not patentable for use in ITP. Instead of a patent,
we will receive protection based on the 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.
We have also obtained the rights to foreign patents, and intend to apply
for additional foreign patents. 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) and Colirest(TM).
16
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. 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.
Risks Relating To Financing Our Business
If we are unable to meet our debt service obligations related to our outstanding
convertible 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 notes are due in June 2005 and are convertible
at a conversion price of $1.85 per share. If the future market price of our
common stock is such that it is not attractive for noteholders to convert their
notes to common stock by the time the notes become due, we are obligated to pay
the notes with cash at a 25% premium to face value at maturity or a 30% premium
if paid prior to maturity. 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:
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 portion of our cash to pay
unconverted debt principal, and interest instead of applying these
funds to operations.
We may need additional capital in the future in order to continue our
operations.
We may need additional capital to further develop, manufacture and market
Visicol(TM), IBStat(TM) and our product candidates if the future revenues from
our marketed products fall short of current assumptions. The revenues from
Visicol(TM) have been less than our expectations. Specifically, we will spend
funds for the following:
o conducting additional studies of Visicol(TM)to increase the
utilization of the product into other therapeutic areas;
o researching and developing our product candidates, including
participating in human clinical trials;
o seeking necessary approvals from the government;
o developing manufacturing 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. The success of Visicol(TM) and
IBStat(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) and IBStat(TM), we have limited experience
in predicting how much capital will be necessary to successfully execute our
marketing plans. If we inaccurately predict our future capital requirements, we
may be unable to continue our operations.
17
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 product candidates 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 and then eliminated our budgeted spending on the
Thrombospondin Technology; and (ii) reduced our staff by 35%.
Risks Relating to Regulatory Matters
If we do not maintain required approvals from the government, then we may not
successfully manufacture, market or sell our marketed products.
FDA manufacturing approval:
The FDA requires pharmaceutical companies to include detailed manufacturing
information in a new drug application. 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 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) and
IBStat(TM). The FDA may still, however, prevent us from continuing to market
Visicol(TM) or IBStat(TM) if we:
o do not continue to consistently manufacture appropriate amounts of
Visicol(TM)and IBStat(TM) or
o cannot continue to repeat the manufacturing process used to
manufacture the validation 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).
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 our marketed products or may require drug
label changes which could hinder the marketability of our marketed products. In
addition, the FDA may place conditions on our marketed products that could
restrict the sale or use of our products.
18
The FDA could prevent us from marketing IBStat(TM).
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.
If we do not obtain required approvals from the government, then we may not
successfully market or sell our product candidates.
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 product
candidates 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 requirement, the FDA could impose penalties on us,
including:
o warning letters;
o fines;
o withdrawal of regulatory approval;
o product recalls;
o operating restrictions; injunctions; and/or
o criminal prosecution.
Our product candidates are in various stages of development and in various
stages of the FDA approval process, as set forth below:
o 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.
o 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.
We may never receive FDA approval for any of these products and without FDA
approval, we cannot market or sell these products.
Risks Related To Our Common Stock Outstanding
If the holders of our outstanding notes, options and warrants convert such
notes or exercise such options and warrants, then the market price of the
common stock may drop.
We have a total of $13,000,000 in outstanding senior secured convertible
notes. The holders of the notes may convert the notes into a total of 7,027,027
shares of our common stock at a conversion price of $1.85 per share. To date,
none of the note holders have converted their notes. The conversion of these
outstanding notes and the sale of the related shares may cause our common stock
price to drop.
19
We have a total of approximately 12,315,000 options and warrants
outstanding. 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
1,450,000 options pursuant to our option plans. To date, option and warrant
holders have exercised approximately 6,552,000 options and warrants in the
aggregate at prices ranging from $.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 37,454,000 shares and our average daily
trading volume for the twelve-month period ended December 31, 2002 has been
approximately 148,000 shares. If our stock continues to trade thinly, our
shareholders may not be able to sell their shares when desired.
EMPLOYEES
As of December 31, 2002, we had 49 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. We lease
approximately 1,600 square feet, in Norristown, Pennsylvania, which is used as
warehouse space. We lease this space pursuant to a lease expiring in March 2004,
which provides for minimum annual rent payments of approximately $18,000 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.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Our common stock currently trades on the NASDAQ Small Cap 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, 2002 High Low
---------------------------- ---- ---
1st Quarter............................ $1.96 $1.25
2nd Quarter............................ $1.84 $0.78
3rd Quarter............................ $1.45 $0.60
4th Quarter............................ $2.49 $1.02
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
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 February 28, 2003 there were approximately 500 shareholders of record
and approximately 22,000 beneficial holders of our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation
Plan category outstanding options options plans
Equity compensation plans approved by security holders:
1993 Equity Compensation Plan 1,249,000 $ 1.89 ---
1997 Consultant Stock Option Plan 1,061,000 $ 1.23 838,000
1999 Equity Compensation Plan 3,074,000 $ 2.79 612,000
Equity compensation plans not approved by security
holders:
Options issued to an officer and a consultant
pursuant to written agreements * 2,057,000 $ 0.85 ---
--------- ------ ---------
Total 7,441,000 $ 1.88 1,450,000
========= =========
- -----------------------
* In addition to the shares of common stock issuable upon exercise of
options granted under the Company's stock option plans, 2,057,000
shares of common stock are issuable upon exercise of outstanding
options granted to an officer and a consultant in 1997 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.
21
Pursuant to the terms of the November 6, 1997 acquisition of the receptor
based technologies from which Colirest(TM) and Hematrol(TM) are derived, we
could be required to pay an aggregate of 720,000 shares of common stock upon the
achievement of certain milestones and targets.
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 accompanying this report (amounts expressed in thousands,
except per share amounts).
Six-Months Ended
Years Ended December 31, December 31, Years Ended June 30,
---------------------------- ----------------- --------------------------
2002 2001 2000 2000 1999 2000 1999 1998
------- ------- ------- ----- ----- ----- ------ -----
(unaudited) (unaudited)
Statement of Operations Data:
Product revenue.......................... $ 7,488 $ 4,338 $ --- $ --- $ --- $ --- $ --- $ ---
Other revenue............................ 64 523 --- --- --- --- --- ---
------- ------- ------- ----- ----- ----- ------ -----
Revenue............................... 7,552 4,861 --- --- --- --- --- ---
Cost of goods sold....................... 1,724 1,881 --- --- --- --- --- ---
------- ------- ------- ----- ----- ----- ------ -----
Gross profit.......................... 5,828 2,980 --- --- --- --- --- ---
Cost and expenses:
Research and development............... 3,259 5,361 9,397 7,060 3,395 5,731 6,565 6,222
Sales and marketing.................... 6,003 8,944 1,457 1,457 --- --- --- ---
General and administrative............. 2,249 3,689 5,509 3,900 1,897 3,506 3,593 3,782
Separation agreement and accelerated
vesting of options................ --- --- --- --- 835 835 --- ---
------- ------- ------- ----- ----- ----- ------ -----
Loss from operations................. (5,683) (15,014) (16,363) (12,417) ( (6,127) (10,072) (10,158) (10,004)
Interest income.......................... 116 475 726 471 144 399 525 515
Interest and other expense............... (877) (645) (47) (9) --- (39) --- ---
Non-cash accretion, financing costs and
cash premium........................... (3,916) (74) --- --- --- --- --- ---
------- ------- ------- ----- ----- ----- ------ -----
Net loss............................... (10,360) (15,258) (15,684) (11,955) (5,983) (9,712) (9,633) (9,489)
======= ======= ======= ======== ======== ======== ========= ========
Net loss per share - basic and diluted (0.30) (0.45) (0.50) (0.36) (0.24) (0.36) (0.42) (0.60)
======= ======= ======= ======== ======== ======== ========= ========
Weighted average shares outstanding-
basic and diluted................... 34,965 34,285 31,586 33,254 24,678 27,300 22,762 15,783
As of December 31, As of June 30,
------------------------------------ ---------------------------
2002 2001 2000 1999 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(unaudited)
Balance Sheet Data:
Cash and investments.............. $ 12,151 $ 12,166 $ 11,520 $ 6,041 $ 16,025 $ 6,862 $ 12,962
Total assets...................... 14,079 13,865 13,400 6,403 16,435 7,162 13,366
Total current liabilities......... 8,633 5,951 2,375 1,525 1,561 1,449 246
Convertible notes................. 11,657 9,801 --- --- --- --- ---
Accumulated deficit............... (70,400) (60,040) (44,782) (29,098) (32,827) (23,115) (13,482)
Shareholders' (deficit) equity ... (6,211) (1,887) 11,025 4,878 14,874 5,713 13,120
22
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 focused on the diagnosis and treatment
of gastrointestinal disorders, including: colon cancer, irritable bowel
syndrome, or IBS, and inflammatory bowel disease, or IBD. Our development
strategy has been to acquire late-stage drug candidates with short time lines to
commercialization. Our current product portfolio includes Visicol(TM),
IBStat(TM), Colirest(TM) and Hematrol(TM). With the exception of our February
2001 agreement to market and sell IBStat(TM), we acquired the rights to each of
our products and product candidates 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. At December 31,
2002, our accumulated deficit was approximately $70 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 the following accounting
policies that may constitute "critical accounting policies," under the guidance
provided by this release.
o Stock based compensation. It 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." Had we applied SFAS No. 123, our net loss for the
years ended December 31 2002 and 2001, the six-months ended
December 31, 2000 and the year ended June 30, 2000 would have been
increased by approximately $3,354,000, $2,807,000, $568,000 and
$399,000, respectively (see Note 2 to the footnotes to our
financial statements accompanying this report).
o Product returns. It is our policy to estimate and record an
allowance for future product returns in connection with our sales
of Visicol(TM). We have applied a return rate to our unit sales to
provide this allowance 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.
o Deferred taxes. In assessing the reliability of deferred tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable income during the
period in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and projections for
future taxable income over the periods in which the deferred tax
asset items are deductible. Management believes that it is not
likely that the Company will realize the benefits of these
deductible differences. At December 31, 2002, management has
concluded that a full valuation allowance is necessary for deferred
tax assets.
23
Results of Operations
Comparison of the Years Ended December 31, 2002 and 2001
We incurred losses of $10,360,000 and $15,258,000 for the years ended
December 31, 2002 and 2001, respectively. The basic and diluted per share loss
was $0.30 and $0.45 per share for the years ended December 31, 2002 and 2001,
respectively. Operating losses were $5,683,000 and $15,014,000 for the years
ended December 31, 2002 and 2001, respectively. Operating losses are expected to
narrow during the first half of 2003. We expect to have income from operations
and positive cash flow for the year ended December 31, 2003.
Our gross profit was $5,828,000 and $2,980,000 for the years ended December
31, 2002 and 2001, respectively. Included in cost of goods sold were both
distribution and royalty costs totaling $379,000 and $369,000, respectively.
Distribution cost included expenses related to warehousing, tracking, and
shipping of product to our customers. Royalty cost represented amounts due to
the inventor of Visicol(TM) based on product sales. Gross profit and gross
profit as a percent of sales are expected to increase in 2003 due to increased
product demand for Visicol(TM) and decreased manufacturing, packaging and
distribution costs.
We incurred research and development expenses of $3,259,000 and $5,361,000
for the years ended December 31, 2002 and 2001, respectively. The significant
reductions were the result of less development costs associated with the new
Visicol(TM) formulation and the internalization of the management of the ongoing
Colirest(TM) clinical trial. Research and development costs are expected to
continue to decrease in 2003 as a result of the internalized management of the
Colirest(TM) clinical trial, partially offset by costs associated with studies
conducted for the use of Visicol(TM) in constipation and in pre-operative
colonic surgical procedures.
Sales and marketing costs of $6,003,000 and $8,944,000 were incurred for
the years ended December 31, 2002 and 2001, respectively. During 2002, we
incurred approximately $2,600,000 in expense related to our former co-promotion
agreement with Procter & Gamble Pharmaceuticals, $1,250,000 related to our
internal sales force and the balance of sales and marketing costs for
administrative costs in connection with our internal sales operations and
marketing activities associated with Visicol(TM) and IBStat(TM). 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 &
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 will decrease in 2003 as a result of the expiration of our
co-promotion agreement with Procter & Gamble Pharmaceuticals, partially offset
by costs associated with our growing internal sales organization.
General and administrative expenses were $2,249,000 and $3,689,000 for the
years ended December 31, 2002 and 2001, 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 for December 31, 2001 was amortization of deferred
compensation and performance based stock expense $1,018,000. We expect that
general and administrative costs for 2003 will remain relatively consistent with
2002 costs.
The $359,000 decrease in interest income was the result of decreased
average cash and investment balances for the year ended December 31, 2002
compared to the same period a year ago. The $232,000 increase in interest and
other expense was the result of interest related to our June 2003 convertible
notes.
As a result of the redemption of the June 2003 convertible notes and
placement of the June 2005 convertible notes, we incurred $3,916,000 in non-cash
accretion, financing costs and cash premium charges. These charges included the
acceleration of a redemption premium, deferred warrant cost, beneficial
conversion amortization and deferred financing fees associated with these notes.
We could amortize non-cash charges of up to $4,670,000 over the remaining life
of the June 2005 convertible notes, if the notes do not convert prior to their
scheduled maturity.
24
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.
Our gross profit was $2,980,000 for the year ended December 31, 2001, as
compared to no gross profit for the year ended December 31, 2000. Included in
cost of goods sold are both distribution and royalty costs totaling $369,000.
Distribution cost included expenses related to contract warehousing, tracking,
and shipping of product to our customers. Royalty cost represented amounts due
to the inventor of Visicol based on product sales.
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.
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 &
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).
General and administrative expenses were $3,689,000 and $5,509,000 for the
years ended December 31, 2001 and 2000, respectively. The decrease was 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 was 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 was the result of decreased
average cash and investment balances for the year ended December 31, 2001
compared to the year ended December 31, 2000. The $598,000 increase in interest
expense was 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 our 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.
25
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 six-month period ended December 31, 1999. 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 our 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 six-month period ended
December 31, 1999. This increase was 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 was 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 six-month period ended December 31, 1999. The increase in average cash,
cash equivalent and investment balances were due to the receipt of net proceeds
of $9,900,000 from a private placement of common stock in May 2000.
We incurred interest expense of $9,000 and $0 for the six-months ended
December 31, 2000 and 1999, respectively. The increase was the result of
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 our 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 was 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
fiscal year ended June 30, 1999. 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.
26
Liquidity and Capital Resources
At December 31, 2002, we had cash and cash equivalents of $12,151,000. The
cash and cash equivalents balance at December 31, 2002 includes net proceeds
from a private placement of common stock of $3,474,000 and warrant and option
exercises of $218,000.
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 marketplace acceptance of our
products.
In addition to marketplace acceptance of our products, 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 clinical trial of Colirest(TM) in Crohn's
disease, recently commenced studies for the use of Visicol(TM) for constipation
and in pre-operative colonic surgical procedures, and continue to market and
sell Visicol(TM) to distributors and drug store chains. During 2003, we expect
to spend approximately $250,000 on the Visicol(TM) studies and Visicol(TM)
product development, $500,000 on the Colirest(TM) study, and $5,000,000 on
Visicol(TM) sales and marketing costs. These activities will be funded by our
current cash balance and future product sales. If product 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 reaching operating profitability during 2003. To achieve
operating profitability, we, alone or with others, must successfully market and
sell our products; revenues from product sales must be greater than the sum of
cost of goods sold, research and development costs, sales and marketing costs
and general and administrative costs. The time required to reach operating
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, 2002 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)...... $ 13,000,000 $ --- $ --- $13,000,000 $ ---
Leased office space (3)................. 628,000 228,000 219,000 181,000 ---
Manufacturing supply agreement (4)...... 2,400,000 1,200,000 1,200,000 --- ---
------------ ----------- ----------- ----------- ---------
Total contractual commitments........ $ 16,028,000 $ 1,428,000 $ 1,419,000 $13,181,000 $ ---
============ =========== =========== =========== =========
- ---------------
(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. Also, minimum annual
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 expenditures are approximately $100,000 and typically apply
to all years prior to regulatory approval of a product incorporating the
licensed technology.
27
(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 2005 (see Note 11 to the footnotes to our financial
statements accompanying this report).
(3) In November 2000, we entered into a five-year operating lease agreement for
office space for our corporate headquarters, and in April 2002, we entered
into a two-year operating lease for warehouse space for our distribution
center. The above table includes minimum lease payments remaining in
connection with these lease agreements.
(4) Included are direct costs associated with our agreement with a contract
manufacturing organization in connection with the commercial production of
Visicol(TM) tablets.
Research and Development Programs
During 2002, we had three significant research and development projects
relating to: (i) Visicol(TM); (ii) Colirest(TM) and (iii) the Thrombospondin
Technology.
Visicol(TM). We have focused our Visicol(TM) research and development on
cleansing of colon prior to colonoscopy and are presently marketing Visicol(TM)
for that indication. In addition, we are also developing Visicol(TM) for
cleansing the colon prior to pre-operative colonic surgical procedures and for
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 the colon prior to pre-operative colonic
surgical procedures we intend to commence a Phase IV study in 2003; (iii) for
treating constipation, we have commenced a post marketing study and intend to
commence a Phase IV study during 2003. As of December 31, 2002, we have incurred
total costs of approximately $11,300,000 in connection with our Visicol(TM)
research and development. During the fiscal year ended December 31, 2002, we
incurred an aggregate of $3,259,000 in research and development expenses,
approximately $500,000 of which was attributable to Visicol(TM).
Colirest(TM). We are developing Colirest(TM) for treatment of IBD and 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) clinical Phase IIb study of
Crohn's disease. We anticipate an interim analysis by either late 2003 or early
2004. As of December 31, 2002, we have incurred total costs of approximately
$6,500,000 in connection with the development of Colirest(TM) and related
compounds. During the fiscal year ended December 31, 2002, we incurred an
aggregate of $3,259,000 in research and development expenses, approximately
$1,900,000 of which was attributable to Colirest(TM).
Thrombospondin Technology. We were developing the Thrombospondin Technology
for prevention of metastatic cancer. During 2002 we terminated support of this
program in order to focus resources on product opportunities with closer time
lines to commercialization. Through December 31, 2002, we incurred total costs
of approximately $2,125,000 in connection with the Thrombospondin Technology
research and development. During the fiscal year ended December 31, 2002, we
incurred an aggregate of $3,259,000 in research and development expenses,
approximately $125,000 of which was attributable to the Thrombospondin
Technology.
Indirect Costs. In addition to the direct costs related to the development
of our technologies, we incurred indirect non-technology specific overhead
costs. These expenses include the salaries and administrative costs of managing
our research and development projects.
Recently Issued Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 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. The adoption of SFAS No. 143 is
not expected to impact our financial statements.
28
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145 updates, clarifies and simplifies existing accounting
pronouncements. The rescission of SFAS No.4, "Reporting Gains and Losses from
Extinguishment of Debt", and SFAS No. 64, "Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements," which amended SFAS No. 4, will effect income
statement classification of gains and losses from extinguishment of debt. SFAS
No. 4, required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of related
income tax effect. As a result of the rescission, the criteria in APB No. 30
will now be used to classify those gains and losses. This is a result of the
changed marketplace that now utilizes the extinguishment of debt as part of
day-to-day risk management strategies. SFAS No. 44 was issued to establish
accounting requirements for the effects of transition to the provisions of the
Motor Carrier Act of 1980. Because the transition is completed, SFAS No. 44 is
no longer necessary. SFAS No. 145 amends SFAS No. 13 to require that certain
lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
The standard was effective for fiscal years beginning after May 15, 2002 with
early adoption of the provisions related to the rescission of SFAS No. 4
encouraged. The adoption of SFAS 145 did not have any impact on our financial
statements.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Exit or Disposal
Activities." SFAS No. 146 addresses significant issues regarding the
recognition, measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS No. 146 also
addresses recognition of certain costs related to terminating a contract that is
not capital lease, costs to consolidate facilities or relocate employees, and
termination of benefits provided to employees that are involuntarily terminated
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. The adoption of
SFAS No. 146 did not have any impact on our financial statements. SFAS No. 146
is effective for exit or disposal activities that are initiated after December
31, 2002. We do not expect the adoption of SFAS No. 146 to have a material
impact on our financial statements.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others," an interpretation of SFAS Nos. 5, 57 and 107 and a
rescission of SFAS No. 34. This interpretation elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under guarantees issued. The FIN No. 45 also clarifies that a
guarantor is required to recognize, at inception of the guarantee, a liability
for the fair value of the obligation undertaken. The initial recognition and
measurement provisions of FIN No. 45 are applicable to guarantees issued or
modified after December 31, 2002 and are not expected to have a material effect
on our financial statements. The disclosure requirements are effective for
financial statements of interim and annual periods ending after December 31,
2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, the statement amends the
disclosure requirement of SFAS No. 123 to require more prominent disclosures in
interim and annual financial statements. Certain of the disclosure modifications
are required for the fiscal years ending after December 15, 2002 and are
included in the notes to these financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities" with the objective of improving financial reporting by
companies involved with variable interest entities. A variable interest entity
is a corporation, partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights, or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. Historically, entities
generally were not consolidated unless the entity was controlled through voting
interests. FIN No. 46 changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. A company that consolidates a
variable interest entity is called the "primary beneficiary" of that entity. FIN
No. 46 also requires disclosures about variable interest entities that a company
is not required to consolidate but in which it has a significant variable
interest. The consolidation requirements of FIN No. 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements of FIN No. 46 apply to existing entities in the first fiscal year
or interim period beginning after June 15, 2003. Also, certain disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. We do not
expect the adoption of the Fin No. 46 to have any financial impact on its
financial statements.
29
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 2004. The interest rate on our line
of credit has fluctuated from 3.47% to 4.24% over the past year and the
outstanding balance at December 31, 2002 was $4,444,000.
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 2003. 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-19 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
30
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 2003 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 2003 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 2003 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 2003 Annual
Meeting of Shareholders.
ITEM 14. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. We evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of a date within 90 days of the filing date of this Form 10-K (the
Evaluation Date). Our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that are filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that these controls
and procedures are effective as of the Evaluation Date.
Changes in internal controls. There have been no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the Evaluation Date, including any corrective actions
with regard to significant deficiencies or material weaknesses.
31
PART IV
ITEM 15. 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 of this report.
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 on pages F-1
through F-19 of this report.
Reports on Form 8-K
The following current reports on Form 8-K were filed with the Securities
and Exchange Commission via EDGAR:
1. Form 8-K filed on October 8, 2002 with respect to the
restructuring of $10 million of Convertible Subordinated Notes
due June 2003. The earliest event covered by this report
occurred on October 1, 2002.
2. Form 8-K filed on December 19, 2002 with respect to a private
placement of $13 million of 10% Senior Secured Convertible
Notes due June 2005 and warrants to purchase 2,459,460 shares
of common stock. The earliest event covered by this report
occurred on December 17, 2002.
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 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)
4.4 Form of Common Stock Purchase Warrant, dated October 1, 2002. (In accordance with Instruction 2 to
Item 601 of Regulation S-K, similar warrants granted to the investors have not been filed because they
are identical in all material respects except for the number of warrants granted to each investor).
(Exhibit 4.5)(6)
32
4.5 Securities Purchase Agreement, among InKine Pharmaceutical Company, Inc., S.A.C. Capital Associates,
LLC, SDS Merchant Fund, L.P., Royal Bank of Canada, through RBC Dominion Securities Corporation as its
agent, Solomon Strategic Holdings, Inc., and Tail Wind Fund, Ltd. dated as of December 16, 2002. (In
accordance with Item 601 of Regulation S-K, the schedules and certain exhibits have been omitted. They
are available upon request. (Exhibit 4.1)(7)
4.6 Registration Rights Agreement, among InKine Pharmaceutical Company, Inc., S.A.C. Capital Associates,
LLC, Royal Bank of Canada, through RBC Dominion Securities Corporation as its agent, Solomon Strategic
Holdings, Inc., and Tail Wind Fund, Ltd. dated as of December 17, 2002. (Exhibit 4.2)(7)
4.7 Security Agreement, among InKine Pharmaceutical Company, Inc., S.A.C. Capital Associates, LLC, Royal
Bank of Canada, through RBC Dominion Securities Corporation as its agent, Solomon Strategic Holdings,
Inc., and Tail Wind Fund, Ltd. dated as of December 17, 2002. (Exhibit 4.3)(7)
4.8 Form of Convertible Senior Secured Notes due June 2005. (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 4.4)(7)
4.9 Form of Common Stock Purchase Warrant, dated December 17, 2002. (In accordance with Item 601 of
Regulation S-K, similar warrants granted to the investors have not been filed because they are
identical in all material respects except for the number of warrants granted to each investor).
(Exhibit 4.5)(7)
10.1 Employment Agreement between InKine Pharmaceutical Company, Inc. and Leonard S. Jacob, dated November
6, 1997. (Exhibit 10.4)(8)
10.2 Option to Purchase Shares of Common Stock of InKine Pharmaceutical Company, Inc. dated November 6,
1997, issued to Leonard S. Jacob. (Exhibit 10.6)(8)
10.3 Employment Agreement between InKine Pharmaceutical Company, Inc. and Robert F. Apple, dated November
2, 1998. (Exhibit 10.6)(9)
10.4 Stock Option Plan, as amended. (Exhibit 99)(10)
10.5 1997 Consultant Stock Option Plan. (Exhibit 99)(11)
10.6 Form of Stock Option Agreement. (Exhibit 10(b))(12)
10.7 License Agreement with ALW Partnership. (Exhibit 10(1))(13)
10.8 Form of Option granted to Partners of ALW Partnership. (Exhibit 10(n))(13)
10.9 Amendment to Employment Agreement, dated November 4, 1999, between the Company and Leonard S. Jacob.
(Exhibit 10.18)(14)
33
10.10 1999 Equity Compensation Plan (Exhibit 99)(15)
23* Consent of KPMG LLP.
99.1* Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2* Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- -----------------------
* 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 (SEC File No. 000-24972).
(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 (SEC File No. 000-24972).
(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 15, 2001, with the Securities
and Exchange Commission (SEC File No. 000-24972).
(6) Filed as an Exhibit to InKine's Current Report on Form 8-K dated October 1, 2002, with the Securities
and Exchange Commission (SEC File No. 000-24972).
(7) Filed as an Exhibit to InKine's Current Report on Form 8-K dated December 17, 2002, with the
Securities and Exchange Commission (SEC File No. 000-24972).
(8) 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 (SEC File No.
000-24972).
(9) 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 (SEC File No. 000-24972).
(10) 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.
(11) Filed as an Exhibit to InKine's Form S-8 (SEC File No. 333-58065) dated June 29, 1998, with the
Securities and Exchange Commission.
(12) 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 (SEC File No. 000-24972).
(13) Filed as an Exhibit to InKine's Current Report on Form 8-K dated February 14, 1997, with the
Securities and Exchange Commission (SEC File No. 000-24972).
34
(14) 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 (SEC File No. 000-24972).
(15) 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.
35
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 20, 2003 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 20, 2003
- -------------------------------------
Leonard S. Jacob, M.D., Ph.D. Executive Officer and
Director
/S/ Robert F. Apple Chief Operating and March 20, 2003
- -------------------------------------
Robert F. Apple Financial Officer
/S/ J. R. LeShufy Director March 20, 2003
- -------------------------------------
J. R. LeShufy
/S/ Steven B. Ratoff Director March 20, 2003
- -------------------------------------
Steven B. Ratoff
/S/ Norman D. Schellenger Director March 20, 2003
- -------------------------------------
Norman D. Schellenger
/S/ Thomas P. Stagnaro Director March 20, 2003
- -------------------------------------
Thomas P. Stagnaro
/S/ Robert A. Vukovich, Ph.D. Director March 20, 2003
- -------------------------------------=
Robert A. Vukovich, Ph.D.
36
CERTIFICATION
I, Leonard S. Jacob, M.D., Ph.D., certify that:
1. I have reviewed this annual report on Form 10-K of InKine
Pharmaceutical Company, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made known to us by
others, particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 20, 2003 /s/ Leonard S. Jacob, M.D., Ph.D.
---------------------------------
Leonard S. Jacob, M.D., Ph.D.
Chairman of the Board and
Chief Executive Officer
37
CERTIFICATION
I, Robert F. Apple, certify that:
1. I have reviewed this annual report on Form 10-K of InKine
Pharmaceutical Company, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made known to us by
others, particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 20, 2003 /s/ Robert F. Apple
-------------------
Robert F. Apple
Chief Operating and
Financial Officer
38
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 (Deficit)................ 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, 2002 and 2001 and the related statements of
operations, changes in shareholders' equity (deficit) and cash flows for each of
the years in the two-year period ended December 31, 2002, the six-month period
ended December 31, 2000 and for the year 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 of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of InKine Pharmaceutical Company,
Inc. as of December 31, 2002 and 2001 and the results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 2002,
the six-month period ended December 31, 2000 and for the year ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States of America.
/S/ KPMG LLP
Philadelphia, Pennsylvania
February 20, 2003
F-2
INKINE PHARMACEUTICAL COMPANY, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, December 31,
2002 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 12,151 $ 7,379
Short-term investments ................................... -- 4,787
Accounts receivable ...................................... 856 400
Inventory ................................................ 677 204
Prepaid expenses and other current assets ................ 87 89
-------- --------
Total current assets ................................. 13,771 12,859
Deposits and other assets ..................................... 34 607
Fixed assets .................................................. 274 399
-------- --------
Total assets ......................................... $ 14,079 $ 13,865
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable ......................................... $ 967 $ 2,027
Accrued expenses ......................................... 3,222 1,523
Line of credit ........................................... 4,444 2,401
-------- --------
Total current liabilities ............................ 8,633 5,951
Convertible notes (face value $13,000) ........................ 11,657 9,801
-------- --------
Total liabilities .................................... 20,290 15,752
Commitments and contingencies
Shareholders' deficit:
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 37,795,943 and 34,777,720 shares, respectively.. 4 3
Less: common stock held in treasury (16,515 shares) ........... (37) (37)
Additional paid-in capital .................................... 64,222 58,302
Deferred compensation ......................................... -- (115)
Accumulated deficit ........................................... (70,400) (60,040)
-------- --------
Total shareholders' deficit .......................... (6,211) (1,887)
-------- --------
Total liabilities and shareholders' deficit .......... $ 14,079 $ 13,865
======== ========
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
Ended Year Ended
Year Ended December 31, December 31, June 30,
------------------------- ------------ -----------
2002 2001 2000 2000
-------- -------- ------------ ----------
Product revenue ............................. $ 7,488 $ 4,338 $ -- $ --
Other revenue ............................... 64 523 -- --
-------- -------- -------- --------
Revenue .................................. 7,552 4,861 -- --
Cost of goods sold .......................... 1,724 1,881 -- --
-------- -------- -------- --------
Gross profit ............................. 5,828 2,980 -- --
Cost and expenses:
Research and development ................. 3,259 5,361 7,060 5,731
Sales and marketing ...................... 6,003 8,944 1,457 --
General and administrative ............... 2,249 3,689 3,900 3,506
Separation agreement and accelerated
vesting of options .................. -- -- -- 835
-------- -------- -------- --------
Operating expenses .......................... 11,511 17,994 12,417 10,072
-------- -------- -------- --------
Loss from operations ..................... (5,683) (15,014) (12,417) (10,072)
Interest income ............................. 116 475 471 399
Interest and other expense .................. (877) (645) (9) (39)
Non-cash accretion, financing costs and cash
premium .................................. (3,916) (74) -- --
-------- -------- -------- --------
Net loss ............................. $(10,360) $(15,258) $(11,955) $ (9,712)
======== ======== ======== ========
Net loss per share - basic and diluted $ (0.30) $ (0.45) $ (0.36) $ (0.36)
======== ======== ======== ========
Weighted average shares outstanding-
basic and diluted .... 34,965 34,285 33,254 27,300
The accompanying notes are an integral part of these financial statements.
F-4
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
Common Stock Additional Treasury Stock
------------------ Paid-In Deferred -------------------
Shares Amount Capital Compensation Shares Amount
------ -------- -------- -------- ----- --------
Balance - June 30, 1999 23,117 $ 2 $ 31,427 $ (2,560) (17) $ (37)
Common stock issued pursuant to
private placement ........... 5,147 1 12,649
Value of options, warrants and
restricted stock granted .... 320 (320)
Proceeds from options and
warrants .................... 4,431 3,822
Amortization of deferred
compensation ................ 2,407
Unrealized loss on investments ..
Net Loss ........................
------ -------- -------- -------- ----- --------
Balance - June 30, 2000 ......... 32,695 $ 3 $ 48,218 $ (473) (17) $ (37)
Value of options, warrants and
restricted stock granted .... 7,600 (7,600)
Proceeds from options and
warrants .................... 927 874
Vesting of restricted stock ..... 119
Amortization of deferred
compensation ................ 7,222
Unrealized gain on investments ..
Net Loss ........................
------ -------- -------- -------- ----- --------
Balance - December 31, 2000 ..... 33,741 $ 3 $ 56,692 $ (851) (17) $ (37)
Common stock issued pursuant to
convertible notes ........... 61 275
Value of options, warrants and
restricted stock granted .... 622 (349)
Proceeds from options and
warrants .................... 737 713
Vesting of restricted stock ..... 239
Amortization of deferred
compensation ................ 1,085
Net Loss ........................
------ -------- -------- -------- ----- --------
Balance - December 31, 2001 ..... 34,778 $ 3 $ 58,302 $ (115) (17) $ (37)
Common stock issued pursuant to
private placement ........... 2,469 1 3,473
Common stock issued pursuant to
convertible notes ........... 336 598
Non-cash warrant costs and
beneficial conversion charge. 1,631
Proceeds from options and
warrants .................... 213 218
Amortization of deferred
compensation ................ 115
Net Loss ........................
------ -------- -------- -------- ----- --------
Balance - December 31, 2002 ..... 37,796 $ 4 $ 64,222 $ --- (17) $ (37)
====== ======== ======== ======== ===== ========
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
Unrealized Total
Gain Shareholders'
(Loss) on Accumulated Equity
Investments Deficit (Deficit)
-------- -------- --------
Balance - June 30, 1999 $ (4) $ (23,115) $ 5,713
Common stock issued pursuant to
private placement ........... 12,650
Value of options, warrants and
restricted stock granted .... ---
Proceeds from options and
warrants .................... 3,822
Amortization of deferred
compensation ................ 2,407
Unrealized loss on investments .. (6) (6)
Net Loss ........................ (9,712) (9,712)
-------- -------- --------
Balance - June 30, 2000 ......... $ (10) $(32,827) $ 14,874
Value of options, warrants and
restricted stock granted .... ---
Proceeds from options and
warrants .................... 874
Vesting of restricted stock ..... ---
Amortization of deferred
compensation ................ 7,222
Unrealized gain on investments .. 10 10
Net Loss ........................ (11,955) (11,955)
-------- -------- --------
Balance - December 31, 2000 ..... $ --- $(44,782) $ 11,025
Common stock issued pursuant to
convertible notes ........... 275
Value of options, warrants and
restricted stock granted .... 273
Proceeds from options and
warrants .................... 713
Vesting of restricted stock ---
Amortization of deferred
compensation ................ 1,085
Net Loss ........................ (15,258) (15,258)
-------- -------- --------
Balance - December 31, 2001 ..... $ --- $(60,040) $ (1,887)
Common stock issued pursuant to
private placement ........... 3,474
Common stock issued pursuant to
convertible notes ........... 598
Non-cash warrant costs and
beneficial conversion charge. 1,631
Proceeds from options and
warrants .................... 218
Amortization of deferred
compensation ................ 115
Net Loss ........................ (10,360) (10,360)
-------- -------- --------
Balance - December 31, 2002 ..... $ --- $(70,400) $ (6,211)
======== ======== ========
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
Ended Year Ended
Years Ended December 31, December 31, June 30,
------------------------------ ------------ ------------
2002 2001 2000 2000
------------ ------------ ------------ ------------
Operating activities:
Net loss ......................................... $ (10,360) $ (15,258) $ (11,955) $ (9,712)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation.................................... 168 167 63 99
Amortization of deferred compensation .......... 115 1,085 1,167 2,407
Non-cash accretion and debt modification ....... 3,916 74 --- ---
Performance based stock expense ................ --- --- 6,055 ---
Loss on sale of fixed asset .................... --- 6 --- ---
Changes in operating assets and liabilities:
(Increase) in accounts receivable............... (456) (400) --- ---
Decrease (increase) in inventory ............... (473) 482 (686) ---
Decrease (increase) in prepaid expenses
and other assets ........................... 297 47 (665) 22
Increase (decrease) in accounts payable and
accrued expenses ........................... 1,086 3,202 83 (909)
------------ ------------ ------------ ------------
Net cash used in operating activities................ (5,707) (10,595) (5,938) (8,093)
Investing activities:
Purchases of investments ....................... --- (5,280) (4,774) (14,446)
Proceeds from maturities and sales of
investments............................... 4,787 9,773 5,900 8,938
Proceeds from sale of fixed asset............... --- 12 --- ---
Capital expenditures ........................... (43) (133) (182) (231)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities.. 4,744 4,372 944 (5,739)
Financing activities:
Proceeds from sale of stock and exercise of
options and warrants - net of expenses ..... 3,692 713 874 16,472
Net borrowings on line of credit ............... 2,043 649 731 1,021
Proceeds from sale of convertible notes......... 13,000 10,000 --- ---
Redemption of convertible notes................. (13,000) --- --- ---
------------ ------------ ------------ ------------
Net cash provided by financing activities ........... 5,735 11,362 1,605 17,493
Net increase (decrease) in cash and cash equivalents. 4,772 5,139 (3,389) 3,661
Cash and cash equivalents - beginning of period ..... 7,379 2,240 5,629 1,968
------------ ------------ ------------ ------------
Cash and cash equivalents - end of period ........... $ 12,151 $ 7,379 $ 2,240 $ 5,629
============ ============ ============ ============
Non cash:
Stock issued pursuant to convertible notes ..... $ 598 $ 275 $ --- $ ---
Warrants issued in connection with
convertible notes........................... 1,273 273 --- ---
Beneficial conversion feature................... 358 --- --- ---
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 May 1993. The Company's portfolio of product
and product candidates includes Visicol(TM), a novel bowel-cleansing agent
currently marketed for use prior to colonoscopy. The Company's portfolio also
includes IBStat(TM), an antispasmodic product currently marketed to
gastroenterologists and others for use as an immediately available acute care
product for a variety of indications. The Company is also developing
Colirest(TM), a steroid molecule, for the treatment of inflammatory bowel
disease ("IBD"). 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):
Years 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 and other expense.................. (645) (47) (9) ---
Non-cash accretion and debt modification.... (74) --- --- ---
------------ ------------ ------------ ------------
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 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 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.
F-7
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) and IBStat(TM). The Company sells its
products to wholesalers and large drug store chains located primarily in the
United States.
Deposits and Other Assets -- A deposit was made for leased office space
that will be refunded in full at the end of the lease term. Other assets for
2001 were deferred financing costs related to the Company's then outstanding
June 2003 convertible 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 years for computers/software; (ii) five years
for office equipment and manufacturing equipment (located at the Company's
contract manufacturer); and (ii) seven 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.
Impairment of Long-Lived Assets -- In accordance with SFAS No. 144,
long-lived assets, such as fixed assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying value of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
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 shipment of the product. For
IBStat(TM), the Company recognizes revenue based on prescription data. This
practice will continue until such time as data becomes available that indicates
that the product has achieved adequate market acceptance and that future product
returns can be reasonably estimated. 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 SFAS No. 123, "Accounting for
Stock-Based Compensation" 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.
F-8
Under the Company's employee stock compensation plans, the Company
generally grants employees and outside directors stock options at an exercise
price equal to the fair market value as of the date of grant. No compensation is
recorded with respect to such stock option grants. Compensation expense with
respect to restricted stock awards and performance-based stock options are
charged to expense over the vesting period or the measurement date,
respectively. The following table illustrates the effect on net income and
earnings per share if the fair value method had been applied to all of the
outstanding and unvested awards in each period (in thousands, except per share
data).
For the For the Year
Six-Months Ended Ended
For the Years Ended December 31 December 31, June 30,
------------------------------- ----------------- ------------
2002 2001 2000 2000
---- ---- ---- ----
Net Loss As reported $(10,360) $(15,258) $(11,955) $(9,712)
Pro forma $(13,714) $(18,065) $(12,523) $(10,111)
Net Loss Per
Share-basic and
diluted As reported $(0.30) $(0.45) $(0.36) $(0.36)
Pro forma $(0.39) $(0.53) $(0.38) $(0.37)
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 SFAS No. 128, "Earnings Per Share." 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.
F-9
3. ACCOUNTS RECEIVABLE:
Accounts receivable balances consist of the following (in thousands):
December 31, December 31,
2002 2001
------------- ------------
Accounts receivable - gross................... $ 888 $ 412
Less: allowance for cash discounts............ (32) (12)
----------- -----------
Accounts receivable...................... $ 856 $ 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, 2002 and
2001. The Company has not realized any losses on its investments.
5. INVENTORIES:
Inventories balances consist of the following (in thousands):
December 31, December 31,
2002 2001
------------- ------------
Raw materials................................. $ 114 $ 137
Work in process............................... 357 ---
Finished goods................................ 206 67
----------- -----------
Inventory................................ $ 677 $ 204
=========== ===========
6. FIXED ASSETS:
Fixed assets are stated at cost and consist of the following (in
thousands):
December 31, December 31,
2002 2001
------------- ------------
Manufacturing equipment....................... $ 220 $ 220
Office equipment and furniture................ 532 489
----------- -----------
Total......................................... 752 709
Less accumulated depreciation................. (478) (310)
----------- -----------
Fixed assets, net........................ $ 274 $ 399
=========== ===========
F-10
7. Accrued Expenses:
Accrued expenses consist of the following (in thousands):
December 31, December 31,
2002 2001
------------- -------------
Sales and marketing costs...................... $ 1,632 $ 604
Deferred revenue............................... 524 ---
Financing costs................................ 310 ---
Research and development costs................. 256 ---
Allowance for returns and third-party rebates.. 168 534
Payroll and severance costs.................... 154 165
Professional fees.............................. 105 170
Interest....................................... 54 23
Other.......................................... 19 27
----------- -----------
Accrued expenses.......................... $ 3,222 $ 1,523
=========== ===========
8. DEFERRED REVENUE:
For IBStat(TM), the Company recognizes revenue based on prescription data.
This practice will continue until such time as data becomes available that
indicates that the product has achieved adequate market acceptance and that
future product returns can be reasonably estimated. As a result, the Company has
recorded deferred revenue of $524,000 that was included in accrued expenses on
the balance sheet as of December 31, 2002.
9. ALLOWANCE FOR SALES RETURNS:
The Company maintains allowances for potential future sales returns. These
allowances are evaluated on a quarterly basis based on product characteristics,
industry averages, wholesaler stocking patterns, and prescription trends. At
December 31, 2002 and 2001, the Company had returns allowances of $149,000 and
$441,000, respectively, that was included in accrued expenses on the balance
sheet. The following is an analysis of the sales returns allowance:
December 31, December 31,
2002 2001
------------- -------------
Beginning allowance for sales returns.......... $ 441 $ ---
Provision for estimated sales returns.......... 581 524
Actual sales returns........................... (873) (83)
----------- -----------
Ending allowance for sales returns........ $ 149 $ 441
=========== ===========
10. LINE OF CREDIT:
The Company has a $7,500,000 line of credit with a financial institution.
Under the 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, 2004. 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, 2002 and 2001,
$4,444,000 and $2,401,000, respectively, was outstanding under this line of
credit at average interest rates of 3.88% and 6.06%, respectively.
F-11
11. CONVERTIBLE SUBORDINATED NOTES:
In June 2001, the Company completed a private placement of $10,000,000 of
5.50% convertible notes due June 2003 together with 265,487 warrants. The notes
were 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. 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 at $281,000
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 of $788,000 that
were deferred and included in deposits and other assets on the balance sheet.
In October 2002, the Company amended its then outstanding June 2003
convertible notes. Pursuant to the amendment, the terms of the notes were
revised to remove the requirement that the Company's common stock be listed on
the Nasdaq National Market. As consideration for the amendment, the Company paid
a fee of $150,000, increased the coupon to 10.0%, added a redemption premium of
30% and issued to the noteholders additional warrants to purchase an aggregate
of 500,000 shares of the Company's common stock at an exercise price of $1.00
per share, subject to adjustment in certain circumstances. As a result of the
amendment, the Company incurred a $278,000 non-cash charge resulting from
acceleration of the amortization of deferred financing costs. The warrants
issued in connection with the amendment were valued at $210,000 using the
Black-Scholes valuation methodology and were to be amortized over the remaining
life of the notes. In addition, the 30% premium was to be amortized over the
remaining life of the notes.
In December 2002, the Company completed a $13,000,000 private placement of
June 2005 convertible notes together with 2,459,460 warrants. Proceeds from the
placement were used to redeem the Company's then outstanding June 2003
convertible notes. The June 2005 notes are convertible into the Company's common
stock at a conversion price of $1.85 per share and the warrants, which are not
exercisable for one year, also have an exercise price of $1.85 per share. The
notes have redemption provisions requiring the Company to pay a 25% premium if
the notes are not converted by the maturity date and a 30% premium if an early
redemption or change in control were to occur. 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 at $1,061,000 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. Since the fair value
of the proceeds that were allocated to the convertible notes was less than the
fair value of the Company's common stock as of the commitment date, in
accordance with the Emerging Issues Task Force Issue No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," the carrying value of the notes was further
reduced by a beneficial conversion feature of $359,000. The combination of the
maturity premium, the warrant debt discount and the beneficial conversion
feature represents potential future non-cash accretion charges and premium
accruals of $4,670,000 that will be amortized over the life of the June 2005
convertible notes on the effective interest method. The amortization of these
charges will be reflected in the other income and expense section of the
Company's statement of operations. The Company has an effective registration
statement for the resale of the common stock issuable upon conversion of the
notes and exercise of the warrants. When considering the amortization of the
non-cash accretion along with the coupon interest rate associated with the June
2005 notes, the effective interest rate on this note payable is approximately
24.37%. At December 31, 2002, the Company had $13,000,000 of these notes
outstanding, which includes $54,000 of premium accretion and is net of
$1,044,000 and $353,000 of warrant debt discount and beneficial conversion
feature, respectively, resulting on a net balance of $11,657,000.
As a result of the extinguishment of the June 2003 convertible notes the
Company incurred $3,916,000 in debt modification charges. These charges include
the redemption premium of $3,000,000, warrant debt discount acceleration and the
write-off of deferred financing costs. The charges have been included, along
with the non-cash accretion and premium charges associated with the June 2005
convertible notes, in the other income and expense section of the Company's
statement of operations.
F-12
12. SHAREHOLDERS' EQUITY (DEFICIT):
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 warrants, 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 warrants, as described below, with net proceeds
to the Company of $9,900,000.
In December 2002, the Company completed a private placement of 2,469,032
shares of common stock, together with warrants, as described below, with net
proceeds to the Company of $3,474,000.
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.
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 the Company's then outstanding June 2003
convertible notes.
Throughout the year ended December 31, 2002 the Company issued
approximately 213,000 shares of common stock from the exercise of warrants and
stock options with net proceeds to the Company of $218,000. In addition, the
Company issued approximately 336,000 shares of common stock in connection with
the Company's then outstanding June 2003 convertible notes.
Warrants
In connection with the September 1999 private placement of common stock,
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 and
expire in September 2003. At December 31, 2002, 407,692 of these warrants are
outstanding.
F-13
In connection with the May 2000 private placement of common stock, 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, 2002, 283,887 of these warrants are
outstanding.
In connection with the June 2001 private placement of June 2003 convertible
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, 2002, 265,487 of these warrants
are outstanding.
In connection with the October 2002 amendment of the June 2003 convertible
notes, the Company issued warrants to the noteholders to purchase an aggregate
of 500,000 shares of common stock, exercisable at $1.00 per share. These
warrants expire in October 2007. At December 31, 2002, 500,000 of these warrants
are outstanding.
In connection with the December 2002 private placement of the June 2005
convertible notes, the Company issued warrants to the noteholders to purchase an
aggregate of 2,459,460 shares of common stock, exercisable at $1.85 per share.
These warrants expire in December 2007. At December 31, 2002, 2,459,460 of these
warrants are outstanding.
In connection with the December 2002 private placement of common stock, the
Company issued warrants to the investors and placement agent to purchase an
aggregate of 964,160 shares of common stock, exercisable at $1.85 per share.
These warrants expire in December 2007. At December 31, 2002, 964,160 of these
warrants were issued.
Treasury Stock
In May 1997, a shareholder/officer transferred to the Company 16,515 shares
of common stock 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 an amendment to
the 1993 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 and May
2001, 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 4,000,000 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.
F-14
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
are issuable upon exercise of outstanding options granted to an officer and a
consultant in 1997 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,
2002, 2001 and 2000, and June 30, 2000, and changes during the periods ending on
those dates is presented below (in thousands, except per share data):
Six-Months Ended
Year Ended December 31, December 31, Year Ended June 30,
---------------------------------------- ------------------ -------------------
2002 2001 2000 2000
------------------ ------------------ ------------------ ------------------
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.. 6,589 $2.16 6,443 $2.09 6,661 $1.30 8,246 $0.92
Granted................. 1,744 $1.08 1,116 $2.82 809 $7.10 962 $3.58
Exercised............... (254) $1.09 (596) $1.23 (827) $0.82 (2,420) $0.92
Forfeited............... (638) $2.76 (374) $4.52 (200) $1.00 (127) $0.72
---- ---- ---- -----
Outstanding at end of
period............... 7,441 $1.88 6,589 $2.16 6,443 $2.09 6,661 $1.30
Exercisable at end of
period............... 5,006 $1.69 4,764 $1.64 4,486 $1.28 4,100 $0.86
The following table summarizes information about stock options outstanding
at December 31, 2002 (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 12/31/02 Contractual Life Exercise Price at 12/31/02 Exercise Price
--------------- ----------- ---------------- ---------------- ----------- ----------------
$0.61-$3.00............... 5,960 6.63 years $0.99 4,202 $0.95
$3.01-$6.00............... 927 7.66 years $4.09 525 $4.40
$6.01-$8.50............... 554 7.91 years $7.77 279 $7.77
----- -----
$0.61-$8.50............... 7,441 6.85 years $1.88 5,006 $1.69
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-15
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
Six-Months For the Year
For the Years Ended Ended Ended
December 31, December 31, June 30,
---------------------- ------------ ------------
2002 2001 2000 2000
---- ---- ---- ----
Range of risk free interest rates. 1.61% 3.57% 6.24% 5.5%
Dividend yield.................... 0% 0% 0% 0%
Volatility factor................. 223% 202% 172% 159%
Expected life of options (in years) 5 5 5 5
The weighted average fair value of options granted was $1.07 and $3.22 for
the years ended December 31, 2002 and 2001, respectively, $6.77 for the
six-months ended December 31, 2000 and $2.80 for the year ended June 30, 2000.
At December 31, 2002, there were 1,450,000 options available for issuance in
connection with the Company's stock option plans.
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. No such shares were awarded during the year ended
December 31, 2002. The restriction period for restricted stock awards were
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.
13. INCOME TAXES:
The Company has approximately $47,063,000 of net operating loss, or NOL,
carryforwards available to offset future federal taxable income and
approximately $41,999,000 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 2023. The NOL carryforward differs
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 $1,541,000 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'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 $3,557,000 during the year
ended December 31, 2002, for the entire amount of the tax benefit.
F-16
Significant components of the Company's deferred tax assets as of December
31, 2002 and 2001 are as follows (in thousands):
December 31, December 31,
2002 2001
------------ ------------
Net operating loss carryforwards and credits.... $ 20,096 $ 16,095
Research and development costs.................. 10,646 11,867
Other........................................... 1,359 582
--------- ---------
Net deferred tax assets................... 32,101 28,544
Valuation allowance for deferred tax assets..... (32,101) (28,544)
--------- ---------
Total deferred tax assets.................. $ --- $ ---
========= =========
14. 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 years ended December 31, 2002 and 2001, the six-months
ended December 31, 2000 and the year ended June 30, 2000, the Company provided a
contribution equal to 50% of the first 4% contributed by the employee. An
expense of approximately $29,000, $37,000, $15,000, and $26,000 was recognized
for the same periods, respectively. During the year ended December 31, 2002, the
Company also provided a discretionary matching contribution totaling $15,000
paid entirely from plan forfeitures.
15. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
License Agreements
The Company's rights to Visicol(TM), Colirest(TM) and Hematrol(TM) 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 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 the Company fails to pay, commencing in
February 2003, minimum royalties of $100,000 per year whether or not any sales
have occurred. 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.
F-17
Terms of the November 6, 1997 acquisition of the receptor based
technologies from which Colirest(TM) and Hematrol(TM) are derived, the Company
could be required 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.
In February 2001, the Company entered into an agreement with Morton Grove
Pharmaceuticals to develop, and manufacture 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, Morton Grove Pharmaceuticals will develop and
supply the product and the Company will market and sell IBStat(TM) through its
commercial operations.
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
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.
The Company entered into a license agreement in September 2002 with Global
Damon Pharm., a multi-national pharmaceutical company of Seoul, Korea, to
develop, register, market and sell Visicol(TM) for use in Korea. As compensation
for the license granted, Global Damon is to pay an upfront milestone payment
with additional payments due based on future milestones and sales in Korea. To
date, Global Damon has not paid the upfront payment and is therefore in default
under the license agreement. The Company is currently looking for a new partner
to replace Global Damon in the event that Global Damon does not honor their
contract with us.
In July 2002, the Company granted ZaBeCor Pharmaceutical Company the
exclusive right to develop, manufacture, market and sell products and
technologies covered by Company owned patents relating to inflammatory disease.
As compensation for the license granted to ZaBeCor, the Company received a
percentage ownership in ZaBeCor, subject to adjustment in the event that ZaBeCor
were to receive additional funding. Additionally, ZaBeCor shall pay the Company
a royalty based on net sales of all products discovered or developed by ZaBeCor
or its partners. ZaBeCor will be responsible for all development costs. The
Company, however, will retain all rights to Colirest(TM) and Hematrol(TM).
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.
F-18
Rent
In November 2000, the Company entered into a five-year lease for office
space of approximately 8,000 square feet, in Blue Bell, Pennsylvania. In April
2002, the Company entered into a two-year lease for warehouse space of
approximately 1,600 square feet, in Norristown, Pennsylvania. Minimum annual
rent payments under these leases are as follows:
2003 $ 228,000
2004 219,000
2005 181,000
------------
$ 628,000
============
Rent expense was approximately $221,000, $205,000, $79,000 and $108,000 for
the years ended December 31, 2002 and 2001, the six-month period ended December
31, 2000 and the year ended June 30, respectively.
16. INTERIM FINANCIAL RESULTS (UNAUDITED):
The following tables set forth certain unaudited financial information for
each of the quarters in the years ended December 31, 2002 and 2001. 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,
2002 2002 2002 2002
---------------- ---------------- ---------------- ----------------
Revenue...................................... $ 977 $ 2,007 $ 2,222 $ 2,346
Cost of goods sold........................... 285 504 445 490
Gross profit................................. 692 1,503 1,777 1,856
Research and development..................... 1,602 870 459 328
Sales and marketing.......................... 1,030 1,350 1,698 1,925
General and administrative................... 593 577 541 538
Loss from operations......................... (2,533) (1,294) (921) (935)
Net loss..................................... $ (2,777) $ (1,555) $ (1,477) $ (4,551)
Net loss per share - basic and diluted....... $ (0.08) $ (0.04) $ (0.04) $ (0.13)
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)
F-19
EXHIBIT INDEX
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 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)
4.4 Form of Common Stock Purchase Warrant, dated October 1, 2002. (In accordance with Instruction 2 to
Item 601 of Regulation S-K, similar warrants granted to the investors have not been filed because they
are identical in all material respects except for the number of warrants granted to each investor).
(Exhibit 4.5)(6)
4.5 Securities Purchase Agreement, among InKine Pharmaceutical Company, Inc., S.A.C. Capital Associates,
LLC, SDS Merchant Fund, L.P., Royal Bank of Canada, through RBC Dominion Securities Corporation as its
agent, Solomon Strategic Holdings, Inc., and Tail Wind Fund, Ltd. dated as of December 16, 2002. (In
accordance with Item 601 of Regulation S-K, the schedules and certain exhibits have been omitted. They
are available upon request. (Exhibit 4.1)(7)
4.6 Registration Rights Agreement, among InKine Pharmaceutical Company, Inc., S.A.C. Capital Associates,
LLC, Royal Bank of Canada, through RBC Dominion Securities Corporation as its agent, Solomon Strategic
Holdings, Inc., and Tail Wind Fund, Ltd. dated as of December 17, 2002. (Exhibit 4.2)(7)
4.7 Security Agreement, among InKine Pharmaceutical Company, Inc., S.A.C. Capital Associates, LLC, Royal
Bank of Canada, through RBC Dominion Securities Corporation as its agent, Solomon Strategic Holdings,
Inc., and Tail Wind Fund, Ltd. dated as of December 17, 2002. (Exhibit 4.3)(7)
4.8 Form of Convertible Senior Secured Notes due June 2005. (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 4.4)(7)
4.9 Form of Common Stock Purchase Warrant, dated December 17, 2002. (In accordance with Item 601 of
Regulation S-K, similar warrants granted to the investors have not been filed because they are
identical in all material respects except for the number of warrants granted to each investor).
(Exhibit 4.5)(7)
10.1 Employment Agreement between InKine Pharmaceutical Company, Inc. and Leonard S. Jacob, dated November
6, 1997. (Exhibit 10.4)(8)
10.2 Option to Purchase Shares of Common Stock of InKine Pharmaceutical Company, Inc. dated November 6,
1997, issued to Leonard S. Jacob. (Exhibit 10.6)(8)
10.3 Employment Agreement between InKine Pharmaceutical Company, Inc. and Robert F. Apple, dated November
2, 1998. (Exhibit 10.6)(9)
10.4 Stock Option Plan, as amended. (Exhibit 99)(10)
10.5 1997 Consultant Stock Option Plan. (Exhibit 99)(11)
10.6 Form of Stock Option Agreement. (Exhibit 10(b))(12)
10.7 License Agreement with ALW Partnership. (Exhibit 10(1))(13)
10.8 Form of Option granted to Partners of ALW Partnership. (Exhibit 10(n))(13)
10.9 Amendment to Employment Agreement, dated November 4, 1999, between the Company and Leonard S. Jacob.
(Exhibit 10.18)(14)
10.10 1999 Equity Compensation Plan (Exhibit 99)(15)
23* Consent of KPMG LLP.
99.1* Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2* Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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* 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 (SEC File No. 000-24972).
(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 (SEC File No. 000-24972).
(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 15, 2001, with the Securities
and Exchange Commission (SEC File No. 000-24972).
(6) Filed as an Exhibit to InKine's Current Report on Form 8-K dated October 1, 2002, with the Securities
and Exchange Commission (SEC File No. 000-24972).
(7) Filed as an Exhibit to InKine's Current Report on Form 8-K dated December 17, 2002, with the
Securities and Exchange Commission (SEC File No. 000-24972).
(8) 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 (SEC File No.
000-24972).
(9) 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 (SEC File No. 000-24972).
(10) 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.
(11) Filed as an Exhibit to InKine's Form S-8 (SEC File No. 333-58065) dated June 29, 1998, with the
Securities and Exchange Commission.
(12) 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 (SEC File No. 000-24972).
(13) Filed as an Exhibit to InKine's Current Report on Form 8-K dated February 14, 1997, with the
Securities and Exchange Commission (SEC File No. 000-24972).
(14) 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 (SEC File No. 000-24972).
(15) 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.