ITEM 1. BUSINESS
THE COMPANY
NeoPharm is a pharmaceutical company engaged in the research and development of drugs for the diagnosis and treatment of various forms of cancer. Phase II clinical trials have been completed by various parties under the sponsorship of the National Cancer Institute (the "NCI"), a unit of the National Institutes of Health, with respect to the Company's two primary drugs, BUdR (Broxuridine) and IUdR (Idoxuridine). In clinical trials involving brain cancer patients, patients receiving BUdR together with radiation therapy exhibited increased survival times as compared to patients receiving radiation therapy alone. Preliminary results of additional studies indicate that BUdR and IUdR may enhance the effectiveness of radiation therapy for other cancers, including cervical and gynecological cancers, soft tissue sarcomas, and head and neck cancers. BUdR and IUdR are also being used for diagnostic applications as indicators of cancer cell proliferation activity. The Company anticipates filing new drug applications ("NDA") with the United States Food and Drug Administration ("FDA") for BUdR in a diagnostic application, for IUdR in a diagnostic application and for BUdR in the treatment of brain cancer in the future.
The Company's BUdR and IUdR products are the subject of a Cooperative Research and Development Agreement ("CRADA") with the NCI. The CRADA provides the Company with exclusive access to all clinical data compiled in BUdR and IUdR studies conducted by various parties under the sponsorship of the NCI, involving more than 6,000 patients for diagnostic applications and 1,500 patients for therapeutic applications. Under the CRADA, NCI has agreed to provide the Company with exclusive access to all clinical data for the compounds from clinical trials sponsored by the NCI during the term of the CRADA pursuant to the CRADA Research Plan.
The incorporation of BUdR and IUdR into the DNA of actively dividing cancer cells weakens the DNA molecules in the cancerous cells, and renders them more sensitive to the lethal effects of radiation. These drugs, when coupled with radiation therapy, may therefore be a more effective treatment for certain forms of cancer than radiation therapy alone. In addition to their therapeutic applications, BUdR and IUdR administered in smaller doses have been used for diagnostic applications as indicators of cellular proliferation activity. Following the administration of BUdR and IUdR, biopsies of the tumor are taken and treated with specific monoclonal antibodies to highlight the presence of BUdR or IUdR in the cells, and the actively dividing cells can then be identified and counted. Clinical trials involving diagnostic use of BUdR and IUdR have indicated that this cell tumor behavior information provided by BUdR and IUdR can assist the oncologist in selecting appropriate therapeutic regimens and enable better monitoring of the effectiveness of the chosen therapy.
The Company also has developed proprietary liposome products (spheres of subcellular size composed primarily of phospholipids, certain of which are the primary components of living cell membranes). By encapsulating certain chemotherapeutic drugs in liposomes, the toxic side effects associated with the drug can be reduced and the dose increased, thereby potentially increasing the effectiveness of therapy through both increased drug action against cancer cells and reduced side effects. Unlike other liposome-encapsulated chemotherapeutic drugs, the Company believes its liposomes overcome the effects of MDR (multiple drug resistance), which is a common phenomenon in approximately 300,000 cancer patients each year. The Company has conducted one Phase II efficacy study of its liposome-encapsulated doxorubicin ("LED") product involving approximately 20 patients with breast cancer, in which 45% of the patients showed either a partial (minimum 50% shrinkage of the tumor) or complete (100% shrinkage of the tumor) response, as compared to a reported 22% partial or complete response observed with free doxorubicin in other studies. The study also demonstrated a significant reduction in side effects. In addition, the Company has developed a synthetically derived lipid source for making its liposomes, and plans to initiate Phase I/II clinical trials using the synthetically derived formulation in 1996. During 1995 and the first quarter of 1996, the Company's liposome products were the subject of license and sponsored research agreements
with Georgetown University ("Georgetown"). Under these agreements, the Company was obligated to fund liposome related research activities at Georgetown in return for exclusive licenses to its liposome products then under development, and a right of first refusal to license additional liposome products developed by Georgetown. As of April 27, 1996 the Company's obligation to fund further supportive research under these agreements has ended.
The Company does not intend to acquire or establish its own dedicated manufacturing facilities for the foreseeable future. The Company's manufacturing strategy is to develop manufacturing relationships with established pharmaceutical manufacturers for production of BUdR and IUdR as well as its liposome products. The Company's primary market in the United States consists of approximately 3,500 oncologists, most of whom are affiliated with major cancer treatment centers. The Company believes it will be able to address this market with a direct sales force of relatively modest size. The Company intends to enter into collaborative arrangements with other companies to market its products elsewhere in the world. To date, the Company has been engaged primarily in research and development of its proposed products. The Company currently has no marketing or sales staff and, to date, has conducted its activities through consultants and at university research facilities. The Company will need to hire additional personnel and gain access to marketing and sales resources in order to continue the development and commercialization of its products.
NeoPharm, Inc. was incorporated under the name OncoMed, Inc. in June 1990, and changed its name to NeoPharm, Inc. in March 1995. The Company's principal offices are located at 225 East Deerpath, suite 250, Lake Forest, Illinois 60045, and its telephone number is (847) 295-8678.
NEOPHARM PRODUCTS
The Company has two primary areas of product focus, its BUdR and IUdR products and its proprietary liposome products. The Company is developing BUdR and IUdR for use as radiation sensitizers to improve the effectiveness of radiation therapy for certain types of cancers and as diagnostic agents in cancer therapy. The Company is also developing liposome encapsulated chemotherapeutic agents, including liposome encapsulated doxorubicin and liposome encapsulated vincristine. The Company has also acquired rights to liposome encapsulated taxol and liposome encapsulated antisense oligodeoxynucleotides.
All of the products currently being developed by the Company will require approval by the FDA before they can be sold commercially in the United States. This approval process is rigorous and time consuming. The products must be shown to be effective in preclinical studies involving animal models and must be shown to have acceptable levels of toxicity. The products are then subjected to controlled clinical trials involving hundreds of patients in order to prove safety and efficacy. These clinical trials are typically divided into Phase I and II trials in which the safety and appropriate therapeutic dose are determined, followed by Phase III trials, in which the efficacy is confirmed in larger numbers of patients. BUdR and IUdR, which the Company is focusing on for development of its initial products, have been shown to be safe and effective in Phase I and Phase II clinical trials. BUdR and IUdR are currently undergoing Phase III clinical trials. See "Government Regulation" below.
The table below sets forth the Company's principal products under development, the primary indications for these products and the development status for each product.
NEOPHARM PRODUCT SUMMARY
There can be no assurance that any of the Company's products will receive necessary regulatory approvals, be successfully commercialized and achieve market acceptance, or that any products commercialized by the Company will not be rendered obsolete by other developments in the field of cancer treatment.
BUDR AND IUDR PRODUCTS
The first commercial products for the Company are expected to be BUdR and IUdR. Under the sponsorship of the National Cancer Institute ("NCI"), a unit of the National Institutes of Health, these compounds have been evaluated as agents for improving the effectiveness of cancer therapy in academic and clinical studies for nearly 30 years, and the first IND application for BUdR and IUdR was filed with the FDA in 1964. During the course of clinical evaluation of these compounds, approximately 7,500 patients have been studied under NCI-approved and sponsored clinical protocols. Recent advancements in radiation therapy and cancer diagnostic techniques have increased the potential utility of BUdR and IUdR as therapeutic and diagnostic agents in cancer therapy. As a result of these advancements, in the early 1990s the NCI determined that BUdR and IUdR should be made available on a commercial basis. NCI chose NeoPharm as its development partner to bring these products to market. As a result, a Cooperative Research and Development Agreement ("CRADA") has been signed between NeoPharm and NCI. Under the terms of the CRADA, NeoPharm has exclusive rights to the data generated with BUdR and IUdR by NCI for certain indications contained in the CRADA including tumors metastatic to the brain, astrocytomas, gastrointestinal cancers, colon cancer, pancreatic cancer, lung cancer, soft tissue sarcomas, head and neck cancer and leukemia. The CRADA provides that the Company may sponsor and help support clinical studies, pay for the cost of producing BUdR and IUdR used in clinical trials and, to the extent supported by clinical results, file appropriate NDAs with the FDA. The term of the CRADA extends through May 1, 1997, although the agreement may be terminated by either party without cause upon 60 days notice; provided that in the event of such termination all clinical trials and protocols that have been scheduled, initiated, or otherwise included under the CRADA prior to the notification of termination shall be completed unless otherwise mutually agreed. All provisions of the CRADA shall continue in effect for such clinical trials and protocols. Although BUdR and IUdR are not covered by patents or patent applications, the Company believes that its exclusive access to the clinical data collected by NCI and its
investigators and its other rights under the CRADA represent a significant competitive advantage for the Company in the development and eventual commercialization of BUdR and IUdR. There can be no assurance that the CRADA will remain in effect or that the collaboration provided for in the CRADA will be successfully completed. See "Collaborative Relationships, Licenses and Commercialization Strategy", below.
LIPOSOME PRODUCTS
Liposomes are spheres of subcellular size composed primarily of phospholipids, certain of which are the primary components of living cell membranes, and can be made to contain and deliver drugs. This membrane encapsulation feature of liposomes enables the entrapped drug to be circulated in the bloodstream in higher concentrations for longer periods of time than the free drug. When certain drugs, including chemotherapeutic agents, are administered in conjunction with liposomes, they have been shown to produce fewer and less severe local and systemic side effects. Although liposomes have been investigated and used for many years as drug delivery systems, the difficulty in producing liposomes on a large scale, as well as the limited shelf life of many liposomes, have limited their use in clinical settings.
Unlike other liposomes-encapsulated chemotherapeutic drugs, the Company believes its liposomes overcome the effects of MDR (multiple drug resistance), which occurs in many chemotherapeutic regimens. In addition, these liposomes are easy to prepare at the clinical site. The Company's formulation is based on a lipid, cardiolipin, that is found in cardiac tissue. In addition, the Company has developed a synthetically derived cardiolipin, which it believes will provide a reliable lipid source for making the Company's liposomes to be used in upcoming clinical trials.
COLLABORATIVE RELATIONSHIPS, LICENSES AND COMMERCIALIZATION STRATEGY
The Company has entered into a CRADA with the NCI and has licensed certain technology relating to its liposome products from Georgetown. Dr. Aquilur Rahman, the Company's Chief Scientific Officer, is an Adjunct Professor of Pathology and Pharmacology at Georgetown. The principal terms of the NCI CRADA and the license and sponsored research agreements with Georgetown are summarized below.
NCI CRADA. The Company has entered into a CRADA with the National Cancer Institute giving the Company the exclusive right to develop and commercialize BUdR and IUdR for use as diagnostic and therapeutic agents in the treatment of cancer. Under the CRADA, the Company is responsible for the co- development with the NCI of clinical trials and for obtaining regulatory approvals for BUdR and IUdR. NCI will provide NeoPharm with exclusive access to all clinical data for the compounds from clinical trials sponsored by NCI during the term of the CRADA pursuant to the CRADA Research Plan. NeoPharm has the right to use all such data for the purpose of obtaining regulatory approval for the compounds. NeoPharm is responsible for the preparation and submission of NDAs for the compounds and for supplying the BUdR and IUdR to be used in clinical trials. NCI has agreed, during the term of the CRADA, to refrain from assisting any other party in the development and commercialization of BUdR and IUdR; however, either the Company or the NCI may independently initiate clinical trials involving BUdR or IUdR that are not part of the research plan or clinical trial program under the CRADA. BUdR and IUdR are currently not the subject of any patent or patent application; however, in the event any NCI personnel develop any patentable inventions within the scope of the CRADA, NCI will offer NeoPharm a first option to a license to such inventions on industry standard terms. The term of the CRADA extends through May 1, 1997, although the agreement may be terminated by either party upon 60 days' notice; provided that in the event of such termination all clinical trials and protocols that have been scheduled, initiated, or otherwise included under the CRADA prior to the notification of termination shall be completed unless otherwise mutually agreed. All provisions of the CRADA shall continue in effect for such clinical trials and protocols. In addition, should NeoPharm fail to prepare and submit an NDA to the FDA within 18 months from the time the data are known to demonstrate reproducible results that would be sufficient to support an NDA, the NCI may terminate the CRADA but only if the Company fails to exercise reasonable diligence in pursuit of an NDA. The Company's preclinical and clinical research and development activities under the
CRADA are conducted pursuant to guidelines established by a Steering Committee of three voting members from the NCI and three voting members from the Company. In the event the Steering Committee cannot reach agreement on an issue related to the CRADA, then the matter will be submitted to Dr. John Kapoor (or another individual designated by the Company) and the Director of the Division of Cancer Treatment at the NCI. If the matter cannot then be resolved, the Director of the NCI shall propose a resolution in writing. If NeoPharm elects not to accept the proposed resolution, either party may terminate the CRADA or make a new proposal for resolution of the matter. The Company has assumed responsibility for satisfying the supply requirements of BUdR and IUdR for conducting clinical trials. During 1994, the Company reimbursed NCI $45,000 for prior product production costs. The Company will also provide $120,000 per year for reasonable and necessary expenses incurred by the NCI in carrying out its responsibilities under the CRADA. Any excess funds not used by the NCI for incurred expenses will be refunded to the Company at the termination of the agreement. The Company is further obliged under the CRADA to provide sufficient staff to meet its obligations under the CRADA. Pursuant to the CRADA, the NCI will refrain from assisting any other party other than the Company in commercializing BUdR/IUdR during the term of the CRADA. The Company may license any drug developed under the CRADA not made solely by NeoPharm's employees for which a patent or patent application is filed. The terms of the license for such jointly developed drugs will, according to the CRADA, reflect relative contributions of the parties to the invention, the risks incurred by the Company, and the costs of subsequent research and development needed to bring the invention to the marketplace. If NeoPharm does not accept the NIH proposals on the license terms, the NIH will be free to license such inventions to third parties.
Because BUdR and IUdR are not covered by patents or patent applications, the Company's exclusive access to the clinical data collected by NCI and its investigators and its other rights under the CRADA represent the principal competitive advantage for the Company in the development and eventual commercialization of BUdR and IUdR. The NCI may publish summary data from the clinical trials under the CRADA in its annual reports, which do not include individual patient data. Furthermore, the collaborative nature of the Company's relationship with the NCI is of significant importance for conduct of clinical trials and to assist the Company in gaining acceptance of its products among oncologists. Accordingly, termination of the CRADA would be materially adverse to the Company's BUdR and IUdR program, could require curtailment or termination of such program and could therefore have a material adverse effect on the Company's business, financial condition and results of operations.
Georgetown University. The Company previously entered into license and sponsored research agreements with Georgetown University relating to LED, LEVCR, LET and LE-AON. Under these agreements, the Company was obligated to sponsor certain research activities at Georgetown relating to liposome-encapsulated chemotherapeutic agents. As of April 27, 1996 the obligation to fund further supportive research ended. The research was previously conducted in the laboratory of Dr. Aquilur Rahman, the Company's Chief Scientific Officer and an Adjunct Professor at Georgetown University. Under the agreements with Georgetown, and in return for the sponsorship of this supportive research, the Company has exclusive licenses to manufacture and sell LED, LEVCR, LET and LE-AON. The Company also had a right of first refusal to obtain exclusive licenses to new liposome-encapsulated anticancer agents developed in Dr. Rahman's laboratory under the license and sponsored research agreement with Georgetown University. The Company will also be obligated to pay Georgetown royalties on commercial sales of the liposome products. In addition, the Company will be obligated to make certain advance royalty payments to Georgetown, which payments will be credited against future royalties payable under the Company's agreements with Georgetown. In the event the Company is unable to successfully commercialize its liposome products, it would be unable to recoup these advance royalty payments. The licenses are generally not terminable by Georgetown, except in the event of a default by the Company. Any such default and resulting termination of the licenses would be materially adverse to the Company's liposome program, could require curtailment or termination of such program and could therefore have a material adverse effect on the Company's business, financial condition and results of operations.
The Company's strategy for future development and commercialization of therapeutics will involve, where appropriate, the establishment of collaborative relationships with pharmaceutical industry partners.
The Company intends to seek collaborative relationships in certain targeted development areas, particularly in situations where the Company believes that the clinical testing, marketing, manufacturing and other resources of pharmaceutical collaborators will enable it to more effectively access particular product or geographic markets. There can be no assurance that any products which are developed by the Company and for which the Company obtains regulatory approvals could be manufactured at a cost or in quantities required to make them commercially viable. The Company's inability to contract, on acceptable terms and with qualified suppliers, for the manufacture of any products which it develops, or delays or difficulties in its relationships with manufacturers, would have a material adverse effect on the Company.
MARKETING AND SALES
The treatment of cancer is a highly specialized activity in which the treating oncologists tend to be concentrated in major medical centers. The Company's marketing strategy is designed to enable the Company to operate with a relatively small direct sales force in the United States. As products receive regulatory approval, the Company plans to develop a sales force of modest size to service the over 3,500 practicing oncologists in the United States. The Company intends to seek collaborative agreements with other companies to market the products elsewhere in the world.
The marketing and sale of the Company's BUdR and IUdR will be subject to certain requirements imposed pursuant to the CRADA. These include requirements that the products not be sold at prices that may be deemed to be excessive.
MANUFACTURING
The Company does not intend to acquire or establish its own dedicated manufacturing facilities for the foreseeable future. Rather, the Company's manufacturing strategy will be to develop manufacturing relationships with established pharmaceutical manufacturers for production of BUdR and IUdR as well as its liposomal products.
There are a number of FDA approved suppliers of raw materials used in the Company's products in existence. There are also a number of facilities with FDA Good Manufacturing Practice approval for contract manufacturing of the Company's proposed products. The Company has a source for the manufacture of BUdR and IUdR and is in the process of arranging for sources for the manufacture of certain of its planned liposomal products. The Company believes that, in the event of the termination of its existing sources for product supplies and manufacture, the Company will be able to enter into agreements with other suppliers and/or manufacturers on similar terms. There can be no assurance that there will be manufacturing capacity available to the Company at the time the Company is ready to manufacture its products.
PATENTS AND PROPRIETARY RIGHTS
It will be the Company's policy to, where possible, file patent applications to protect technology, inventions and improvements that are important to the development of its business. Under its agreements with Georgetown University, the Company has licensed rights to three United States patents and two pending United States patent applications relating to its liposome products under development. BUdR and IUdR are, however, not currently the subject of patents or patent applications, and the Company does not expect to obtain patent protection for its BUdR and IUdR products. The Company's principal advantage with respect to the development and planned commercialization of BUdR and IUdR is its exclusive access under the CRADA to NCI's clinical data regarding the compounds.
The patent position of participants in the pharmaceutical field generally is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation. There can be no assurance that any patent applications relating to the Company's potential products or processes will result in patents being issued, or that the resulting patents, if any, will provide protection against competitors who
successfully challenge the Company's patents, obtain patents that may have an adverse effect on the Company's ability to conduct business, or are able to circumvent the Company's patent position. It is possible that other parties have conducted or are conducting research and could make discoveries of compounds or processes that would precede any discoveries made by the Company, which could prevent the Company from obtaining patent protection for these discoveries. Finally, there can be no assurance that others will not independently develop pharmaceutical products similar to or obsoleting those that the Company is planning to develop, or duplicate any of the Company's products.
The Company's competitive position is also dependent upon unpatented trade secrets. In an effort to protect its trade secrets, the Company has a policy of requiring its employees, Scientific Advisory Board members, consultants and advisors to execute proprietary information and invention assignment agreements upon commencement of employment or consulting relationships with the Company. These agreements provide that all confidential information of the Company developed or made known to the individual during the course of their relationship with the Company must be kept confidential, except in specified circumstances. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets or other proprietary information in the event of unauthorized use or disclosure of confidential information. Invention assignment agreements executed by Scientific Advisory Board members, consultants and advisors may conflict with, or be subject to, the rights of third parties with whom such individuals have employment or consulting relationships. In addition, there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets, that such trade secrets will not be disclosed or that the Company can effectively protect its rights to unpatented trade secrets.
The Company may be required to obtain licenses to patents or proprietary rights of others. No assurance can be given that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to the Company, or at all. If the Company does not obtain such licenses, it could encounter delays in product market introductions while it attempts to design around such patents, or could find that the development, manufacture or sale of products requiring such licenses could be foreclosed. Litigation may be necessary to defend against or assert such claims of infringement, to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, or to determine the scope and validity of the proprietary rights of others. In addition, interference proceedings declared by the United States Patent and Trademark Office may be necessary to determine the priority of inventions with respect to patent applications of the Company or its licensors. Litigation or interference proceedings could result in substantial costs to and diversion of effort by, and may have a material adverse impact on, the Company. In addition, there can be no assurance that these efforts by the Company will be successful.
GOVERNMENT REGULATION
Introduction. Regulation by governmental authorities in the United States and foreign countries is a significant factor in the development, manufacture and marketing of the Company's proposed products and in its ongoing research and product development activities. The nature and extent to which such regulation will apply to the Company will vary depending on the nature of any products which may be developed by the Company. It is anticipated that all of the Company's products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic and some diagnostic products are subject to rigorous preclinical and clinical testing and other approval procedures of the FDA and similar regulatory authorities in foreign countries. Various Federal statutes and regulations also govern or influence testing, manufacturing, safety, labeling, storage and record-keeping related to such products and their marketing. The process of obtaining these approvals and the subsequent compliance with appropriate Federal statutes and regulations require the expenditure of substantial time and financial resources. Any failure by the Company or its collaborators to obtain, or any delay in obtaining, regulatory approval could adversely affect the marketing of any products developed by the Company, its ability to receive product revenues and its liquidity and capital resources.
FDA Approval Process. Prior to commencement of clinical studies involving human beings, preclinical testing of new pharmaceutical products is generally conducted on animals in the laboratory to evaluate the potential efficacy and the safety of the product. The results of these studies are submitted to the FDA as a part of an investigational new drug ("IND") application, which must become effective before clinical testing in humans can begin. Typically, clinical evaluation involves a time consuming and costly three-phase process. In Phase I, clinical trials are conducted with a small number of subjects to determine the early safety profile, the pattern of drug distribution and metabolism. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large-scale, multi-center, comparative trials are conducted with patients afflicted with a target disease in order to provide enough data to demonstrate the efficacy and safety required by the FDA. The FDA closely monitors the progress of each of the three phases of clinical testing and may, at its discretion, re-evaluate, alter, suspend or terminate the testing based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the patient.
The results of the preclinical and clinical testing on a nonbiologic drug and certain diagnostic drugs are submitted to the FDA in the form of a new drug application ("NDA") for approval to commence commercial sales. In responding to an NDA, the FDA may grant marketing approval, request additional information or deny the application if the FDA determines that the application does not satisfy its regulatory approval criteria. There can be no assurance that approvals will be granted on a timely basis, if at all. Similar procedures are in place in countries outside the United States.
In 1988, the FDA issued "fast-track" regulations intended to accelerate the approval process for the development, evaluation and marketing of new therapeutic and diagnostic products used to treat life-threatening and severely debilitating illnesses, especially those for which no satisfactory alternative therapies exist. "Fast-track" designation affords the Company early interaction with the FDA in terms of protocol design and permits, although it does not require the FDA to grant approval after completion of Phase II clinical trials (although the FDA may require subsequent Phase III clinical trials or even post-approval Phase IV efficacy studies). The Company believes that a number of its product candidates may fall under these regulations, but there can be no assurance that any of the Company's products will receive this or other similar regulatory treatment.
In late 1992, legislation imposing FDA user fees on drug manufacturers was enacted. Such fees will be required for each commercial marketing drug application submitted by the Company for FDA approval, and annual product and establishment fees will also be imposed upon approval. The revenues raised from these fees are earmarked specifically to increase the resources of the FDA, and by doing so, to increase the speed with which the FDA reviews and approves drug marketing applications. Currently, the user fee for an NDA is approximately $150,000, and the statute provides for periodic fee increases. The statute currently provides small companies (defined as companies with less than 500 employees that are not marketing a prescription drug product) with a reduction in the initial application fee and contains limited provisions for fee waivers. The Company is unable to predict the impact of the current user fee legislation, as well as possible future changes in the law, upon its business.
Waxman-Hatch Act. The Drug Price Competition and Patent Restoration Act of 1984, also known as the Waxman-Hatch Act, contains provisions pertaining to marketing exclusivity from generic competition for most non-biological drugs and patent restoration for most pharmaceutical products. These patent provisions will not be applicable to BUdR and IUdR because such compounds are not patented. A five-year marketing exclusivity period is provided for new chemical entities, and a three-year marketing exclusivity period is provided for approved drugs for which new clinical investigations are essential to the receipt of FDA approval to market the product. For purposes of the Waxman-Hatch Act, a new chemical entity is defined as a drug product that contains an active moiety not previously approved by the FDA for marketing. Accordingly, the Company believes that BUdR and IUdR would qualify as new chemical entities under the Waxman-Hatch Act. If the Company were to obtain FDA approval to market BUdR or IUdR, for a period of five years after such approval, no company could copy the approved product and
obtain approval of a competitive version. The five year exclusivity period would not prevent a competitive product from being marketed based upon new preclinical and clinical studies conducted by the competitor. In the event that the Company receives approval of NDAs for BUdR and IUdR, there can, however, be no assurance that the Company would receive any or all of the benefits provided by the Waxman-Hatch Act as currently in effect.
Orphan Drug Act. Under the Orphan Drug Act, the FDA may designate drug products as orphan drugs if there is no reasonable expectation of recovery of the costs of research and development from sales in the United States or if such drugs are intended to treat a rare disease or condition, which is defined as a disease or condition that affects less than 200,000 persons in the United States. If certain conditions are met, designation as an orphan drug confers upon the sponsor marketing exclusivity for seven years following FDA approval of the product, meaning that the FDA cannot approve another version of the "same" product for the same use during such seven year period. The market exclusivity provision does not, however, prevent the FDA from approving a different orphan drug for the same use or the same orphan drug for a different use. Although the Company received a letter from the FDA stating that BUdR qualifies for orphan drug designation as a radiation sensitizer in the treatment of primary brain tumors, there is no assurance that any of the Company's products will ultimately receive orphan drug designation or approval, or that the benefits currently provided by such designations or approvals will not hereafter be amended or eliminated. The Orphan Drug Act has been controversial, and many legislative proposals have from time to time been introduced in Congress to modify various aspects of the Orphan Drug Act, particularly the market exclusivity provisions. There can be no assurance that new legislation will not be introduced in the future that may adversely impact the availability or attractiveness of orphan drug status for any of the Company's products.
Other Regulations. The Company is also subject to various Federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory manufacturing practices and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's research work. The extent of government regulation which might result from future legislation or administrative action cannot be predicted accurately.
PRODUCT LIABILITY AND INSURANCE
The Company's business exposes it to potential product liability risks which are inherent in the testing, manufacturing and marketing of human therapeutic products. The Company does not currently have any product liability insurance. Although the Company plans to obtain product liability insurance, there can be no assurance that it will be able to obtain or maintain such insurance on acceptable terms or that any insurance obtained will provide adequate coverage against potential liabilities. Claims or losses in excess of any liability insurance coverage obtained by the Company could have a material adverse effect on the business, financial condition or results of operations of the Company.
COMPETITION
Competition in the discovery and development of methods for treating cancer is intense. Numerous pharmaceutical, biotechnology and medical companies and academic and research institutions in the United States and elsewhere are engaged in the discovery, development, marketing and sale of products for the treatment of cancer. These include surgical approaches, new pharmaceutical products and new biologically derived products. The Company expects to encounter significant competition for the principal pharmaceutical products it plans to develop. Companies that complete clinical trials, obtain regulatory approvals and commence commercial sales of their products before their competitors may achieve a significant competitive advantage. A number of pharmaceutical companies are developing new products for the treatment of the same diseases being targeted by the Company. In some instances, the Company's competitors already have products in clinical trials. In addition, certain pharmaceutical companies are
currently marketing drugs for the treatment of the same diseases being targeted by the Company, and may also be developing new drugs to address these disorders.
The Company believes that its competitive success will be based on its ability to create and maintain scientifically advanced technology, develop proprietary products, attract and retain scientific personnel, obtain patent or other protection for its products, obtain required regulatory approvals, obtain orphan drug status for certain products and manufacture and successfully market its products either independently or through outside parties. Many of the Company's competitors have substantially greater financial, clinical testing, regulatory compliance, manufacturing, marketing, human and other resources. In addition, the Company will continue to seek licenses with respect to key technologies related to its fields of interest and may face competition with respect to such efforts.
HUMAN RESOURCES
As of April 25, 1996, the Company had one full time employee, and two part-time employees, all of whom are officers. The Company currently has consulting agreements with 8 consultants, holding either Ph.D. or M.D. degrees. None of the Company's consultants are represented by a collective bargaining arrangement, and the Company believes its relationship with its consultants is satisfactory. The Company intends to continue to retain consultants and to add personnel in as the business strategy is implemented.
SCIENTIFIC ADVISORY BOARD
The Company has assembled a six-member Scientific Advisory Board. The members of the Scientific Advisory Board together provide expertise in areas of scientific and medical interest to the Company. The Company has entered into agreements with the Scientific Advisors providing that all inventions made by the Advisors when working for the Company will belong to the Company; however, most of the members of the Company's Scientific Advisory Board are employed on a full-time basis by academic or research institutions. The members of the Scientific Advisory Board are permitted to share information among themselves regarding the projects that they are working on with the Company. The Company granted options to acquire an aggregate of 25,000 shares its Common Stock to members of the Scientific Advisory Board, and pays a retainer to compensate its Scientific Advisory Board members.
ITEM 2.
ITEM 2. PROPERTIES
The Company's administrative offices are located in 4470 square feet of leased office space in Lake Forest, Illinois. This leased space is provided to the Company as a part of a consulting agreement with EJ Financial.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation or other legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since January 25, 1996, the Common Stock has been quoted on The NASDAQ Stock Market's Small Cap Issues under the trading symbol. Since trading opened on January 25, 1996, the stock has been a high of $17 and a low of $4.50. As of April 25, 1996, there were 19 holders of record of the Common Stock, and the Company estimates that as of such date there were more than 300 beneficial holders of the Common Stock. The Company has never paid a cash dividend on its Common Stock and has no present intention of paying cash dividends in the foreseeable future. Any determination in the future to pay dividends will depend on the Company's financial condition, capital requirements, results of operations, contractual limitations and other factors deemed relevant by the Board of Directors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
- - - ---------- (1) See Note 2 of Notes to Financial Statements for an explanation of pro forma net loss and shares used to compute pro forma net loss per share.
(2) Adjusted to give effect to the receipt of the net proceeds of the Offering at the initial public offering price of $7.00 per Share and $.10 per Warrant (after deducting $ 1,110,175 in expenses and underwriting discounts payable by the Company in connection with the Offering), the reclassification of the accumulated deficit to additional paid-in capital as the result of the termination of the Company's S Corporation status, the conversion of the $1,500,000 loan and $523,385 of accrued interest payable at November 30, 1995 to a trust, the sole beneficiary of which is Dr. John N. Kapoor, the chairman of the Company, pursuant to the June 18, 1990 note issued to the trust (the "Loan Repayment Note") into 287,004 shares of Common Stock and 143,502 Warrants, and to reflect the retirement of the bank line of credit which had a balance of $2,007,652 at December 31, 1995.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since the Company's inception in June 1990, NeoPharm has devoted its resources primarily to fund its research and product development programs. The Company has been unprofitable since inception and has had no revenues from the sale of products or other sources, and does not expect revenues in the near future. The Company expects to continue to incur losses as it expands its research and development activities and sponsorship of clinical trials. As of December 31, 1995, the Company's accumulated deficit was $4.5 million.
RESULTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
The Company had no revenues during the three fiscal years ended December 31, 1995. The Company incurred research and development expenses of approximately $1,069,000 in 1995, as compared to $814,000 in 1994 and $233,000 in 1993. The increase in 1995 research and development expenses is primarily due to acceleration of gathering and analyzing clinical data relating to BUdR and IUdR. The increase in 1994 is primarily due to sponsored research initiated at Georgetown, spending to support clinical trials and payments associated with gathering and analyzing clinical data relating to BUdR and IUdR. 1995 and 1994 expenses include payments made by the Company to Georgetown and the NCI pursuant to the Company's license and sponsored research agreements with Georgetown and its CRADA with the NCI. The Company expects research and development spending to increase over the next several years. See "Item 1 - Business -- Collaborative Relationships, Licenses and Commercialization Strategy."
General and administrative expenses increased to approximately $245,000 in 1995 from $107,000 for the same period of 1994. The increase was due primarily to professional fees on general corporate matters and consulting fees due to EJ Financial Enterprises, Inc. ("EJ Financial"), a health care consulting and investment company, accrued during 1995. General and administrative expenses decreased to approximately $107,000 in 1994 from $175,000 in 1993. This decrease was mainly due to the Company's efforts to better control its expenditures. Because the majority of the Company's research and development efforts are being conducted in university laboratories and at clinical sites, the Company concluded that a separate administrative facility was no longer necessary. Accordingly, the Company closed its Rockville, Maryland office in 1993. The Company expects to lease laboratory facilities in the Chicago, Illinois area during 1996 and to hire additional personnel. The Company will also incur salaries for key management personnel as well as expenses to support corporate development activities and costs resulting from becoming a public company. From its inception through June 30, 1994, the Company accrued management services charges to EJ Financial of $25,000 per year. These charges were not paid, but were instead treated as contributions to capital by the John N. Kapoor Trust, the sole beneficiary of which is Dr. John Kapoor, the sole stockholder of EJ Financial and the chairman of the Company. Effective July 1, 1994, EJ Financial increased its management services charge to $125,000 per year plus expenses incurred. The increased charges, which the Company believes are reasonable and reflect the cost of the services provided, reflect the increased need for EJ Financial's services in connection with operation as a publicly-held company. The management services agreement with EJ Financial expires in 1997. As a result of these factors, the Company expects general and administrative expenses to increase in the future. See "Item 13 - Certain Relationships and Related Transactions" and Note 7 of Notes to the Financial Statements attached as Exhibit 1.
Interest expense increased to approximately $356,000 in 1995 from $163,000 in 1994 and $85,000 in 1993. These increases were due to additional borrowings on debt, owed to the Company's principal stockholder and Harris Bank and Trust N.A., under the Company's bank line of credit. The increase in
1995 is due in part to the delay in the completion of the Offering until the first month in 1996. The proceeds of borrowings were used to fund the Company's operations during the period from 1993 to 1995. The Company's principal stockholder subsequently converted the principal of and accrued interest on the loan into shares of Common Stock and Warrants at $7.00 per share, the initial public offering price. In addition, a portion of the proceeds from the Offering were used to repay the outstanding balance under the bank line of credit. See "Item 13 - Certain Relationships and Related Transactions" and Note 3 of Notes to the Financial Statements.
Inception to December 31, 1995
The Company was taxed as an S corporation from inception through October 11, 1995 when the S corporation status was voluntarily terminated. Because the Company was taxed as an S Corporation, all of its net losses from inception through October 11, 1995 were passed through to its stockholders. Accordingly, the Company did not accumulate operating loss carryforwards prior to October 11, 1995. The Company uses the cash method to report tax losses. Due to the use of this method, the Company had tax expenses of approximately $437,000 at December 31, 1995, to be reported in future periods. The Company has commenced accruing net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through borrowings from its principal stockholder and under its bank line of credit, which is guaranteed by the Company's principal stockholder. At December 31, 1995, the Company had an outstanding principal balance of approximately $3.5 million under its debt financing arrangements. Of this amount, $1.5 million consisted of borrowings from the Company's principal stockholder and the remainder consisted of borrowings under the Company's bank line of credit. Borrowings under the stockholder loan bear interest at a rate equal to the lesser of 10% or the prime rate of Northern Trust Bank. Principal payments not paid when due are subject to additional interest at the rate of 15%. Approximately $193,000 of additional interest has been accrued through December 31, 1995. Borrowings under the bank line of credit have accrued interest at the prime rate of Harris Bank & Trust N.A., and such bank line of credit is payable upon demand and not on a revolving credit basis (that is, payments made on the line of credit by the Company are not available to be borrowed again by the Company). Because the Company has financed operations through debt financing, the Company has typically maintained minimal cash balances.
The Company's assets at December 31, 1995 increased to approximately $496,000 from $113,000 at December 31, 1994, principally due to $486,436 of deferred offering costs relating to its initial public offering (the "Offering"). The classification of these costs as an asset is in conformity with generally accepted accounting principles. Since these costs directly relate to the Offering, they should not be expensed when incurred. The costs were treated as a deferred cost and reflected on the balance sheet as an asset until the Offering was closed on January 30, 1996. Deferred offering costs will be offset against the net proceeds from the Offering.
The Company's liabilities at December 31, 1995 increased to approximately $4.9 million from $2.8 million at December 31, 1994. This increase is due to additional accrued expenses and borrowings under the Company's debt financing arrangements. These funds were used primarily for research and development costs incurred during the year.
The Company expects its cash requirements to increase significantly in future periods. In May 1995, the Company agreed to fund ongoing research at Georgetown through April 1996 for approximately $258,000. In addition, under the CRADA the Company is committed to pay NCI clinical trial costs of $120,000 per year as well as the cost to supply the BUdR and IUdR to be used in clinical trials. The Company may incur additional costs in supporting its agreements with NCI, as well as the continuation of its own research and development efforts. In the future, the Company will require funds for building a sales and marketing organization and development of distribution channels.
Based on its currently planned research and product development programs, the Company anticipates that the net proceeds of the initial public offering and interest income earned thereon should be adequate to satisfy its capital and operational requirements for approximately 12 months. The net proceeds from the Offering were $8,662,092, including exercise of the Underwriters' over-allotment option. The Company's cash requirements may vary materially from those now planned because of results of research and development, results of clinical testing, relationships with possible strategic partners, changes in the focus and direction of the Company's research and development programs, competitive and technological advances, the FDA regulatory process and other factors. The Company has not yet submitted an NDA or received FDA approval for any of its products, and the Company has not realized any operating revenues. The Company's cumulative loss is approximately $4.5 million as of December 31, 1995.
The Company anticipates filing NDAs with the FDA for BUdR and IUdR for diagnostic and therapeutic applications for various cancers during 1996 and 1997. See "Item - 1 Business -- NeoPharm Products -- NeoPharm Product Summary." All of the products currently being developed by the Company will require approval by the FDA before they can be sold commercially in the United States. The results of the preclinical and clinical testing on a nonbiologic drug and certain diagnostic drugs are submitted to the FDA in the form of an NDA for approval to commence commercial sales. In responding to an NDA, the FDA may grant marketing approval, request additional information or deny the application if the FDA determines that the application does not satisfy its regulatory approval criteria.
The Company may seek to satisfy its future funding requirements through public or private offerings of securities, with collaborative or other arrangements with corporate partners or from other sources. Additional financing may not be available when needed or on terms acceptable to the Company. If adequate financing is not available, the Company may be required to delay, scale back or eliminate certain of its research and development programs, to relinquish rights to certain of its technologies, therapeutic and diagnostic agents, product candidates or products, or to license third parties to commercialize products or technologies that the Company would otherwise seek to develop itself.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements and Supplementary Data are incorporated herein by reference to the Company's Financial Statements included as Exhibit 1. The information is contained as follows:
PAGE ---- Report of Arthur Andersen LLP, Independent Public Accountants . . . . . . . . . . . . . . . . . . . . Balance Sheets . . . . . . . . . . . . . . . . . . Statements of Operations . . . . . . . . . . . . . Statements of Stockholders' Equity (Deficit) . . . Statements of Cash Flows . . . . . . . . . . . . . Notes to Financial Statements . . . . . . . . . . .
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
- - - ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
All directors hold office until the next annual meeting of the stockholders and until their successors are duly elected. Officers are appointed to serve, subject to the discretion of the Board of Directors, until their successors are appointed.
John N. Kapoor, Ph.D., Chairman of the Board of Directors, has been a director of the Company since July 1990. Prior to forming the Company, Dr. Kapoor formed EJ Financial Enterprises, Inc., a health care consulting and investment company, in March 1990, of which Dr. Kapoor is currently President. Dr. Kapoor is presently Chairman and Chief Executive Officer of Option Care, Inc., an outpatient and home infusion health care company; Chairman of Unimed Pharmaceuticals, Inc., a developer and marketer of pharmaceuticals for cancer, endocrine disorders and infectious diseases; and Chairman of Akorn, Inc., a manufacturer, distributor, and marketer of generic ophthalmic products. Dr. Kapoor received his Ph.D. in medicinal chemistry from the State University of New York in 1970 and a B.S. in pharmacy from Bombay University in India.
Aquilur Rahman, Ph.D., joined the Company as Chief Scientific Officer and as a member of the Board of Directors in July 1990. Dr. Rahman is an adjunct professor of pathology and pharmacology at Georgetown University and has more than 15 years of research experience in developing methods of chemotherapy treatment for cancer. Dr. Rahman received his Masters of Science in Biochemistry from the University of Dacca (Bangladesh) in 1964 and his Ph.D. in Pharmaceutics from the University of Strathclyde (Glasgow, U.K.) in 1972.
Anatoly Dritschilo, M.D., joined the Company as a Member of the Board of Directors in July 1990. Since August 1979, Dr. Dritschilo has been Chairman of the Department of Radiation Medicine and Medical Director of the Georgetown University Medical Center in Washington, D.C. Dr. Dritschilo received his B.S. in Chemical Engineering from the University of Pennsylvania, his M.S. in Engineering in 1969 from Newark College of Engineering, and his M.D. in 1973 from the College of Medicine of New Jersey.
William C. Govier, M.D., Ph.D., joined the Company in December 1993 as its President, Chief Executive Officer, and a member of the Board of Directors. Dr. Govier was a founder of Aegis Technology, Inc., a developer of pharmaceuticals for pulmonary disease therapy, and has been its President since June 1990. Prior to that time, Dr. Govier was Executive Vice President and Director of Research and Medical Affairs at Medco Research, Inc., a developer of drugs aimed at treating heart diseases. Dr. Govier received a B.A. in Chemistry and Biology in 1957 from Kalamazoo College, an M.D. in 1961 from McGill University in Montreal, Quebec, Canada, and a Ph.D. in Pharmacology in 1965 from the University of
Mississippi. From 1963 to 1968 he was a faculty member at the University of Mississippi, University of Texas Southwestern Medical School and Oxford University in England. From 1968 to 1970 Dr. Govier was associated with the Experimental Therapeutics Branch of the National Heart Institute, National Institutes of Health. Since that time, he has held management positions with major pharmaceutical companies, including Executive Director of Biological Research with CIBA-Geigy; Director of Pharmaceutical Research and Director of Medical Research with Lederle Laboratories, Division of American Cyanamid; and Director, Pharmaceuticals Research and Development Division of E.I. DuPont de Nemours & Co.
Mahendra G. Shah, Ph.D., has served as Vice President of Corporate and Business Development since October 1991. Dr. Shah is also a Vice President of EJ Financial Enterprises, Inc., a position he has held since October 1991. Prior to joining the Company, Dr. Shah was the Senior Director of New Business Development with Fujisawa USA from January 1987 to October 1991. Dr. Shah received his M.S. in 1978 and Ph.D. in 1984 in Industrial Pharmacy from St. John's University and an M.S. in 1969 and a B.S. in 1967 in Pharmaceutical Chemistry from Gujarat University in India.
David E. Riggs has served as Chief Financial Officer since November 1995. Mr. Riggs is Senior Vice President, Chief Financial Officer, Secretary and Treasurer of Unimed Pharmaceuticals, Inc., a developer and marketer of pharmaceuticals for cancer, endocrine disorders and infectious diseases, since October 1994, and Vice President, Chief Financial Officer, Secretary and Treasurer of Unimed since May 1992. Prior to joining Unimed, Mr. Riggs was Chief Financial Officer of VideoCart, Inc., a micro-marketing media company, a company sold by Information Resources Inc., a market research company, from April 1990 to August 1991. Prior to working for VideoCart, Mr. Riggs held various positions from April 1986 until April 1990 with Fujisawa USA, serving finally as Treasurer. Mr. Riggs received a B.S. in accounting from the University of Illinois in 1979 and an M.B.A. from DePaul University in 1984. Mr. Riggs is a Certified Public Accountant.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation for services to the Company for the fiscal year ended December 31, 1995, of the Chief Executive Officer. No executive officer of the Company had total salary and bonus in excess of $100,000 in 1995:
Summary Compensation Table
DIRECTOR COMPENSATION
Directors are not paid any compensation for attendance at directors' meetings or for attending or participating in any committee. Directors are reimbursed for reasonable out-of-pocket expenses incurred in connection with attendance at such meetings. Non-employee directors are eligible to participate in the Company's 1995 Director Option Plan. See "Employee Benefit Plans -- 1995 Director Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries, incentives and other forms of compensation for directors, officers and other employees of the Company and administers various incentive compensation and benefit plans. The Compensation Committee consists of Messrs. Kapoor and Dritschilo.
INCENTIVE STOCK OPTION PLAN
In January 1995, the Board of Directors (the "Board") and the stockholders of the Company approved the 1995 Stock Option Plan (the "Plan"). The Plan provides for the granting to employees (including officers and employee directors) of "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and the granting to employees (including officers, employees, directors, and consultants) of nonstatutory stock options. The purpose of the Plan is to attract and retain the best available personnel to the Company and to encourage stock ownership by employees, officers, directors and consultants of the Company to give them a greater personal stake in the success of the Company. A total of 450,000 shares of Common Stock were reserved for issuance under the Plan.
The Plan is currently administered by the Board of Directors, which determines the terms of the options granted under the Plan, including the exercise price, number of shares subject to the option and the exercisability thereof. Generally, options granted to employees and consultants under the Plan vest and become exercisable at a rate of 2.08% of the shares subject to the option per month but may not be exercised prior to one (1) year from the commencement of employment or the consultant relationship, but the Board of Directors of the Company has the discretion to determine the vesting of shares subject to each option. The terms of incentive stock options and nonstatutory stock options granted under the Plan may not exceed ten (10) years. The term of incentive stock options and nonstatutory stock options granted to an optionee who, at the time of grant, owns stock representing more than 10% of the Company's outstanding capital stock may not exceed five (5) years. No option granted under the Plan may be transferred by the optionee other than by will or the laws of descent or distribution and each option may be exercised, during the lifetime of the optionee, only by such optionee. In the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company's assets, each option will be assumed or an equivalent option substituted by the successor corporation.
In the event any change is made in the Company's capitalization (other than the one for 1.28681 reverse stock split effected on October 4, 1995), such as a stock split or stock dividend, which results in a greater or lesser number of shares of Common Stock of the Company, appropriate adjustment shall be made in the option price and in the number of shares subject to the options. In the event of the proposed dissolution or liquidation of the Company, to the extent that an option has not been previously exercised, it will terminate immediately prior to the consummation of such proposed action. In the event of the merger or sale of substantially all of the assets of the Company, all outstanding options shall be assumed or substituted by the successor corporation, or if they are not assumed or substituted, they shall become fully vested unless the Board of Directors determines otherwise.
The exercise price of all incentive stock options granted under the Plan must be at least equal to the fair market value of the shares of Common Stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting rights of the Company's outstanding capital stock, the
exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the date of grant. No incentive stock options may be granted to a participant, that, when aggregated with all other incentive stock options granted to such participant would have an aggregate fair market value in excess of $100,000 becoming exercisable in any calendar year. The exercise price of all nonstatutory stock options granted under the Plan is determined by the Administrator but cannot be less than 85% of fair market value on the date of grant. No options have been granted to date at prices less than 100% of the fair market value on the date of grant.
In 1995, options to acquire 247,000 shares were granted under the Plan. The exercise price for all such option grants will be equal to the initial public offering price. No stock options nor SAR's were granted to named executives during 1995.
1995 DIRECTOR OPTION PLAN
The 1995 Director Option Plan (the "Director Plan") was adopted by the Company's Board of Directors in January 1995 and approved by the Company's stockholders in January 1995. The Director Plan provides for the grant of nonstatutory stock options to non-employee directors of the Company who are not stockholders holding more than 5% of the Company's outstanding Common Stock ("Outside Directors") pursuant to an automatic, non-discretionary grant mechanism providing for a total of 50,000 shares of Common Stock. Currently one director is eligible to participate in the Director Plan in 1995.
The exercise price of options granted to Outside Directors must be 100% of the fair market value of the Company's Common Stock on the date of grant. The consideration for exercising options granted to Outside Directors may only consist of cash, check, previously owned shares of the Company's Common Stock or cashless exercise. Options granted to the Outside Directors have a five (5) year term, or shorter upon termination of their tenure as a director. Options granted to the Outside Directors vest at the rate of 25% of the shares subject to the option one year from the date of grant and 6.25% of the shares subject to the option at the end of each full quarter thereafter.
The Director Plan provides that each director who is an Outside Director on the date on which the Director Plan becomes effective will automatically be granted an option to purchase 1,000 shares of Common Stock of the Company. Each future Outside Director automatically will be granted an option to purchase 1,000 shares of Common Stock of the Company upon his or her initial election as a director. Subsequently, each Outside Director will be granted an additional option to purchase 500 shares of Common Stock on January 1 of each year thereafter (if, on such date, he or she has served as a director for at least six (6) months), so long as he or she remains an Outside Director. No option granted under the Plan may be transferred by the optionee other than by will or the laws of descent or distribution and each option may be exercised, during the lifetime of the optionee, only by such optionee.
In the event any change is made in the Company's capitalization (other than the one for 1.28681 reverse stock split effected on October 4, 1995), such as a stock split or stock dividend, which results in a greater or lesser number of shares of Common Stock of the Company, appropriate adjustment shall be made in the option price and in the number of shares subject to the options. In the event of the proposed dissolution or liquidation of the Company, to the extent that an option has not been previously exercised, it will terminate immediately prior to the consummation of such proposed action. In the event of the merger or sale of substantially all of the assets of the Company, all outstanding options shall be assumed or substituted by the successor corporation, or if they are not assumed or substituted, they shall become fully vested unless the Board of Directors determines otherwise.
The Board of Directors may amend the Director Plan at any time or may terminate it without approval of the stockholders. However, no such action by the Board of Directors may unilaterally alter or impair any option previously granted under the Director Plan without the consent of the optionee. In any event, the Director Plan will terminate in January 2005.
1990 STOCK OPTION PLAN
The 1990 Stock Option Plan (the "1990 Plan") was terminated by the Company in January 1995. Upon termination of the 1990 Plan, there were 12,433 shares subject to options outstanding under such plan. The weighted average exercise price of such outstanding options is $.04 per share. Options for 8,547 shares are currently exercisable, and options for 3,886 shares are exercisable upon the filing with the FDA of the Company's first NDA.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of April 25, 1996 for (i) each director, (ii) all of the Company's directors and executive officers as a group and (iii) each person known to the Company to be the beneficial owner of more than 5% of the Company's Common Stock. Except as otherwise indicated, based on information furnished by the beneficial owners of the Common Stock listed below, the Company believes that such owners have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
- - - ----------
* As of December 31, 1995 35,618 of Dr. Govier's shares are subject to a Stock Repurchase Agreement.
(1) Does not include the 287,004 shares of Common Stock, or 143,502 shares of Common Stock that may be acquired upon exercise of 143,502 Warrants issuable to the John N. Kapoor Trust upon conversion of the $1,500,000 loan and $523,385 of accrued interest thereon payable pursuant to the Loan Repayment Note (based upon interest accruing through November 30, 1995). Dr. John N. Kapoor disclaims beneficial ownership of 777,117 shares of Common Stock held by the John N. Kapoor 1994-A Annuity Trust, 38,856 shares of Common Stock held by the Christina Grace Kapoor Trust, 38,856 shares of Common Stock held by the Jonathan Nath Kapoor Trust, 38,856 shares of Common Stock held by the Olivia Jane Kapoor Trust, and 38,856 shares of Common Stock held by the Jules Alexander Kapoor Trust.
(2) Includes the 287,004 shares of Common Stock the John N. Kapoor Trust may acquire upon conversion of the outstanding principal and accrued interest on the Loan Repayment Note, but does not include 143,502 shares of Common Stock that may be acquired at a price of $9.80 per share commencing upon exercise on or after January 25, 1997 of 143,502 Warrants issuable to the John N. Kapoor Trust
upon conversion of the $1,500,000 loan and $523,385 of accrued interest thereon payable pursuant to the Loan Repayment Note (based upon interest accruing through November 30, 1995). See "Risk Factors -- Litigation Involving Company's Chairman."
(3) Includes an option immediately exercisable for 25,000 shares of Common Stock. Dr. Mahendra G. Shah disclaims beneficial ownership of 7,771 shares of Common Stock held by Nrupal Shah, 7,771 shares of Common Stock held by Shaily Shah, and 23,312 shares of Common Stock held by Indira Shah.
(4) Includes an option immediately exercisable for 50,000 shares of Common Stock.
(5) Does not include shares held by family members of officers and directors over which shares such officers and directors disclaim beneficial ownership.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Aquilur Rahman, the Company's Chief Scientific Officer and member of the Board of Directors, was until April 1, 1996 employed by Georgetown University on a full -time basis, an entity with which the Company had entered into license and sponsored research agreements. See "Item 1 - Business--Collaborative Relationships, Licenses and Commercialization Strategy."
A trust of which Dr. John N. Kapoor, Chairman of the Board of the Company, is the sole beneficiary has loaned the Company $1,500,000 pursuant to a Loan Repayment Note dated June 18, 1990. The amount outstanding on such Loan Repayment Note as of December 31, 1995 was $1,500,000 in principal amount and $545,379 in interest. Funds borrowed under the Loan Repayment Note incur interest at the lesser of 10% per annum or the prime rate, plus, if the Company is in default under the Loan Repayment Note, an additional 15% per annum accrues on the Loan Repayment Note from the date of default until the Loan Repayment Note is paid. The Company has been in default under the Loan Repayment Note since June 18, 1992. No payments have been made on the Loan Repayment Note. The Company is accruing interest at 15% per annum on the principal balances that are past due. The principal and accrued interest to November 30, 1995 under this Loan Repayment Note will convert into Common Stock and Warrants at the initial public offering price, and $54,834 in remaining unpaid interest accruing from November 30, 1995 through the date of the closing of the Offering was paid by the Company in cash, subsequent to year-end. An aggregate of 287,004 shares of Common Stock and 143,502 Warrants were issued upon conversion of the outstanding $1,500,000 in principal and $523,385 of accrued interest debt.
The Company's President and Chief Executive Officer ("CEO"), William C. Govier, has served as a consultant to the Company on clinical trials and NDA filing matters, both individually and as a consultant with Aegis Technology, Inc. ("Aegis"), an entity co-founded by Govier. As the Company's President and CEO, Govier received options in December 1993, to purchase 116,567 shares of Company stock at the fair market value on the date of grant, which were subsequently exercised. His colleague and co-founder of Aegis received options in December 1993 to purchase 7,771 shares of Company stock at the fair market value on the date of grant, of which 3,885 options were 100% vested and 3,886 options vest upon future performance of services. The Company has expensed approximately $442,000 since inception through December 31, 1995, related to work performed and expenses incurred by Govier, his colleague and Aegis. During 1994 and 1993, the Company expensed approximately $104,000 and $3,600 were expensed.
On July 1, 1994, the Company entered into a Consulting Agreement with EJ Financial Enterprises, Inc. ("EJ Financial"). The Consulting Agreement provides that the Company will pay EJ Financial $125,000 per year (paid quarterly) for certain business and financial services, including having certain officers of EJ Financial serve as officers of the Company. Dr. John Kapoor, the Company's Chairman of the Board is the president and a director of EJ Financial. Dr. Mahendra Shah, Vice President of the Company, is also a Vice President of EJ Financial. The Company believes that the charges provided for in the Agreement are reasonable and reflect the cost of the services provided. These charges reflect the increased need for EJ Financial's services in connection with future operation of NeoPharm as a publicly-held company. The management services agreement with EJ Financial expires in 1997.
In connection with the Offering, the Company has adopted a policy whereby any further transactions between the Company and its officers, directors, principal stockholders and any affiliates of the foregoing persons will be on terms no less favorable to the Company than could reasonably be obtained in arm's length transactions with independent third parties, and that any such transactions also be approved by a majority of the Company's disinterested outside directors.
During 1995, John N. Kapoor extended his personal guarantee of a $1 million Harris Bank and Trust Company line of credit, and guaranteed a $1.5 million increase to the line. This line of credit was closed as of February 19, 1996.
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
3.1 Certificate of Incorporation, as amended filed with the Commission as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 3.2 Bylaws of the Registrant, as amended filed with the Commission as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 33- 90516), is incorporated by reference. 4.1 Specimen Common Stock Certificate filed with the Commission as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 33- 90516), is incorporated by reference. 4.2 Specimen Warrant Certificate filed with the Commission as Exhibit 4.2 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 4.3 Form of Representative's Warrant Agreement between the Registrant and the Representative, including form of Representative's Warrant filed with the Commission as Exhibit 4.3 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 4.4 Form of Warrant Agreement between the Registrant, the Representative and Harris Trust and Savings Bank, including form of Warrant filed with the Commission as Exhibit 4.4 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 10.1 1995 Stock Option Plan, with forms of Incentive and Nonstatutory Stock Option Agreements filed with the Commission as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 10.2 1995 Director Option Plan, with form of Director Stock Option Agreement filed with the Commission as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 10.3 Form of Director and Officer Indemnification Agreement. filed with the Commission as Exhibit 10.3to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 10.4 Cooperative Research and Development Agreement between the Company and the National Cancer Institute dated September 13, 1993 filed with the Commission as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 10.5 License Agreement between the Company and Georgetown University dated July, 1990 filed with the Commission as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 10.6 License Agreement between the Company and Georgetown University dated April 18, 1994 filed with the Commission as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 10.7 Loan Repayment Note, dated June 18, 1990, by and between the Company and the John N. Kapoor Trust filed with the Commission as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 10.8 Consulting Agreement, dated July 1, 1994, by and between the Company and EJ Financial Services, Inc. filed with the Commission as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 10.9 Stock Repurchase Agreement, dated November 17, 1994, between the Company and William C. Govier filed with the Commission as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 10.10 Harris Bank and Trust Company Loan Agreement dated March 16, 1995, as amended on October 5, 1995. filed with the Commission as Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference. 11.1 Calculation of Earnings Per Share.
- - - -----------
(b) Financial Statements
(1) Financial Statements
The financial statements filed as part of this Registration Statement are listed in the Index to Financial Statements of the Company on Page.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 25TH DAY OF APRIL, 1996.
NEOPHARM, INC.
By: /s/ WILLIAM C. GOVIER ---------------------------------------- William C. Govier, President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
NEOPHARM, INC. (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stockholders of NeoPharm, Inc.:
We have audited the accompanying balance sheets of NeoPharm, Inc. (a Delaware corporation in the development stage) as of December 31, 1994 and 1995, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NeoPharm, Inc. as of December 31, 1994 and 1995, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois April 12, 1996
NEOPHARM, INC. (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
The accompanying notes are an integral part of these balance sheets.
NEOPHARM, INC. (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these statements.
NEOPHARM, INC. (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990) THROUGH DECEMBER 31, 1995
The accompanying notes are an integral part of these statements.
NEOPHARM, INC. (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
Supplemental disclosure of non--cash transactions:
The Company received management services from a related party (Note 7) of $25,000 and $12,500 in 1993 and 1994, respectively, which were recorded as additional capital contributions.
The accompanying notes are an integral part of these statements.
NEOPHARM, INC. (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
1. ORGANIZATION AND BUSINESS:
NeoPharm, Inc. (the "Company"), a Delaware corporation in the development stage, was incorporated on June 15, 1990, under the name of OncoMed, Inc. In March 1995, the Company changed its name to NeoPharm, Inc. The Company is developing products to provide therapeutic and diagnostic benefits in the treatment of various forms of cancer. The Company has two products which are the subject of a Cooperative Research and Development Agreement ("CRADA") with the National Cancer Institute ("NCI"), a unit of the National Institutes of Health. The Company also has rights to products developed under license and sponsored research agreements with Georgetown University ("Georgetown").
The Company is in the development stage which requires substantial capital for research, product development and market development activities. The Company has not yet initiated marketing of a commercial product. The Company's proposed products are in various stages of clinical trials, but the Company has not yet filed an NDA. These and other proposed products will require clinical testing, regulatory approval and substantial additional investment prior to commercialization. The future success of the Company is dependent on its ability to obtain additional working capital to develop, manufacture and market its products and, ultimately, upon its ability to attain future profitable operations. There can be no assurance that the Company will be able to obtain necessary financing or regulatory approvals to be able to successfully develop, manufacture and market its products, or attain successful future operations. Accordingly, the predictability of the Company's future success is uncertain.
The Company's rights to its products are subject to the terms of its agreements with NCI and Georgetown. Termination of either, or both, of these agreements would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, uncertainty exists as to the Company's ability to protect its rights to patents and its proprietary information. There can also be no assurance that research and discoveries by others will not render some or all of the Company's programs or products noncompetitive or obsolete. Nor can there be any assurance that unforeseen problems will not develop with the Company's technologies or applications, or that the Company will be able to address successfully technological challenges it encounters in its research and development programs. Although the Company plans to obtain product liability insurance, it currently does not have any nor is there any assurance that it will be able to attain or maintain such insurance on acceptable terms or with adequate coverage against potential liabilities.
2. SIGNIFICANT ACCOUNTING POLICIES:
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. These costs include, among other things, consulting fees and costs reimbursed to Georgetown pursuant to the agreements as described in Note 6. Payments related to the acquisition of technology rights, for which development work is in process, are expensed and considered a component of research and development costs. The Company also allocates indirect costs, consisting primarily of operational costs for administering research and development activities, to research and development expenses.
EQUIPMENT AND FURNITURE
Equipment and furniture are recorded at cost and are depreciated using an accelerated method over the estimated useful economic lives of the assets involved. The estimated useful lives employed in computing depreciation are five years for computer equipment and seven years for furniture. Maintenance and repairs that do not extend the life of assets are charged to expense when incurred.
DEFERRED OFFERING COSTS
Deferred offering costs represent costs incurred directly related to the initial public offering. Upon completion of the offering, these costs will be offset against the proceeds of the offering.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
PRO FORMA FINANCIAL INFORMATION
Pro forma financial information is presented to reflect the impact of the conversion of the loan and interest payable to the principal stockholder into equity of the Company at the offering. Pro forma net loss differs from net loss due to the reduction of interest expense resulting from the assumed conversion of the $1,500,000 loan payable to the principal stockholder into equity. The interest expense reduction was $209,835 for the year ended December 31, 1995.
Pro forma net loss per share is computed using the weighted average number of common shares outstanding during the period, retroactively adjusted for the one-for-1.28681 reverse stock split effected in October 1995 (See Note 8). The calculation of the shares used in computing pro forma loss per share assumes the conversion of the $1,500,000 loan payable to the principal stockholder outstanding at December 31, 1995 into 212,766 shares of common stock. This conversion is assumed to have occurred at the beginning of the period. During all periods presented, outstanding options have been excluded from the computation as their effect was antidilutive. There were no option grants during the 12-month period prior to the proposed offering at prices below the expected initial public offering price. All stock issuances during the 12-month period prior to the proposed offering were pursuant to the exercise of options previously granted.
Supplementary pro forma loss per share for the year ended December 31, 1995 (based on the weighted average number of common shares outstanding during the respective periods, assuming the conversion of the loan payable to the principal stockholder and the retirement of the line of credit with the bank occurred at the beginning of the period or the issue date, if later) was $(0.49).
Pro forma information in the accompanying balance sheet reflects the reclassification of the accumulated deficit to additional paid-in capital as a result of the termination of the Company's S Corporation status in connection with the proposed initial public offering, and the conversion of the $1,500,000 loan and $523,385 of accrued interest payable at December 31, 1995 to a trust, the sole beneficiary of which is Dr. John N. Kapoor, the Chairman of the Company, into 287,004 shares of common stock and 143,502 warrants.
3. DEBT:
On June 18, 1990, the Company executed a loan agreement with Dr. John N. Kapoor, its principal stockholder. The loan agreement allows the Company to borrow up to $1,500,000. Funds borrowed under the agreement incur interest at the lesser of 10% or the prime rate as determined by the Northern Trust
Bank. The Company has borrowed funds up to the maximum of $1,500,000 at December 31, 1995 and December 31, 1994.
Interest on borrowed funds accrues until the second anniversary of the funding. Thereafter, principal and interest are to be repaid in 12 quarterly installments. Any principal payment not paid within 5 days of the date when due is subject to additional interest of 15% per annum.
From June 1990 through April 1994, the Company financed its operations by borrowing under this loan agreement. No payments of interest or principal were made during this period. Subsequent to year-end, in accordance with the agreement between the principal stockholder and the Company, with the completion of the proposed offering, the principal stockholder converted the outstanding loan balance, plus accrued interest through November 30, 1995, into shares of the Company's common stock and common stock purchase warrants at a per share conversion price equal to the offering price, $7.00 per share, $.10 per warrant. The Company issued 287,004 shares and 143,502 warrants.
In July 1994, the Company obtained a line of credit from Harris Bank. Maximum borrowings under this line were $1,000,000 and were subject to interest at the prime rate (8.5% at December 31, 1994, which is also the weighted average interest rate on all short term borrowings at December 31, 1994). In March 1995, the Company increased the Harris Bank line of credit from $1,000,000 to $2,500,000. The line was subject to interest at the prime rate (8.5% at December 31, 1995, which is also the weighted average interest rate on all short term borrowings). Funds were drawn on the line for any corporate purposes. Amounts borrowed were payable on demand.
The Harris Bank line of credit was personally guaranteed by Dr. Kapoor, the principal stockholder. The Company owed approximately $2,008,000 and $656,000 in principal under this agreement as of December 31, 1995 and December 31, 1994, respectively. The unused portion of the line of credit was approximately $492,000 and $344,000 at December 31, 1995 and December 31, 1994, respectively.
On January 31, 1996, the Company remitted principal of $2,007,652 and interest of $136,750 representing payment in full of the outstanding obligation under the line of credit.
4. OPTIONS AND STOCK REPURCHASE AGREEMENTS
OPTION AGREEMENTS
The Company adopted a stock plan in 1990. The Company granted options under the plan to purchase 730,489 shares. The options have an exercise price of $0.000429 per share with the exception of options to purchase 124,338 shares issued in December 1993, which have an exercise price of $.06434 per share. Effective January 1995, this plan has been terminated. No additional grants will be made under this plan.
Included in the grants described above are options to purchase 147,652 shares granted to non-employees. The Company accounts for these options using a fair value method with the fair value of these options determined at the date of issuance. The Company has deemed the fair value for these options at their respective issuance dates to be nominal. Thus, no expense for these option grants has been recorded by the Company.
A summary of stock option activity is as follows:
On January 25, 1995, the board of directors approved the NeoPharm, Inc. 1995 Stock Option Plan (the "Plan"), which provides for the grant of up to 450,000 options to acquire the Company's common stock. The option prices shall be not less than 85 percent of the fair market value of the stock as determined by the Administrator pursuant to the Plan. The board also approved the NeoPharm, Inc. 1995 Director Option Plan, which provides for the grant of up to 50,000 options to acquire the Company's common stock. The option prices shall be the fair market value on the date of grant.
STOCK REPURCHASE AGREEMENT
In December 1993, the Company granted an option to purchase 116,567 shares of its common stock to William C. Govier, President and Chief Executive Officer (See Note 7). The option had an exercise price of $.06434 per share and a three year monthly vesting schedule. On November 17, 1994, the Company agreed to allow Govier to exercise the option for all 116,567 shares in exchange for Govier agreeing to a Stock Repurchase Agreement. The Company has an option to repurchase the unreleased shares at $.06434 per share. The shares are released from the repurchase agreement one thirty-sixth ( 1/36) per month starting from December 1, 1993. As of December 31, 1995 and December 31, 1994, 35,618 and 74,473 shares, respectively, are still subject to the terms of this repurchase agreement.
5. FEDERAL INCOME TAXES:
The Company elected "S" Corporation status at inception. Losses incurred to date have been reported on the stockholders' tax returns and are not available to the Company as a net operating loss carryforward. During 1994, the Company adopted Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income Taxes." The Company reports certain income and expense items for income tax purposes on a basis different from that reflected in the accompanying financial statements. The principal differences are due to accruals which are accounted for on a cash basis for income tax purposes. The Company voluntarily terminated its S Corporation election on October 11, 1995. The Company has future tax deductions of approximately $383,000 and $437,000 as of December 31, 1994 and December 31, 1995, respectively, that have previously been expensed for financial reporting purposes. In accordance with the
provisions of FAS 109, the Company will record a 100% valuation reserve for the deferred tax asset related to the future tax expenses.
6. COMMITMENTS AND CONTINGENCIES:
LICENSE AND RESEARCH AGREEMENTS
From time to time the Company enters into license and research agreements with third parties. At December 31, 1995, the Company has three agreements in effect as described below.
NATIONAL CANCER INSTITUTE
The Company has entered into an agreement ("CRADA") with NCI. Pursuant to the agreement, the Company has committed to commercialize certain products received from NCI. The Company has agreed to provide product to support NCI sponsored clinical trials and will use its best efforts to file a New Drug Application ("NDA") with the Food and Drug Administration ("FDA"). NCI has agreed to collaborate on the clinical development of the products and to provide access to the data necessary to obtain pharmaceutic regulatory approval.
During the years ended December 31, 1995 and 1994, the Company paid and expensed approximately $87,000 and $153,000, respectively, for product used in clinical trials. During 1994, the Company paid approximately $162,000 for current and prior product used in clinical trials. The Company expensed, as research and development costs, $45,000 in 1993 and $117,000 in 1994. In addition, the Company is committed to pay NCI $120,000 per year for reasonable and necessary expenses incurred by NCI in carrying out NCI's responsibilities under the CRADA. During 1995 and 1994, the Company expensed, as research and development costs, and paid $120,000 to NCI for these expenses. NCI is required to provide the Company an accounting of the use of funds. Any amounts not expended at the end of the agreement (May 1997) are refundable to the Company.
The CRADA will expire on May 1, 1997, if not earlier terminated. It may be terminated by mutual consent of NCI and the Company. Either Party may terminate if the other Party breaches a material term or condition and such breach is not cured within a certain period of time. Also, either Party may unilaterally terminate by giving 60 days notice. If unilaterally terminated by either party, all provisions of the CRADA shall continue in full force and effect during the completion of all clinical trials and clinical protocols included under the CRADA prior to the date of notification of intent to terminate. In such situation, the Company retains the rights to data from clinical trials conducted prior to, or in progress, at the time of the termination.
GEORGETOWN UNIVERSITY
The Company has entered into two license and research agreements with Georgetown whereby the Company has obtained an exclusive worldwide license to use certain technology. In exchange for the grant of these exclusive licenses, the Company will pay Georgetown, beginning with the first commercial sale of a product incorporating the licensed technologies, a royalty on net sales by the Company of products incorporating any of such technologies. The royalty will be payable for the life of the related patents.
During the years ended December 31, 1995 and 1994, the Company paid and expensed approximately $277,000 and $229,000, respectively, pursuant to the license and research agreements. No amounts were expensed under this agreement in 1993.
OTHER
The Company has entered into consulting arrangements with members of its Scientific Advisory Board who are also employed on a full-time basis by academic or research institutions. Since inception through December 31, 1995, members of the Scientific Advisory Board have been issued options (see Note 4) to purchase an aggregate 43,313 shares of Company stock at the fair market value at the date of grant which vest over the consulting period. Additionally, the Scientific Advisory Board members have received aggregate payments of approximately $50,000 since the inception of these consulting arrangements for work performed and expenses incurred through December 31, 1995.
The Company is not a party to any litigation or other legal proceedings.
7. TRANSACTIONS WITH RELATED PARTIES
The Company receives management services from EJ Financial Enterprises, Inc. ("EJ Financial"), a healthcare consulting and investment firm in which Dr. Kapoor is the principal stockholder. From inception through June 30, 1994, EJ Financial has charged the Company $25,000 per year for services provided plus actual expenses incurred. Through June 30, 1994, no payment for these services was made, but rather has been treated as additional capital contributions by Dr. Kapoor in the accompanying statements of stockholders' equity (deficit). Effective July 1, 1994, EJ Financial increased its charge for management services provided to $125,000 per year plus actual expenses. The agreement, which expires June 30, 1997, reflects an increase in the research and development activity of the Company, the increased need for EJ Financial's services and future operations as a public company. Charges are allocated to the Company based on estimated time spent by EJ Financial personnel on the Company's affairs. Management believes that the cost for management services allocated to the Company represents the cost of the services provided and that they are reasonable. Since inception through December 31, 1995, the Company has expensed approximately $187,500 for management services and $174,000 as reimbursement of actual expenses incurred by EJ Financial that directly related to the Company.
The Company's Chief Scientific Officer, Dr. Aquilur Rahman, is employed on a full-time basis by Georgetown with which the Company has entered into license and sponsored research agreements for product research and development (see Note 6). During 1995 and 1994, the Company expensed approximately $347,000 and $302,000 related to work performed and expenses incurred by Georgetown and Dr. Rahman. Since inception through December 31, 1995, the Company has expensed approximately $1,542,000. Additionally, Dr. Rahman received options in June 1990 (See Note 4) to purchase 466,270 shares of Company stock at the fair market value on the date of the grant of the options.
The Company's President and Chief Executive Officer ("CEO"), William C. Govier, has served as a consultant to the Company on clinical trials and NDA filing matters, both individually and as a consultant with Aegis Technology, Inc. ("Aegis"), an entity co-founded by Govier. As the Company's President and CEO, Govier received options in December 1993, to purchase 116,567 shares of Company stock at the fair market value on the date of grant, which were subsequently exercised (See Note 4). His colleague and co-founder of Aegis received options in December 1993 (see Note 4) to purchase 7,771 shares of Company stock at the fair market value on the date of grant, of which 3,885 options were 100% vested and 3,886 options vest upon future performance of services. The Company has expensed approximately $442,000 since inception through December 31, 1995, related to work performed and expenses incurred by Govier, his colleague and Aegis. During 1994 and 1993, the Company expensed approximately $104,000 and $3,600 were expensed.
As discussed in Note 3, the Company has a financing arrangement with its principal stockholder.
Included as accrued expenses in the accompanying balance sheet is an accrual for management services and expense reimbursement due to EJ Financial of $206,366 and $62,500 at December 31, 1995 and 1994, respectively. Also, included as accrued expenses is an accrual for consulting services and expenses due to Dr. Rahman of $69,205 and 41,667, and due to Govier's colleague of $62,169 and $18,000 at December 31, 1995 and 1994, respectively.
8. STOCKHOLDERS' EQUITY
In January 1995, the Company amended its Certificate of Incorporation to increase the number of authorized shares of common stock to 15,000,000 shares. In October 1995, the Company amended its Certificate of Incorporation to convert each 1.28681 shares of outstanding Common Stock into one share of Common Stock and to restate the par value of the Common Stock from $0.000333 per share to $0.000429 per share. The reverse stock split has been reflected retroactively in these financial statements for all periods presented.
9. SUBSEQUENT EVENT -- INITIAL PUBLIC OFFERING
On January 30, 1996 the Company completed a public offering of newly issued 1,350,000 shares of common stock and 675,000 warrants for proceeds of approximately $8,435,000, net of expenses. On March 8, 1996 the Company issued 36,130 shares of common stock and 18,565 warrants related to the underwriter's over-allotment option for proceeds of approximately $267,000, net of expenses. The Company plans to use the proceeds for research and development, repayment of bank debt, sales and marketing, working capital and general corporate purposes (including payment of certain interest accrued on the Chairman's loan).
PRO FORMA BALANCE SHEET