Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
FOR
ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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(MARK
ONE) |
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2004 |
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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FOR
THE TRANSITION PERIOD FROM ____ TO ____. |
COMMISSION
FILE NUMBER 1-10113
ACURA
PHARMACEUTICALS, INC.
(Exact
name of registrant as specified in its charter)
NEW
YORK |
11-0853640 |
(State
or other jurisdiction of |
(I.R.S.
Employer |
Incorporation
or organization) |
Identification
No.) |
616
N. NORTH COURT, SUITE 120, |
60067 |
PALATINE,
ILLINOIS |
(Zip
Code) |
(Address
of principal executive offices) |
|
REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE:
(847)
705-7709
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(TITLE OF
CLASS)
NONE
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(TITLE OF
CLASS)
COMMON
STOCK, PAR VALUE $0.01
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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes o No x
As of
February 1, 2005, the registrant had 22,466,967 shares of Common Stock, par
value $0.01, outstanding. Based on the average closing bid and asked prices of
the Common Stock on June 30, 2004 ($0.47) (the last business day of the
registrant’s most recently completed second fiscal quarter), the aggregate
market value of the voting stock held by non-affiliates of the registrant was
approximately $6,725,372.
DOCUMENTS
INCORPORATED BY REFERENCE
NONE
CONTENTS
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PAGE |
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PART
I |
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Item
1. |
Business |
1 |
Item
2. |
Properties |
15 |
Item
3. |
Legal
Proceedings |
15 |
Item
4. |
Submission
of Matters to a Vote of Security Holders |
15 |
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PART
II |
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Item
5. |
Market
for Registrant’s Common Equity and Related Stockholder Matters
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16 |
Item
6. |
Selected
Financial Data |
17 |
Item
7. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
17 |
Item
7A. |
Quantitative
and Qualitative Disclosures about Market Risk |
42 |
Item
8. |
Financial
Statements and Supplementary Data |
42 |
Item
9. |
Changes
in and Disagreement with Accountants on Accounting and Financial
Disclosure |
42 |
Item
9A. |
Controls
and Procedures |
42 |
Item
9B. |
Other
Information |
43 |
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PART
III |
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Item
10. |
Directors
and Executive Officers of the Registrant |
44 |
Item
11. |
Executive
Compensation |
47 |
Item
12. |
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
52 |
Item
13. |
Certain
Relationships and Related Transactions |
55 |
Item
14. |
Principal
Accountant Fees and Services |
57 |
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PART
IV |
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Item
15. |
Exhibits,
Financial Statement Schedules and Reports on Form 8K |
58 |
Signatures |
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Index
to Consolidated Financial Statements |
F-1 |
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements in this Report under the captions Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” Item 1,
“Business”, Item 3, “Legal Proceedings” and elsewhere in this Report constitute
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 (the “Reform Act”). Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of Acura
Pharmaceuticals, Inc. (“Acura” or the “Company”), or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. The most significant of
such factors include, but are not limited to, general economic conditions,
competitive conditions, technological conditions and governmental legislation.
More specifically, important factors that may affect future results include, but
are not limited to: changes in laws and regulations, particularly those
affecting the Company’s operations; the Company’s ability to continue to
attract, assimilate and retain highly skilled personnel; its ability to secure
and protect its patents, trademarks and proprietary rights; its ability to avoid
infringement of patents, trademarks and other proprietary rights or trade
secrets of third parties; litigation or regulatory action that could require the
Company to pay significant damages or change the way it conducts its business;
the Company’s ability to successfully develop and market its products; customer
responsiveness to new products and distribution channels; its ability to compete
successfully against current and future competitors; its dependence on
third-party suppliers of raw materials; the availability of controlled
substances that constitute the active ingredients of the Company’s products in
development; difficulties or delays in clinical trials for Company products or
in the manufacture of Company products; and other risks and uncertainties
detailed in this Report. The Company is at an early stage of development and may
not ever have any products that generate revenue. When used in this Report, the
words “estimate,” “project,” “anticipate,” “expect,” “intend,” “believe,” and
similar expressions are intended to identify forward-looking
statements.
PART
I
ITEM
1. BUSINESS
General
The
Company is a New York corporation established in 1935. Prior to the
restructuring of the Company’s operations described below, the Company had been
engaged in the development, manufacture, sale and distribution of a variety of
generic finished dosage pharmaceutical products and active pharmaceutical
ingredients (“APIs”). On November 6, 2003, the Company announced its plan to
restructure the Company’s operations to focus on research and development
related to certain proprietary opioid synthesis and finished dosage formulation
technologies. The Board of Directors determined, among other factors, that the
Company’s ability to generate positive cash flow from the operation of the
Company’s finished dosage manufacturing, packaging, labeling and distribution
facilities located in Congers, New York (collectively, the “Congers Facilities”)
in the manufacture and distribution of finished dosage generic products pursuant
to abbreviated new drug applications (“ANDAs”) was compromised by the highly
competitive market environment, low market pricing and declining market size for
its existing generic products and the lack of new generic products in
development. The Board determined that near term sales of the Company’s finished
dosage generic drug products would likely result in negative gross margins in
view of the market environment. Based on this analysis and other factors, the
Board concluded that the Company’s manufacture and sale of finished dosage
products licensed to be produced at the Congers Facilities would result in
continuing negative cash flow for the foreseeable future. After due
consideration of alternative strategies and considering the optimal use of
available funding, the Board adopted a strategy to substantially restructure the
Company’s business. Manufacturing of the Company’s generic finished dosage
products at the Congers Facilities substantially ceased on January 30, 2004.
Such date also marks the completion, in large part, of the reduction in work
force by approximately 100 employees, 70 of whom were employed by the Company at
the Congers Facilities, associated with the restructuring of the Company’s
operations. See “Recent Events - Restructure of Operations” below.
As
restructured, the
Company is an emerging specialty pharmaceutical company primarily engaged in
research, development and manufacture of innovative abuse deterrent formulations
(“Aversion TM
Technology”) intended for use in orally administered opioid-containing
pharmaceutical products. The
status of the Aversion TM
Technology
development is described below under the caption “AversionTM
Technology”. The
Company is also engaged, to a much lesser extent, in research, development and
manufacture of proprietary, high-yield, short cycle time, environmentally
sensitive opioid synthesis processes (the “Opioid Synthesis Technologies” and,
collectively with the AversionTM
Technology,
the “Technologies”) intended for use in the commercial production of certain
bulk opioid APIs. The status of the Opioid Synthesis Technologies is described
below under the caption “Opioid Synthesis Technologies”. As
described below under the caption “Patent Applications”, as of February 1, 2005,
the Company had one issued US patent, one US Notice of Allowance and 14 patent
applications pending, including one (1) issued US patent, one (1) US Notice of
Allowance granted, eight (8) US patent applications pending and one (1) foreign
patent application pending relating to the Opioid Synthesis Technologies, and
four (4) US patent applications pending and one (1) foreign patent application
pending relating to the AversionTM
Technology. As of
February 1, 2005, the Company retained ownership of all intellectual property
and commercial rights to its product candidates and Technologies.
The
Company conducts research, development, laboratory, manufacturing and
warehousing activities relating to its Technologies at its Culver, Indiana
facility (the “Culver Facility”). The Culver Facility is registered by the U.S.
Drug Enforcement Administration (the “DEA”) to perform research, development and
manufacture of DEA controlled substances in bulk and finished dosage forms. In
2001, the Company filed with the DEA an application for registration (the
“Import Registration”) to import narcotic raw materials (“NRMs”). NRMs are
commonly used as the initial starting materials in the synthesis of certain
opioid APIs. The Import Registration, if ultimately granted, for which there can
be no assurance, will provide the Company with an economical source of NRMs for
use as starting materials in the commercial manufacture and supply of certain
opioid APIs utilizing the Opioid Synthesis Technologies. The status of the
application for the Import Registration is described below under the caption
“Import License Registration.”
The
Company plans to enter into development and commercialization agreements with
strategically focused pharmaceutical company partners (the “Partners”) providing
that such Partners license the Company’s product candidates incorporating the
Aversion Technology and further develop, register and commercialize multiple
formulations and strengths of orally administered opioid-containing finished
dosage products utilizing the AversionTM
Technology. The Company expects to receive milestone payments and a share of
profits and/or royalty payments derived from the Partners’ sale of finished
products incorporating the AversionTM
Technology. The Company also believes that it may derive revenues through
licensing the Opioid Synthesis Technologies, and contract manufacture and supply
of clinical trial and commercial supplies of finished dosage products utilizing
the AversionTM
Technologies. As of February 1, 2005, the Company was not a party to any
development or commercialization agreement with a third party relating to any of
its Technologies and no assurance can be given that the Company will be
successful in entering into any such agreement in the future.
The
Company files annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission (the “SEC”). These
filings are available to the public over the internet at the SEC’s web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC’s
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room.
The
Company’s internet address is www.acurapharm.com. We make available free of
charge on www.acurapharm.com our annual, quarterly and current reports and
amendments to those reports, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. In addition,
you may request a copy of these filings (excluding exhibits) at no cost by
contacting us at the following address or telephone number:
Acura
Pharmaceuticals, Inc.
616 N.
North Court, Suite 120
Palatine,
Illinois 60067
Attn:
Investor Relations
847.705.7709
AversionTM
Technology
The class
of drugs exhibiting opium or morphine-like properties is referred to as opioids,
or opioid agonists. This class of products has experienced substantial market
growth in recent years. Certain opioids act as agonists, interacting with stereo
specific and saturable binding sites in the brain and other tissues. Endogenous
opioid-like peptides are present in areas of the central nervous system that are
presumed to be related to the perception of pain, to movement, mood and
behavior, and to the regulation of neuroendocrinological functions. Three
classical opioid receptor types, mu ((mu)), delta ((delta)), and kappa
((kappa)), have been studied extensively. Each of these receptors has a unique
anatomical distribution in the brain, spinal cord, and the periphery. Most of
the clinically used opioids are relatively selective for (mu) receptors,
reflecting their similarity to morphine. However, it is important to note that
opioid containing drugs that are relatively selective at standard doses will
often interact with additional receptor subtypes when given at sufficiently high
doses, leading to possible changes in their pharmacological effect. This is
especially true as opioid doses are escalated to overcome
tolerance.
The
potential for the development of tolerance, physical and/or psychological
dependence (i.e., addiction) with repeated opioid use is a characteristic
feature of most opioid containing drugs. The possibility of developing addiction
is one of the major societal concerns in the long-term use of opioids for the
management of pain. Another major concern associated with the use of opioids is
the diversion of these drugs from a patient in legitimate pain to other
individuals (non-patients) for illegitimate purposes.
Drug
abusers and/or addicts typically may obtain a commercial dosage form containing
an opioid analgesic and crush, shear, grind, chew, dissolve and/ or heat,
extract or otherwise manipulate the product so that a significant amount or even
the entire amount of the drug becomes available for immediate absorption by
injection, inhalation, and/or oral consumption.
There are
three basic patterns of behavior leading to opioid abuse. The first involves
individuals whose opioid drug use begins in the context of medical treatment and
who obtain their initial drug supplies through prescriptions from physicians.
The second begins with experimental or “recreational” drug use and progresses to
more intensive use. A third pattern of abuse involves users who begin in one or
another of the preceding ways but later switch to oral opioids such as
methadone, obtained from organized addiction treatment programs. Physicians
cannot easily identify or predict which of their patients may fall into one of
these behavior patterns.
There are
various routes of administration by which an abuser may commonly attempt to
abuse an opioid containing drug formulation. The most common methods include (1)
intravenous injection, (2) intranasal (e.g., snorting), and (3) repeated oral
ingestion of excessive quantities of orally administered tablets or capsules.
One very common mode of abuse of oral solid drug product involves mixing the
tablet or capsule with a suitable solvent (e.g., water), and then subsequently
extracting the opioid component from the mixture for use in a solution suitable
for intravenous injection of the opioid to achieve a “high.”
Attempts
have been made by various companies to develop technology to deter abuse of
orally administered opioid analgesics. Some of these attempts have included the
use of an opioid antagonist in the oral dosage form designed to substantially
block the analgesic effects of the opioid if one attempts to crush/grind the
tablet and snort the resulting powder or dissolve/extract the opioid and
administer the opioid drug intravenously. The Aversion TechnologyTM does not
utilize opioid antagonists. A clear need continues to exist to have a delivery
system for commonly used oral dosage formulations of drugs (i.e., immediate
release, sustained or extended release and delayed release tablets and capsules)
which deters abuse and minimizes or reduces the potential for physical or
psychological dependency. The need is particularly imperative for opioid
analgesics.
It is
with the growing concern in mind about the illegitimate use of legitimate
opioid-based drug products described above that the Company is pursuing its
abuse deterrent formulation technology (the “AversionTM
Technology”). The Company believes that the internally developed
AversionTM
Technology is applicable to both immediate release and extended release orally
administered tablets and capsules which are formulated with an opioid analgesic
or other potentially abusable orally administered drug, such as an amphetamine,
as an active ingredient. Company research and laboratory experiments to date
suggest that the AversionTM
Technology may be formulated into an orally administered tablet with the
commonly utilized opioid active pharmaceutical ingredients and related salts
including morphine, codeine, hydrocodone and oxycodone. The AversionTM
Technology utilizes certain pharmaceutical product excipients and other
ingredients in addition to the opioid API. The Aversion Technology™ does not
utilize opioid antagonists. The Company believes that the AversionTM
Technology will discourage or deter a pre-existing opioid drug abuser, or a
legitimate patient properly using opioid containing analgesics for management of
pain, from abusing an orally administered opioid containing product. Provided
the AversionTM
Technology is appropriately tested and proves successful in clinical trials, of
which no assurance can be given, the Company believes that its
AversionTM
Technology will discourage or deter the three most commonly utilized routes of
opioid abuse including (1) intravenous, (2) intranasal/snorting and (3) excess
oral consumption of tablets or capsules. However, the Company can provide no
assurance that such clinical testing will demonstrate that the
AversionTM
Technology will discourage or deter abuse. In addition, if such abuse deterrent
characteristics are demonstrated, the Company can provide no assurance that the
magnitude of such effect will be statistically significant or clinically
meaningful.
To date,
the Company has formulated and evaluated two distinct product candidates
incorporating the AversionTM
Technology (“Product Candidate #1” and “Product Candidate #2”). Both product
candidates are tablet formulations intended for oral administration and contain,
among other ingredients, a widely prescribed opioid active pharmaceutical
ingredient. During the second half of 2004, the Company and the Food and Drug
Administration (“FDA”) held two scheduled telephonic meetings relating to the
Company’s Aversion™ Technology product development efforts. Subsequent to the
first meeting the Company received acceptance by the FDA of an Investigational
New Drug (“IND”) for Product Candidate #1 and clearance to initiate a clinical
trial program. The clinical development program included in the IND is designed
to optimize the formulation of such product candidate to effectively deter
opioid abuse while minimizing the potential for any new adverse events compared
to non-AversionTM
formulated
commercially marketed products. After conducting a Phase 1 clinical trial for
Product Candidate #1 and following (1) a second teleconference with the FDA, (2)
the Company’s receipt and analysis of new proprietary Company-initiated primary
market research with physicians, and (3) an assessment of the Company’s new
patent applications and intellectual property relating to the
AversionTM
Technology, a strategic decision was made by the Company to shift its
AversionTM
Technology development efforts to Product Candidate #2. This decision was based
primarily on the Company’s belief that the development expense and timeline for
Product Candidate #2 would be reduced and the commercial opportunity for success
would be increased with Product Candidate #2 as compared with Product Candidate
#1.
To date,
the Company has performed pre-clinical and clinical research and development on
its product candidates through a combination of internal and external
collaborative research programs. The Company has and will continue to rely on
contract research organizations (“CROs”) to perform key components of its
product development activities. To date such development efforts have included
the completion of two laboratory studies by CROs demonstrating the relative
advantages in effectiveness of the AversionTM
Technology compared to selected currently marketed, widely prescribed opioid
products in deterring potential intravenous injection. In addition, in the first
quarter of 2004, the Company entered into a Master Services Agreement with a
full service CRO with wide ranging capabilities and expertise in regulatory and
clinical development consultation, clinical trial and clinical data management,
biostatistics, medical writing, and other relevant research and development
services. Such full service CRO is engaged in writing clinical trial protocols,
contracting with clinical trial sites and IND development compilation and
submissions to the FDA.
In
addition, to the studies outlined above, the Company has evaluated Product
Candidate #1 in two clinical studies to assess the bioavailability and
bioequivalence (“BA/BE”) of such product candidate in comparison to a frequently
prescribed, commercially marketed drug products with the same opioid active
ingredient but without abuse deterrent properties. The results of the first
BA/BE study indicated that Product Candidate #1 was sufficiently bioavailable
but not bioequivalent to the reference commercially marketed opioid product. The
Company subsequently developed a revised formulation (“Product Candidate #1R”).
The second BA/BE study confirmed that Product Candidate #1R is both bioavailable
and bioequivalent to the commercially marketed product which does not possess
abuse deterrent properties.
Currently,
the Company is engaged in pre-clinical studies and manufacturing of clinical
trial supplies and contemplates submitting an IND or an IND amendment with the
FDA for Product Candidate #2 during the first quarter of 2005. Since the
formulation of Product Candidate #2, the Company has suspended all new
development activities for Product Candidate #1 and Product Candidate #1R and
will focus future development activities primarily on Product Candidate #2.
There can be no assurance, however, that any of the Company’s product candidates
incorporating the AversionTM
Technology will result in a commercially acceptable drug product.
To
receive marketing authorization for commercial distribution in the United
States, all drug products formulated with the AversionTM
Technology will require the development, compilation, submission and filing of a
new drug application (“NDA”) and approval of such application by the FDA. In the
event that Product Candidate #2 is stable and demonstrates acceptable
bioequivalence, then additional clinical and non-clinical testing will be
required prior to the submission of an NDA. There can be no assurances that
Product Candidate #2 will lead to an NDA submission or that if an NDA is filed,
that the FDA will approve such regulatory application for commercial
distribution of such product candidate.
The
Company plans to enter into development and commercialization agreements with
strategically focused pharmaceutical company partners (the “Partners”) providing
that such Partners license the Company’s AversionTM
Technology and further develop, register and commercialize multiple formulations
and strengths of orally administered opioid containing finished dosage products
utilizing the AversionTM
Technologies. The Company believes that it will derive revenues through
licensing fees, milestone payments, profit sharing and/or royalties on net sales
of such products as well as from the contract manufacture and supply of clinical
trial and commercial supplies of finished dosage products for distribution and
sale by such Partners. As of February 1, 2005 the Company did not have any such
collaborative agreements. The Company can make no assurance that it will be able
to negotiate such agreements on favorable terms and, even assuming that such
agreements are successfully executed, that the milestones will be achieved and
the milestone payments will be subsequently made by our Partners.
Estimating
the dates of completion of clinical development, and the costs to complete
development, of the Company’s product candidates would be highly speculative,
subjective and potentially misleading. Pharmaceutical products take a
significant amount of time to research, develop and commercialize, with the
clinical trial portion of development generally taking several years to
complete. The Company expects to re-assess its future research and development
plans based on the review of data received from current research and development
activities. The costs and pace of future research and development activities are
linked and subject to change.
Opioid
Synthesis Technologies
In 2004
the Company was engaged in the research and development of proprietary
manufacturing processes for opioid APIs (the “Opioid Synthesis Technologies”)
including the following:
OPIOID
SYNTHESIS
TECHNOLOGY |
STARTING
MATERIAL |
ESTIMATED
YIELD |
APPLICABLE
DEA
REGISTRATIONS
REQUIRED |
STATUS
OF PATENT
APPLICATION |
Hydrocodone
Bitartrate
Process
#1 |
Codeine
Phosphate |
85% |
a)
Manufacturing |
Filed
and pending |
Oxycodone
HCl
Process
#2 |
NRMs |
68-72% |
a)
Research
b)
Manufacturing
c)
Import |
Filed
and pending |
Codeine
Phosphate
Process
#1 |
NRMs |
90-100% |
a)
Research
b)
Manufacturing
c)
Import |
Filed
and pending |
Codeine
Phosphate
Process
#2 |
NRMs |
80-90% |
a)
Research
b)
Manufacturing
c)
Import |
Filed
and pending |
Codeine
Phosphate
Process
#3 |
NRMs |
65-85% |
a)
Research
b)
Manufacturing
c)
Import |
Filed
and pending |
Hydrocodone
Bitartrate
Process
#2 |
Codeine
Base |
85-95% |
a)
Research
b)
Manufacturing |
Filed
and pending |
Morphine
Sulfate |
NRMs |
96% |
a)
Research
b)
Manufacturing
c)
Import |
Draft
application pending |
Dihydrocodeine
Bitartrate |
Codeine Phosphate |
>90% |
a)
Research
b)
Manufacturing |
Filed
and pending |
Hydrocodone
Derivatives |
Dihydrocodeine |
90% |
a)
Research
b)
Manufacturing |
Filed
and pending |
The
Company believes at this stage of development that the above-described Opioid
Synthesis Technologies are efficient and cost-effective methods of manufacturing
opioid APIs. The Company believes that the primary advantages of these processes
include a reduction in the time and number of processing steps required to
produce the desired opioid APIs and reduction of the quantity and/or toxicity of
the waste products relating to such production. The Company believes that at the
current manufacturing scale Hydrocodone Bitartrate Process #1 meets all United
States Pharmacopeia (“USP”) release testing specification and provides high
yields and comparable levels of purity compared to competitive manufacturing
processes used for this active ingredient.
The
development and documentation of Hydrocodone Bitartrate Process #1 has been
completed and the Company believes such process is ready to be tested at full
commercial scale. The Company estimates that to scale up its Hydrocodone
Bitartrate Process #1 Opioid Synthesis Technology to desirable commercial scale
at its Culver Facility, additional funding of at least $7.0 million will be
required for facility improvements, the purchase, installation and validation of
new API manufacturing equipment, environmental waste management compliance, the
preparation of the drug master files for the API to be produced at the facility,
and related direct labor expenses (collectively, the “API Scale Up Expenses”).
Until such time, if any, as the Company secures third-party financing dedicated
to such scale-up expenses the Company will be unable to complete the commercial
scale-up of the Hydrocodone Bitartrate Process #1 or the other Opioid Synthesis
Technologies in the above table. No assurance can be given that the Company will
obtain the third-party financing necessary to scale up the Opioid Synthesis
Technologies or that if such financing is obtained, that any one or more of the
Opioid Synthesis Technologies will be capable of commercial scale-up. As an
alternative to scaling up the Opioid Synthesis Technologies in its own facility,
the Company may license out such Technology to third parties on an exclusive or
non-exclusive basis. There can be no assurance, however, that the Company will
actually enter into any license agreements relating to the Opioid Synthesis
Technologies or derive any licensing fees, milestone payments or royalties from
such arrangements.
The
Company is in the process of suspending further development and
commercialization efforts relating to the Opioid Synthesis Technologies. The
Company has determined based on, among other factors, the Company’s limited cash
balances, prospects for third-party financing, the Company’s focus on the
AversionTM
Technology, the API Scale Up Expenses and the projected timeline for resolution
of the Company’s application for the Import Registration, that suspending
further activities relating to the Opioid Synthesis Technologies is in the
Company’s best interests. The Company expects to re-evaluate the development and
commercialization of the Opioid Synthesis Technologies after the Administrative
Law Judge’s determination relating to the Import Registration (see “Import
License Registration” below). No assurance can be given that development and
commercialization efforts relating to the Opioid Synthesis Technologies will
resume in the future, or even if such activities resume, that the Opioid
Synthesis Technologies will be capable of commercial scale up or
commercialized.
Patent
Applications
As of
February 1, 2005, the Company had one US issued patent, one US Notice of
Allowance and 14 patent applications pending, including one (1) issued US
Patent, one (1) US Notice of Allowance granted and eight (8) US patent
applications pending and one (1) foreign patent application pending relating to
the Opioid Synthesis Technologies and four (4) US patents applications pending
and one (1) foreign patent application pending relating to the
AversionTM
Technology. The typical review time of a US patent application varies. The
initial review generally occurs approximately 12 to 18 months from date of
patent filing. At the completion of the initial review, the patent examiner will
issue an Office Action letter, which will detail any necessary amendments,
supplements or reasons for the rejection. Subsequent processing of the patent
application will depend on the number of Office Action letters issued and the
speed of review of the Company’s responses thereto. If an application is
granted, a Notice of Allowance will be issued, requiring a payment of the issue
fee within three (3) months from the date of the notice. Upon the payment of the
fee, the patent would be issued.
In
September 2004, the Company received from the United States Patent and Trademark
Office (“PTO”) an issued patent relating to one of the Opioid Synthesis
Technologies. In October 2004, the Company received from the PTO a Notice of
Allowance for a second patent application relating to one of the Opioid
Synthesis Technologies. The Company has paid the issuing fee relating to the
Notice of Allowance and expects that the corresponding US patent will be issued.
No assurance can be given, however, that any other currently pending patent
applications or future patent applications relating to the Opioid Synthesis
Technologies will be granted. In addition, the Company is currently unable to
provide any assurance that all or any of the US patent applications associated
with the AversionTM
Technology will issue, or if such patents issue, that the claims granted will be
sufficiently broad to provide economic value. Moreover, even if such patents
issue, there can be no assurance that the commercialization of products
incorporating the AversionTM
Technology will not infringe the patents or other intellectual property rights
of third parties. For example, if a third party were issued a patent with claims
encompassing the AversionTM
Technology or products incorporating such Technology, the Company may need to
obtain a license in order to commercialize products utilizing the
AversionTM
Technology, should one be available or, alternatively, alter the
AversionTM
Technology so as to avoid infringing such third-party patents. If the Company
were unable to obtain a license on commercially reasonable terms, the Company
could be restricted or prevented from commercializing products utilizing the
AversionTM
Technology. The Company’s success depends in significant part on the Company’s
ability to obtain protection for the AversionTM
Technology, both in the United States and in other countries, to enforce these
patents and to avoid infringing third-party patent and intellectual property
rights.
Import
License Registration
The
research, development and manufacture of APIs and finished dosage products
incorporating the Opioid Synthesis Technologies are subject to extensive
regulation by the DEA and the FDA. The Culver Facility is currently registered
by the DEA to research and manufacture certain DEA controlled substances (the
“Manufacturing Registration”). To provide for an economical source of raw
materials for the commercial manufacturing of opioids utilizing the Opioid
Synthesis Technologies the Company filed with the DEA an application for
registration to import narcotic raw materials (“NRMs”) including raw opium,
opium poppy and concentrate of poppy straw from certain foreign countries. These
NRMs are commonly used as the initial starting materials in the synthesis of
certain opioid APIs.
The
Company filed its application for registration to import NRMs on January 31,
2001 (the “Import Registration”). Notice of the Company’s application was
published in the Federal Register on September 6, 2001. Within the 30 day period
provided under DEA guidelines, three parties, including two companies that the
Company believes are the largest U.S. importers of NRMs requested a hearing to
formally object to the Company’s request for an Import Registration. Pursuant to
established procedures, an evidentiary hearing relating to the Company’s Import
Registration application was held before a DEA Administrative Law Judge (“ALJ”)
in August 2003. The ALJ later re-opened the administrative record, at the
request of opposing parties, to consider the Company’s November and December
2003 announcements concerning the Company restructuring and financing
activities. After submission of additional testimony by the Company and certain
of the opposing parties, the ALJ closed the evidentiary record on May 25, 2004.
As of August 31, 2004, the Company and the opposing parties have prepared and
submitted to the ALJ briefing documents based on the evidentiary record and
replies to the opposing parties’ briefing documents. With the evidentiary record
closed and the briefing documents and reply briefing documents submitted, the
Company estimates that within 18 months from September 1, 2004, the ALJ will
make findings of fact, draw legal conclusions and make a specific recommendation
on the Company’s Import Registration application to the DEA Deputy
Administrator. Historically, within 14 months after receiving the ALJ’s
recommendation, the DEA deputy administrator will issue an order relating to the
Company’s application. Assuming DEA grants the Company’s application, of which
no assurance can be given, the Company would be permitted to import NRMs upon
appropriate notice in the Federal Register. However, the opposing parties may
challenge the DEA decision to grant the Company’s application in an appropriate
Court of Appeals. In such a case, assuming the Company opposes an appellate
challenge, the Company would likely incur additional time delays and legal
expenses prior to the issuance of a final decision by the U.S. Court of Appeals.
Provided the Company continues to seek the Import Registration, it is expected
that the proceedings will continue through 2005 and beyond.
No
assurance can be given that the Company’s Import Registration application will
be approved by the DEA or that, if granted by DEA, the Import Registration would
be upheld following an appellate challenge. Furthermore, the Company’s cash flow
and limited sources of available financing make it uncertain that the Company
will have sufficient capital to continue to fund the development of the Opioid
Synthesis Technologies, to obtain required DEA approvals and to fund the capital
improvements necessary for the manufacture of APIs and finished dosage products
incorporating the Opioid Synthesis Technologies. See “Opioid Synthesis
Technologies” above for a discussion of the Company’s need for additional
financing and estimated capital requirements for the scale-up of the Hydrocodone
Bitartrate Process #1 Opioid Synthesis Technology and the Company’s suspension
of development and commercialization efforts relating to the Opioid Synthesis
Technologies.
Recent
Events
Restructure
of Operations
After due
consideration of alternative strategies and considering the optimal use of
available funding, and the prospects for attracting new funding, on October 30,
2003, the Company’s Board of Directors unanimously adopted a strategy to
substantially restructure the Company’s operations. On November 6, 2003, the
Company publicly announced its restructuring plan to focus its efforts on
research and development related to certain proprietary finished dosage products
and APIs. In making its determination the Board of Directors considered, among
other factors, the Company’s ability and time required to generate positive cash
flow and income from the operation of the Company’s finished dosage
manufacturing, packaging, labeling and distribution facilities located in
Congers, New York (collectively, the “Congers Facilities”) in the manufacture
and distribution of finished dosage generic products pursuant to abbreviated new
drug applications (“ANDAs”).
The
Company incurred losses of $48.5 million in 2003, $59.6 million in 2002 and
$12.6 million in 2001. The Board determined that near term sales of the
Company’s finished dosage generic products would likely result in continued
financial losses in view of the highly competitive market environment, low
market pricing, declining market size for its existing generic products and the
lack of timely new generic product launches. Based on this analysis and other
factors, the Board concluded that the Company restructure its operations by
closing or divesting the Congers Facilities and reducing certain activities at
its Culver Facility.
In
implementing the restructuring of operations at the Congers Facilities, finished
generic product manufacturing operations substantially ceased on January 30,
2004. Packaging and labeling operations ceased approximately February 12, 2004
and quality assurance and related support activities ceased on approximately
February 27, 2004. Such dates also mark the substantial completion of the
reduction in work force of approximately 70 employees engaged in these
activities at the Congers Facilities.
In
accordance with the restructuring of the its operations, the Company has
transitioned to a single vertically integrated operations site located at its
Acura Pharmaceutical Technologies, Inc. subsidiary in Culver, Indiana. The
Company intends to implement the following strategy and perform relevant key
activities primarily at the Culver Facility:
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Development,
in concert with Contract Research Organizations (“CROs”), of the Company’s
proprietary AversionTM
Technology for use in orally administered opioid finished dosage
products. |
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Manufacture
and quality assurance release of clinical trial supplies of certain
finished dosage form products utilizing the AversionTM
Technology. |
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Evaluation,
in concert with CROs, of certain finished dosage products utilizing the
AversionTM
Technology in clinical trials. |
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Scale-up
and manufacture of commercial quantities of certain products utilizing the
AversionTM
Technology for sale by the Company’s licensees. |
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Prosecution
of the Company’s application to the DEA to receive a registration (the
“Import Registration”) to import Narcotic Raw Materials
(“NRMs”). |
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Negotiating
and executing license and development agreements with strategic
pharmaceutical company partners providing that such licensees will further
develop certain finished dosage products utilizing the
AversionTM
Technology, file for regulatory approval with the FDA and other regulatory
authorities and commercialize such
products. |
The
development, scale-up and commercialization of APIs incorporating the Company’s
Opioid Synthesis Technologies and AversionTM
Technology are subject to various factors, many of which are outside the
Company’s control. To date, a portion of such technologies have been tested in
laboratory and clinical settings. All such Technologies will need to be
successfully scaled up to be commercially viable, of which no assurance can be
given. Additionally, the Company must satisfy, and continue to maintain
compliance with the DEA’s and FDA’s requirements for the maintenance of its
controlled substances research and manufacturing registrations. The Company is
pursuing the Import Registration to import NRMs from certain foreign countries
as described above under the caption “Import License Registration”. The Company
is unable to provide any assurance that such Technologies can be scaled up to
commercial scale or that they will be commercially viable. Moreover, no
assurance can be given that the Company will succeed in obtaining the Import
Registration. The Company is committing substantially all of its resources and
available capital to the development of the AversionTM
Technology and to a lesser extent the Opioid Synthesis Technologies and the
prosecution of the Import Registration. The failure of the Company to
successfully develop the AversionTM
Technology will have a material adverse effect on the Company’s operations and
financial condition.
2004
Debenture Offering
On
February 10, 2004, the Company consummated a private offering of convertible
senior secured debentures (the “2004 Debentures”) in the aggregate principal
amount of approximately $12.3 million (the “2004 Debenture Offering”). The 2004
Debentures were issued by the Company pursuant to a certain Debenture and Share
Purchase Agreement dated as of February 6, 2004 (the “2004 Purchase Agreement”)
by and among the Company, Care Capital Investments, Essex Woodlands Health
Ventures, Galen Partners and each of the purchasers listed on the signature page
thereto. On April 14, 2004 and May 26, 2004, the Company completed additional
closings under the 2004 Purchase Agreement raising the aggregate gross proceeds
received by the Company from the offering of the 2004 Debentures to $14 million.
The 2004 Debentures carried an interest rate of $1.62% per annum and were
secured by a lien on all assets of the Company and the assets of Acura
Pharmaceutical Technologies, Inc. and Axiom Pharmaceutical Corporation, each a
wholly-owned subsidiary of the Company. As the conversion price of the 2004
Debentures was less than the fair market value of the Company’s common stock on
the date of issue, beneficial conversion features were determined to exist. The
Company recorded approximately $14.0 million of debt discount limited to the
face amount of the new debt. The debt discount was amortized over the life of
the debt, which matured on August 13, 2004, the date the 2004 Debentures were
automatically converted into the Company’s Series A Convertible Preferred Stock
(see “Conversion of 2004 Debentures into Series A Preferred Stock” below).
Source
and Amount of Funding under 2004 Purchase Agreement
Of the
$14.0 million in 2004 Debentures issued in the 2004 Debenture Offering,
approximately $2.0 million of 2004 Debentures were issued in exchange for the
surrender of like amount of principal plus accrued interest outstanding under
Company’s 5% convertible senior secured debentures issued pursuant to working
capital bridge loan transactions with Care Capital, Essex Woodlands Health
Ventures and Galen Partners during November and December, 2003.
Conversion
of 2004 Debentures into Series A Preferred Stock
The 2004
Debentures (including the principal amount plus interest accrued) converted
automatically into the Company’s Series A convertible preferred stock (the
“Series A Preferred”) on August 13, 2004, the business day following the
Company’s receipt of shareholder approval to restate the Company’s Certificate
of Incorporation (the “Charter Amendment”) to authorize the Series A Preferred
and the Junior Preferred Shares (as described below) and the filing of the
Charter Amendment with the Office of the New York Department of State, as
provided in the 2004 Purchase Agreement. The 2004 Debentures converted into an
aggregate of 21,963,757 Series A Preferred shares based on a $0.6425 per share
conversion price.
Series A
Preferred Stock Liquidation Preference, Conversion Right and Participation
Right
In
general, the Series A Preferred shares have a liquidation preference equal to
five (5) times the initial $0.6425 Series A conversion price (the “Series A
Liquidation Preference”). In addition, the Series A Preferred shares are
convertible into the Company’s Common Stock, with each Series A Preferred share
convertible into the number of shares of Common Stock obtained by dividing (i)
the Series A Liquidation Preference, by (ii) the $0.6425 Series A conversion
price, as such conversion price may be adjusted, from time to time, pursuant to
the dilution protections of such shares. Without limiting the Series A
Liquidation Preference, the holders of Series A Preferred shares also have the
right to participate with the holders of the Company’s Common Stock upon the
occurrence of a liquidation event, including the Company’s merger, sale of all
or substantially all of its assets or a change of control transaction, on an
as-converted basis (but for these purposes only, assuming the Series A Preferred
shares to be convertible into only thirty percent (30%) of the shares of Common
Stock into which they are otherwise then convertible). The holders of Series A
Preferred shares also have the right to vote as part of a single class with all
holders of the Company’s voting securities on all matters to be voted on by such
security holders. Each holder of Series A Preferred shares will have such number
of votes as shall equal the number of votes he would have had if such holder
converted all Series A Preferred shares held by such holder into shares of
Common Stock immediately prior to the record date relating to such
vote.
Board of
Director Representation
The 2004
Purchase Agreement provides that each of Care Capital, Essex Woodlands Health
Ventures and Galen Partners (collectively, the “Lead 2004 Investors”) has the
right to designate for nomination one member of the Company’s Board of
Directors, and that the Lead Investors collectively may designate one additional
member of the Board (collectively, the “Designees”). The Purchase Agreement
further provides that the Designees, if so requested by such Designee in his
sole discretion, shall be appointed to the Company’s Executive Committee,
Compensation Committee and any other Committee of the Board of Directors. The
Designees of Care Capital, Essex and Galen are Messrs. Karabelas, Thangaraj and
Wesson, respectively, each of whom are current Board members. In accordance with
the terms of the 2004 Purchase Agreement, the Lead 2004 Investors may
collectively nominate one additional Designee to the Board. The Company has
agreed to nominate and appoint to the Board of Directors, subject to shareholder
approval, one designee of each of Care Capital, Essex and Galen, and one
collective designee of the Lead 2004 Investors, for so long as each holds a
minimum of 50% of the Series A Preferred shares initially issued to such party
(or at least 50% of the shares of Common Stock issuable upon conversion of the
Series A Preferred shares).
Impact of
Conversion of the Company’s Outstanding Debentures
As of
February 10, 2004, the date of the initial closing of the 2004 Purchase
Agreement, the Company had issued and outstanding and aggregate of approximately
$86.6 million in principal amount of 5% convertible senior secured debentures
maturing March 31, 2006 issued pursuant to three separate Debenture Purchase
Agreements dated March 10, 1998, as amended (the “1998 Debentures”), May 26,
1999, as amended (the “1999 Debentures”) and December 20, 2002 (the “2002
Debentures”), respectively. The 1998 Debentures, 1999 Debentures and 2002
Debentures are referred to collectively as the “1998-2002 Debentures”. After
giving effect to the Company’s issuance of additional 5% convertible senior
secured debentures in satisfaction of interest payments on the 1998-2002
Debentures, as of February 10, 2004, the 1998-2002 Debentures were convertible
into an aggregate of approximately 190.4 million shares of the Company’s Common
Stock.
Conversion
Agreement of Holders of 1998-2002 Debentures
Simultaneous
with the execution of the 2004 Purchase Agreement, and as a condition to the
initial closing of the 2004 Purchase Agreement, the Company, the investors in
the 2004 Debentures and each of the holders of the 1998-2002 Debentures executed
a certain Debenture Conversion Agreement, dated as of February 6, 2004 (the
“Conversion Agreement”). In accordance with the terms of the Conversion
Agreement, effective August 13, 2004, each holder of 1998-2002 Debentures
converted the 1998-2002 Debentures held by such holder into the Company’s Series
B convertible preferred stock (the “Series B Preferred”) and/or Series C-1, C-2
and/or C-3 convertible preferred stock (collectively, the “Series C Preferred”).
The Series C Preferred shares together with the Series B Preferred shares are
herein referred to as, the “Junior Preferred Shares”.
Under the
Conversion Agreement, the holders of approximately $6.6 million in principal
amount of 2002 Debentures issued during 2003 converted such 2002 Debentures
(plus accrued and unpaid interest) into Series B Preferred Shares. Of the
remaining approximate $80 million in principal amount of the 1998-2002
Debentures, approximately $31.2 million was comprised of 1998 Debentures,
approximately $21.5 million was comprised of 1999 Debentures and approximately
$27.3 million was comprised of 2002 Debentures. Effective August 13, 2004, the
1998 Debentures were converted into Series C-1 Preferred shares, the 1999
Debentures were converted into Series C-2 Preferred shares and the remaining
balance of the 2002 Debentures were converted into Series C-3 Preferred
shares.
The
number of Junior Preferred Shares issued by the Company to each holder of
1998-2002 Debentures was based on the respective prices at which the 1998-2002
Debentures were convertible into Common Stock. The 2002 Debentures issued in
2003 had a conversion price of $0.3420 per share. The 1998 Debentures, 1999
Debentures and the remaining balance of the 2002 Debentures had conversion
prices of $0.5776, $0.5993 and $0.3481 per share, respectively. Upon the
automatic conversion of the 1998-2002 Debentures on August 13, 2004, the Company
issued an aggregate of 20,246,506 million Series B Preferred shares, 56,422,558
million Series C-1 Preferred shares, 37,433,096 million Series C-2 Preferred
shares and 81,907,069 million Series C-3 Preferred shares.
Liquidation
Preference of Junior Preferred Shares
In
general, the Junior Preferred Shares have a liquidation preference equal to one
(1) time the principal amount plus accrued and unpaid interest on the 1998-2002
Debentures converted into Junior Preferred Shares. The liquidation preference of
the Series B Preferred has priority over, and will be satisfied prior to, the
liquidation preference of the Series C Preferred. The liquidation preference for
each class of the Junior Preferred Shares is equal to the conversion prices of
such shares. The Junior Preferred Shares are convertible into the Company’s
Common Stock, with each Junior Preferred Share convertible into one share of
Common Stock. The holders of the Junior Preferred Shares have the right to vote
as part of the single class with all holders of the Company’s Common Stock and
the holders of the Series A Preferred on all matters to be voted on by such
security holders, with each holder of Junior Preferred Shares having such number
of votes as shall equal the number of votes he would have had if such holder had
converted all Junior Preferred Shares held by such holder into Common Stock
immediately prior to the record date relating to such vote.
Common
Share Equivalents of the Series A Preferred and Junior Preferred Shares
The
Series A Preferred shares, the Series B Preferred shares and the Series C
Preferred shares are convertible into approximately 109.8 million, 20.2 million
and 175.7 million shares of Common Stock, respectively. If all of such Preferred
Shares were converted into Common Stock, the Company would have issued and
outstanding approximately 328 million shares of Common Stock.
Amendment
to Watson Term Loan Agreement
The
Company was a party to a certain loan agreement with Watson Pharmaceuticals,
Inc. (“Watson”) pursuant to which Watson made term loans to the Company (the
“Watson Term Loan Agreement”) in the aggregate principal amount of $21.4 million
as evidenced by two promissory notes (the “Watson Notes”). It was a condition to
the completion of the 2004 Debenture Offering that simultaneous with the closing
of the 2004 Purchase Agreement, the Company shall have paid Watson the sum of
approximately $4.3 million (which amount was funded from the proceeds of the
2004 Debenture Offering) and conveyed to Watson certain Company assets in
consideration for Watson’s forgiveness of approximately $16.4 million of
indebtedness under the Watson Notes. A part of such transaction, the Watson
Notes were amended to extend the maturity date of such notes from March 31, 2006
to June 30, 2007, to provide for satisfaction of future interest payments under
the Watson Notes in the form of the Company’s Common Stock, to reduce the
principal amount of the Watson Notes from $21.4 million to $5.0 million, and to
provide for the forbearance from the exercise of rights and remedies upon the
occurrence of certain events of default under the Watson Notes (the Watson Notes
as so amended, the “2004 Note”). Simultaneous with the issuance of the 2004
Note, each of Care Capital, Essex Woodland Health Ventures, Galen Partners and
the other investors in the 2004 Debentures as of February 10, 2004
(collectively, the “Watson Note Purchasers”) purchased the 2004 Note from Watson
in consideration for a payment to Watson of $1.0 million.
In
addition to Watson’s forgiveness of approximately $16.4 million under the Watson
Notes, as additional consideration for the Company’s payment to Watson of
approximately $4.3 million and the Company’s conveyance of certain Company
assets, all supply agreements between the Company and Watson were terminated and
Watson waived the dilution protections contained in the Common Stock purchase
warrant dated December 20, 2002 exercisable for approximately 10.7 million
shares of the Company’s Common Stock previously issued by the Company to Watson,
to the extent such dilution protections were triggered by the transactions
provided in the 2004 Debenture Offering.
Terms of
the 2004 Note
The 2004
Note in the principal amount of $5.0 million, as purchased by the Watson Note
Purchasers, is secured by a first lien on all of the Company’s and its
subsidiaries’ assets, carries a floating rate of interest equal to the prime
rate plus 4.5% and matures on June 30, 2007.
Sale
of Certain
Company Assets
On
February 18, 2004, the Company and Mutual Pharmaceuticals, Inc. (“Mutual”)
entered into a certain Asset Purchase Agreement (the “Mutual Asset Purchase
Agreement”) pursuant to which the Company sold certain inactive, non-revenue
generating ANDAs to Mutual in consideration of $2.0 million. The ANDAs sold to
Mutual were in various therapeutic categories, including analgesics,
anti-infectives, anti-hypertensives, antihistamines, steroids and certain other
categories. The decision to divest such ANDAs was based, among other things, on
the Company’s revised business strategy which focuses on research and
development of the AversionTM
Technology
and the Opioid Synthesis Technologies, and that the Company had ceased
operations at its finished dosage manufacturing facilities in Congers, New York
and was in the process of negotiating the sale of such facilities.
On March
19, 2004, the Company and its wholly-owned subsidiary, Axiom Pharmaceutical
Corporation (“Axiom”), entered into an Asset Purchase Agreement with IVAX
Pharmaceuticals New York LLC (“IVAX”). Pursuant to the Purchase Agreement, the
Company and Axiom agreed to sell to IVAX substantially all of the Company’s
assets used in the operation of the Company’s former generic manufacturing and
packaging operations located in Congers, New York in consideration of an
immediate payment of $2.0 million and an additional payment $0.5 million upon
receipt of shareholder approval of the transaction. Shareholder approval of the
asset sale transaction with IVAX was obtained on August 12, 2004 and the closing
was completed on August 13, 2004, at which time the Company received the
remaining payment of $0.5 million from IVAX.
Marketing
and Customers
As a
result of restructuring its operations, the Company has discontinued the
manufacture and distribution of all of its generic products and therefore at
this time is not engaged in product marketing, selling or distributing finished
dosage products or bulk API to trade or pharmaceutical industry
customers.
Segment
Reporting
The
Company operates in only one business segment - primarily
engaged in research, development and manufacture of innovative abuse deterrent
formulations (“Aversion TM
Technology”) intended for use in orally administered opioid-containing
pharmaceutical products.
Government
Regulation
General
All
pharmaceutical technology and manufacturing firms, including the Company, are
subject to extensive regulation by the Federal government, principally by the
FDA, and, to a lesser extent, by state and local governments. Additionally, the
Company is subject to extensive regulation by the DEA for research, development
and manufacturing of controlled substances. The Company cannot predict the
extent to which it may be affected by legislative and other regulatory
developments concerning its products and the healthcare industry in general. The
Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act and other
Federal statutes and regulations govern or influence the testing, manufacture,
labeling, storage, record keeping, approval, pricing, advertising, promotion,
sale and distribution of pharmaceutical products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, criminal
proceedings, total or partial suspension of production, and refusal of the
government to enter into supply contracts or to approve new drug applications.
The FDA also has the authority to revoke or withhold approvals of new drug
applications.
FDA
approval is required before any “new drug,” whether prescription or
over-the-counter, can be marketed. A “new drug” is one not generally recognized
by qualified experts as safe and effective for its intended use. Such general
recognition must be based on published adequate and well controlled clinical
investigations. Each dosage form of a specific “new drug” product requires
separate approval by the FDA. In general, as discussed below, less costly and
time consuming approval procedures may be used for generic equivalents as
compared to the innovative products. In addition, certain modifications using
existing pharmaceutical products may be subject to streamlined approval
procedures, although a case-by-case analysis must be undertaken. In addition to
providing required safety and effectiveness data for FDA approval, a drug
manufacturer’s practices and procedures must conform to current Good
Manufacturing Practice Regulations (“cGMPs”), which apply to the manufacture,
receiving, holding and shipping of all drugs, whether or not approved by the
FDA. To ensure full compliance with relevant standards, some of which are set
forth in regulations, the Company must continue to expend time, money and effort
in the areas of production and quality control. Failure to so comply risks
delays in approval of drugs, disqualification from eligibility to sell to the
government, and possible FDA enforcement actions, such as an injunction against
shipment of the Company’s products, the seizure of non-complying drug products,
and/or, in serious cases, criminal prosecution. The Company’s manufacturing
facilities are subject to periodic inspection by the FDA.
In
addition to the regulatory approval process, the Company is subject to
regulation under Federal, state and local laws, including requirements regarding
occupational safety, laboratory practices, environmental protection and
hazardous substance control, and may be subject to other present and future
local, state, Federal and foreign regulations, including possible future
regulations of the pharmaceutical industry.
Drug
Approvals
There are
currently three ways to obtain FDA approval to commercially market and
distribute a new drug in the U.S.:
1. New
Drug Applications (“NDA”). Unless one of the procedures discussed in paragraph 2
or 3 below is available, a prospective manufacturer must conduct and submit to
the FDA complete clinical studies to prove a drug’s safety and efficacy, in
addition to the bioavailability and/or bioequivalence studies discussed below,
and must also submit to the FDA information about manufacturing practices, the
chemical make-up of the drug and labeling. Some of the products anticipated to
be developed by the Company which will incorporate the Opioid Synthesis
Technologies and the AversionTM
Technology will require an NDA filing. The full clinical testing required for
the preparation and filing of an NDA requires the expenditure of substantial
resources. The Company intends to collaborate with third-parties to fund the
preparation and filing of any such NDAs. There can be no assurance that any such
collaboration will be available on terms acceptable to the Company, if at
all.
2.
“505(b)(2) or “Paper” NDA. An alternative NDA procedure is provided by the 1984
Act whereby the applicant may rely on published literature and more limited
testing requirements. This application process is useful when the API is
commercially available in an alternative dosage form or formulation. The Company
believes that the 505(b)(2) application procedure may be applicable to a portion
of the products it intends to develop utilizing its AversionTM
Technology.
3.
Abbreviated New Drug Applications (“ANDAs”). The Drug Price Competition and
Patent Term Restoration Act of 1984 (the “1984 Act”) established the ANDA
procedure for obtaining FDA approval for those drugs that are off-patent or
whose exclusivity has expired and that are bioequivalent to brand-name drugs. An
ANDA is similar to an NDA, except that the FDA waives the requirement of
conducting complete clinical studies of safety and efficacy, although it may
require expanded clinical bioavailability and/or bioequivalence studies.
“Bioavailability” means the rate of absorption and levels of concentration of a
drug in the blood stream needed to produce a therapeutic effect.
“Bioequivalence” means equivalence in bioavailability between two drug products.
In general, an ANDA will be approved only upon a showing that the generic drug
covered by the ANDA is bioequivalent to the previously approved version of the
drug product, i.e., that the rate of absorption and the levels of concentration
of a generic drug in the body are substantially equivalent to those of a
previously approved equivalent drug product. The principal advantage of this
approval mechanism is that an ANDA applicant is not required to conduct the same
preclinical and clinical studies to demonstrate that the product is safe and
effective for its intended use.
Healthcare
Reform
Several
legislative proposals to address the rising costs of healthcare have been
introduced in Congress and several state legislatures. Many of such proposals
include various insurance market reforms, the requirement that businesses
provide health insurance coverage for all their employees, significant
reductions in the growth of future Medicare and Medicaid expenditures, and
stringent government cost controls that would directly control insurance
premiums and indirectly affect the fees of hospitals, physicians and other
healthcare providers. Such proposals could adversely affect the Company’s
business by, among other things, reducing the demand, and the prices paid, for
pharmaceutical products such as those being developed by the Company.
Additionally, other developments, such as (i) the adoption of a nationalized
health insurance system or a single payor system, (ii) changes in needs-based
medical assistance programs, or (iii) greater prevalence of capitated
reimbursement of healthcare providers, could adversely affect the demand for the
Company’s products in development utilizing the Company’s
Technologies.
Environmental
Compliance
In
addition to regulation by the FDA and DEA, the Company is subject to regulation
under Federal, state and local environmental laws. The Company believes it is in
material compliance with applicable environmental laws. The Company spent
$180,000, $227,000 and $227,000 in the years 2004, 2003 and 2002, respectively,
on environmental compliance relating to the disposal of hazardous and controlled
substances waste and personnel costs.
Competition
The
Company competes to varying degrees with numerous companies in the
pharmaceutical research, development, manufacturing and commercialization
fields. Most, if not all, of the Company’s competitors have substantially
greater financial and other resources and are able to expend more funds and
effort than the Company in research and development of their competitive
technologies and products. Although a larger company with greater resources than
the Company will not necessarily have a higher likelihood of receiving
regulatory approval for a particular product or technology as compared to a
smaller competitor, the company with a larger research and development
expenditure will be in a position to support more development projects
simultaneously, thereby improving the likelihood of obtaining regulatory
approval of a commercially viable product or technology than its smaller
rivals.
The
Company is aware of potential competitors that may be developing technologies
designed to have one or more of the abuse deterrent features of the Company’s
AversionTM
Technology.
Such competitors include, but are not limited to, Elite Pharmaceuticals, Inc. of
Northvale, New Jersey, Collegium Pharmaceuticals of Cumberland, Rhode Island,
New River Pharmaceuticals, Inc. of Radford, Virginia and Pain Therapeutics of
South San Francisco, California. In addition, Purdue Pharma of Stamford,
Connecticut and Endo Pharmaceuticals of Chadds Ford, Pennsylvania have announced
that they are pursuing abuse deterrent formulations of opioid based products.
The Company believes that Endo Pharmaceuticals has entered into a license
agreement to evaluate opioid abuse deterrent technologies developed by Collegium
Pharmaceuticals.
Raw
Materials
The DEA
controls both the quantity of controlled substances produced in the U.S. and the
quantity of certain raw materials obtained by pharmaceutical developers and
manufacturers for the production of controlled substances. In this regard, the
Company is required to file for and obtain quotas from the DEA for the purchase
and use of controlled substance materials including NRMs. Although the Company
has made initial contacts with overseas NRM suppliers, no assurance can be given
that the Company will be successful in obtaining an adequate quota from the DEA
or (even assuming the Company’s Import Registration is granted) in contracting
with third-party suppliers in foreign countries for NRMs on commercially
acceptable terms for the Company’s requirements of NRMs to be used in its
controlled substance development and commercialization efforts. Provided the
Company continues to seek the Import Registration, the process and proceedings
described above under the caption “Import License Registration” will continue
through 2005 and beyond.
Subsidiaries
The
Company’s Culver, Indiana research, development, and manufacturing operations
are conducted by Acura Pharmaceutical Technologies, Inc., an Indiana corporation
and wholly-owned subsidiary of the Company. Axiom Pharmaceutical Corporation, a
Delaware corporation, is a wholly-owned subsidiary of the Company and was
formerly engaged in generic product manufacturing and distribution in Congers,
New York. Inasmuch as the Company’s generic drug manufacturing and distribution
operations have been terminated, Axiom Pharmaceutical Corporation is an inactive
subsidiary of the Company.
Employees
As of
February 1, 2005, the Company had 17 full-time
employees. Twelve of these employees are engaged in activities at the Culver
Facility relating to the research, development, scale-up and commercialization
of the Opioid Synthesis Technologies and AversionTM
Technology.
The remaining five employees are engaged in administrative, legal, accounting,
finance, market research, business development and licensing
activities.
ITEM
2. PROPERTIES
The
Company leases approximately 1,600 square feet of administrative office space at
616 N. North Court, Suite 120, Palatine, Illinois 60067. The lease agreement is
between the Company and an unaffiliated lessor. The lease agreement has an
initial term of one year expiring February 28, 2005. The Company has exercised
its option under the lease to renew the lease for an additional one year term.
The lease agreement provides for annual rent, property taxes, common area
maintenance and janitorial services for approximately $29,000 per year. This
leased office space is utilized for the Company’s administrative, accounting,
finance, market research, and business development functions.
The
Company conducts research, development, laboratory, manufacturing and
warehousing activities relating to the AversionTM
Technology
and the Opioid Synthesis Technologies at its facility located at 16235 State
Road 17, Culver, Indiana. At this location the Company’s Acura Pharmaceutical
Technologies, Inc. subsidiary owns a 28,000 square foot facility
configured with (approximately) a 7,000 square feet warehouse, 10,000 square
feet of manufacturing space, 6,000 square feet of research and development labs
and 5,000 square feet of administrative and storage space. The facility is
located on approximately 30 acres of land.
ITEM
3. LEGAL PROCEEDINGS
Beginning
in 1992, actions were commenced against the Company and numerous other
pharmaceutical manufacturers in connection with the alleged exposure to
diethylstilbestrol (“DES”). The defense of all of such matters was assumed by
the Company’s insurance carrier and a substantial number have been settled by
the carrier. Currently, several actions remain pending with the Company as a
defendant and the insurance carrier is defending each action. Plaintiffs in the
pending litigations seek unspecified damages. The Company does not believe any
of such actions will have a material impact on the Company’s financial
condition.
The
Company is named as a defendant in an action entitled Alfred Kohn v. Halsey Drug
Co. in the Supreme Court of New York, Bronx County. The plaintiff seeks damages
of $1.0 million for breach of an alleged oral contract to pay a finder’s fee for
a business transaction involving the Company. Discovery in this action is
complete. The Company’s and the Plaintiff’s motion for summary judgment were due
to be heard by the Court in August 8, 2003. Plaintiff Kohn deceased shortly
prior to such hearing date, and the motions for summary judgment and any trial
of this matter were stayed pending the substitution of Mr. Kohn’s estate as the
plaintiff. The Estate of Mr. Kohn has been substituted as the plaintiff. In
February, 2005, the Court ruled in favor of the Company under its motion for
summary judgment. In doing so, the Court dismissed all aspects of Plaintiff’s
complaint, with the exception of Plaintiff’s claim for payment of the fair value
for the services alleged to have been performed by Plaintiff. The
Company and the Estate of Mr. Kohn have agreed in principle to settle this
matter, pursuant to which the Company would make a one-time payment of $35,000.
The proposed settlement is subject to the preparation and execution of a
definitive settlement agreement and the approval of the Bronx, New York
Surrogate's Court.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders during the fourth quarter
of 2004.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
Market
and Market Prices of Common Stock
Set forth
below for the periods indicated are the high and low bid prices for the
Company’s Common Stock for trading in the Common Stock on the OTC Bulletin Board
as reported by the OTC Bulletin Board. Such over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
|
|
BID
PRICE |
|
PERIOD |
|
HIGH |
|
LOW |
|
2003
Fiscal Year |
|
|
|
|
|
First
Quarter |
|
|
1.09 |
|
|
0.82 |
|
Second
Quarter |
|
|
1.11 |
|
|
0.76 |
|
Third
Quarter |
|
|
1.60 |
|
|
0.76 |
|
Fourth
Quarter |
|
|
1.07 |
|
|
0.26 |
|
|
|
|
|
|
|
|
|
2004
Fiscal Year |
|
|
|
|
|
|
|
First
Quarter |
|
|
0.82 |
|
|
0.41 |
|
Second
Quarter… |
|
|
0.62 |
|
|
0.37 |
|
Third
Quarter… |
|
|
0.53 |
|
|
0.31 |
|
Fourth
Quarter…. |
|
|
0.64 |
|
|
0.32 |
|
|
|
|
|
|
|
|
|
2005
Fiscal Year |
|
|
|
|
|
|
|
First
Quarter… |
|
|
0.50 |
|
|
0.38 |
|
(through
February 1, 2005) |
|
|
|
|
|
|
|
Holders
There
were approximately 662
holders of record of the Company’s common stock on February 1, 2005. This
number, however, does not reflect the ultimate number of beneficial holders of
the Company’s Common Stock.
Dividend
Policy
The
payment of cash dividends from current earnings is subject to the discretion of
the Board of Directors and is dependent upon many factors, including the
Company’s earnings, its capital needs and its general financial condition. The
terms of the Company’s Series A Preferred shares and the Term Loan Agreement
assigned by Watson Pharmaceuticals, Inc. to Care Capital Investments II, LP,
Essex Woodlands Health Ventures V, L.P., Galen Partners III, L.P. and certain
other investors in the 2004 Debentures (see “Item 13. Certain Relationships and
Related Transactions”) prohibit the Company from paying cash dividends. The
Company does not intend to pay any cash dividends in the foreseeable
future.
Recent
Sales of Unregistered Securities
During
the quarter ended December 31, 2004, the Company issued 277,715 shares of the
Company’s Common Stock in satisfaction of the payment of $119,417 in accrued
interest due December 31, 2004 under the Company’s senior secured term note.
Each of the recipients of such Common Stock is an Accredited Investor as defined
in Rule 501(a) of Regulation D promulgated under the Securities Act. Such Common
Stock was issued without registration under the Securities Act in reliance upon
Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
ITEM
6. SELECTED FINANCIAL DATA
The
selected consolidated financial data presented on the following pages for the
years ended December 31, 2004, 2003, 2002, 2001 and 2000 are derived from the
Company’s audited Consolidated Financial Statements. The Consolidated Financial
Statements as of December 31, 2004 and December 31, 2003, and for each of the
years in the three-year period ended December 31, 2004, and the report thereon,
are included elsewhere herein. The selected financial information as of and for
the years ended December 31, 2001 and 2000 are derived from the audited
Consolidated Financial Statements of the Company not presented
herein.
The
information set forth below is qualified by reference to, and should be read in
conjunction with, the Consolidated Financial Statements and related notes
thereto included elsewhere in this Report and “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
|
|
YEARS
ENDED DECEMBER 31, |
|
|
|
2004 |
|
2003
|
|
2002
|
|
2001 |
|
2000 |
|
|
|
(IN
THOUSANDS, EXCEPT PER SHARE DATA) |
|
OPERATING
DATA: |
|
|
|
|
|
|
|
|
|
|
|
Net
revenues |
|
$ |
838 |
|
$ |
5,750 |
|
$ |
8,205 |
|
$ |
16,929 |
|
$ |
20,223 |
|
Operating
Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of manufacturing |
|
$ |
1,435 |
|
$ |
11,705 |
|
$ |
12,535 |
|
|
14,857 |
|
|
18,743 |
|
Research
and development |
|
$ |
4,130 |
|
$ |
1,460 |
|
$ |
1,517 |
|
|
1,327 |
|
|
1,821 |
|
Selling,
general and Administrative expenses |
|
$ |
5,238 |
|
$ |
7,903 |
|
$ |
7,216 |
|
|
6,616 |
|
|
6,208 |
|
Plant
shutdown costs |
|
$ |
— |
|
$ |
1,926 |
|
$ |
(126 |
) |
|
68 |
|
|
53 |
|
Interest
expense |
|
$ |
2,962 |
|
$ |
6,001 |
|
$ |
4,728 |
|
|
3,913 |
|
|
3,699 |
|
Interest
income |
|
$ |
59 |
|
$ |
25 |
|
$ |
15 |
|
|
69 |
|
|
662 |
|
Amortization
of deferred debt Discount and private offering Costs |
|
$ |
72,491 |
|
$ |
24,771 |
|
$ |
12,558 |
|
|
2,591 |
|
|
2,448 |
|
Loss
(gain) on extinguishments of Debt |
|
$ |
(12,401 |
) |
$ |
— |
|
$ |
28,415 |
|
|
|
|
|
|
|
Investment
in joint venture |
|
$ |
— |
|
$ |
— |
|
$ |
|
|
|
(202 |
) |
|
(57 |
) |
Other
(income) expense |
|
$ |
(2,962 |
) |
$ |
464 |
|
$ |
966 |
|
|
(13 |
) |
|
(101 |
) |
Loss
before income tax Benefit |
|
$ |
(69,996 |
) |
$ |
(48,455 |
) |
$ |
(59,589 |
) |
|
(12,563 |
) |
|
(12,043 |
) |
Income
tax benefit |
|
$ |
— |
|
$ |
— |
|
$ |
|
|
|
— |
|
|
(389 |
) |
Net
loss |
|
$ |
(69,996 |
) |
$ |
(48,455 |
) |
$ |
(59,589 |
) |
$ |
(12,563 |
) |
$ |
(11,654 |
) |
Basic
and diluted loss per common share |
|
$ |
(3.20 |
) |
$ |
(2.28 |
) |
$ |
(3.90 |
) |
$ |
(.84 |
) |
$ |
(.80 |
) |
Weighted
average number of outstanding shares |
|
|
21,861 |
|
|
21,227 |
|
|
15,262 |
|
|
15,021 |
|
|
14,503 |
|
|
|
DECEMBER
31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000
|
|
|
|
(IN
THOUSANDS) |
|
BALANCE
SHEET DATA: |
|
|
|
|
|
|
|
|
|
|
|
Working
capital (deficiency) |
|
$ |
2,423 |
|
$ |
(3,770 |
) |
$ |
5,933 |
|
$ |
(8,276 |
) |
$ |
(5,061 |
) |
Total
assets |
|
$ |
4,967 |
|
$ |
6,622 |
|
$ |
19,364 |
|
|
11,069 |
|
|
15,209 |
|
Total
liabilities |
|
$ |
6,052 |
|
$ |
58,689 |
|
$ |
31,632 |
|
|
76,505 |
|
|
68,558 |
|
Accumulated
deficit |
|
$ |
(279,541 |
) |
$ |
(209,546 |
) |
$ |
(161,090 |
) |
|
(101,501 |
) |
|
(88,938 |
) |
Stockholders’
equity (deficit) |
|
$ |
(1,085 |
) |
$ |
(52,067 |
) |
$ |
(12,268 |
) |
|
(65,436 |
) |
|
(53,349 |
) |
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This
discussion and analysis should be read in conjunction with the Company’s
financial statements and accompanying notes included elsewhere in this Report.
Operating results are not necessarily indicative of results that may occur in
the future periods.
Certain
statements in this Report including, without limitation, in this Item 7
constitute “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 (the “Reform Act”). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Acura Pharmaceuticals, Inc. (“Acura” or the “Company”), or industry results, to
be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. The most significant of
such factors include, but are not limited to, general economic conditions,
competitive conditions, technological conditions and governmental legislation.
More specifically, important factors that may affect future results include, but
are not limited to: changes in laws and regulations, particularly those
affecting the Company’s operations; the Company’s ability to continue to
attract, assimilate and retain highly skilled personnel; its ability to secure
and protect its patents, trademarks and proprietary rights; its ability to avoid
infringement of patents, trademarks and other proprietary rights or trade
secrets of third parties; litigation or regulatory action that could require the
Company to pay significant damages or change the way it conducts its business;
the Company’s ability to successfully develop and market its products; customer
responsiveness to new products and distribution channels; its ability to compete
successfully against current and future competitors; its dependence on
third-party suppliers of raw materials; the availability of controlled
substances that constitute the active ingredients of the Company’s products in
development; difficulties or delays in clinical trials for Company products or
in the manufacture of Company products; and other risks and uncertainties
detailed in this Report. The Company is at an early stage of development and may
not ever have any products that generate significant revenue. When used in this
Report, the words “estimate,” “project,” “anticipate,” “expect,” “intend,”
“believe,” and similar expressions are intended to identify forward-looking
statements. Additionally,
such forward-looking statements are subject to the risks and uncertainties
discussed below under the section entitled “Risk Factors Relating to the
Company”.
Overview
In
November 2003, the Company commenced the restructuring of its operations to
focus its efforts on research and development relating to the
AversionTM
Technology and Opioid Synthesis Technologies and to provide for the cessation of
operations, and the sale of assets, relating to the manufacture and distribution
of finished dosage generic products conducted at the Company’s Congers, New York
facilities (the “Congers Facilities”).
To fund
continuing operations and the research and development of the Company’s
proprietary Technologies, on February 10, 2004, the Company completed a private
offering of debentures in the aggregate principal amount of approximately $12.3
million (the “2004 Debenture Offering”). As part of the completion of the 2004
Debenture Offering, the Company retired approximately $16.4 million in
indebtedness under the Company’s $21.4 million term loan with Watson
Pharmaceuticals. On April
14, 2004 and May 26, 2004 the Company completed additional funding under the
2004 Debenture Offering in the aggregate principal amount of approximately $1.7
million resulting in an aggregate principal amount of convertible secured
debentures issued as part of the 2004 Debenture Offering of $14.0 million. In
accordance with the terms of the documents executed in connection with the 2004
Debenture Offering, effective August 13, 2004, the aggregate principal amount of
the 2004 Debentures as well as Company’s other convertible debentures issued
during the period 1998 through 2003 (aggregating approximately $80.6 million)
converted into various classes of the Company’s preferred shares. (See “Item 1
- Business - Recent Events - 2004 Debenture Offering”).
On
February 18, 2004, the Company sold certain of its inactive, non-revenue
generating Abbreviated New Drug Applications (“ANDAs”) to Mutual Pharmaceutical
Company, Inc. in consideration of $2.0 million. On March 19, 2004, the Company
and its wholly-owned subsidiary, Axiom Pharmaceutical Corporation, entered into
an Asset Purchase Agreement with IVAX Pharmaceuticals New York LLC (“IVAX”)
pursuant to which the Company and Axiom agreed to sell to IVAX substantially all
of the Company’s assets used in the operation of the Congers Facilities in
consideration of $2.5 million. On August 13, 2004, the Company completed the
sale of the assets used in the operation of the Congers Facilities to IVAX.
As
restructured, the Company is an emerging specialty pharmaceutical company
primarily engaged in research, development and manufacture of innovative abuse
deterrent formulations (“AversionTM
Technology”) intended for use in orally administered opioid-containing
pharmaceutical products. In addition, to a lesser extent, during 2004 and early
2005 the Company was engaged in research, development and manufacture of
proprietary, high-yield, short cycle time, environmentally sensitive opioid
synthesis processes (the “Opioid Synthesis Technologies” and, collectively with
the AversionTM
Technology,
the “Technologies”) intended for use in the commercial production of certain
bulk opioid active pharmaceutical ingredients (“APIs”). The Company is currently
in the process of suspending further development and commercialization efforts
relating to the Opioid Synthesis Technologies (See “Item 1 -Business - Opioid
Synthesis Technologies”). As of
February 1, 2005, the Company has one (1) issued US patent, one (1) US Notice of
Allowance granted, eight (8) U.S. patent applications and one (1) foreign patent
application pending relating to the Opioid Synthesis Technologies. Additionally,
the Company has four (4) U.S. patent applications and one (1) foreign patent
application pending relating to the AversionTM
Technology. As of
February 1, 2005, the Company retained all intellectual property and commercial
rights to its product candidates, the AversionTM Technology
and the Opioid Synthesis Technologies.
Company’s
Present Financial Condition and Commercial Focus
At
December 31, 2004, the Company had cash and cash equivalents of approximately
$3.1 million compared to $942,000 at December 31, 2003. The Company had working
capital of $2.4 million at December 31, 2004 and a working capital deficit of
approximately $3.8 million at December 31, 2003. The Company had an accumulated
deficit of approximately $279.5 million and approximately $209.5 million at
December 31, 2004 and December 31, 2003, respectively. The
Company incurred a loss from operations of approximately $9.9 million
and a net loss of approximately $70.0 million
during the year ended December 31, 2004, as compared to a loss from operations
and a net loss of $17.2
million and $48.5 million, respectively, for the year ended December 31,
2003.
In
implementing the restructuring adopted by the Board, the Company has
transitioned to a single vertically integrated operations facility located in
Culver, Indiana. The Company’s strategy and key activities to be conducted at
the Culver Facility are as follows:
o
Development, in concert with Contract Research Organizations (“CROs”) of the
Company’s AversionTM
Technology for use in orally administered opioid finished dosage product
candidates.
o
Manufacture and quality assurance release of clinical trial supplies of certain
finished dosage form product candidates utilizing the AversionTM
Technology.
o
Evaluation,
in concert with CROs, of certain finished dosage product candidates utilizing
the AversionTM
Technology in clinical trials.
o
Scale-up and manufacture of commercial quantities of certain product candidates
utilizing the AversionTM
Technology for sale by the Company’s licensees.
o
Prosecution of the Company’s application to the U.S. Drug Enforcement
Administration (“DEA”) for registration to import narcotic raw materials
(“NRMs”).
o
Negotiating and executing license and development agreements with strategic
pharmaceutical company partners providing that such licensees will further
develop certain finished dosage product candidates utilizing the
AversionTM
Technology, file for regulatory approval with the FDA and other regulatory
authorities and commercialize such products.
The
Company has incurred net losses since 1992 and the Company’s consolidated
financial statements for each of the years ended December 31, 2004 and 2003 have
been prepared on a going-concern basis, expressing substantial doubt about the
Company’s ability to continue as a going-concern as a result of recurring losses
and negative cash flows. The Company expects net losses to continue at least
through 2005. The
Company’s future profitability will depend on several factors, including:
o The
successful completion of the development, scale-up, clinical testing and
acceptable regulatory review of the AversionTM
Technology;
o The
receipt of a notice of allowance from the U.S. Patent and Trademark Office
(“PTO”) for the material claims in the Company’s patent applications relating to
the AversionTM
Technology;
o The
commercialization of products incorporating the AversionTM
Technology without infringing the patents and other intellectual property rights
of third parties;
o The
receipt of approval from the DEA to import NRMs to be used in the Company’s
development and manufacturing efforts; and
o The
interest of third parties in the Technologies and the Company’s ability to
negotiate and execute commercially viable collaboration agreements with
interested third parties relating to the Technologies.
Many of
these factors will depend upon circumstances beyond the Company’s control.
As of
February 25, 2005, the Company had cash and cash equivalents of approximately
$2.5 million.
The Company estimates its current cash reserves will be sufficient to fund the
development of the AversionTM
Technology and related operating expenses only through May, 2005. See “Liquidity
and Capital Resources - Commercial Focus, Cash Reserves and Funding
Requirements.”
In order
to complete the development and regulatory approval of the Company’s product
candidates and commercialize such products, if any are approved by the FDA, the
Company must enter into development and commercialization agreements with third
party pharmaceutical company partners providing that such partners license the
Company’s Technologies and further develop, register and commercialize the
Company’s orally administered opioid-containing finished dosage products
utilizing such Technology. Future revenue, if any, will be derived from
milestone payments and a share of profits and/or royalty payments relating to
such collaborative partners’ sale of products incorporating the Company’s
Technologies. As of February 1, 2005, the Company did not have any such
collaborative agreements, nor can there be any assurance that the Company will
enter into collaborative agreements in the future.
Estimating
the dates of completion of clinical development, and the costs to complete
development, of the Company’s product candidates would be highly speculative,
subjective and potentially misleading. Pharmaceutical products take a
significant amount of time to research, develop and commercialize, with the
clinical trial portion of development generally taking several years to
complete. The Company expects to reassess its future research and development
plans based on the review of data received from current research and development
activities. The cost and pace of future research and development activities are
linked and subject to change.
Results
of Operations for the Year Ended December 31, 2004 and 2003
In
comparing results of operations for the year ended December 31, 2004 with those
for 2003 it is important
to
consider that in 2004 the Company, as restructured, focused the majority of its
efforts and resources on research and development activities and, subsequent to
March, 2004, no longer maintained any generic manufacturing facilities or
conducted any finished dosage manufacturing activities. Net product revenues and
manufacturing expenses realized in 2004 were incurred as part of an orderly
phase out of all generic manufacturing activities.
Net
Product Revenues
The
Company’s net product revenues for the year ended December 31, 2004 and December
31, 2003 were as follows (in thousands):
12/31/04
NET
PRODUCT REVENUES |
12/31/03
NET
PRODUCT REVENUES |
12/31/04-12/31/03
NET
PRODUCT REVENUE
CHANGE
($) |
12/31/04-12/31/03
NET
PRODUCT REVENUE
CHANGE
(%) |
$
838 |
$
5,750 |
($4,912) |
(85%) |
The
decrease in net product revenues was a result of the Company’s decision to
restructure operations and cease the manufacture of finished dosage generic
pharmaceutical products. The net product revenues for the year ended December
31, 2004 reflect the sale of all remaining inventories of saleable finished
dosage generic pharmaceutical products during the first two quarters of 2004. No
product sales revenues were recorded for the third or fourth quarter of
2004.
Cost of
Manufacturing
The
Company’s cost of manufacturing for the year ended December 31, 2004 and
December 31, 2003 were as follows (in thousands):
12/31/04
COST
OF MANUFACTURING |
12/31/03
COST
OF MANUFACTURING |
12/31/04-12/31/03
COST OF MANUFACTURING CHANGE
($) |
12/31/04-12/31/03
COST OF MANUFACTURING CHANGE
(%) |
$
1,435 |
$
11,705 |
($10,270) |
(88%) |
For the
year ended December 31, 2004 cost of manufacturing includes the fixed costs of
the Company’s generic finished dosage manufacturing operations in the first
quarter of 2004 and residual expenses through the second quarter of 2004. The
Company’s generic finished dosage manufacturing operations ceased in March
2004.
Research
and Development Expenses
The
Company’s research and development expenses for the year ended December 31, 2004
and December 31, 2003 were as follows (in thousands):
12/31/04
R&D
EXPENSES |
12/31/03
R&D
EXPENSES |
12/31/04-12/31/03
R&D
EXPENSES CHANGE
($) |
12/31/04-12/31/03
R&D
EXPENSES CHANGE
(%) |
$
4,130 |
$
1,460 |
$
2,670 |
183% |
Research
and development expense consisted primarily of product development costs prior
to the cessation of the manufacture and sale of finished dosage products. During
2004, research and development expense consists primarily of drug development
work associated with our
AversionTM
Technology, including costs of preclinical, clinical trials, clinical supplies
and related formulation and design costs, salaries and other personnel related
expenses, and facility costs. The increase in R&D expenses is primarily
related to the Company’s strategic decision to devote a major portion of its
resources in 2004 to research and development activities relating to its
AversionTM
Technology and to a lesser extent to its Opioid Synthesis Technologies. The
expenses include a non cash
compensation charge of $553 recorded for the issuance of stock options and
$1,093 of personnel and departmental type charges, which were reassigned from
being chargeable to general and administrative department to being chargeable to
research and development.
Selling,
Marketing, General and Administrative Expenses
Selling,
marketing, general and administrative expenses for the year
ended December 31, 2004 and 2003 were as follows (in thousands):
12/31/04
SELLING,
MARKETING, G&A EXPENSES |
12/31/03
SELLING,
MARKETING, G&A EXPENSES |
12/31/04-12/31/03
SELLING,
MARKETING, G&A EXPENSES CHANGE
($) |
12/31/04-12/31/03
SELLING,
MARKETING, G&A EXPENSES CHANGE
(%) |
$
5,212 |
$
7,903 |
($
2,691) |
(34%) |
The
decrease in selling, marketing, general and administrative expenses resulted
from the Company’s
decision to restructure operations by discontinuing the marketing and sale of
generic finished dosage products and reducing its administrative and
manufacturing support staff. The decrease includes $1,093 of personnel and
departmental type charges, which were reassigned from being chargeable to
general and administrative department to being chargeable to research and
development, a nonrecurring benefit for settlement of trade payables at a
discount of $194 and a non cash compensation charge of $1,453 recorded for the
issuance of stock options.
Environmental
Compliance Expenses
During
the year ended December 31, 2004 and December 31, 2003, the Company incurred the
following expenses in connection with environmental compliance (in thousands):
12/31/04
ENVIRONMENTAL
COMPLIANCE EXPENSES |
12/31/03
ENVIRONMENTAL
COMPLIANCE EXPENSES |
12/31/04-12/31/03
ENVIRONMENTAL
COMPLIANCE EXPENSES CHANGE
($) |
12/31/04-12/31/03
ENVIRONMENTAL
COMPLIANCE EXPENSES CHANGE
(%) |
$
180 |
$
227 |
($
47) |
(21%) |
The
environmental compliance expenses related primarily to disposal of hazardous and
controlled substances waste and related personnel costs for environmental
compliance during the period the Company maintained its manufacturing
operations. No environmental compliance costs were incurred subsequent to the
second quarter of 2004.
Interest
Expense, Net of Interest Income
The
Company’s interest expense, net of interest income for the year ended December
31, 2004 and December 31, 2003 was as follows (in thousands):
12/31/04
INTEREST
EXPENSE, NET OF INTEREST INCOME |
12/31/03
INTEREST
EXPENSE, NET OF INTEREST INCOME |
12/31/04-12/31/03
INTEREST
EXPENSE, NET OF INTEREST INCOME CHANGE
($) |
12/31/04-12/31/03
INTEREST
EXPENSE, NET OF INTEREST INCOME CHANGE
(%) |
$
2,903 |
$
5,976 |
($
3,073) |
(51%) |
The
change in the interest expense, net of interest income reflects the interest
savings from the restructuring of the Company’s term note indebtedness to Watson
Pharmaceuticals, Inc. in February, 2004 as well as the conversion of the
Company’s 5% convertible debentures into convertible preferred stock on August
13, 2004.
Amortization
of Deferred Debt Discount and Private Debt
Offering Costs
The
Company’s deferred debt discount and private debt offering costs for the year
ended December 31, 2004 and December 31, 2003 were as follows (in
thousands):
12/31/04
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS
|
12/31/03
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS |
12/31/04-12/31/03
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS
CHANGE
($) |
12/31/04-12/31/03
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS
CHANGE
(%) |
$
72,491, consisting of
· $ 1,030 private debt offering
costs
· $ 71,461 deferred debt
discount |
$
24,771, consisting of
· $ 1,099 private debt offering
costs
· $ 23,672 deferred debt
discount |
$
47,720 |
193% |
The
change in the deferred debt discount and private debt offering costs reflects
the amortization of the remaining deferred debt discount and private debt
offering costs incurred from all of the Company’s debenture and bridge loan
financings consummated during the period from March 1998 through May, 2004. As a
result of the conversion of all convertible debentures into preferred stock at
August 13, 2004, all remaining unamortized deferred debt discount and private
debt offering cost balances were written off to expense.
Net
Loss
The
Company’s net loss for the year ended December 31, 2004 and December 31, 2003
was as follows (in thousands):
12/31/04
NET
LOSS |
12/31/03
NET
LOSS |
12/31/04-12/31/03
NET
LOSS CHANGE
($) |
12/31/04-12/31/03
NET
LOSS CHANGE
(%) |
($
69,996) |
($
48,455) |
($21,541) |
44% |
Included
in the net loss for the year ended December 31, 2004 is the full amortization of
the remaining deferred debt discount and private offering costs of $72,491,
gains on debt restructuring of the Watson note of $12,401 and asset sales of
$2,359, net interest expense of $2,903 and other income of $603 relating to
settlements of a liabilities at discount.
Results
of Operations for the Year Ended December 31, 2003 and 2002
Net
Product Revenues
The
Company’s net product revenues for the year ended December 31, 2003 and December
31, 2002 were as follows (in thousands):
12/31/03
NET
PRODUCT REVENUES |
12/31/02
NET
PRODUCT REVENUES |
12/31/03-
12/31/02
NET
PRODUCT REVENUE
CHANGE
($) |
12/31/03-12/31/02
NET
PRODUCT REVENUE
CHANGE
(%) |
$
5,750 |
$
8,205 |
($
2,455) |
(30%) |
The
decrease in the 2003-2002 Net Product Revenues resulted primarily from declining
purchases by a single customer under an exclusive supply agreement for the
Company’s major product lines. The Company, pursuant to certain provisions in
that agreement, terminated the exclusive supply agreement in March, 2003 and
thereafter attempted to re-establish itself in the market place by manufacturing
and distributing generic products under its Axiom subsidiary label. The
Company’s relatively narrow generic product lines, the entrenched market
positions of existing competitors, relatively low margins and time required to
fulfill the regulatory requirements of re-establishing the Company’s generic
products under its Axiom label resulted in revenues lower than anticipated.
Ultimately, these conditions caused the Company to reassess its strategy and to
implement a restructuring of operations. Such restructuring was announced on
November 6, 2003.
Cost of
Manufacturing
The
Company’s cost of manufacturing for the year ended December 31, 2003 and
December 31, 2002 were as follows (in thousands):
12/31/03
COST OF MANUFACTURING |
12/31/02
COST
OF MANUFACTURING |
12/31/03-12/31/02
COST OF MANUFACTURING CHANGE
($) |
12/31/03-12/31/02
COST OF MANUFACTURING CHANGE
(%) |
$
11,705 |
$
12,535 |
($
830) |
(7%) |
The
increased cost as a percentage of sales in 2003, as compared in the year 2002,
was directly attributable to a charge of approximately $1,345 in 2003 for
impairment of inventory in connection with the Company’s
restructuring.
Research
and Development Expenses
The
Company’s research and development expenses for the year ended December 31, 2003
and December 31, 2002 were as follows (in thousands):
12/31/03
R&D
EXPENSES |
12/31/02
R&D
EXPENSES |
12/31/03-12/31/02
R&D
EXPENSES CHANGE
($) |
12/31/03-12/31/02
R&D
EXPENSES CHANGE
(%) |
$
1,460 |
$
1,517 |
($57)
|
(4%) |
The
decrease in research and development expenses reflects the reduction in the
resources available to fund these activities. The development expenditures in
2003 were primarily related to the Company’s AversionTM
Technology and Opioid Synthesis Technologies.
Selling,
Marketing, General and Administrative Expenses
Selling,
marketing, general and administrative expenses for the year
ended December 31, 2003 and December 31, 2002 were as follows (in
thousands):
12/31/03
SELLING,
MARKETING, G&A EXPENSES |
12/31/02
SELLING,
MARKETING, G&A EXPENSES |
12/31/03-12/31/02
SELLING,
MARKETING, G&A EXPENSES CHANGE
($) |
12/31/03-12/31/02
SELLING,
MARKETING, G&A EXPENSES CHANGE
(%) |
$
7,903 |
$
7,216 |
$
687 |
10% |
The
increase in selling, marketing, general and administrative expenses is primarily
due to added professional costs associated with the prosecution of the Company’s
Import Registration of $233,000, increased bad debt expense of $350,000 and
sales personnel costs of $93,000.
Environmental
Compliance Expenses
During
the year ended December 31, 2003 and December 31, 2002, the Company incurred the
following expenses in connection with environmental compliance (in thousands):
12/31/03
ENVIRONMENTAL
COMPLIANCE EXPENSES |
12/31/02
ENVIRONMENTAL
COMPLIANCE EXPENSES |
12/31/03-12/31/02
ENVIRONMENTAL
COMPLIANCE EXPENSES CHANGE
($) |
12/31/03-12/31/02
ENVIRONMENTAL
COMPLIANCE EXPENSES CHANGE
(%) |
$
227 |
$
227 |
$
— |
—
% |
The
environmental compliance expenses related to disposal of hazardous and
controlled substances waste and related personnel costs for environmental
compliance during the period the Company maintained its manufacturing
operations.
Interest
Expense, Net of Interest Income
The
Company’s interest expense, net of interest income for the year ended December
31, 2003 and December 30, 2002 was as follows (in thousands):
12/31/03
INTEREST
EXPENSE, NET OF INTEREST INCOME |
12/31/02
INTEREST
EXPENSE, NET OF INTEREST INCOME |
12/31/03-12/31/02
INTEREST
EXPENSE, NET OF INTEREST INCOME CHANGE
($) |
12/31/03-12/31/02
INTEREST
EXPENSE, NET OF INTEREST INCOME CHANGE
(%) |
$
5,976 |
$
4,713 |
$1,263 |
27% |
The
increase in interest expense, net of income reflects interest expense on the
Company’s convertible debenture financing completed in December, 2002 and the
Company’s bridge financings completed during the 2003.
Amortization
of Deferred Debt Discount and Private Debt
Offering Costs
The
Company’s deferred debt discount and private debt offering costs for the year
ended December 31, 2003 and December 31, 2002 were as follows (in
thousands):
12/31/03
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS
|
12/31/02
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS |
12/31/03-12/31/02
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS
CHANGE
($) |
12/31/03-12/31/02
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS
CHANGE
(%) |
$24,771,
consisting of
· $ 1,099 private debt offering
costs
· $ 23,672 deferred debt
discount |
$12,558,
consisting of
· $ 751 private debt offering
costs
· $ 11,807 deferred debt
discount |
$
12,213 |
97% |
The
Company incurred offering costs associated the issuance of certain convertible
debentures and bridge financings in 2003, 2002 and 2001. Additionally, these
offerings included warrants and beneficial conversion features which were valued
using the Black-Scholes valuation model. The value of the warrants, private
offering costs and beneficial conversion features are amortized over the life of
the underlying debentures and notes
Net
Loss
The
Company’s net loss for the year ended December 31, 2003 and December 31, 2002
was as follows (in thousands):
12/31/03
NET
LOSS |
12/31/02
NET
LOSS |
12/31/03-12/31/02
NET
LOSS CHANGE
($) |
12/31/03-12/31/02
NET
LOSS CHANGE
(%) |
($
48,455) |
($
59,589) |
$
10,134 |
17% |
In 2002,
the Company recorded a charge to earnings recorded as loss on the extinguishment
of debt of $28,415,000 as a result of the Company’s 2002 debenture offering. The
loss consists of the following amounts: 1) $11,985,000, representing the fair
value of 10,700,665 warrants, as calculated using the Black-Scholes
option-pricing model, that the Company issued to Watson Pharmaceuticals, Inc.
(“Watson”) in consideration of Watson’s extension of the maturity date of the
Watson Term Loan; 2) $2,282,000, representing the fair value of the shares of
Common Stock issued on the exercise of 8,145,736 Common Stock Purchase Warrants
in excess of the number of shares that would have been issued as a result of a
modification of the Warrants’ net shares settlement provisions; and 3)
$14,148,000, representing the incremental increase in the fair value of the
remaining Warrants issued as part of the Company’s debenture offerings completed
in 1998 and 1999 as a result of reducing their exercise price in connection with
the modification of the associated debt agreements, as calculated using the
Black-Scholes option-pricing model.
Liquidity
and Capital Resources
At
December 31, 2004, the Company had cash and cash equivalents of $3.1 million as
compared to $942,000 at December 31, 2003. The Company had working capital of
$2.4 million at December 31, 2004 as compared to a working capital deficit of
$3.8 million at December 31, 2003.
2004
Debenture Offering
On
February 10, 2004, the Company consummated a private offering of convertible
senior secured debentures (the “2004 Debentures”) in the aggregate principal
amount of approximately $12.3 million (the “2004 Debenture Offering”). The 2004
Debentures were issued by the Company pursuant to a certain Debenture and Share
Purchase Agreement dated as of February 6, 2004 (the “2004 Purchase Agreement”)
by and among the Company, Care Capital Investments, Essex Woodlands Health
Ventures, Galen Partners and each of the purchasers listed on the signature page
thereto. On April 14, 2004 and May 26, 2004, the Company completed additional
closings under the 2004 Purchase Agreement raising the aggregate gross proceeds
received by the Company from the offering of the 2004 Debentures to $14 million.
As the conversion price of the 2004 Debentures was less than the fair market
value of the Company’s Common Stock on the date of issue, beneficial conversion
features were determined to exist. The Company recorded approximately $14.0
million of debt discount limited to the face amount of the new debt. The debt
discount was amortized over the life of the debt, which matured on August 13,
2004, the date the 2004 Debentures were automatically converted into the
Company’s Series A Convertible Preferred Stock.
Pursuant
to the terms of the 2004 Purchase Agreement and other documents executed in
connection with the 2004 Debentures, effective August 13, 2004, each of the
holders of the Company’s 2004 Debentures converted the 2004 Debentures into the
Company’s Series A preferred shares (the “Series A Preferred”). In addition,
effective August 13, 2004, each of the holders of the Company’s 5% convertible
senior secured debentures issued during the period 1998 through and including
2003 converted such debentures into the Company’s Series B Preferred Stock (the
“Series B Preferred”) and/or Series C-1, C-2 and/or C-3 preferred stock
(collectively, the “Series C Preferred”). The Series C Preferred shares together
with the Series B Preferred shares are herein referred to as the “Junior
Preferred Shares”). Upon conversion of the Company’s outstanding debentures, the
Company issued approximately 21.9 million Series A Preferred shares,
approximately 20.2 million Series B Preferred shares, approximately 56.4 million
Series C-1 Preferred shares, approximately 37.4 million Series C-2 Preferred
shares and approximately 81.9 million Series C-3 Preferred shares. The Series A
Preferred shares and the Junior Preferred Shares are convertible into an
aggregate of approximately 349.7 million shares of the Company’s Common Stock.
Reference is made to “Item 1-Business-Recent Events-2004 Debenture Offering” for
a more detailed description of the 2004 Debenture Offering, the conversion of
the outstanding debentures into preferred shares and the rights and preferences
of the Series A Preferred shares and the Junior Preferred Shares.
Amendment
to Watson Term Loan Agreement
The
Company was a party to a certain loan agreement with Watson Pharmaceuticals,
Inc. (“Watson”) pursuant to which Watson made term loans to the Company (the
“Watson Term Loan Agreement”) in the aggregate principal amount of $21.4 million
as evidenced by two promissory notes (the “Watson Notes”). It was a condition to
the completion of the 2004 Debenture Offering that simultaneous with the closing
of the 2004 Purchase Agreement, the Company shall have paid Watson the sum of
approximately $4.3 million (which amount was funded from the proceeds of the
2004 Debenture Offering) and conveyed to Watson certain Company assets in
consideration for Watson’s forgiveness of approximately $16.4 million of
indebtedness under the Watson Notes. A part of such transaction, the Watson
Notes were amended to extend the maturity date of such notes from March 31, 2006
to June 30, 2007, to provide for satisfaction of future interest payments under
the Watson Notes in the form of the Company’s Common Stock, to reduce the
principal amount of the Watson Notes from $21.4 million to $5.0 million, and to
provide for the forbearance from the exercise of rights and remedies upon the
occurrence of certain events of default under the Watson Notes (the Watson Notes
as so amended, the “2004 Note”). Simultaneous with the issuance of the 2004
Note, each of Care Capital, Essex Woodlands Health Ventures, Galen Partners and
the other investors in the 2004 Debentures as of February 10, 2004
(collectively, the “Watson Note Purchasers”) purchased the 2004 Note from Watson
in consideration for a payment to Watson of $1.0 million.
In
addition to Watson’s forgiveness of approximately $16.4 million under the Watson
Notes, as additional consideration for the Company’s payment to Watson of
approximately $4.3 million and the Company’s conveyance of certain Company
assets, all supply agreements between the Company and Watson were terminated and
Watson waived the dilution protections contained in the Common Stock purchase
warrant dated December 20, 2002 exercisable for approximately 10.7 million
shares of the Company’s Common Stock previously issued by the Company to Watson,
to the extent such dilution protections were triggered by the transactions
provided in the 2004 Debenture Offering.
Terms
of the 2004
Note
The 2004
Note in the principal amount of $5.0 million as purchased by the Watson Note
Purchasers is secured by a first lien on all of the Company’s and its
subsidiaries’ assets, senior to the lien securing the Outstanding Debentures and
all other Company indebtedness, carries a floating rate of interest equal to the
prime rate plus 4.5% (paid quarterly in the Company’s common stock) and matures
on June 30, 2007.
Sale
of Certain Company Assets
On March
19, 2004, the Company and its wholly-owned subsidiary, Axiom Pharmaceutical
Corporation (“Axiom”), entered into an Asset Purchase Agreement with IVAX
Pharmaceuticals New York LLC (“IVAX”). Pursuant to the Purchase Agreement, the
Company and Axiom agreed to sell to IVAX substantially all of the Company’s
assets used in the operation of the Company’s former generic manufacturing and
packaging operations located in Congers, New York in consideration of an
immediate payment of $2.0 million and an additional payment $0.5 million upon
receipt of shareholder approval of the transaction. Shareholder approval of the
asset sale transaction with IVAX was obtained on August 12, 2004 and the closing
was completed on August 13, 2004, at which time the Company received the
remaining payment of $0.5 million from IVAX.
Commercial
Focus, Cash Reserves and Funding Requirements
As of
February 25, 2005, the Company had cash and cash equivalents of approximately
$2.5
million.
The majority of such cash reserves will be dedicated to the development of the
Company’s AversionTM
Technology, the prosecution of the Company’s patent applications relating to the
AversionTM Technology and for administrative and related operating
expenses. Currently the Company is suspending further development and
commercialization efforts relating to the Opioid Synthesis Technologies and
expects to minimize the use of cash and cash equivalents for the prosecution of
patent applications relating to the Opioid Synthesis Technologies (See “Item 1 -
Business - Opioid Synthesis Technologies”).
As
restructured, the Company is no longer engaged in the manufacture and sale of
finished dosage generic pharmaceutical products. As a result, the Company has no
ability presently to generate revenue from product sales. Accordingly, the
Company must rely on its current cash reserves to fund the development of its
AversionTM
Technology and related ongoing administrative and operating expenses. The
Company’s future sources of revenue, if any, will be derived from contract
signing fees, milestone payments and royalties and/or profit sharing payments
from licensees for the Company’s AversionTM
Technology.
The Company estimates that its current cash reserves will be sufficient to fund
the development of the AversionTM
Technology and related operating expenses through May, 2005. To fund operations
through March, 2006, the Company estimates that it must raise additional
financing, or enter into alliances or collaboration agreements with third
parties providing for net proceeds to the Company of at least $5 million. No
assurance can be given that the Company will be successful in obtaining any such
financing or in securing collaborative agreements with third parties on
acceptable terms, if at all, or if secured, that such financing or collaborative
agreements will provide for payments to the Company sufficient to continue to
fund operations. In the absence of such financing or third-party collaborative
agreements, the Company will be required to scale back or terminate operations
and/or seek protection under applicable bankruptcy laws.
Even
assuming the Company is successful in securing additional sources of financing
to fund the continued development of the AversionTM
Technology, or otherwise enters into alliances or collaborative agreements
relating to the AversionTM
Technology, there can be no assurance that the Company’s development efforts
will result in commercially viable products. The Company’s failure to
successfully develop the AversionTM
Technology in a timely manner, to obtain an issued U.S. patent relating to the
AversionTM
Technology and to avoid infringing third-party patents and other intellectual
property rights will have a material adverse impact on its financial condition
and results of operations.
In view
of the matters described above, recoverability of a major portion of the
recorded asset amounts shown in the Company’s accompanying consolidated balance
sheets is dependent upon continued operations of the Company, which in turn are
dependent upon the Company’s ability to meet its financing requirements on a
continuing basis, to maintain present financing, and to succeed in its future
operations. The Company’s financial statements do not include any adjustment
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
The
following table presents the Company’s expected cash requirements for
contractual obligations outstanding as of December 31, 2004:
|
|
TOTAL |
|
DUE
IN
2005 |
|
DUE
IN
2006 |
|
DUE
IN
2007 |
|
DUE
THEREAFTER |
|
|
|
(IN
THOUSANDS) |
|
Term
loan payable |
|
|
5,000 |
|
|
|
|
|
|
|
|
5,000 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
leases |
|
|
93 |
|
|
29 |
|
|
32 |
|
|
— |
|
|
7 |
|
Operating
leases |
|
|
34 |
|
|
29 |
|
|
5 |
|
|
— |
|
|
—- |
|
Contract
research obligations |
|
|
93 |
|
|
93 |
|
|
— |
|
|
— |
|
|
— |
|
Employment
agreements |
|
|
765 |
|
|
640 |
|
|
125 |
|
|
— |
|
|
— |
|
Total
Contractual Cash Obligations |
|
$ |
5,985 |
|
$ |
791 |
|
$ |
162 |
|
$ |
5,025 |
|
$ |
7 |
|
Critical
Accounting Policies
Financial
Reporting Release No. 60, which was released by the Securities and Exchange
Commission (“SEC”) in December 2001, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note A of the Notes to Consolidated Financial Statements
included as a part of this Report, includes a summary of the Company’s
significant accounting policies and methods used in the preparation of the
financial statements. In preparing these financial statements, the Company has
made its best estimates and judgments of certain amounts included in the
financial statements, giving due consideration to materiality. The application
of these accounting policies involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. The Company does not believe there is a great
likelihood that materially different amounts would be reported under different
conditions or using different assumptions. The Company’s critical accounting
policies are as follows:
Income
Taxes
Deferred
income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and loss carry-forwards
for which income tax benefits are expected to be realized in future years. A
valuation allowance is established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. In estimating future tax
consequences, the Company generally considers all expected future events other
than an enactment of changes in the tax laws or rates. The Company has recorded
a full valuation allowance to reduce its deferred tax assets to the amount that
is more likely than not to be realized. In the event the Company were to
determine that it would be able to realize its deferred tax assets in the future
an adjustment to reduce the valuation allowance would increase income in the
period such determination was made.
Stock
Compensation
The
Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB Opinion No. 25, “Accounting for Stock Issued
to Employees” (“APB No. 25”) and complies with the disclosure provision of SFAS
No. 148, “Accounting for Stock-based Compensation - Transition and Disclosure,
an amendment of FASB Statement No. 123” (“SFAS No. 148”). The amounts disclosed
include various estimates used to determine fair value of stock options. If the
Company were to include the cost of stock-based employee compensation in the
financial statements, the Company’s operating results would decline based on the
fair value of the stock-based employee compensation.
Deferred
Debt Discount
Deferred
debt discount results from the issuance of stock warrants and beneficial
conversion features in connection with the issuance of subordinated debt and
other notes payable. The amount of the discount is recorded as a reduction of
the related obligation and is amortized over the remaining life of the related
obligations. Management determines the amount of the discount, based, in part,
by the relative fair values ascribed to the warrants determined by an
independent valuation or through the use of the Black-Scholes valuation model.
Inherent in the Black-Scholes valuation model are assumptions made by management
regarding the estimated life of the warrant, the estimated volatility of the
Company’s common stock and the expected dividend yield.
New
Accounting Pronouncements
Consolidation
of Variable Entities
In
January 2003, the Financial Accounting Standards Board (“FASB”), issued FASB
Interpretation of FIN No. 46, “Consolidation of Variable Entities,” (VIEs). FIN
46 establishes standards for determining under what circumstances VIEs should be
consolidated with their primary beneficiary, including those to which the usual
condition of consolidation does not apply. FIN 46 also requires disclosure about
unconsolidated VIEs in which the company has a significant interest. The
consolidation requirements of FIN 46 apply immediately to older entities the
first fiscal year or interim period beginning after June 15, 2003. certain
disclosures requirements apply in all financial statements issued after January
31, 2003. The adoption of the accounting pronouncement did not have an impact on
our financial position or results of operations.
In
December 2003, the FASB publishes FIN No. 46-R, Consolidation of Variable
Entities (revised December 2003),” superseding Fin 46, and exempting certain
entities from the provisions of FIN 46. Generally, application of FIN 46-R is
required in financial statements of nonpublic entities immediately to VIEs or
potential VIEs created after December 31, 2003 and for all entities by the
beginning of the first annual period beginning after December 31, 2004.” The
adoption of the accounting pronouncement did not have an impact on our financial
position or results of operations.
Accounting
for Certain Financial Instruments with the Characteristics of Both Liabilities
and Equity
FASB
issued Statement No. 150, “Accounting for Certain Financial Instruments with the
Characteristics of Both Liabilities and Equity”, in June 2003. The Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires an issuer to classify a financial instruments that is within the scope
of the pronouncement as a liability. Many of those financial instruments were
previously classified as equity. The statement is effective for all financial
instruments entered into or modified after May 2003 and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of the accounting pronouncement did not have an impact on our
financial position or results of operations.
Share-Based
Payment
On
December 16, 2004, the FASB released FASB Statement No. 123 (revised 2004),
“Share-Based Payment, (“FASB 123R”)”. These changes in accounting replace
existing requirements under FASB Statement No. 123, “Accounting for Stock-Based
Compensation”, and eliminates the ability to account for share-based
compensation transaction using APB Opinion No.25, “Accounting for Stock Issued
to Employees”. The compensation cost relating to share-based payment
transactions will be measured based on the fair value of the equity or liability
instruments issues. This Statement does not change the accounting for similar
transactions involving parties other than employees. Publicly traded companies
must apply this Standard as of the beginning of the first interim or annual
period that begins after June 15, 2005. This Statement applies to all awards
granted after the required effective date and to awards modified, repurchased,
or cancelled after that date. The cumulative effect of initially applying this
Statement, if any, is recognized as of the required effective date. The Company
has not completed it evaluation of the impact of adopting FASB 123R on its
consolidated
financial statements,
but anticipates that more compensation costs will be recorded in the future if
the use of options for employees and director compensation continues as in the
past.
Capital
Expenditures
The
Company’s capital expenditures during 2004, 2003 and 2002 were $444,000,
$412,000 and $287,000, respectively. The capital expenditures during these
periods are attributable to capital improvements to the Company’s Congers, NY
and Culver, Indiana facilities. In connection with the Company’s prosecution of
its Import Registration with the DEA, specific improvements were made for
security and related items to the Culver, Indiana facility. Additionally,
expenditures were made to improve and expand the manufacturing capabilities of
both Congers, NY locations.
Impact
of Inflation
The
Company believes that inflation did not have a material impact on its operations
for the periods reported. Significant increases in labor, employee benefits and
other expenses could have a material adverse effect on the Company’s
performance. The Company has indebtedness which incurs interest on a floating
basis in relation to the Prime Rate. To the extent that inflation is reflected
in higher interest rates, the Company would expect to incur greater interest
costs on this debt.
Risk
Factors Relating To The Company
The
Company Received a “Going Concern” Opinion From Its Independent Auditors, Has a
History of Operating Losses and May Not Achieve Profitability Sufficient to
Generate a Positive Return on Shareholders’ Investment
We have
incurred net losses since 1992, including net losses of approximately $70.0
million for the year ended December 31, 2004 and net losses of $48.5, $59.6 and
$12.5 million for fiscal 2003, 2002 and 2001, respectively. As of December 31,
2004 our accumulated deficit was approximately $279.5 million. The Company’s
consolidated financial statements for the year ended December 31, 2004 and 2003
have been prepared on a going-concern basis, expressing substantial doubt about
the Company’s ability to continue as a going concern as a result of recurring
losses and negative cash flows. Our future profitability will depend on several
factors, including:
· |
the
successful completion of the formulation development, clinical testing and
acceptable regulatory review of our AversionTM
Technology; |
· |
the
receipt of a notice of allowance and issued patent from the US Patent and
Trademark Office (“PTO”) for the material claims in our patent application
relating to the AversionTM
Technology;
|
· |
the
AversionTM
Technology not infringing third-party patents or other intellectual
property rights; |
· |
the
completion of the development, commercial scale up and acceptable
regulatory review of our opioid active pharmaceutical ingredient
manufacturing process technology (the “Opioid Synthesis
Technologies”); |
· |
the
receipt of approval from the U.S. Drug Enforcement Administration (“DEA”)
to import narcotic raw materials to be used in our development and
manufacturing efforts; and |
· |
the
interest of qualified third parties in our AversionTM
Technology
and our Opioid Synthesis Technologies (collectively the “Technologies”)
and our ability to negotiate and execute commercially viable collaboration
agreements with qualified third parties relating to the Technologies.
|
Many of
these factors will depend on circumstances beyond our control. We cannot assure
you that we will ever have a product approved by the FDA, that we will bring any
product to market or, if we are successful in doing so, that we will ever become
profitable.
We
Require Additional Funding
Our
requirements for additional capital are substantial and will depend on many
factors, including:
· |
the
expenses incurred in the development and commercialization of products
incorporating our Technologies; |
· |
the
structure of any future collaborative or development agreements relating
to the Technologies, including the timing and amount of payments, if any,
that may be received under possible future collaborative
agreements; |
· |
our
ability to develop additional products utilizing the
Technologies; |
· |
our
ability to negotiate agreements with third parties for development,
marketing, sale and distribution of products utilizing our Technologies;
|
· |
the
prosecution, defense and enforcement of patent claims and other
intellectual property rights relating to the Technologies; and
|
· |
the
commercialization of products incorporating our Technologies without
infringing third-party patents or other intellectual property
rights. |
We
currently have no committed sources of capital. We anticipate that our existing
capital resources will be sufficient to fund operations only through May, 2005.
To fund operations through March, 2006, the Company estimates that it must raise
additional financing, or enter into alliances or collaborative agreements with
third parties providing for net proceeds to the Company of at least $5 million.
No assurance can be given that the Company will be successful in obtaining any
such financing or in securing collaborative agreements with third parties on
acceptable terms, if at all, or if secured, that such financing or collaborative
agreements will provide for payments to the Company sufficient to continue to
fund operations. In the absence of such financing or third-party collaborative
agreements, the Company will be required to scale back or terminate operations
and/or seek protection under applicable bankruptcy laws.
Even
assuming the Company is successful in securing additional sources of financing
to fund the continued development of the Technologies, or otherwise enters into
alliances or collaborative agreements relating to the Technologies, there can be
no assurance that the Company’s development efforts will result in commercially
viable products.
We
Have No Near Term Sources of Revenue and Must Rely on Current Capital Resources,
Third Party Financing, and Technology Licensing Fees to Fund Operations
Pending
the completion of the development and commercial scale up of our Technologies,
and the receipt of regulatory approval of products incorporating our
Technologies, of which no assurance can be given, the Company must rely on its
current capital resources, third-party financing and technology licensing fees
to fund the Company’s operations. As a consequence of the restructuring of our
operations, including the cessation of our finished dosage manufacturing and
packaging operations at our former Congers, NY facilities and the sale of such
assets and related generic products to third parties, we have no ability to
generate revenues from the sale of generic products. As of February 25, 2005, we
had cash and cash equivalents of approximately $2.5
million.
No assurance can be given that such cash resources will be sufficient to fund
the continued development of our Technologies until such time as we generate
revenue from the license of products incorporating the Technologies to third
parties. Moreover, in the event of a cash shortfall, no assurance can be given
that we will be successful in raising additional financing to fund operations
or, if funding is obtained, that such funding will be sufficient to fund
operations until the Company’s Technologies, or products incorporating such
Technologies, may be commercialized.
Our
Product Candidates Are Based on Technologies That Could Ultimately Prove
Ineffective
In
accordance with the restructuring of the Company’s operations, the Company has
transitioned to a single operations facility located in Culver, Indiana. At such
site, the Company will seek to develop its proprietary AversionTM
Technology
and Opioid Synthesis Technologies. With respect to the AversionTM
Technology,
the first product candidate (“Product Candidate #1”) resulting from the
AversionTM
Technology is a tablet formulation intended for oral administration. Six month
real time stability data for Product Candidate #1 are satisfactory. However, the
Company can provide no assurance that the stability of Product Candidate #1 will
result in a commercially acceptable drug product with at least 24 months of
acceptable stability data. In addition, Product Candidate #1 was evaluated in a
single dose clinical study to assess the bio-availability and bio-equivalence
(“BA/BE”) of such product candidate in comparison to a frequently prescribed
commercially marketed drug product with the same opioid active ingredient but
without abuse deterrent properties. The results of the BA/BE study indicate that
Product Candidate #1 is sufficiently bioavailable but not bioequivalent to the
reference commercially marketed opioid product. The Company subsequently
developed a more discriminating dissolution test methodology and a revised
formulation of Product Candidate #1 (“Product Candidate #1R”). Based on an
additional BA/BE study, we confirmed that Product Candidate #1R is both
bioavailable and bioequivalent to a commercially marketed product without the
abuse deterrent properties. The Company has additionally formulated another
product candidate (“Product Candidate #2”) incorporating the
AversionTM
Technology
and contemplates submitting an IND or an IND amendment with the FDA for Product
Candidate #2 during the first half of 2005. Since the formulation of Product
Candidate #2, the Company has suspended all new development activities for
Product Candidate #1 and Product Candidate #1R and will focus future development
activities on Product Candidate #2. Substantial additional clinical and
non-clinical testing will be required to continue development and for the
preparation and submission of a new drug application (“NDA”) filing with the
FDA. There can be no assurance that Product Candidate #2 or any other product
developed using the AversionTM
Technology
will lead to a NDA submission to the FDA and that if an NDA is filed, that the
FDA will approve such regulatory application to allow for commercial
distribution of the product.
With respect to the Opioid Synthesis Technologies, while the
Company believes that such technologies are effective and cost-effective methods
of manufacturing opioid APIs, such technologies will need to be scaled up to
commercial scale to have economic value, of which no assurance can be given.
Additionally, unless the Company secures third-party financing dedicated to the
scale up expenses relating to the Opioid Synthesis Technologies (estimated by
the Company to be at least $7.0 million), the Company will be unable to complete
the commercial scale up of the Opioid Synthesis Technologies. No assurance can
be given that the Company will obtain the third-party financing necessary to
scale up the Opioid Synthesis Technologies or, if such financing is obtained,
that any one or more of the Opioid Synthesis Technologies will be capable of
commercial scale up. The Company is currently suspending further development and
commercialization efforts relating to the Opioid Synthesis Technologies (See
“Item 1 - Business - Opioid Synthesis Technologies”).
The
Company is committing substantially all of its resources and available capital
to the development of the AversionTM
Technology
and the prosecution of its patent applications for such Technologies. The
failure of the Company to successfully develop the AversionTM
Technology,
to successfully obtain an issued patent from the PTO relating to the
AversionTM
Technology
and product candidates utilizing the AversionTM
Technology,
and to avoid infringing third-party patents and intellectual property rights in
the commercialization of such AversionTM
Technology
will have a material adverse effect on the Company’s operations and financial
condition.
If
Pre-clinical Testing or Clinical Trials For Our Product Candidates Are
Unsuccessful or Delayed, We Will Be Unable to Meet Our Anticipated Development
and Commercialization Timelines.
To obtain
FDA approval for any of our product candidates, we must submit to the FDA an NDA
demonstrating, among other things, that the product candidate is safe and
effective in humans for its intended use. This demonstration requires
significant research and animal tests, which are referred to pre-clinical
studies, as well as human tests, which are referred to as clinical trials. As we
do not possess the resources or employ all the personnel necessary to conduct
clinical trial studies, it is our intention to rely on collaborative partners to
conduct Phase II and Phase III clinical trials on our product candidates. As a
result, we will have less control over the timing and other aspects of these
clinical trials than if we performed the monitoring and supervision of clinical
trials entirely on our own. Third parties may not perform their responsibilities
for our pre-clinical testing or clinical trials on our anticipated schedule or,
for clinical trials, consistent with a clinical trial protocol. Delays in
pre-clinical and clinical testing could significantly increase our product
development costs and delay product commercialization. In addition, many of the
factors that may cause, or lead to, a delay in the clinical trials may also
ultimately lead to denial of regulatory approval of a product
candidate.
The
commencement of clinical trials can be delayed for a variety of reasons,
including delays in:
· |
demonstrating
sufficient pre-clinical safety data required to obtain regulatory approval
to commence a clinical trial; |
· |
reaching
agreement on acceptable terms with prospective collaborative
partners; |
· |
manufacturing
and quality assurance release of a sufficient supply of a product
candidate for use in our clinical trials;
and/or |
· |
obtaining
institutional review board approval to conduct a clinical trial at a
prospective site. |
Once a
clinical trial has begun, it may be delayed, suspended or terminated by us or
the FDA or other regulatory authorities due to a number of factors,
including:
· |
ongoing
discussions with the FDA or other regulatory authorities regarding the
scope or design of our clinical trials; |
· |
failure
to conduct clinical trials in accordance with regulatory
requirements; |
· |
lower
than anticipated recruitment or retention rate of patients in clinical
trials; |
· |
inspection
of the clinical trial operations or trial sites by the FDA or other
regulatory authorities resulting in the imposition of a clinical
hold; |
· |
lack
of adequate funding to continue clinical trials;
and/or |
· |
negative
results of clinical trials. |
Phase III
clinical trials, where required by the FDA for commercial approval of the
Company’s Product Candidates, may not demonstrate the safety or efficacy of our
product candidates. Success in pre-clinical testing and early clinical trials
does not ensure that later clinical trials will be successful. Results of later
clinical trials may not replicate the results of prior clinical trials and
pre-clinical testing. Even if the results of our pivotal Phase III clinical
trials are positive, we and our collaborative partners may have to commit
substantial time and additional resources to conduct further pre-clinical and
clinical studies before we can submit NDAs or obtain final FDA approval for our
product candidates.
Clinical
trials are often very expensive and difficult to design and implement, in part
because they are subject to rigorous requirements. Further, if participating
patients in clinical studies suffer drug-related adverse reactions during the
course of such trials, or if we, our collaborative partner or the FDA believes
that participating patients are being exposed to unacceptable health risks, our
collaborative partner may have to suspend the clinical trials. Failure can occur
at any stage of the trials, and our collaborative partner could encounter
problems that cause the abandonment of clinical trials or the need to conduct
additional clinical studies, relating to a product candidate.
Even if
our clinical trials are completed as planned, their results may not support our
product claims. The clinical trial process may fail to demonstrate that our
product candidates are safe and effective for their intended use. Such failure
would cause us or our collaborative partner to abandon a product candidate and
could delay the development of other product candidates.
If
We Retain Collaborative Partners and Our Partners Do Not Satisfy Their
Obligations, We Will Be Unable to Develop Our Partnered Product Candidates
To
complete the development and regulatory approval of our products and
commercialize our products, if any are approved by the FDA, we plan to enter
into development and commercialization agreements with strategically focused
pharmaceutical company partners providing that such partners license our
Technologies and further develop, register and commercialize multiple
formulations and strengths of orally administered opioid-containing finished
dosage products utilizing such Technologies. We expect to receive a share of
profits and/or royalty payments derived from such collaborative partners’ sale
of products incorporating the Technologies. Currently, we do not have any such
collaborative agreements, nor can there be any assurance that we will actually
enter into collaborative agreements in the future. Our inability to enter into
collaborative agreements, or our failure to maintain such agreements, would
limit the number of product candidates that we can develop and ultimately,
decrease our sources of any future revenues. In the event we enter into any
collaborative agreements, we may not have day-to-day control over the activities
of our collaborative partners with respect to any product candidate. Any
collaborative partner may not fulfill its obligations under such agreements. If
a collaborative partner fails to fulfill its obligations under an agreement with
us, we may be unable to assume the development of the product covered by that
agreement or to enter into alternative arrangements with a third party. In
addition, we may encounter delays in the commercialization of the product
candidate that is the subject of a collaboration agreement. Accordingly, our
ability to receive any revenue from the product candidates covered by
collaboration agreements will be dependent on the efforts of our collaborative
partner. We could be involved in disputes with a collaborative partner, which
could lead to delays in or termination of, our development and commercialization
programs and result in time consuming and expensive litigation or arbitration.
In addition, any such dispute could diminish our collaborative partners’
commitment to us and reduce the resources they devote to developing and
commercializing our products. If any collaborative partner terminates or
breaches its agreement, or otherwise fails to complete its obligations in a
timely manner, our chances of successfully developing or commercializing our
product candidates would be materially and adversely effected.
Additionally,
due to the nature of the market for pain management products, it may be
necessary for us to license all or significant portion of our product candidates
to a single collaborator, thereby eliminating our opportunity to commercialize
other pain management products with other collaborative partners.
The
Market May Not Be Receptive to Products Incorporating Our
Technologies
The
commercial success of products incorporating our Technologies that are approved
for marketing by the FDA and other regulatory authorities will depend upon their
acceptance by the medical community and third party payors as clinically useful,
cost-effective and safe. There can be no assurance given, even if we succeed in
the development of products incorporating our Technologies and receive FDA
approval for such products, that our products incorporating the Technologies
would be accepted by the medical community and others. Factors that we believe
could materially affect market acceptance of these products
include:
· |
the
relative advantages and disadvantages of our Technologies and timing to
commercial launch of products utilizing our Technologies compared to
products incorporating competitive
technologies; |
· |
the
timing of the receipt of marketing approvals and the countries in which
such approvals are obtained; |
· |
the
safety and efficacy of products incorporating our Technologies as compared
to competitive products; and/or |
· |
the
cost-effectiveness of products incorporating our Technologies and the
ability to receive third party
reimbursement. |
Our
product candidates, if successfully developed, will compete with a number of
products manufactured and marketed by other brand focused pharmaceutical
companies, biotechnology companies and manufacturers of generic products. Our
products may also compete with new products currently under development by
others. Physicians, patients, third-party payors and the medical community may
not accept or utilize any of our product candidates. Physicians may not be
inclined to prescribe the products utilizing the AversionTM
Technology
unless our products bring substantial and demonstrable advantages over other
products currently marketed for the same indications. If our products do not
achieve market acceptance, we will not be able to generate significant revenues
or become profitable.
In
the Event That We Are Successful in Bringing Any Products to Market, Our
Revenues May Be Adversely Affected If We Fail to Obtain Acceptable Prices or
Adequate Reimbursement For Our Products From Third-Party Payors
Our
ability to commercialize pharmaceutical products successfully may depend in part
on the availability of reimbursement for our products from:
· government
and health administration authorities;
· private
health insurers; and
· other
third-party payors, including Medicare.
We cannot
predict the availability of reimbursement for newly-approved health care
products. Third-party payors, including Medicare, are challenging the prices
charged for medical products and services. Government and other third-party
payors increasingly are limiting both coverage and the level of reimbursement
for new drugs. Third-party insurance coverage may not be available to patients
for any of our products.
The
continuing efforts of government and third-party payors to contain or reduce the
costs of health care may limit our commercial opportunity. If government and
other third-party payors do not provide adequate coverage and reimbursement for
any product we bring to market, doctors may not prescribe them or patients may
ask to have their physicians prescribe competing products with more favorable
reimbursement. In some foreign markets, pricing and profitability of
pharmaceutical products are subject to government control. In the United States,
we expect that there will continue to be federal and state proposals for similar
controls. In addition, we expect that increasing emphasis on managed care in the
United States will continue to put pressure on the pricing of pharmaceutical
products. Cost control initiatives could decrease the price that we receive for
any products in the future. Further, cost control initiatives could impair our
ability to commercialize our products and our ability to earn revenues from this
commercialization.
Our
Success Depends on Our Ability to Protect Our Intellectual
Property
Our
success depends in significant part on our ability to obtain patent protection
for our AversionTM
Technology,
both in the United States and in other countries, and to enforce these patents.
The patent positions of pharmaceutical firms, including us, are generally
uncertain and involve complex legal and factual questions. Although we have
filed four (4) patent applications with the PTO and one (1) foreign patent
application on our AversionTM
Technology,
there is no assurance that a patent will issue or, if issued, that such patent
will be valid and enforceable against third party infringement or that such
patent will not infringe any third party patent or intellectual property.
Moreover, even if patents do issue on our AversionTM
Technology,
the claims allowed may not be sufficiently broad to protect the products
incorporating the AversionTM
Technology.
In addition, issued patents may be challenged, invalidated or circumvented. Even
if issued, our patents may not afford us protection against competitors with
similar technology or permit the commercialization of our products without
infringing third-party patents or other intellectual property
rights.
Our
success also depends on our not infringing patents issued to competitors or
others. We may become aware of patents and patent applications belonging to
competitors and others that could require us to alter our Technologies. Such
alterations could be time consuming and costly.
We may
not be able to obtain a license to any technology owned by or licensed to a
third party that we require to manufacture or market one or more products
incorporating our Technologies. Even if we can obtain a license, the financial
and other terms may be disadvantageous.
Our
success also depends on our maintaining the confidentiality of our trade secrets
and know-how. We seek to protect such information by entering into
confidentiality agreements with employees, potential collaborative partners,
potential investors and consultants. These agreements may be breached by such
parties. We may not be able to obtain an adequate, or perhaps, any remedy to
such a breach. In addition, our trade secrets may otherwise become known or be
independently developed by our competitors. Our inability to protect our
intellectual property or to commercialize our products without infringing
third-party patents or other intellectual property rights would have a material
adverse effect on our operations and financial condition.
We
May Become Involved in Patent Litigation or Other Intellectual Property
Proceedings Relating to Our Products or Technologies Which Could Result in
Liability for Damages or Delay or Stop Our Development and Commercialization
Efforts
The
pharmaceutical industry has been characterized by significant litigation and
other proceedings regarding patents, patent applications and other intellectual
property rights. The types of situations in which we may become parties to such
litigation or proceedings include:
· we may
initiate litigation or other proceedings against third parties to enforce our
patent rights or other intellectual property rights;
· we may
initiate litigation or other proceedings against third parties to seek to
invalidate the patents held by such third parties or to obtain a judgment that
our products or processes do not infringe such third parties’
patents;
· if our
competitors file patent applications that claim technology also claimed by us,
we may participate in interference or opposition proceedings to determine the
priority of invention; and
· if third
parties initiate litigation claiming that our processes or products infringe
their patent or other intellectual property rights, we will need to defend
against such proceedings.
The costs
of resolving any patent litigation or other intellectual property proceeding,
even if resolved in our favor, could be substantial. Some of our competitors may
be able to sustain the cost of such litigation and proceedings more effectively
than we can because of their substantially greater resources. Uncertainties
resulting from the initiation and continuation of patent litigation or other
intellectual property proceedings could have a material adverse effect on our
ability to compete in the marketplace. Patent litigation and other intellectual
property proceedings may also consume significant management time.
Our
Technologies may be found to infringe upon claims of patents of owned by others.
If we determine or if we are found to be infringing on a patent held by another,
we might have to seek a license to make, use, and sell the patented
technologies. In that case, we might not be able to obtain such license on terms
acceptable to us, or at all. If a legal action is brought against us, we could
incur substantial defense costs, and any such action might not be resolved in
our favor. If such a dispute is resolved against us, we may have to pay the
other party large sums of money and our use of our Technologies and the testing,
manufacturing, marketing or sale of one or more of our products could be
restricted or prohibited. Even prior to resolution of such a dispute, use of our
Technologies and the testing, manufacturing, marketing or sale of one or more of
our products could be restricted or prohibited.
Moreover,
other parties could have blocking patent rights to products made using the
AversionTM
Technology.
For example, the Company has recently become aware of certain United States and
European patent applications owned by third parties that claim multiple-form
abuse deterrent technologies. If such patent applications result in issued
patents, with claims encompassing our AversionTM
Technology
or products, the Company may need to obtain a license in order to commercialize
products incorporating the AversionTM
Technology,
should one be available or, alternatively, alter the AversionTM
Technology
so as to avoid infringing such third-party patents. If the Company is unable to
obtain a license on commercially reasonable terms, the Company could be
restricted or prevented from commercializing products utilizing the
AversionTM
Technology.
Additionally, any alterations to the AversionTM
Technology
in view of pending third-party patent applications could be time consuming and
costly and may not result in technologies or products that are non-infringing or
commercially viable.
The
Company expects to seek and obtain licenses to such patents or patent
applications when, in the Company’s judgment, such licenses are needed. If any
such licenses are required, there can be no assurances that the Company would be
able to obtain any such license on commercially favorable terms, or at all, and
if these licenses are not obtained, the Company might be prevented from making,
using and selling the AversionTM
Technology
and products. The Company’s failure to obtain a license to any technology that
it may require would materially harm the Company’s business, financial condition
and results of operations. We cannot assure that the Company’s products and/or
actions in developing products incorporating the Company’s AversionTM
Technology
will not infringe third-party patents.
We
May Not Obtain Required FDA Approval; the FDA Approval Process Is Time-Consuming
and Expensive
The
development, testing, manufacturing, marketing and sale of pharmaceutical
products are subject to extensive federal, state and local regulation in the
United States and other countries. Satisfaction of all regulatory requirements
typically takes many years, is dependent upon the type, complexity and novelty
of the product candidate, and requires the expenditure of substantial resources
for research, development and testing. Substantially all of the Company’s
operations are subject to compliance with FDA regulations. Failure to adhere to
applicable FDA regulations would have a material adverse effect on the Company’s
operations and financial condition. In addition, in the event the Company is
successful in developing product candidates for sale in other countries, the
Company would become subject to regulation in such countries. Such foreign
regulations and product approval requirements are expected to be time consuming
and expensive.
We may
encounter delays or rejections during any stage of the regulatory approval
process based upon the failure of clinical or laboratory data to demonstrate
compliance with, or upon the failure of the products to meet, the FDA’s
requirements for safety, efficacy and quality; and those requirements may become
more stringent due to changes in regulatory agency policy or the adoption of new
regulations. After submission of a marketing application, in the form of an NDA,
a 502(b)(2) application, or an Abbreviated New Drug Application (“ANDA”), the
FDA may deny the application, may require additional testing or data and/or may
require post-marketing testing and surveillance to monitor the safety or
efficacy of a product. The FDA commonly takes one to two years to grant final
approval to a marketing application (NDA, 505(b)(2) or ANDA). Further, the terms
of approval of any marketing application, including the labeling content, may be
more restrictive than we desire and could affect the marketability of the
products incorporating the Company’s Technologies.
Even if
we comply with all FDA regulatory requirements, we may never obtain regulatory
approval for any of our product candidates. If we fail to obtain regulatory
approval for any of our product candidates, we will have fewer saleable products
and corresponding lower revenues. Even if we receive regulatory approval of our
products, such approval may involve limitations on the indicated uses or
marketing claims we may make for our products.
The FDA
also has the authority to revoke or suspend approvals of previously approved
products for cause, to debar companies and individuals from participating in the
drug-approval process, to request recalls of allegedly violative products, to
seize allegedly violative products, to obtain injunctions to close manufacturing
plants allegedly not operating in conformity with current Good Manufacturing
Practices (GMP) and to stop shipments of allegedly violative products. As any
future source of Company revenue will be derived from the sale of FDA approved
products, the taking of any such action by the FDA would have a material adverse
effect on the Company.
The
U.S. Drug Enforcement Administration (“DEA”) Limits the Availability of the
Active Ingredients Used in Our Product Candidates and, as a Result, Our Quota
May Not Be Sufficient to Complete Clinical Trials, or to Meet Commercial Demand
or May Result in Development Delays
The DEA
regulates chemical compounds as Schedule I, II, III, IV or V substances, with
Schedule I substances considered to present the highest risk of substance abuse
and Schedule V substances the lowest risk. Certain opioid active pharmaceutical
ingredients in our current product candidates are classified by the DEA as
Schedule II substances under the Controlled Substances Act of 1970.
Consequently, their manufacture, research, shipment, storage, sale and use are
subject to a high degree of regulation. Furthermore, the amount of Schedule II
substances we can obtain for clinical trials and commercial distribution is
limited by the DEA and our quota may not be sufficient to complete clinical
trials or meet commercial demand. There is a risk that DEA regulations may
interfere with the supply of the products used in our clinical trials, and, in
the future, our ability to produce and distribute our products in the volume
needed to meet commercial demand.
We
May Not Obtain Required DEA Approval for Our Narcotic Raw Materials Import
Registration
Our
business strategy focuses on the development of opioid containing products
incorporating the Technologies. The development, marketing and sale of products
incorporating the Technologies is subject to extensive regulation by the DEA and
FDA. At present, the Company’s facility located in Culver, Indiana is approved
by the DEA to manufacture DEA controlled substance active pharmaceutical
ingredients (“APIs”) and finished dosage products incorporating such API’s. We
are seeking to obtain a registration from the DEA to import narcotic raw
materials (“NRMs”) and have been engaged in the application process seeking
approval to import NMRs directly from foreign countries for use in our opioid
API manufacturing efforts since early 2001.
No
assurance can be given that the Import Registration application will be approved
by the DEA or that if granted by DEA, the Import Registration would be upheld
following an appellate challenge. Furthermore, our cash flow and limited sources
of available financing make it uncertain that the Company will have sufficient
capital to re-initiate the development of the Opioid Synthesis Technologies, to
obtain required DEA approvals and to fund the capital improvements necessary for
the commercial manufacture of APIs and finished dosage products incorporating
the Opioid Synthesis Technologies.
We
Must
Obtain FDA Approval to Manufacture Our Products at Our Facilities; Failure to
Obtain FDA Approval and Maintain Compliance with FDA Requirements May Prevent or
Delay the Manufacture of Our Products and Costs of Manufacture May Be Higher
Than Expected
We have
constructed and installed the equipment necessary to manufacture clinical trial
supplies of our AversionTM
product
candidates in tablet formulations at our Culver, Indiana facility. To be used in
clinical trials, all of our product candidates must be manufactured in
conformity with current Good Manufacturing Practice (cGMPs) regulations as
interrupted and enforced by the FDA. All such product candidates must be
manufactured, packaged, and labeled and stored in accordance with cGMPs.
Modifications, enhancements or changes in manufacturing sites of marketed
products are, in many circumstances, subject to FDA approval, which may be
subject to a lengthy application process or which we may be unable obtain. Our
Culver, Indiana facility, as well as those of any third-party manufacturers that
we may use, are periodically subject to inspection by the FDA and other
governmental agencies, and operations at these facilities could be interrupted
or halted if such inspections are unsatisfactory.
Failure
to comply with FDA or other governmental regulations can result in fines,
unanticipated compliance expenditures, recall or seizure of products, total or
partial suspension of production or distribution, suspension of FDA review of
our products, termination of ongoing research, disqualification of data for
submission to regulatory authorities, enforcement actions, injunctions and
criminal prosecution.
We
Face Significant Competition, Which May Result in Others Discovering, Developing
or Commercializing Products Before or More Successfully Than We
Do
The
pharmaceutical industry is highly competitive and is affected by new
technologies, governmental regulations, health care legislation, availability of
financing, litigation and other factors. If our product candidates receive FDA
approval, they will compete with a number of existing and future drugs and
therapies developed, manufactured and marketed by others. Existing or future
competing products may provide greater therapeutic convenience or clinical or
other benefits for a specific indication than our products, or may offer
comparable performance at lower costs. If our products are unable to capture and
maintain market share, we will not achieve significant product revenues and our
financial condition will be materially adversely affected.
We will
compete for market share against fully integrated pharmaceutical companies or
other companies that collaborate with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have opioid analgesics already approved
or in development. In addition, many of these competitors either alone or
together with their collaborative partners, operate larger research and
development programs and have substantially greater financial resources then we
do as well as significantly greater experience in developing products,
conducting pre-clinical testing and human clinical trials, obtaining FDA and
other regulatory approvals, formulating and manufacturing drugs, and
commercializing drugs.
We will
be concentrating all of our efforts on the development of the Technologies. The
commercial success of products using our Technologies will depend, in large
part, on the intensity of competition from branded opioid containing products,
generic versions of branded opioid containing products and other drugs and
technologies that compete with the products incorporating our Technologies, as
well as the timing of product approval.
Alternative
technologies and products are being developed to improve or replace the use of
opioids for pain management, several of which are in clinical trials or are
awaiting approval from the FDA. In addition, the opioid active ingredients in
all of our product candidates are readily available for use in generic products.
Companies selling generic opioid containing products may represent substantial
competition. Most of these organizations competing with us have substantially
greater capital resources, larger research and development staff and facilities,
greater experience in drug development and in obtaining regulatory approvals and
greater manufacturing and marketing capabilities than we do.
The
pharmaceutical industry is characterized by frequent litigation. Those companies
with significant financial resources will be better able to bring and defend any
such litigation. No assurance can be given that we would not become involved in
such litigation. Such litigation may have material adverse consequences to the
Company’s financial conditions and operations.
We
May Be Exposed to Product Liability Claims and May Not Be Able to Obtain
Adequate Product Liability Insurance
Our
business exposes us to potential product liability risks, which are inherent in
the testing, manufacturing, marketing and sale of pharmaceutical products.
Product liability claims might be made by consumers, health care providers or
pharmaceutical companies or others that sell our products. These claims may be
made even with respect to those products that are manufactured in licensed and
regulated facilities or that otherwise possess regulatory approval for
commercial sale.
We are
currently covered by clinical trial product liability insurance in the amount of
$1.0 million
per occurrence and $3.0 million
annually in the aggregate on a claims-made basis. This coverage may not be
adequate to cover any product liability claims. Product liability coverage is
expensive. In the future, we may not be able to maintain or obtain such product
liability insurance at a reasonable cost or in sufficient amounts to protect us
against losses due to liability claims. Any claims that are not covered by
product liability insurance could have a material adverse effect on our
business, financial condition and results of operations.
The
Market Price of Our Common Stock May Be Volatile
The
market price of our common stock, like the market price for securities of
pharmaceutical, biopharmaceutical and biotechnology companies, has historically
been highly volatile. The market from time to time experiences significant price
and volume fluctuations that are unrelated to the operating performance of
particular companies. Factors, such as fluctuations in our operating results,
future sales of our common stock, announcements of technological innovations or
new therapeutic products by us or our competitors, announcements regarding
collaborative agreements, clinical trial results, government regulation,
developments in patent or other proprietary rights, public concern as to the
safety of drugs developed by us or others, changes in reimbursement policies,
comments made by securities analysts and general market conditions may have a
significant effect on the market price of our common stock. In the past,
following periods of volatility in the market price of a company’s securities,
securities class action litigation has often been instituted. A securities class
action suit against us could result in substantial costs, potential liabilities
and the diversion of management’s attention and resources.
In
addition, since the Company’s delisting from the American Stock Exchange in
September 2000, the Company’s common stock has been traded on the OTC Bulletin
Board, a NASD-sponsored inter-dealer quotation system. As the Company’s common
stock is not quoted on a stock exchange and is not qualified for inclusion on
the NASD Small-Cap Market, our common stock could be subject to a rule by the
Securities and Exchange Commission that imposes additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors. For transactions covered by this
rule, the broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser’s written consent for a transaction
prior to sale. Consequently, the rule may affect the ability of broker-dealers
to sell the Company’s common stock and the ability of purchasers in the offering
to sell the common stock received upon conversion of the Preferred Shares in the
secondary market. There is no guaranty that an active trading market for our
common stock will be maintained on the OTC Bulletin Board. Investors may be not
able to sell their shares of common stock quickly or at the latest market price
if trading in our common stock is not active.
No
Dividends
The
Company has not declared and paid cash dividends on its common stock in the
past, and the Company does not anticipate paying any cash dividends in the
foreseeable future. The Company’s senior term loan indebtedness prohibits the
payment of cash dividends.
Control
of the Company
Galen
Partners beneficially owns in excess of an aggregate of approximately
48% of the
Company’s common stock (after giving effect to the conversion of outstanding
common stock purchase warrants held by Galen Partners). In addition, pursuant to
the terms of the Amended and Restated Voting Agreement dated February 6, 2004,
between the Company and the holders of the Company’s outstanding convertible
preferred stock, all holders of the Company’s convertible preferred stock have
agreed that the Board of Directors shall be comprised of not more than 7
members, 4 of whom shall be the designees of each of Care Capital Investments
II, LP, Essex Woodlands Health Venture V, L.P. and Galen Partners. Each of Care
Capital, Essex Woodlands and Galen Partners has the right to designate one
member of the Company’s Board of Directors and each of such investors
collectively may designate one additional member to the Board. As a result,
Galen Partners, in view of its ownership percentage of the Company, and each of
Care Capital, Essex Woodlands and Galen Partners, by virtue of their controlling
positions on the Company’s Board of Directors, will be able to control or
significantly influence all matters requiring approval by our shareholders,
including the approval of mergers or other business combination transactions.
The interests of Care Capital, Essex Woodlands and Galen Partners may not always
coincide with the interests of other shareholders and such entities may take
action in advance of their interests to the detriment of our other shareholders.
Key
Personnel Are Critical to Our Business, and Our Future Success Depends on Our
Ability to Retain Them
We are
highly dependent on the principal members our of management and scientific team,
particularly Andrew Reddick, our President and Chief Executive Officer, and Ron
Spivey, Ph.D. our Senior Vice President and Chief Scientific Officer. We may not
be able to attract and retain personnel on acceptable terms given the intense
competition for such personnel among biotechnology, pharmaceutical and
healthcare companies, universities and non-profit research institutions. We are
not aware of any present intention of any our key personnel to leave our Company
or to retire. However, while we have employment agreements with certain of our
employees, all of our employees are at-will employees who may terminate their
employment at any time. We do not currently have key personnel insurance on any
of our officers or employees. The loss of any of our key personnel, or the
inability to attract and retain such personnel, may significantly delay or
prevent the achievement of our research, development and business objectives and
could materially aversely affect our business, financial condition and results
of such operations.
We
Expect That Our Quarterly Results of Operations Will Fluctuate, and These
Fluctuations Could Cause Our Stock Price to Decline
Our
quarterly operating results are likely to fluctuate in the future. These
fluctuations could cause our stock price to decline. The nature of our business
involves variable factors, such as the timing of the research, development and
regulatory pathways of our product candidates that could cause our operating
results to fluctuate.
The
Company Is Subject to Restrictions on the Incurrence of Additional Indebtedness,
Which May Adversely Impact the Company’s Ability to Fund
Operations
Pursuant
to the terms of each of the Company’s outstanding $5.0 million senior term loan
and the Investor Rights Agreement with the holders of the Company’s convertible
preferred stock, the Company is limited as to the type and amount of future
indebtedness it may incur. The restriction on the Company’s ability to incur
additional indebtedness in the future may adversely impact the Company’s ability
to fund the development and commercialization of its products.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
primary objective of our cash investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. None of the securities that we invest in
are subject to market risk. To minimize this risk in the future, we intend to
maintain our portfolio of cash equivalents in a variety of securities, including
commercial paper, government and non-government debt securities and/or money
market funds that invest in such securities. We have no holdings of derivative
financial or commodity instruments. As of December 31, 2004, our investments
consisted primarily of short-term bank commercial paper and checking funds with
variable, market rates of interest.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
response to this item is submitted as a separate section of this Report
commencing on page F-1.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On
October 21, 2004, the Company notified Grant Thornton LLP (“Grant Thornton”) of
its decision to dismiss Grant Thornton as its independent auditor. BDO Seidman,
LLP (“BDO Seidman”) was selected to replace Grant Thornton as the Company’s
independent auditor for the fiscal year ending December 31, 2004. The decision
to dismiss Grant Thornton and to select BDO Seidman, which was made to reduce
the cost of compliance with SEC accounting rules, was approved by the Company’s
Audit Committee of the Board of Directors on October 21, 2004 and subsequently
approved by the Company’s Board of Directors with an effective date of October
22, 2004.
Grant
Thornton’s audit reports on the consolidated financial statements of the Company
and its subsidiaries as of and for the years ended December 31, 2003 and
December 31, 2002, respectively, did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles, except to the extent that, as discussed in
the former accountant’s report, the Company has suffered significant losses and
negative cash flows from operations which raised substantial doubt about its
ability to continue as a going concern. The Company’s financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
During
the Company’s two most recent fiscal years and in the subsequent interim period
through October 21, 2004, the Company did not have any disagreements with Grant
Thornton on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedures, which disagreements, if
not resolved to Grant Thornton’s satisfaction would have caused it to make
reference to the subject matter of the disagreements in connection with its
reports.
During
the Company’s two most recent fiscal years and in the subsequent interim period
through October 21, 2004, there were no “reportable events” as defined in
Regulation S-K, Item 304(a)(1)(v).
At the
Company’s request and after providing Grant Thornton with a copy of the
disclosures contained in this Item 9, Grant Thornton provided the Company with a
letter addressed to the SEC stating that it agrees with the statements made by
the Company in this Item 9.
During
the Company’s fiscal years ended December 31, 2003 and 2002, and the subsequent
interim period through October 21, 2004, neither the Company nor someone acting
on the Company’s behalf consulted BDO Seideman regarding (i) the application of
accounting principles to a specified transaction either completed or proposed,
(ii) the type of audit opinion that might be rendered on the Company’s financial
statements, or (iii) any matter that was either the subject of a disagreement
(as defined in Regulation S-K, Item 304(a)(1)(iv)), or a “reportable event” (as
defined in Regulation S-K, Item 304(a)(1)(v)).
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures. The
Company carried out an evaluation as of December 31, 2004, under the supervision
and with the participation of the Company’s management, including the Company’s
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Disclosure controls and procedures are
those controls and other procedures that are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company’s periodic
Securities and Exchange Commission filings. No significant changes were made in
the Company’s internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
Changes
in Internal Control Over Financial Reporting. There
was no change in the Company’s internal control over financial reporting that
occurred during the period covered by this Report that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over-financial reporting.
Item
9B. OTHER
INFORMATION
Not
Applicable.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The
directors and executive officers of the Company are as follows:
NAME |
AGE |
POSITION |
Jerry
Karabelas |
52 |
Chairman
of the Board |
Andrew
D. Reddick |
52 |
President,
Chief Executive Officer and Director |
Ron
J. Spivey |
58 |
Senior
Vice President and Chief Scientific Officer |
Peter
A. Clemens |
52 |
Senior
Vice President, Chief Financial Officer and Secretary |
James
Emigh |
49 |
Vice
President of Marketing and Administration |
Robert
Seiser |
41 |
Vice
President, Corporate Controller and Treasurer |
Bruce
F. Wesson |
62 |
Director |
William
A. Sumner |
67 |
Director |
William
Skelly |
54 |
Director |
Immanuel
Thangaraj |
34 |
Director |
Jerry
Karabelas has been a Director of the Company since December, 2002 and Chairman
of the Board since May 2003. Dr. Karabelas was Head of Healthcare and CEO of
Worldwide Pharmaceuticals for Novartis AG from 1998 until July 2000. Prior to
joining Novartis, Dr. Karabelas was Executive Vice President of SmithKline
Beecham. From July, 2000 until December, 2001, Dr. Karabelas was the Founder and
Chairman of the Novartis Bio Venture Fund. Since November, 2001 he has been a
Partner with Care Capital LLC. Dr. Karabelas holds a Ph.D. in pharmacokinetics
from the Massachusetts College of Pharmacy and serves as a Director of
SykePharma Plc., Human Genome Sciences, Nitromed, Anadys and
Renova.
Andrew D.
Reddick has been President and Chief Executive Officer since August, 2003 and a
Director of the Company since August, 2004. From April, 2000 to September, 2002
Mr. Reddick was Chief Operating Officer and Sr. Vice President Commercial
Operations for Adolor Corporation, a pharmaceutical company. From June, 1999 to
March, 2000 he served as President of Faulding Laboratories, Inc. and he served
as Executive Vice President Marketing, Sales & Business Development with
Purepac Pharmaceuticals from August, 1996 to June, 1999. Mr. Reddick holds a BA
degree in Biology from the University of California and an MBA degree from Duke
University.
Ron J.
Spivey has been Senior Vice President and Chief Scientific Officer since April,
2004. From June, 2002 to March, 2004 Dr. Spivey was President of Gibraltar
Associates, a private company providing consulting services to the
pharmaceutical industry relating to product research and development. From
March, 1998 to May, 2002 he served as Vice President, Scientific Affairs for
Alpharma/Purepac Pharmaceuticals. Additionally, Dr. Spivey has served in a
number of senior level scientific and leadership positions at Zenith Goldline
Pharmaceuticals, Cima Labs Inc., Marion Merrell Dow, Burroughs Wellcome Company
and Warner Chilcott Division of Warner Lambert. Dr. Spivey holds a BA degree
from Indiana University and a Ph.D. degree in pharmaceutics from the University
of Iowa.
Peter A.
Clemens has been Senior Vice President, Chief Financial Officer and Secretary
since April 2004. Mr. Clemens was Vice President, Chief Financial Officer and
Secretary of the Company from February 1998 to March 2004 and a Director of the
Company from June, 1998 to August, 2004. From February, 1988 until joining the
Company, Mr. Clemens was employed by TC Manufacturing Co., Inc. (“TC”) which,
through its various subsidiaries and divisions, manufactures generic
pharmaceuticals, industrial coatings and flexible packaging. Mr. Clemens was
TC’s President from February, 1996 through February, 1998. Prior to that time,
he held the position of Vice President and Chief Financial Officer. Mr. Clemens
is a Certified Public Accountant and earned a B.B.A. degree from the University
of Notre Dame and an MBA from Indiana University.
James
Emigh has been Vice President of Marketing and Administration since April 2004.
Prior to such time, Mr. Emigh was Vice President of Sales and Marketing. Mr.
Emigh joined the Company in May, 1998, serving first as Executive Director of
Customer Relations and then as Vice President of Operations until November,
2002. From 1991 until joining the Company, Mr. Emigh was employed by Organon,
Inc., a pharmaceutical company, in various management positions and most
recently as its Director of Managed Care and Trade Relations. Mr. Emigh holds a
Bachelor of Pharmacy from Washington State University and a Masters of Business
Administration from George Mason University.
Robert
Seiser has been a Vice President, Corporate Controller and Treasurer since April
2004. Prior to such time, Mr. Seiser was Corporate Controller and Treasurer.
From 1992 until joining the Company in March 1998, Mr. Seiser served as
Treasurer and Corporate Controller of TC Manufacturing Co., Inc., a privately
held company based in Evanston, Illinois. Mr. Seiser is a Certified Public
Accountant and earned a B.B.A. degree from Loyola University of
Chicago.
Bruce F.
Wesson has been a Director of the Company since March, 1998. Mr. Wesson is
President of Galen Associates, a health care venture firm, and a General Partner
of Galen Partners III, L.P. Prior to January, 1991, he was Senior Vice President
and Managing Director of Smith Barney, Harris Upham & Co. Inc., an
investment banking firm. He currently serves on the Boards of Encore Medical
Corporation, QMed, Inc., and Crompton Corporation, each a publicly traded
company, and several privately held companies. Mr. Wesson earned a degree from
Colgate University and a Masters of Business Administration from Columbia
University.
William
A. Sumner has been a Director of the Company since August, 1997. From 1974 until
his retirement in 1995, Mr. Sumner held various positions within Hoechst-Roussel
Pharmaceuticals, Inc., a manufacturer and distributor of pharmaceutical
products, including Vice President and General Manager, Dermatology Division
from 1991 through 1995, Vice President, Strategic Business Development, from
1989 to 1991 and Vice President, Marketing from 1985 to 1989. Since his
retirement from Hoechst-Roussel Pharmaceuticals, Inc. in 1995, Mr. Sumner has
acted as a consultant to various entities in the pharmaceutical
field.
William
Skelly has been a Director of the Company since May, 1996 and served as Chairman
of the Company from October, 1996 through June, 2000. Since 1990, Mr. Skelly has
served as Chairman, President and Chief Executive Officer of Central Biomedia,
Inc. and its subsidiary SERA, Inc., companies involved in the animal health
industry including veterinary biologicals and custom manufacturing of animal
sera products. From 1985 to 1990, Mr. Skelly served as President of Martec
Pharmaceutical, Inc., a distributor and manufacturer of human generic
prescription pharmaceuticals.
Immanuel
Thangaraj has been a Director of the Company since December, 2002. Mr. Thangaraj
has been a Managing Director of Essex Woodlands Health Ventures, a venture
capital firm specializing in the healthcare industry, since 1997. Prior to
joining Essex Woodlands Health Ventures, he helped form a telecommunication
services company, for which he served as its CEO. Mr. Thangaraj also worked as
an Associate for ARCH Venture Partners, LP and managing one of its portfolio
companies, a medical information technology company. Mr. Thangaraj holds a
Bachelor of Arts and a Masters in Business Administration from the University of
Chicago and serves as a Director of iKnowMed Systems, Sound ID and CBR
Systems.
Audit
Committee
The Audit
Committee of the Board of Directors is composed of Messrs. William A. Sumner,
Chairman, Immanuel Thangaraj and Bruce F. Wesson. The Audit Committee is
responsible for selecting the Company’s independent auditors, approving the
audit fee payable to the auditors, working with independent auditors and other
corporate officials, reviewing the scope and results of the audit by, and the
recommendations of, the Company’s independent auditors, approving the services
provided by the auditors, reviewing the financial statements of the Company and
reporting on the results of the audits to the Board, reviewing the Company’s
insurance coverage, financial controls and filings with the Securities and
Exchange Commission (the “Commission”), including, meeting quarterly prior to
the filing of the Company’s quarterly and annual reports containing financial
statements filed with the Commission, and submitting to the Board its
recommendations relating to the Company’s financial reporting, accounting
practices and policies and financial, accounting and operational
controls.
In
assessing the independence of the Audit Committee members during 2004, the
Company has reviewed and analyzed the standards for independence provided in
Section 121A of the American Stock Exchange Listing Standards. Based on this
analysis, the Company has determined that Mr. Sumner is deemed an independent
member of the Audit Committee. While Messrs. Wesson and Thangaraj do not satisfy
the standards for independence set forth in the American Stock Exchange Listing
Standards as a result of the controlling interest held by each of Galen Partners
III, L.P., of which Mr. Wesson is a general partner, and Essex Woodlands Health
Ventures V, L.P., of which Mr. Thangaraj is a general partner, the Board values
the experience of Messrs. Wesson and Thangaraj in the review of the Company’s
financial statements and believes that each is able to exercise independent
judgment in the performance of his duties on the Audit Committee.
The Audit
Committee does not have a financial expert (as defined under applicable
regulations of the Commission) serving on the Committee. The Board has
determined that while none of the Audit Committee members meet all of the
criteria established by the Commission to be classified as a “financial expert”,
the Company believes that in general, the members of the Audit Committee have a
sufficient understanding of audit committee functions, internal control over
financial reporting and financial statement evaluation so as to capably perform
the tasks required of the Audit Committee.
Nominating
Committee
The
Company does not have a standing nominating committee. Currently the Board of
Directors functions as the Company’s nominating committee. The Board performs
the functions typical of a nominating committee, including the identification,
recruitment and selection of nominees for election as directors of the Company.
Two of the six members of the Board (Messrs. Sumner and Skelly) are
“independent” as that term is defined by Section 121(A) of the American Stock
Exchange Listing Standards and participate with entire Board in the
consideration of director nominees. The Board believes that a nominating
committee separate from itself is not necessary at this time, given the size of
the Company and the Board, to ensure that candidates are appropriately evaluated
and selected. The Board also believes that, given the Company’s size and the
size of its Board, an additional committee of the Board would not add to the
effectiveness of the evaluation and nomination process. For these reasons, the
Board believes it is not appropriate to have a nominating
committee.
The
Board’s process for recruiting and selecting nominees for Board members is to
attempt to identify individuals who are thought to have the business background
and experience, industry specific knowledge and general reputation and expertise
that would allow them to contribute as effective directors to the Company’s
governance, and who are willing to serve as directors of a public company. To
date, the Company has not engaged any third party to assist in identifying or
evaluating potential nominees. If a possible candidate is identified, the
individual will meet with various members of the Board and is sounded out
concerning his/her possible interest and willingness to serve, and Board members
discuss amongst themselves the individual’s potential to be an effective Board
member. If the discussions and evaluation are positive, the individual will be
invited to serve on the Board.
To date,
no shareholder has presented any candidate for Board membership to the Company
for consideration, and the Company does not have a specific policy on
shareholder-recommended director candidates. However, the Board believes its
process for evaluation of nominees proposed by shareholders would be no
different from the process of evaluating any other candidate. In evaluating
candidates, the Board will require that candidates possess, at a minimum, a
desire to serve on the Company’s Board, an ability to contribute to the
effectiveness of the Board, an understanding of the function of the Board of a
public company and relevant industry knowledge and experience. In addition,
while not required of any one candidate, the Board would consider favorably
experience, education, training or other expertise in business or financial
matters and prior experience serving on boards of public companies.
Shareholder
Communications to the Board
Shareholders
who wish to send communications to the Company’s Board of Directors may do so by
sending them in care of the Secretary of the Company at the address which
appears on cover page of this Report. The envelope containing such communication
must contain a clear notation indicating that the enclosed letter is a
“Shareholder-Board Communication” or “Shareholder-Director Communication” or
similar statement that clearly and unmistakably indicates the communication is
intended for the Board. All such communications must clearly indicate the author
as a shareholder and state whether the intended recipients are all members of
the Board or just certain specified directors. The Secretary of the Company will
have the discretion to screen and not forward to directors communications which
the Secretary determines in his or her discretion are communications unrelated
to the business or governance of the Company and its subsidiaries, commercial
solicitations, or communications that are offensive, obscene, or otherwise
inappropriate. The Secretary will, however, compile all shareholder
communications which are not forwarded and such communications will be available
to any director.
Code
of Ethics
The
Company has adopted a Code of Ethics that applies to the Company’s principal
executive officer, principal financial officer and principal accounting officer.
The Code of Ethics is available on the Company’s website @ www.acurapharm.com
under the caption “Legal”. Any amendments to or waivers from the Code of Ethics
will be posted on the Company’s website under the caption “Legal”.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
Directors and executive officers, and persons who own beneficially more than ten
percent (10%) of the Common Stock of the Company, to file reports of ownership
and changes of ownership with the Commission. Copies of all filed reports are
required to be furnished to the Company pursuant to Section 16(a). Based solely
on the reports received by the Company and on written representations from
reporting persons, the Company believes that the Directors, executive officers
and greater than ten percent (10%) beneficial owners of the Company’s Common
Stock complied with all Section 16(a) filing requirements during the year ended
December 31, 2003, except that Essex Woodlands Health Ventures V, L.P. filed on
Form 3 late and Mr. Thangaraj filed three Form 4s late.
ITEM
11. EXECUTIVE COMPENSATION
The
following table sets forth a summary of the compensation paid by the Company for
services rendered in all capacities to the Company during the fiscal years ended
December 31, 2004, 2003 and 2002 to the Company’s Chief Executive Officer and
the Company’s next four most highly compensated executive officers
(collectively, the “named executive officers”) whose total annual compensation
for 2004 exceeded $100,000:
SUMMARY
COMPENSATION TABLE
|
|
|
|
LONG
TERM COMPENSATION |
|
|
|
ANNUAL
COMPENSATION |
|
|
|
|
|
|
|
SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
UNDERLYING |
|
|
|
|
|
|
|
|
|
|
|
OTHER
ANNUAL |
|
STOCK |
|
ALL
OTHER |
|
NAME
AND PRINCIPAL POSITION |
|
YEAR |
|
SALARY |
|
BONUS |
|
COMPENSATION |
|
OPTIONS |
|
COMPENSATION |
|
Andrew
D. Reddick |
|
|
2004 |
|
$ |
305,769 |
|
$ |
60,000 |
|
|
— |
|
|
8,750,000 |
|
|
— |
|
President
and Chief |
|
|
2003 |
|
|
96,923 |
|
|
0 |
|
|
— |
|
|
— |
|
|
— |
|
Executive
Officer |
|
|
2002 |
|
|
-0- |
|
|
0 |
|
|
— |
|
|
— |
|
|
— |
|
Ron
J. Spivey
Senior
Vice President and
Chief
Scientific Officer |
|
|
2004
2003
2002 |
|
|
190,000
-0-
-0- |
|
|
0
0
0 |
|
|
—
—
— |
|
|
3,000,000
—
— |
|
|
—
—
— |
|
Peter
A. Clemens |
|
|
2004 |
|
|
181,789 |
|
|
60,000 |
|
|
— |
|
|
375,000 |
|
|
— |
|
Senior
Vice President and |
|
|
2003 |
|
|
155,000 |
|
|
60,000 |
|
|
— |
|
|
— |
|
|
— |
|
Chief
Financial Officer |
|
|
2002 |
|
|
155,000 |
|
|
0 |
|
|
— |
|
|
— |
|
|
— |
|
Vijai
Kumar(1) |
|
|
2004 |
|
|
187,539 |
|
|
0 |
|
|
— |
|
|
200,000 |
|
|
— |
|
Chief
Operations Officer |
|
|
2003 |
|
|
180,000 |
|
|
0 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
2002 |
|
|
18,000 |
|
|
0 |
|
|
— |
|
|
400,000 |
|
|
— |
|
James
Emigh |
|
|
2004 |
|
|
141,892 |
|
|
50,000 |
|
|
— |
|
|
249,000 |
|
|
— |
|
Vice
President Marketing |
|
|
2003 |
|
|
132,000 |
|
|
0 |
|
|
— |
|
|
— |
|
|
— |
|
and
Administration |
|
|
2002 |
|
|
132,000 |
|
|
0 |
|
|
— |
|
|
— |
|
|
— |
|
(1) Mr.
Kumar’s services as Chief Operations Officer ceased effective November 17,
2004.
Other
Compensatory Arrangements
Executive
officers and key employees participate in medical and disability insurance plans
provided to all employees of the Company.
Employment
Agreements
Andrew D.
Reddick is employed pursuant to an Employment Agreement effective as of August
26, 2003, which provides that Mr. Reddick will serve as the Company’s Chief
Executive Officer and President for an initial term expiring August 26, 2005.
The term of the Employment Agreement provides for automatic one (1) year
renewals in the absence of written notice to the contrary from the Company or
Mr. Reddick at least ninety (90) days prior to the expiration of the initial
term or any subsequent renewal period. The Employment Agreement provides for an
annual base salary of $300,000, plus the payment of annual bonus of up to
thirty-five percent (35%) of Mr. Reddick’s base salary based on the achievement
of such targets, conditions, or parameters as may be set from time to time by
the Board of Directors or the Compensation Committee of the Board of Directors.
Mr. Reddick received a bonus of $60,000 in fiscal 2004. In accordance with the
terms of the Employment Agreement, as amended, the Company granted to Mr.
Reddick stock options exercisable for up to 8,750,000 shares of Common Stock at
an exercise price of $0.13 per share. The stock options provide for vesting of
3,000,000 shares on the date of grant of the option, with the balance vesting in
monthly increments of 250,000 shares at the expiration of each monthly period
thereafter commencing with the month ending August 31, 2004. The exercise price
of $0.13 per share represents a discount to the fair market value of the
Company’s common stock on the date of grant. On August 12, 2004, the date of
grant of the stock options, the average of the closing bid and asked prices for
the Company’s Common Stock was $0.435. The Employment Agreement permits the
Company to purchase the vested portion of Mr. Reddick’s options upon his
termination for Cause (as defined in the Employment Agreement) or his
resignation other than for Good Reason (as defined in the Employment Agreement)
at a purchase price equal to the positive difference, if any, between (i) the
average of the closing bid and asked prices of the Company’s Common Stock for
the five trading days prior to the date of termination or resignation, and (ii)
the exercise price of the option shares, multiplied by the numbers shares which,
as of the date of termination or resignation, are vested under the stock option.
The Employment Agreement contains standard termination provisions, including
upon death, disability, for Cause, for Good Reason and without Cause. In the
event the Employment Agreement is terminated due to death or disability, the
Company is required to pay Mr. Reddick, or his designee, a pro rata portion of
the annual bonus that would have been payable to Mr. Reddick during such year
assuming full achievement of the bonus criteria established for such bonus.
Additionally, Mr. Reddick or his designees shall have a period of twelve (12)
months following such termination to exercise Mr. Reddick’s vested stock
options. In the event that the Employment Agreement is terminated by the Company
without Cause or by Mr. Reddick for Good Reason, the Company is required to pay
Mr. Reddick an amount equal to the bonus for such year, calculated on a pro rata
basis assuming full achievement of the bonus criteria for such year, as well as
Mr. Reddick’s base salary for the greater of (i) the remainder of the initial
term of the Employment Agreement, and (ii) one year (the “Severance Pay”),
payable in equal monthly installments over a period of twelve (12) months. In
addition, Mr. Reddick is entitled to continued coverage under the Company’s then
existing benefit plans, including medical and life insurance, for a term equal
to the greater of (i) the remainder of the initial term of the Employment
Agreement, or (ii) twelve (12) months from the date of termination. The
Employment Agreement permits Mr. Reddick to terminate the Employment Agreement
in the event of a Change of Control (as defined in the Employment Agreement), in
which case such termination is considered to be made without Cause, entitling
Mr. Reddick to the benefits described above, except that (i) the Severance Pay
is payable in a lump sum within thirty (30) days of the date of termination, and
(ii) all outstanding stock options granted to Mr. Reddick shall fully vest and
be immediately exercisable. The Employment Agreement restricts Mr. Reddick from
disclosing, disseminating or using for his personal benefit or for the benefit
of others, confidential or proprietary information (as defined in the Employment
Agreement) and, provided the Company has not breached the terms of the
Employment Agreement, from competing with the Company at any time prior to one
year after the termination of his employment with the Company.
Ron J.
Spivey, Ph.D., is employed pursuant to an Employment Agreement effective as of
April 5, 2004, which provides that Dr. Spivey will serve as the Company’s Senior
Vice President and Chief Scientific Officer for term expiring April 4, 2006. The
term of the Employment Agreement provides for automatic one (1) year renewals in
the absence of written notice to the contrary from the Company or Dr. Spivey at
least ninety (90) days prior to the expiration of the initial term or any
subsequent renewal period. The Employment Agreement provides for an annual base
salary of $260,000, plus the payment of annual bonus of up to thirty-five
percent (35%) of Dr. Spivey’s base salary based on the achievement of such
targets, conditions, or parameters as may be set from time to time by the Board
of Directors or the Compensation Committee of the Board of Directors. In
accordance with the terms of the Employment Agreement, the Company granted to
Dr. Spivey stock options exercisable for up to 3,000,000 shares of Common Stock
at an exercise price of $0.13 per share. The stock option provides for vesting
of 1,000,000 shares on October 1, 2004 with the remaining balance vesting in
quarterly increments of 333,333 shares at the expiration of each quarterly
period commencing with the quarterly period ending December 31, 2004. The
Employment Agreement permits the Company to purchase the vested portion of Dr.
Spivey’s options upon his termination for Cause (as defined in the Employment
Agreement) or his resignation other than for Good Reason (as defined in the
Employment Agreement) at a purchase price equal to the positive difference, if
any, between (i) the average of the closing bid and asked prices of the
Company’s Common Stock for the five trading days prior to the date of
termination or resignation, and (ii) the exercise price of the option shares,
multiplied by the number of shares which, as of the date of termination or
resignation, are vested under the stock options. The Employment Agreement
contains standard termination provisions, including upon death, disability, for
Cause, for Good Reason and without Cause. In the event the Employment Agreement
is terminated due to death or disability, Dr. Spivey or his designees shall have
a period of twelve (12) months following such termination to exercise Dr.
Spivey’s vested stock options. In the event that the Employment Agreement is
terminated by the Company without Cause or by Dr. Spivey for Good Reason, the
Company is required to pay Dr. Spivey an amount equal to the bonus for such
year, calculated on a pro rata basis assuming full achievement of the bonus
criteria for such year, as well as Dr. Spivey’s base salary for one year (the
“Severance Pay”), payable in equal monthly installments over a period of twelve
(12) months. In addition, Dr. Spivey is entitled to continued coverage under the
Company’s then existing benefit plans, including medical and life insurance, for
twelve (12) months from the date of termination. The Employment Agreement
permits Dr. Spivey to terminate the Employment Agreement in the event of a
Change of Control (as defined in the Employment Agreement), in which case such
termination is considered to be made without Cause, entitling Dr. Spivey to the
benefits described above, except that (i) the Severance Pay is payable in a lump
sum within thirty (30) days of the date of termination, and (ii) all outstanding
stock options granted to Dr. Spivey shall fully vest and be immediately
exercisable. The Employment Agreement restricts Dr. Spivey from disclosing,
disseminating or using for his personal benefit or for the benefit of others,
confidential or proprietary information (as defined in the Employment Agreement)
and, provided the Company has not breached the terms of the Employment
Agreement, from competing with the Company at any time prior to one year after
the termination of his employment with the Company.
Peter A.
Clemens is employed pursuant to an Employment Agreement effective as of March
10, 1998, which after giving effect to amendments dated as of June 28, 2000, May
4, 2001 and January 5, 2005, provides that Mr. Clemens will serve as the
Company’s Senior Vice President and Chief Financial Officer for a term expiring
April 30, 2006. The term of the Employment Agreement provides for automatic one
(1) year renewals in the absence of written notice to the contrary from the
Company or Mr. Clemens at least one hundred eighty (180) days prior to the
expiration of any renewal period. The Employment Agreement provides for an
annual base salary of $180,000 plus the payment of an annual bonus to be
determined based on the satisfaction of such targets, conditions or parameters
as may be determined from time to time by the Compensation Committee of the
Board of Directors. Mr. Clemens received a bonus of $60,000 in each of fiscal
2004 and 2003. The Employment Agreement also provides for the grant of stock
options on March 10, 1998 to purchase 300,000 shares of the Company’s common
stock at an exercise price of $2.375 per share, which options vest in equal
increments of 25,000 option shares at the end of each quarterly period during
the term of the Employment Agreement (as such vesting schedule may be amended by
mutual agreement of Mr. Clemens and the Board of Directors). In addition, in
August 2004, the Company granted stock options to Mr. Clemens to purchase
375,000 shares of Common Stock at an exercise price of $0.13 per share. Such
stock options vest in equal quarterly increments at the end of each annual
period commencing March 9, 2005. The Employment Agreement permits the Company to
repurchase the vested portion of Mr. Clemens’ options upon his termination for
Cause (as defined in the Employment Agreement) or his resignation (other than
for Good Reason as defined therein), at a purchase price equal to the positive
difference, if any, between (i) the average of the closing price of the
Company’s common stock for the five trading days prior to the date of
termination or resignation, and (ii) the exercise price of the option shares,
multiplied by the number of option shares which, as of the date of termination,
are vested under the option. The Employment Agreement contains standard
termination provisions, including upon death, disability, for Cause, for Good
Reason and without Cause. In the event the Employment Agreement is terminated by
the Company without Cause or by Mr. Clemens for Good Reason, the Company is
required to pay Mr. Clemens an amount equal to $310,000 or twice his then base
salary, whichever is greater, payable in a lump sum within 30 days of
termination and to continue to provide Mr. Clemens coverage under the Company’s
then existing benefit plans, including medical and life insurance, for a term of
24 months. The Employment Agreement permits Mr. Clemens to terminate the
Employment Agreement in the event of a Change of Control (as defined in the
Employment Agreement) and for Good Reason. The Employment Agreement also
restricts Mr. Clemens from disclosing, disseminating or using for his personal
benefit or for the benefit of others confidential or proprietary information (as
defined in the Employment Agreement) and, provided the Company has not breached
the terms of the Employment Agreement, from competing with the Company at any
time prior to two years after the earlier to occur of the expiration of the term
and the termination of his employment.
Compensation
of Directors
Directors
who are employees of the Company receive no additional or special remuneration
for their services as Directors. Directors who are not employees of the Company
receive an annual grant of options to purchase 50,000 shares of the Company’s
common stock and $500 for each meeting attended ($250 in the case of telephonic
meetings). The Company also reimburses Directors for travel and lodging
expenses, if any, incurred in connection with attendance at Board meetings.
Directors who serve on any of the Committees established by the Board of
Directors receive $250 for each Committee meeting attended unless held on the
day of a full Board meeting.
Stock
Option Plans
The
Company currently maintains two stock option plans adopted in 1995 and 1998,
respectively. The Company in the past has used, and will continue to use, stock
options to attract and retain key employees in the belief that employee stock
ownership and stock-related compensation devices encourage a community of
interest between employees and shareholders.
The 1995
Stock Option Plan. In September, 1995, the Company established the 1995 Halsey
Drug Co., Inc. Stock Option and Restricted Stock Purchase Plan (the “1995 Stock
Option Plan”). Under the 1995 Stock Option Plan, the Company may grant options
to purchase up to 1,000,000 shares of the Company’s Common Stock. Incentive
Stock Options (“ISO’s”) may be granted to employees of the Company and its
subsidiaries and non-qualified options may be granted to employees, directors
and other persons employed by, or performing services for, the Company and its
subsidiaries. Subject to the 1995 Stock Option Plan, the Stock Option Committee
determines the persons to whom grants are made and the vesting, timing, amounts
and other terms of such grants. An employee may not receive ISO’s exercisable in
any one calendar year for shares with a fair market value on the date of grant
in excess of $100,000. No quantity limitations apply to the grant of
non-qualified stock options.
As of
February 1, 2005, ISO’s to purchase 540,705 shares and non-qualified options to
purchase 106,390 shares have been granted under the 1995 Stock Option Plan,
leaving 212,445 shares available for grant under the Plan. The average per share
exercise price for all outstanding options under the 1995 Stock Option Plan is
approximately $1.46. No exercise price of an ISO was set at less than 100% of
the fair market value of the underlying Common Stock, except for grants made to
any person who owned stock possessing more than 10% of the total voting power of
the Company, in which case the exercise price was set at not less than 110% of
the fair market value of the underlying Common Stock.
The 1998
Stock Option Plan. The 1998 Stock Option Plan was adopted by the Board of
Directors in April, 1998 and approved by the Company’s shareholders in June,
1998. The 1998 Stock Option Plan was amended by the Board of Directors in April,
1999 to increase the number of shares available for the grant of options under
the Plan from 2,600,000 to 3,600,000 shares. The Company’s shareholders ratified
the Plan amendment on August 19, 1999. The 1998 Stock Option Plan was further
amended by Board of Directors in April, 2001 to increase the number of shares
available for grant of options under the Plan from 3,600,000 to 8,100,000
shares. The Company’s shareholders ratified the Plan amendment on June 14, 2001.
The 1998 Stock Option Plan was further amended by the Board of Directors on May
5, 2004 to increase the number of shares available for grant of options under
the Plan from 8,100,000 to 20,000,000 shares. The Company’s shareholders
ratified the Plan amendment on August 12, 2004. The 1998 Stock Option Plan
permits the grant of ISO’s and non-qualified stock options to purchase shares of
the Company’s Common Stock. As of February 1, 2005,
stock options to purchase 16,851,820 shares of Common Stock had been granted
under the 1998 Stock Option Plan. Of such option grants, 624,519 are ISOs and
16,227,301 are non-qualified options. The average per share exercise price for
all outstanding options under the 1998 Stock Option Plan is approximately $ .40.
No exercise price of an ISO was set at less than 100% of the fair market value
of the underlying Common Stock, except for grants made to any person who owned
stock possessing more than 10% of the total voting power of the Company, in
which case the exercise price was set at not less than 110% of the fair market
value of the underlying Common Stock. The exercise price of non-qualified
options exercisable for 13,375,145 shares of common stock has been set at less
than the fair market value of the underlying Common Stock. Subject to the terms
of the 1998 Stock Option Plan, the Stock Option Committee determines the persons
to whom grants are made and the vesting, timing, amounts and other terms of such
grant. An employee may not receive ISO’s exercisable in any one calendar year
for shares with a fair market value on the date of grant in excess of $100,000.
No quantity limitations apply to the grant of non-qualified stock
options.
Securities
Authorized For Issuance Under Equity Compensation Plans
The
following table includes information as of December 31, 2004 relating to the
Company’s 1995 Stock Option Plan and 1998 Stock Option Plan, which comprise all
of the equity compensation plans of the Company. The table provides the number
of securities to be issued upon the exercise of outstanding options under such
plans, the weighted-average exercise price of such outstanding options and the
number of securities remaining available for future issuance under such equity
compensation plans:
EQUITY
COMPENSATION PLAN INFORMATION
PLAN
CATEGORY |
|
NUMBER
OF SECURITIES TO
BE
ISSUED UPON EXERCISE
OF
OUTSTANDING OPTIONS,
WARRANTS
AND RIGHTS |
|
WEIGHTED-AVERAGE
EXERCISE
PRICE OF
OUTSTANDING
OPTIONS,
WARRANTS
AND RIGHTS |
|
NUMBER
OF SECURITIES
REMAINING
AVAILABLE FOR
FUTURE
ISSUANCE UNDER EQUITY
COMPENSATION
PLANS
(EXCLUDING
SECURITIES
REFLECTED
IN COLUMN(a)) |
|
|
|
(a) |
|
(b) |
|
(c) |
|
Equity
Compensation Plans Approved by Security Holders |
|
|
17,498,915 |
|
$ |
.44 |
|
|
3,338,625 |
|
Equity
Compensation Plans Not Approved by Security Holders |
|
|
0 |
|
|
0 |
|
|
0 |
|
TOTAL |
|
|
17,498,915 |
|
$ |
.44 |
|
|
3,338,625 |
|
OPTION
GRANTS IN 2004
The
following table presents information regarding grants of options to purchase
shares of the Company’s common stock for each of the named executive officers
receiving option grants in 2004.
|
|
Individual
Grants |
|
|
|
Name |
|
Number
of Securities Underlying Options
Granted |
|
Percent
of Total Options Granted to Employees in Fiscal
Year |
|
Exercise
Price Per
Share
(1) |
|
Expiration
Date |
|
Potential
Realizable value at Assumed Annual Rates of Stock Price Appreciation for
Option Term(2) |
|
Andrew
D. Reddick |
|
|
8,750,000 |
|
|
65.4 |
% |
$ |
0.13 |
|
|
2014 |
|
$ |
5,066,250 |
|
$ |
8,732,500 |
|
Ron
J. Spivey |
|
|
3,000,000 |
|
|
22.4 |
% |
$ |
0.13 |
|
|
2014 |
|
|
1,737,000 |
|
|
2,994,000 |
|
Peter
A. Clemens |
|
|
375,000 |
|
|
2.8 |
% |
$ |
0.13 |
|
|
2014 |
|
|
217,125 |
|
|
374,250 |
|
Vijai
Kumar |
|
|
200,000 |
|
|
1.5 |
% |
$ |
0.13 |
|
|
2014 |
|
|
115,800 |
|
|
199,600 |
|
James
Emigh |
|
|
249,000 |
|
|
1.9 |
% |
$ |
0.13 |
|
|
2014 |
|
|
144,171 |
|
|
248,502 |
|
(1) The stock
options granted to Mr. Reddick provide for the vesting of 3,000,000 shares
immediately upon the grant of the options, with the balance vesting in monthly
increments 250,000 shares at the expiration of each monthly period commencing
August 31, 2004. The stock options granted to Dr. Spivey provide for vesting of
1,000,000 shares on October 1, 2004, with the balance vesting in quarterly
increments of 333,333 shares at the expiration of each quarterly period
commencing with the quarterly period ending December 31, 2004. The remainder of
the stock option grants provide for vesting in quarterly increments at the
expiration of each annual period commencing with the quarterly period ending
March 9, 2005.
(2) The
dollar amounts in these columns represent the potential realizable value of each
option assuming that the market price of the Common Stock (based on the average
of the closing bid and asked prices of the Company’s Common Stock on August 12,
2004 of $0.435 appreciates in value from the date of grant at the 5% and 10%
annual rates prescribed by regulation and therefore are not intended to forecast
possible future appreciation, if any, of the price of the Common Stock.
AGGREGATE
OPTION EXERCISED IN LAST FISCAL YEAR
AND
FISCAL YEAR END OPTION VALUES
The
following table presents information regarding the value of options outstanding
at December 31, 2004 for each of the named executive officers.
|
|
NUMBER
OF SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
AT FISCAL YEAR END |
|
VALUE
OF UNEXERCISED
IN-THE-MONEY
OPTIONS AT
FISCAL
YEAR END (2) |
|
NAME |
|
EXERCISABLE |
|
UNEXERCISABLE |
|
EXERCISABLE |
|
UNEXERCISABLE |
|
Andrew
D. Reddick |
|
|
4,250,000 |
|
|
4,500,000 |
|
$ |
1,168,750 |
|
$ |
1,237,500 |
|
Ron
J. Spivey |
|
|
1,333,333 |
|
|
1,666,667 |
|
$ |
366,667 |
|
$ |
458,333 |
|
Peter
A. Clemens |
|
|
625,000 |
|
|
375,000 |
|
$ |
— |
|
$ |
103,125 |
|
Vijai
Kumar(1) |
|
|
400,000 |
|
|
200,000 |
|
$ |
55,000 |
|
$ |
— |
|
James
Emigh |
|
|
144,750 |
|
|
255,250 |
|
$ |
— |
|
$ |
68,475 |
|
(1) Mr.
Kumar’s services as Chief Operations Officer ceased effective November 17,
2004.
(2) Value is
based upon the average of the closing bid and asked prices of $0.405 per
share at December 31, 2004.
Compensation
Committee Interlocks and Insider Participation
From
January 1, 2004 through August 11, 2004 the Company’s Compensation Committee
consisted of Messrs. Wesson, Skelly and Thangaraj. From August 12, 2004 through
December 31, 2004 the Company’s Compensation Committee consisted of Messrs.
Karabelas, Skelly and Reddick. During 2004, except for Mr. Reddick, there were
no Compensation Committee interlocks or insider participation in compensation
decisions.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth information regarding the beneficial ownership of the
Common Stock, as of February 1, 2005, for individuals or entities in the
following categories: (i) each of the Company’s Directors and nominees for
Directors; (ii) the Chief Executive Officer and the next four highest paid
executive officers of the Company whose total annual compensation for 2004
exceeded $100,000 (the “named executive officers”); (iii) all Directors and
executive officers as a group; and (iv) each person known by the Company to be a
beneficial owner of more than 5% of the Common Stock. Unless indicated
otherwise, each of the shareholders has sole voting and investment power with
respect to the shares beneficially owned.
|
|
SHARES
OF COMMON STOCK ON AN AS-
CONVERTED
AND AS-EXERCISED BASIS |
|
NAME
OF BENEFICIAL OWNER |
|
AMOUNT
OWNED(1) |
|
PERCENT
OF
CLASS(2) |
|
PERCENT
OF
CLASS(3) |
|
Galen
Partners III, L.P(4)
610
Fifth Avenue, 5th Floor
New
York, New York 10020 |
|
|
158,503,832 |
(5) |
|
87.9 |
% |
|
42.6 |
% |
Galen
Partners International III, L.P(4)
610
Fifth Avenue, 5th Floor
New
York, New York 10020 |
|
|
15,372,245 |
(6) |
|
40.7 |
% |
|
4.1 |
% |
Oracle
Strategic Partners, L.P(4)
200
Greenwich Avenue
Suite
3
Greenwich,
CT 06830-2506 |
|
|
24,640,794 |
(7) |
|
56.7 |
% |
|
6.6 |
% |
Essex
Woodlands Health Ventures V, L.P..
c/o
Essex Woodlands Health Ventures V, L.L.C.
190
South LaSalle Street, Suite 2800
Chicago,
IL 60603 |
|
|
56,982,825 |
(8) |
|
72.0 |
% |
|
15.3 |
% |
Care
Capital Investments II, LP (4)
c/o
Care Capital, L.L.C.
Princeton
Overlook One
100
Overlook Center, Suite 102
Princeton,
New Jersey 08540 |
|
|
45,524,301 |
(9) |
|
67.2 |
% |
|
12.2 |
% |
Watson
Pharmaceuticals, Inc
311
Bonnie Circle
Corona,
California 92880 |
|
|
10,700,665(10 |
) |
|
32.3 |
% |
|
2.9 |
% |
CI
Mutual Funds
CI
Place
151
Young Street, 11th
Flr.
Toronto,
Canada M5C 2W7 |
|
|
8,184,331(11 |
) |
|
26.7 |
% |
|
2.2 |
% |
Dennis
Adams
120
Kynlyn Road
Radnor,
Pennsylvania 19103 |
|
|
5,085,141 |
(12) |
|
19.2 |
% |
|
1.4 |
% |
Hemant
K. Shah and Varsha H. Shah
29
Christy Drive
Warren,
New Jersey 07059 |
|
|
2,962,157 |
(13) |
|
12.0 |
% |
|
* |
|
Bernard
Selz
c/o
Furman Selz
230
Park Avenue
New
York, New York 10069 |
|
|
2,632,909 |
(14) |
|
10.6 |
% |
|
* |
|
Michael
and Susan Weisbrot
1136
Rock Creek Road
Gladwyne,
Pennsylvania 19035 |
|
|
3,725,031 |
(15) |
|
14.7 |
% |
|
1.0 |
% |
Andrew
D. Reddick |
|
|
4,750,000 |
(16) |
|
17.5 |
% |
|
1.3 |
% |
Ron
J. Spivey |
|
|
1,666,666 |
(17) |
|
6.9 |
% |
|
* |
|
William
Skelly |
|
|
376,000 |
(18) |
|
1.7 |
% |
|
* |
|
Bruce
F. Wesson |
|
|
— |
|
|
* |
|
|
* |
|
William
A. Sumner |
|
|
225,000 |
(19) |
|
* |
|
|
* |
|
Peter
A. Clemens |
|
|
1,034,073 |
(20) |
|
4.4 |
% |
|
* |
|
Jerry
Karabelas |
|
|
— |
|
|
* |
|
|
* |
|
Immanuel
Thangaraj |
|
|
— |
|
|
* |
|
|
* |
|
Vijai
Kumar |
|
|
400,000 |
(21) |
|
1.7 |
% |
|
* |
|
James
Emigh |
|
|
252,000 |
(22) |
|
1.1 |
% |
|
* |
|
All
Directors and Officers as a Group (11 persons) |
|
|
8,510,740 |
(23) |
|
27.6 |
% |
|
2.3 |
% |
*
Represents less than 1% of the outstanding shares of the Company’s Common
Stock.
(1) The
information with respect to Hemant K. Shah and Varsha H. Shah, Dennis Adams,
Bernard Selz and Michael and Susan Weisbrot and Watson Pharmaceuticals, is based
upon filings with the Commission and/or information provided to the
Company.
(2) Shows
percentage ownership assuming (i) such party converts all of its currently
convertible securities or securities convertible within 60 days of February 1,
2005 into the Company’s common stock, and (ii) no other Company securityholder
converts any of its convertible securities.
(3) Shows
percentage ownership assuming such party and all other securityholders of the
Company convert all of their convertible securities into the Company’s common
stock.
(4) The
following natural persons exercise voting, investment and dispositive rights
over the Company’s securities held of record by such entities:
|
(i) |
Galen
Partners III, L.P. and Galen Partners International III, L.P. - William
Grant, Bruce F. Wesson, L. John Wilkenson, Srini Conjeevaram, David
W. Jahns and Zubeen Shroff; |
|
(ii) |
Care
Capital Investments II, LP - Jan Leschly, Argeris Karabelas and David
Ramsay; |
|
(iii) |
Essex
Woodlands Health Ventures V, L.P. - Immanuel Thangaraj;
and |
|
(iv) |
Oracle
Strategic Partners, L.P. - Larry N.
Feinberg. |
(5) Includes
(i) 30,978,600 shares issuable upon conversion of Series A Preferred Shares,
(ii) 6,170,157 shares issuable upon exercise of Series B Preferred shares, (iii)
100,801,521 shares issuable upon conversion of Series C Preferred shares, (iv)
19,476,890 shares issuable upon exercise of common stock purchase warrants , and
(v) 425,000 shares subject to currently exercisable stock options.
(6) Includes
(i) 2,803,960 shares issuable upon conversion of Series A Preferred Shares, (ii)
558,503 shares issuable upon exercise of Series B Preferred shares, (iii)
10,013,122 shares issuable upon conversion of Series C Preferred shares, and
(iv) 1,971,555 shares issuable upon exercise of common stock purchase
warrants.
(7) Includes
(i) 20,991,333 shares issuable upon conversion of Series C Preferred
Shares
(8) Includes
(i) 33,909,751 shares issuable upon conversion of Series A Preferred Shares,
(ii) 6,756,207 shares issuable upon conversion of Series B Preferred Shares,
(iii) 15,593,247 shares issuable upon conversion of Series C Preferred Shares,
(iv) 345,000 shares issuable upon exercise of common stock purchase warrants,
and (v) 75,000 shares subject to currently exercisable stock
options.
(9) Includes
(i) 24,453,931 shares issuable upon conversion of Series A Preferred Shares,
(ii) 6,303,874 shares issuable upon conversion of Series B Preferred Shares,
(iii) 14,312,342 shares issuable upon conversion of Series C Preferred Shares,
(iv) 150,000 shares issuable upon exercise of common stock purchase warrants,
and (v) 75,000 shares subject to currently exercisable stock
options
(10)
Includes
10,700,665 shares issuable upon exercise of a common stock purchase
warrant.
(11)
Includes
8,184,331 shares issuable upon conversion of Series A Preferred
Shares.
(12)
Includes
(i) 907,348 shares issuable upon conversion of Series A Preferred Shares, and
(ii) 3,146,137 shares issuable upon conversion of Series C Preferred
Shares.
(13) Includes
2,130,157 shares issuable upon conversion of Series C Preferred
Shares.
(14) Includes
2,272,666 shares issuable upon conversion of Series C Preferred
Shares.
(15) Includes
1,125,107 shares issuable upon conversion of Series A Preferred Shares and (ii)
1,777,862 shares issuable upon conversion of Series C Preferred
Shares.
(16) Includes
4,750,000 shares subject to currently exercisable stock options.
(17) Includes
1,666,666 shares subject to currently exercisable stock options.
(18)
Includes 365,000 shares subject to currently exercisable stock options.
(19) Includes
225,000 shares subject to currently exercisable stock options.
(20) Includes
(i) 269,273 shares issuable upon conversion of Series C Preferred Shares, and
(ii) 718,750 shares subject to currently exercisable stock options.
(21) Includes
400,000 shares subject to currently exercisable stock options.
(22) Includes
207,000 shares subject to currently exercisable stock options.
(23) Includes
8,408,690 shares which Directors and executive officers have the right to
acquire within the next 60 days through the conversion of preferred shares and
the exercise of outstanding stock options.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On
February 10, 2004, the Company consummated a private offering of convertible
senior secured debentures (the “2004 Debentures”) in the aggregate principal
amount of approximately $12.3 million (the “2004 Debenture Offering”). The 2004
Debentures were issued by the Company pursuant to a certain Debenture and Share
Purchase Agreement dated as of February 6, 2004 (the “2004 Purchase Agreement”)
by and among the Company, Care Capital, Essex Woodlands Health Ventures, Galen
Partners and each of the purchasers listed on the signature page thereto. Of the
approximate $12.3 million in debentures issued on February 10, 2004 under in the
2004 Debenture Offering, approximately $2 million of 2004 Debentures were issued
in exchange for the surrender of a like amount of principal plus accrued and
unpaid interest under the Company’s convertible debentures issued to Care
Capital, Essex Woodlands Health Ventures and Galen Partners during November and
December, 2003.
Effective
August 13, 2004, the 2004 Debentures (including the principal amount plus
interest accrued at the date of conversion) were converted automatically into
the Company’s Series A convertible preferred stock (“Series A Preferred”) at a
price per share (the “Conversion Price”) of $0.6425, representing the average of
the closing bid and asked prices of the Company’s Common Stock for the 20
trading days ending February 4, 2004, as reported by the Over-the-Counter
(“OTC”) Bulletin Board. Based on the $0.6425 Conversion Price, the Company
issued on an aggregate of approximately 22 million shares of Series A Preferred
of which approximately 5.2 million, 6.8 million and 6.8 million were issued to
Care Capital, Essex Woodlands Health Ventures and Galen Partners, respectively,
under the 2004 Debentures held by such parties (representing 23.8%, 30.9% and
30.9%, respectively, of the total Series A Preferred issuable upon conversion of
the 2004 Debentures). The 2004 Purchase Agreement also provides that the holders
of the Series A Preferred shall have the right to vote as part of the single
class with all holders of the Company’s voting securities on all matters to be
voted on by such security holders. Each holder of Series A Preferred shall have
such number of votes as shall equal the number of votes he would have had if
such holder converted all Series A Preferred held by such holder into shares of
Common Stock immediately prior to the record date relating to such
vote.
As a
condition to the completion of the 2004 Purchase Agreement, the Company, the
investors in the 2004 Debentures and the holders of the Company’s outstanding 5%
convertible senior secured debentures due March 31, 2006 issued by the Company
in during the period from 1998 through 2003 (collectively, the “1998-2003
Debentures”), executed a certain Voting Agreement dated as of February 6, 2004
(the “Voting Agreement”). The Voting Agreement provides that each of Care
Capital, Essex Woodlands Health Ventures and Galen Partners (collectively, the
“Lead 2004 Investors”) has the right to designate for nomination one member of
the Company’s Board of Directors, and that the Lead 2004 Investors collectively
may designate one additional member of the Board (collectively, the
“Designees”). The Designees of Care Capital, Essex Woodlands Health Ventures and
Galen Partners are Messrs. Karabelas, Thangaraj and Wesson, respectively, each
of whom are current Board members. As of the date of this Report, the collective
Designee of the Lead 2004 Investors had not been determined.
Simultaneous
with the execution of a 2004 Purchase Agreement, and as a condition to the
initial closing of the 2004 Purchase Agreement, the Company, the investors in
the 2004 Debentures and each of the holders of the 1998-2003 Debentures executed
a certain Debenture Conversion Agreement dated as of February 6, 2004 (the
“Conversion Agreement”). In accordance with the terms of the Conversion
Agreement, the 1998-2003 Debentures were converted automatically into the
Company’s Series B convertible preferred stock (the “Series B Preferred”) and/or
the Company’s Series C convertible preferred stock (the “Series C Preferred”).
The Series B Preferred and the Series C Preferred are referred to collectively
as the “Junior Preferred Shares”, and the Junior Preferred Shares, together with
the Series A Preferred are referred to collectively as the “Preferred
Stock”.
As of
December 31, 2004, after giving effect to the conversion of the 2004 Debentures
and the 1998-2003 Debentures, Care Capital, Essex Woodlands Health Ventures and
Galen Partners control approximately 14.7%, 17.2% and 46.5%, respectively, of
the Company’s voting securities (or approximately 12.2 %, 15.3 %, 47.9 %,
respectively, after giving effect to the conversion of all of the Company’s
issued and outstanding convertible securities).
It was a
condition to the completion of the 2004 Debenture Offering that the Company’s
senior term loan agreement (the “Watson Loan Agreement”) with Watson
Pharmaceuticals, Inc. (“Watson”) be restructured to provide for a reduction in
the principal amount of the Watson term loan and for the assignment of the
Watson term loan as restructured to Care Capital, Essex Woodlands Health
Ventures, Galen Partners and the other investors in the 2004 Debentures as of
February 10, 2004 (collectively, the “Watson Note Purchasers”). Accordingly,
simultaneous with the closing of the 2004 Purchase Agreement, each of the
Company, Watson and the Watson Note Purchasers executed an Umbrella Agreement
dated as of February 10, 2004 (the “Umbrella Agreement”). The Umbrella Agreement
provides for (i) the Company’s payment to Watson of approximately $4.3 million
in consideration of amendments to the Watson term notes in the aggregate
principal amount of approximately $21.4 million evidencing the Watson term loan
(the “Watson Notes”) (A) to forgive approximately $16.4 million of indebtedness
under that Watson Notes, leaving a $5.0 million principal balance, (B) to extend
the maturity date of the Watson Notes from March 31, 2006 to June 30, 2007, (C)
to provide for the satisfaction of future interest payments under the Watson
Notes in the form of the Company’s Common Stock, and (D) to provide for the
forbearance from the exercise of rights and remedies upon the occurrence of
certain events of default under the Watson Notes (the Watson Notes as so
amended, the “2004 Note”), and (ii) Watson’s sale and conveyance of the 2004
Note to the Watson Note Purchasers for cash consideration of $1.0 million. In
addition to Watson forgiveness of approximately $16.4 million of indebtedness
under the Watson Notes, all current supply agreements between the Company and
Watson were terminated and Watson waived the dilution protections contained in
the warrant previously granted to Watson to purchase approximately 10.7 million
shares of Common Stock, to the extent such dilution protections were triggered
by the transactions contemplated in the 2004 Debenture Offering.
The 2004
Note in the principal amount of $5.0 million is secured by a first lien on all
of the Company’s and its subsidiaries’ assets, senior in right of payment and
lien priority over all other Company indebtedness, carries a floating rate of
interest equal to the prime rate plus 4.5% and matures on June 30,
2007.
After
giving effect to the transactions provided in the Umbrella Agreement, the Watson
Note Purchasers represent the Company’s senior lenders. The allocation of
ownership of the $5.0 million 2004 Note among each of the Watson Note Purchasers
was based on the quotient of the principal amount of the 2004 Debentures
purchased by such Watson Note Purchaser, divided by approximately $12.3 million,
representing the aggregate principal amount of the 2004 Debentures issued by the
Company on February 10, 2004. As such, of the $5.0 million principal amount of
the 2004 Note, approximately $1,352,000, $1,754,000, and $1,754,000, is owed by
the Company to Care Capital, Essex Woodlands Health Ventures and Galen Partners,
respectively (representing approximately 27%, 35% and 35%, respectively, of the
2004 Note).
Each of
Michael and Susan Weisbrot beneficially own in excess of 5% of the Company’s
voting securities. The Weisbrots participated as an investor in the 2004
Debentures and purchased a portion of the 2004 Note as a member of the Watson
Note Purchasers. In addition, each of Bernard Selz, Hemant and Varsha Shah,
Oracle Strategic Partners, L.P. and Michael and Susan Weisbrot, each a
beneficial owner of in excess of 5% of the Company’s voting securities,
converted their respective 1998-2003 Debentures into Junior Preferred Shares.
See “Item 12-Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters”.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
Fees
The
aggregate fees billed for professional services rendered by Grant Thornton, LLP,
the Company’s principal accountant during 2003 and through October 21, 2004, was
$209,856 for the audit of the Company’s annual financial statements for the
fiscal year ended December 31, 2003 and $31,979 for the review of the financial
statements included in the Company’s Quarterly Reports on Form 10-Q for each of
the quarters ended March 31, 2004 and June 30, 2004.
The
aggregate fees billed for professional services rendered by BDO Seidman, LLP,
the Company’s principal accountant commencing October 22, 2004, was $6,112 for
the review of the financial statements included in the Company’s quarterly
report on Form 10-Q for the quarter ended September 30, 2004 and $39,500 for the
audit of the Company’s annual financial statements for the fiscal year ended
December 31, 2004.
Audit
- Related Fees
The
aggregate fees billed for professional services rendered by the Company’s
principal accountant and which are reasonably related to the performance of the
audit or review of the Company’s financial statements and which are not reported
above under the caption “Audit Fees” for each of the fiscal years ended December
31, 2003 and December 31, 2004 were $10,724 and $12,500, respectively, all of
which is attributable to Grant Thornton.
These
fees relate to services provided in connection with the audit of the Company’s
401(k) and profit sharing plan.
Tax
Fees
The
aggregate fees billed for professional services rendered by the Company’s
principal accountant for tax compliance, tax advice and tax planning for the
fiscal years ended December 31, 2003 and December 31, 2004 were $55,071 and $0,
respectively, all of which is attributable to Grant Thornton. These services
related to the preparation of various state and Federal tax
returns.
All
Other Fees
There
were no fees billed for professional services rendered by the Company’s
principal accountant for products and services provided, other than those
described above under the captions “Audit Fees”, “Audit-Related Fees” and “Tax
Fees”.
Audit
Committee’s Pre-Approval Policies and Procedures
Consistent
with policies of the Commission regarding auditor independence and the Audit
Committee Charter, the Audit Committee has the responsibility for appointing,
setting compensation and overseeing the work of the independent auditor. The
Audit Committee’s policy is to pre-approve all audit and permissible non-audit
services provided by the independent auditor. Pre-approval is detailed as to the
particular service or category of services and is generally subject to a
specific budget. The Audit Committee may also pre-approve particular services on
a case-by-case basis. In assessing requests for services by the independent
auditor, the Audit Committee considers whether such services are consistent with
the auditor’s independence, whether the independent auditor is likely to provide
the most effective and efficient service based upon their familiarity with the
Company, and whether the service could enhance the Company’s ability to manage
or control risk or improve audit quality.
All of
the audit-related, tax and other services provided by Grant Thornton LLP in
fiscal year 2003 and 2004 and by BDO Seidman in 2004 and related fees (as
described in the captions above) were approved in advance by the Audit
Committee.
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)
Consolidated Financial Statements — See Index to Financial
Statements.
(a)(2)
Consolidated Financial Statement Schedules — See Index to Financial
Statements
(b) Exhibits
The
following exhibits are included as a part of this Annual Report on Form 10-K or
incorporated herein by reference.
EXHIBIT
NUMBER |
DOCUMENT |
3.1 |
Certificate
of Incorporation and amendments (incorporated by reference to Exhibit 3.1
to the Registrant’s Annual Report on 10-K for the year ended December 31,
1999). |
3.2 |
Restated
Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
1993). |
3.3 |
Restated
By-Laws (incorporated by reference to Exhibit 3.3 to the Registrant’s
Annual Report Form 10-K for the year ended December 31, 1998 (the “1998
Form 10-K”)). |
4.1 |
Form
of 5% Convertible Senior Secured Debenture (incorporated by reference to
Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated December
20, 2002 (the “December 2002 Form 8-K”)). |
4.2 |
Form
of Convertible Senior Secured Debenture issued pursuant to the Debenture
and Share Purchase Agreement dated as of February 6, 2004 (incorporated by
reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K
dated February 10, 2004 (the “February 2004 Form 8-K”) |
10.1 |
Credit
Agreement, dated as of December 22, 1992, among the Registrant and The
Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.1 to
the Registrant’s Annual Report on Form 10-K for the year ended December
31, 1992 (the “1992 Form 10-K”)). |
10.2 |
Amendment
Two, dated as of January 12, 1994, to Credit Agreement among the
Registrant and The Chase Manhattan Bank, N.A., together with forms of
Stock Warrant and Registration Rights Agreement (incorporated by reference
to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the
year ended December 31, 1993 (the “1993 Form 10-K”)). |
10.3 |
Amendment
Three, dated as of May 31, 1994, to Credit Agreement among the Registrant
and The Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit
6(a) to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994). |
10.4 |
Amendment
Four, dated as of July 1994, to Credit Agreement among the Registrant and
The Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 6(a)
to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994). |
10.5 |
Amendment
Five, dated as of March 21, 1995, to Credit Agreement among the Registrant
and The Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit
10.7 to the Registrant’s Current Report on Form 8-K dated March 21, 1995
(the “March 1995 8-K”)). |
10.5(1) |
Form
of Warrants issued to The Bank of New York, The Chase Manhattan Bank, N.A.
and the Israel Discount Bank (incorporated by reference to Exhibit 10.5(i)
to the Registrant’s Annual Report on Form 10-K for the year ended December
31, 1995 (the “1995 Form 10-K”)). |
10.5(2) |
Letter
Agreement, dated July 10, 1995, among the Registrant, The Chase Manhattan
Bank, N.A., The Bank of New York and Israel Discount Bank of New York
(incorporated by reference to Exhibit 6(a) to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995 (the “June 1995
10-Q”)). |
10.5(3) |
Letter
Agreement, dated November 16, 1995, among the Registrant, Inc., The Chase
Manhattan Bank, N.A., The Bank of New York and Israel Discount Bank of New
York (incorporated by reference to Exhibit 10.25(iv) to the 1995
10-K). |
10.5(4) |
Amendment
6, dated as of August 6, 1996, to Credit Agreement among The Registrant,
The Chase Manhattan Bank, N.A., The Bank of New York and Israel Discount
Bank of New York (incorporated by reference to Exhibit 10.1 to Amendment
No. 1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996 (the “June 1996 10-Q”). |
10.5(5) |
Letter
Agreement, dated March 25, 1997 among the Registrant, The Chase Manhattan
Bank, as successor in interest to The Chase Manhattan Bank (National
Association), The Bank of New York and Israel Discount
Bank. |
10.6 |
Agreement
Regarding Release of Security Interests dated as of March 21,1995 by and
among the Registrant, Mallinckrodt Chemical Acquisition, Inc. and The
Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.9 of
the March 1995 8-K). |
10.7 |
Consulting
Agreement dated as of September, 1993 between the Registrant and Joseph F.
Limongelli (incorporated by reference to Exhibit 10.6 to the 1993 Form
10-K). |
10.8 |
Employment
Agreement, dated as of January 1, 1993, between the Registrant and Rosendo
Ferran (incorporated by reference to Exhibit 10.2 to the 1992 Form
10-K). |
10.10(1) |
Registrant’s
1984 Stock Option Plan, as amended (incorporated by reference to Exhibit
10.3 to the 1992 Form 10-K). |
10.10(2) |
Registrant’s
1995 Stock Option and Restricted Stock Purchase Plan (incorporated by
reference to Exhibit 4.1 to the Registrant’s Registration Statement on
Form S-8, File No. 33-98396). |
10.10(3) |
Registrant’s
Non-Employee Director Stock Option Plan. |
10.11 |
Leases,
effective February 13, 1989 and January 1, 1990, respectively, among the
Registrant and Milton J. Ackerman, Sue Ackerman, Lee Hinderstein, Thelma
Hinderstein and Marilyn Weiss (incorporated by reference to Exhibits 10.6
and 10.7, respectively, to the Registrant’s Annual Report on Form 10-K for
the year ended December 31, 1989). |
10.12 |
Lease,
effective as of April 15, 1988, among the Registrant and Milton J.
Ackerman, Sue Ackerman, Lee Hinderstein, Thelma Hinderstein and Marilyn
Weiss, and Rider thereto (incorporated by reference to Exhibit 10.12 to
the Registrant’s Annual Report on Form 10-K for the year ended December
31, 1987). |
10.12(l) |
Lease,
as of October 31, 1994, among Registrant and Milton J. Ackerman, Sue
Ackerman, Lee Hinderstein, Thelma Hinderstein and Marilyn Weiss, together
with Modification, Consolidation and Extension Agreement (incorporated by
reference to Exhibit 10.12(i) to the 1995 Form 10-K). |
10.13 |
Asset
Purchase Agreement dated as of March 21, 1995 among Mallinckrodt Chemical
Acquisition, Inc. (“Acquisition”), Mallinckrodt Chemical, Inc., as
guarantor and the Registrant (incorporated by reference to Exhibit 10.1 to
the March 1995 8-K). |
10.14 |
Toll
Manufacturing Agreement for APAP/Oxycodone Tablets dated as of March 21,
1995 between Acquisition and the Registrant (incorporated by reference to
Exhibit 10.2 to the March 8-K). |
10.15 |
Capsule
ANDA Option Agreement dated as of March 21, 1995 between Acquisition and
the Registrant (incorporated by reference to Exhibit 10.3 to the March
1995 8-K). |
10.16 |
Tablet
ANDA Noncompetition Agreement dated as of March 21, 1995 between the
Registrant and Acquisition (incorporated by reference to Exhibit 10.4 to
the March 1995 8-K). |
10.17 |
Subordinated
Non-Negotiable Promissory Term Note in the amount of $1,200,00 dated March
21, 1995 issued by the Registrant to Acquisition (incorporated by
reference to Exhibit 10.5 to the March 1995 8-K). |
10.18 |
Term
Note Security Agreement dated as of March 21, 1995 among the Company,
Houba, Inc. and Acquisition (incorporated by reference to Exhibit 10.6 to
the March 1995 8-K). |
10.19 |
Amendment
dated March 21, 1995 to Subordination Agreement dated as of July 21, 1994
between Mallinckrodt Chemical, Inc., Acquisition, the Registrant, The
Chase Manhattan Bank (National Association), Israel Discount Bank of New
York, The Bank of New York, and The Chase Manhattan Bank (National
Association) (incorporated by reference to Exhibit 10.8 to the March 1995
8-K). |
10.20 |
Agreement
dated as of March 30, 1995 between the Registrant and Zatpack, Inc.
(incorporated by reference to Exhibit 10.10 to the March 1995
8-K). |
10.21 |
Waiver
and Termination Agreement dated as of March 30, 1995 between Zuellig
Group, W.A., Inc. and Indiana Fine Chemicals Corporation (incorporated by
reference to Exhibit 10.11 to the March 1995
8-K). |
10.22 |
Convertible
Subordinated Note of the Registrant dated December 1, 1994 issued to
Zatpack, Inc. (incorporated by reference to Exhibit 10.12 to the March
1995 8-K). |
10.23 |
Agreement
dated as of March 30, 1995 among the Registrant, Indiana Fine Chemicals
Corporation, Zuellig Group, N.A., Inc., Houba Inc., Zetapharm, Inc. and
Zuellig Botanical, Inc. (incorporated by reference to Exhibit 10.13 to the
March 1995 8-K). |
10.24 |
Supply
Agreement dated as of March 30, 1995 between Houba, Inc. and ZetaPharm,
Inc. (incorporated by reference to Exhibit 10.14 to the March 1995
8-K). |
10.25 |
Form
of 10% Convertible Subordinated Debenture (incorporated by reference to
Exhibit 6(a) to the June 1995 10-Q). |
10.26 |
Form
of Redeemable Common Stock Purchase Warrant (incorporated by reference to |