-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ew+iL2NCsOmweTz5+MarJMJVX4jBRO6w7JTZR+nokTjGidZLZHOo0f6ZQvg8UQou NTN+rZHxkSQdE8Go/frSVA== 0000950130-97-001449.txt : 19970401 0000950130-97-001449.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950130-97-001449 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEUROGEN CORP CENTRAL INDEX KEY: 0000849043 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 222845714 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18311 FILM NUMBER: 97571379 BUSINESS ADDRESS: STREET 1: 35 NORTHEAST INDUSTRIAL RD CITY: BRANFORD STATE: CT ZIP: 06405 BUSINESS PHONE: 2034888201 MAIL ADDRESS: STREET 1: 35 NORTHEAST INDUSTRIAL RD CITY: BRANFORD STATE: CT ZIP: 06405 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-18311 NEUROGEN CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 22-2845714 (State or other jurisdiction of (I.R.S. Employer Corporation or organization) Identification No.) 35 NORTHEAST INDUSTRIAL ROAD BRANFORD, CONNECTICUT 06405 (Address of principal executive offices)(Zip Code) (203) 488-8201 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.025 per share (the "Common Stock") (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. YES X NO ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [__] The approximate aggregate market value of the Common Stock held by non- affiliates of the registrant was $177,160,000 as of March 1, 1997, based upon the closing price of the Common Stock as reported on The Nasdaq National Market on such date. For purposes of determining this number, shares of Common Stock held by officers, directors and stockholders whose ownership exceeds five percent were excluded. This number is provided only for purposes of this report and does not represent an admission by either the registrant or any such person as to the status of such person. As of March 1, 1997, the registrant had 14,272,479 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) The Neurogen Corporation Proxy Statement for the Annual Meeting of Stockholders to be held on June 3, 1997, is incorporated by reference into Items 10, 11, 12 and 13 of Part III of this Form 10-K. PART I ITEM 1. BUSINESS Neurogen Corporation ("Neurogen" or the "Company") is an emerging neuropharmaceutical company engaged in the discovery and development of a new generation of drugs to treat psychiatric and neurological disorders by regulating nerve cell (neuron) communication in the brain. The Company is developing "receptor subtype specific" drugs based on its expertise in neuronal communication. The Company believes that receptor subtype specific drugs offer the potential for equivalent or improved efficacy and fewer side effects than currently marketed psychotherapeutic drugs, most of which interact with multiple receptor subtypes. The Company leverages its resources, where it believes it to be advantageous, through collaborations with large pharmaceutical companies for advanced clinical development and commercialization of its products. The Company has three existing collaborations with Pfizer Inc ("Pfizer") and one collaboration with Schering Corporation and Schering-Plough Ltd. (together, "Schering-Plough") and intends to enter into additional collaborations where appropriate. Neurogen believes that its expertise in neurobiology, medicinal chemistry and molecular biology, combined with its Accelerated Intelligent Drug Design (AIDD) program, which combines a biased combinatorial chemistry program with high-throughput screening, informatics and robotics, enable it to identify and develop compounds more quickly and efficiently than it could using traditional drug discovery techniques. Neurogen has developed a portfolio of neuropharmaceutical drug candidates designed to treat obesity and other eating disorders, anxiety, schizophrenia, sleep disorders, cognitive impairment, depression, epilepsy and stress disorders. Industry analysts estimate the worldwide market for currently marketed neuropharmaceuticals for such disorders to be in excess of $17 billion annually. The Company was incorporated in Delaware in September 1987 and commenced operations in July 1988. The Company's executive offices and its research and development facility are located at 35 Northeast Industrial Road, Branford, Connecticut 06405. Its telephone number is (203) 488-8201. BACKGROUND The human central nervous system (the "CNS") is composed of nerve cells (neurons) in the brain and spinal cord which are organized into interconnecting networks responsible for coordinating all functions in the body. As a result, neurons are implicated in all psychiatric and neurological disorders. Neurons can be divided into many different classes. While the fundamental purpose of all neurons is to communicate with other neurons and cells throughout the body, each class of neurons has a particular function to play in the CNS, including controlling a physiological action, responding to stimulation or storing memory. Communication between neurons occurs through complex electrical and chemical processes involving the transmission of chemicals, known as neurotransmitters, across spaces between nerve cells, known as synapses. At a synapse, electrical signals in the transmitting neuron cause the release of neurotransmitters. After being released from one neuron, a neurotransmitter diffuses in the synapse and interacts with proteins, known as receptors, located on the surface of adjacent neurons. Each neuron contains thousands of receptors. When a neurotransmitter binds to and activates a receptor, it produces a response in the receiving neuron thereby stimulating specific functions or actions. Disruption of normal neuronal communication has been implicated in many neurological and psychiatric disorders, including anxiety, schizophrenia, eating disorders, stroke and epilepsy. Such disruption can result from abnormal release of neurotransmitters, aberrant signaling between nerve cells or heightened sensitivity of receptors to normal levels of neurotransmitters. The complex task of communication between neurons is carried out by almost 100 different types of neurotransmitters. Each neurotransmitter interacts only with selected types of receptors specific to that neurotransmitter. For many years, it was commonly believed that each neurotransmitter interacted with one or at most two types of receptors. In the last decade, however, scientists, including current members of Neurogen's scientific staff, have discovered that each neurotransmitter typically interacts with not just one type of receptor but with multiple receptor subtypes which are grouped into families depending on the similarity of their molecular structure. Receptor subtypes differ slightly from other members of their family, are often distributed differently throughout the brain and may control different physiological functions from other receptor subtypes within the same family. 2 Neurotransmitters such as gamma-aminobutyric acid ("GABA"), dopamine and various neuropeptides control many important neurophysiological functions. GABA is believed to be one of the most prevalent neurotransmitters in the CNS. GABA interacts with a family of receptor subtypes, to regulate the activity level of neurons. Subtypes of GABA receptors have evolved to carry out particular functions in the CNS. Because of its prevalence in the CNS, disruption of normal GABA receptor function is implicated in many neuro-psychiatric disorders, including anxiety, learning and memory impairment, sleep disorders and seizures. Dopamine is present at fewer synapses in the CNS than GABA, but is known to control important functions such as movement and emotional responses. Dopamine interacts with a family of receptors, consisting of at least five subtypes, each of which is responsible for certain functions in the CNS. For example, abnormalities in dopamine transmission have been implicated in schizophrenia. The Company believes certain neuropeptides, by interacting with certain receptors, are associated with, among other things, eating, stress responses and cognitive functions. One neuropeptide, neuropeptide Y ("NPY"), has for several years been associated with eating responses as well as other functions, including metabolism and blood pressure. Another neuropeptide, corticotropin releasing factor ("CRF") is believed to be associated with stress responses, while a third neuropeptide, galanin, is thought to be involved in eating responses as well as cognitive functions. The identity and role of various subtypes of the receptor families of each of the above neuropeptides is the subject of ongoing scientific research at Neurogen as well as at many other institutions and companies. Almost every psychotherapeutic drug currently on the market interacts not with one specific receptor subtype, but with many or all members of one or more receptor families. Neurogen believes that this nonselectivity is the principal cause of the side effects, including sedation and addiction, associated with such drugs. The discovery of receptor subtypes provides opportunities for Neurogen to design drugs which target specific receptor subtypes. Neurogen believes that such compounds offer the potential for equivalent or improved efficacy with fewer side effects than drugs currently on the market. BUSINESS STRATEGY Neurogen's mission is to be a leader in the design, development and commercialization of psychotherapeutic drugs. The Company focuses its drug discovery programs on small molecule compounds that target specific receptor subtypes implicated in a variety of neuropsychiatric disorders. The key points of the Company's strategy are as follows: TARGET MULTIPLE MARKETS WITH MULTIPLE DRUG CANDIDATES. Neurogen utilizes its expertise in the CNS area to develop a diverse portfolio of drug candidates to treat common disorders, including obesity and other eating disorders, anxiety, schizophrenia, sleep disorders, cognitive impairment, depression, epilepsy and stress disorders. By targeting multiple disorders which represent large markets, the Company seeks to reduce its reliance on any single program. Further, within each program Neurogen seeks to develop multiple drug candidates with differing chemical structures, pharmacokinectic profiles and, at times, differing subtype profiles in order to further enhance the likelihood of producing a successful drug candidate from such program. DEVELOP RECEPTOR SUBTYPE SPECIFIC COMPOUNDS. The Company focuses its drug discovery efforts on receptor subtype specific small molecule compounds the Company believes will have fewer side effects than currently marketed drugs. The Company believes that such drugs have the potential to penetrate and expand existing markets as evidenced by the new class of antidepressants (e.g., Prozac(R), Zoloft(R) and Paxil(R)) which selectively interact with serotonin (another neurotransmitter) reuptake receptors and have less severe side effects than previous antidepressants. In addition, the Company seeks to develop small molecule drugs due to their relatively high solubility, increased ability to cross the blood brain barrier (a critical consideration in developing safe and efficacious psychotherapeutic drugs) and low manufacturing costs. UTILIZE ADVANCED DISCOVERY TECHNOLOGIES. The Company utilizes its advanced discovery technologies, including its AIDD program, to enhance its drug discovery capabilities and to provide new opportunities for strategic partnerships. Through its AIDD program, the Company is employing biased combinatorial chemistry methodologies to develop extensive libraries of small molecule compounds. This program was instrumental in the discovery of NGD 95-1, Neurogen's development compound for the treatment of eating disorders. In addition, as part of its collaboration with Schering-Plough, Neurogen has granted limited access to a portion of its combinatorial libraries in return for $3.0 million per year for two years. RATCHET GROWTH THROUGH STRATEGIC COLLABORATIONS. The Company seeks to ratchet its growth through successive strategic collaborations in which it hopes to progressively retain additional commercial rights 3 and assume additional responsibilities to gradually develop its clinical development, manufacturing and sales capabilities. Further, through its collaborations, Neurogen seeks to diversify the development risk of its programs and to enhance the likelihood of commercialization of its compounds. In its first two collaborations with Pfizer (1992 and 1994), Neurogen has focused its efforts primarily on research and discovery and looks to Pfizer to conduct and fund all clinical development, manufacturing and sales/marketing activities. In its collaboration with Schering-Plough (June 1995), in addition to leading the research and discovery efforts, Neurogen retained the right to participate in the clinical development of collaboration compounds (while Schering-Plough will conduct and fund clinical trials) and an option to manufacture products resulting from the collaboration for the United States market. In its third collaboration with Pfizer (November 1995), in addition to retaining similar rights relating to clinical trials and manufacturing, Neurogen retained an option to earn a portion of the profits, if any, generated by sales of collaboration drugs in to the North American Free Trade Agreement ("NAFTA") countries by funding a portion of the cost of clinical trials and marketing in those countries. PRODUCT RESEARCH AND DEVELOPMENT The Company believes it is well-positioned to capitalize on advances in molecular biology, medicinal chemistry and neurobiology to develop new psychotherapeutic compounds. The Company believes that its scientists possess an advanced understanding of the biochemistry of the brain and its possible connection to human behavior and that this understanding has enabled the Company to develop a portfolio of compounds which include product candidates for the treatment of obesity and other eating disorders, anxiety, schizophrenia, sleep disorders, cognitive impairment, depression, epilepsy, and stress disorders. ACCELERATED INTELLIGENT DRUG DESIGN In January 1996, Neurogen announced the integration of its combinatorial chemistry program and high-throughput screening capabilities with state-of-the- art automation and an interactive data system under a program entitled "Accelerated Intelligent Drug Design" or "AIDD". Combinatorial Chemistry libraries and high-throughput screening systems like those being developed at Neurogen can be used to find new chemical leads for receptors or other targets where no leads exist as well as to optimize chemical leads by refining candidates into structures with suitable drug-like characteristics. To date, Neurogen has utilized its AIDD technologies to discover and optimize chemical leads, in its NPY, CRF and Galanin research efforts. Through these discoveries Neurogen has established its programs to develop drugs working through these neuropeptide mechanisms to treat disorders such as obesity, stress, depression and cognition impairment. The Company has also applied its AIDD technologies to extend its portfolios of drug candidates in its GABA program. Neurogen's drug discovery technologies include both the traditional pharmaceutical company the combinatorial design of chemical leads from approach of identifying specific chemical leads among compounds developed singly using medicinal chemistry and its own proprietary libraries of compounds developed through its AIDD program. Unlike traditional drug discovery, in which compounds are typically designed and synthesized at a rate of 50 to 100 compounds per year per chemist, combinatorial chemistry technologies can generate libraries of thousands of compounds per day. Moreover, advances in screening techniques and robotics now allow the rapid screening of thousands of compounds created through combinatorial efforts to identify possible new drug candidates. These advances in chemistry and screening technologies have significantly impacted the drug discovery practices of the industry. Neurogen believes it has been, and believes it can remain, a leader in the development and application of such advances. Many companies with combinatorial chemistry programs have used these technologies to systematically and randomly create immense libraries of diverse compounds. However, since the number of unique organic compounds is essentially infinite, Neurogen believes it is important to bias its AIDD libraries (rather than randomly generate compounds) toward the selection of molecules most likely to interact with receptor families of interest to Neurogen and other pharmaceutical companies. Neurogen also biases its libraries to create compounds more likely to have drug-like characteristics such as oral availability. To bias its libraries, Neurogen first selects or designs a number of known and proprietary pharmacophores (arrangements of atoms thought to have activity in some biochemical assay) with the aid of Computer Assisted Molecular Modeling (CAMM). These pharmacophores then serve as templates and are subjected to "combinatorial" procedures, whereby the templates are reacted with numerous different variants of a given reaction simultaneously, producing a pool of numerous compounds. The pools of compounds are then screened through a variety of high capacity receptor-based assays to identify compounds that interact with specific receptor subtypes. 4 To date, Neurogen has generated libraries of more than 1,000,000 compounds in its AIDD program, which, as noted above, has been instrumental in developing discovery and developing chemical leads in its NPY, CRF and Galanin programs, including NGD 95-1. The Company believes that the discovery and development of NGD 95-1 required a fraction of the time that would have been needed using only traditional approaches. Neurogen believes these discovery technologies will continue to enhance its ability to find lead structures for difficult medicinal chemistry problems and significantly shorten the time required to optimize such leads and produce viable drug candidates. In addition, the Company believes that these discovery technologies will provide it with new opportunities for strategic partnerships. 5 PRODUCT DEVELOPMENT PROGRAMS The following table lists the neuropsychiatric disorders being targeted by the Company and the current status of Neurogen's potential products with respect to each of these disorders.
DISORDER RECEPTOR DEVELOPMENT COMMERCIAL (COMPOUND) TARGET STATUS RIGHTS - --------------------------- ------------ --------------- ----------------- Obesity and other NPY1 Phase I Pfizer eating disorders (NGD 95-1) receptor clinical (Neurogen trials (1) royalty, manufacturing and profit sharing) Anxiety (NGD 91-2 and GABA NGD 91-2 Pfizer NGD 91-1) receptor preclinical; (Neurogen subtype NGD 91-1 royalty) preliminary test of novel receptor binding through Phase I clinical trials (1) Schizophrenia NGD 94-4 and Dopamine D4 Phase I Schering-Plough (NGD 94-1) receptor clinical (Neurogen trials (1) royalty and manufacturing) Schizophrenia (NGD 94-2) Dopamine Preclinical Schering-Plough D4, D2 development (2) (Neurogen receptors royalty and manufacturing) Seizure disorders NMDA Preclinical Wyeth-Ayerst (ADCI) receptors development (2) (Neurogen and NIH royalty) Insomnia GABA Preclinical Pfizer receptor development (2) (Neurogen subtype royalty) Dementia, cognition GABA Preclinical Pfizer deficits receptor development (2) (Neurogen subtype royalty) Depression and CRF receptor Neurogen stress-related disorders Obesity and cognition Galanin Leads Neurogen deficits receptor identified (3) Depression NPY2 Leads Neurogen receptor identified (3)
- -------- (1) See "--Government Regulation" for a description of the phases of clinical trials. (2) "Preclinical development" indicates that Neurogen is conducting pharmacology testing, toxicology testing, formulation, process development and/or manufacturing scale-up prior to possible submission of an Investigational New Drug application (an "IND"). (3) "Leads identified" indicates that lead compounds have been discovered that meet certain in vitro criteria of the Company. Lead compounds may undergo structural modification and more extensive evaluation prior to selection of candidates, if any, for preclinical development. OBESITY AND OTHER EATING DISORDERS PROGRAM. Obesity is a major health problem in the United States. Recent studies indicate that almost one-third of the adult population fits the criteria for at least moderate obesity and that severe obesity affects a large subgroup of this population. Many health problems, 6 including hypertension, arthritis, non-insulin dependent diabetes and elevated cholesterol, are associated with obesity. In addition, it is estimated that as many as one percent and three percent of females in the United States suffer from anorexia nervosa and bulimia nervosa, respectively. Based on studies by various market sources, Neurogen believes the annual market for currently marketed obesity drugs to be approximately $800 miliion worldwide and $500 million in the United States. Obesity has traditionally been treated with amphetamines or amphetamine- like drugs which can be highly addictive. Antidepressants, such as Prozac(R), have also been used with limited success in treating obesity More recently, other drugs to treat obesity by modulating the neurotransmitter serotonin have been approved for marketing or gained popularity. These drugs, like older approaches continue to be plagued by serious side effects. Due to the limited success of obesity therapy and side effects, including nervousness, tremors, primary pulmonary hypertension and insomnia, associated with currently available medications, Neurogen believes that an eating disorder therapy without these side effects would have the ability to penetrate and potentially expand the market for these drugs. In recognition of health risks associated with obesity, the FDA transferred the review of anti-obesity drugs to its Endocrine and Metabolic Division in 1994. This move, together with its proposed FDA Guidance for Weight-Control Drugs, suggests that the FDA is increasingly viewing obesity as a disorder which may require chronic treatment. These events have increased interest in the development of improved treatments for obesity in the pharmaceutical industry. The Company believes that a drug which blocks the effects of the neurotransmitter NPY may moderate eating habits without side effects and represent a step forward in the treatment of eating disorders. Academic research (both at Neurogen and at other institutions) has demonstrated that the neurotransmitter NPY is closely connected with animal feeding behavior and appetite control. In preclinical studies, injection of NPY into the hypothalamic region of the brain has stimulated animals that have just eaten to eat again. Studies indicate that animals develop no tolerance for NPY and that those chronically exposed to NPY (over a period of days to weeks) become obese. Independent of these studies, there has developed a greater understanding of the existence and role of NPY receptor subtypes which has stimulated interest in pursuing an NPY-mediated treatment of obesity. Based on these studies and its understanding of receptor subtypes and receptor modulation, Neurogen believes that a drug which blocks the binding (that is, acts as an antagonist) of NPY to certain of its receptor subtypes located in the hypothalamus may have the opposite effect of chronic exposure to NPY and reduce the desire to eat. NGD 95-1. Through its AIDD program, Neurogen has identified a number of antagonists for the NPY family of receptors. The most advanced of these compounds, NGD 95-1, entered Phase I clinical trials in March 1996 and is currently being tested in a Phase I-B multiple dosing trial. In Phase I-A studies in which successive groups of men and women received single doses of NGD 95-1 at escalating levels, NGD 95-1 was shown to be safe and well tolerated across a broad dose range. In the ongoing Phase I-B study, groups of overweight but otherwise healthy men and women are receiving multiple doses of NGD 95-1 over a two-week period. This study will further evaluate the safety, tolerance and pharmacokinetic profile of the compound. NGD 95-1 was selected as a candidate for human clinical trials on the basis of results of various preclinical animal studies. In rodent studies NGD 95-1 has been shown to inhibit normal eating as well as eating induced by food deprivation or the administration of NPY. In a 21-day study of normal growing rodents NGD 95-1 was shown to reduce food intake and weight gain. This study indicated that these effects were exhibited early in the trial and showed no signs of tolerance during the balance of the trial. In November 1995 Neurogen entered into the Collaborative Research Agreement and the Commercialization and Development Agreement, each dated as of November 1, 1995 between the Company and Pfizer (collectively, the "1995 Pfizer Agreement") to develop and commercialize with Pfizer drugs to treat NPY-mediated disorders, including obesity and eating disorders. All drug candidates in the Company's NPY program (with the exception of compounds which work through NPY\\2\\ for the treatment of depression), including NGD 95-1, are subject to the 1995 Pfizer Agreement. Pursuant to this agreement, Neurogen is responsible for conducting Phase I trials under Pfizer auspices and Pfizer will be responsible for conducting Phase II and later trials. While Neurogen and Pfizer share clinical development responsibilities, Pfizer has the right to determine when to advance collaboration compounds in the clinical process, if at all. No assurance can be given that any collaboration compound will successfully complete the clinical trials or advance through the regulatory approvals process. In order to increase the likelihood that Neurogen's portfolio will produce a successful obesity drug, Neurogen is developing alternative obesity drug candidates in collaboration with Pfizer. See "-Collaborative Research and Licensing Agreements." Neurogen has also established a program to develop drugs which modulate the neuropeptide galanin for the treatment of obesity. Galanin has been demonstrated in various industry studies to stimulate eating, particularly the eating of fats, in laboratory animals. Neurogen believes that a drug which blocks the activity of galanin could decrease appetite. Neurogen has discovered a number of compounds that block a galanin receptor and is in process of selecting the most attractive compounds for testing in animal models. Neurogen has, to date, retained all commercial rights to its galanin program. 7 ANXIETY PROGRAM. Estimates by the National Institute of Mental Health (the "NIMH") suggest that anxiety, a sense of irrational fear or dread, is the most common CNS disorder in the United States affecting approximately 23 million people, or 12% of the adult population. The most common anxiety-reducing drugs, or anxiolytics, are the class of drugs known as benzodiazepines (such as Valium(R), Xanax(R) and Librium(R)) which are orally administered compounds that exert their pharmacologic effect on the GABA family of receptors. Benzodiazepines alleviate some of the symptoms of anxiety, but at the same time cause numerous side effects, including drowsiness, impairment of motor skills, memory loss and addiction. In addition, benzodiazepines can cause coma or death if a patient consumes excess alcohol in conjunction with drug treatment. The Company believes these side effects are due to benzodiazepines interacting with and enhancing the activity of many or all GABA receptor subtypes. Despite these side effects, based on studies by various market sources, the Company estimates the annual market for currently marketed anxiolytics to be approximately $2.3 billion worldwide and $800 million in the United States. Neurogen's scientists have been leaders in defining the mechanism of action of benzodiazepines at the GABA receptors. Based on its scientists' understanding of the role which GABA receptor subtypes play in the side effects caused by benzodiazepines, Neurogen has developed small molecule, orally administered anxiolytic compounds which it believes may avoid or reduce the adverse side effects of currently marketed anxiolytics by binding to specific subtypes in the GABA receptor family. The Company entered into the Collaborative Research Agreement dated as of January 1, 1992 between the Company and Pfizer (the "1992 Pfizer Agreement") to research, develop and commercialize with Pfizer anxiolytic and cognition enhancing compounds that act through the GABA family of receptors. See "--Collaborative Research and Licensing Agreements." Drug Candidates. Neurogen has discovered several drug candidates that have the novel GABA binding activity which the Company believes will relieve anxiety while avoiding or reducing adverse side effects. Two of these candidates, NGD 91-2 and NGD 91-1, have been the primary focus of development efforts of Pfizer and Neurogen. NGD 91-1, the initial clinical candidate of the collaboration, has been the subject of Phase I studies to explore safety and pharmacokinetic properties and to obtain preliminary indications of efficacy of drugs which have the novel binding profile discovered by Neurogen. NGD 91-2, which appears to have pharmacokinetic properties which are superior to NGD 91-1, is currently in preclinical development in preparation for the commencement of Phase I studies. In order to obtain an early indication of efficacy and the desired lack of sedation of the novel binding profile of Neurogen's drug candidates, Pfizer designed and conducted a Phase I-B study of NGD 91-1 to test the drug in an acute (situational) anxiety setting. In this trial, NGD 91-1 was compared to a marketed anti-anxiety drug, Valium, and to a control placebo. The study was "double-blinded" and involved 150 healthy men and women exposed to anxiety caused by the anticipation of an unpleasant medical procedure. Both NGD 91-1 and Valium(R) demonstrated significant anti-anxiety effects. However, while Valium(R) caused significant sedation, NGD 91-1 did not cause any sedation. While the goal of the collaboration with Pfizer is to develop drugs to treat generalized anxiety disorder, a chronic condition, the Company believes the results of the Phase I-B study demonstrate that the selective GABA activity identified by Neurogen can relieve anxiety without causing sedation. In December 1996, Neurogen announced that the development focus of the collaboration would be transferred from NGD 91-1 to NGD 91-2, a newer development compound which appears to have pharmacokinectic properties that are superior to NGD 91-1 and which demonstrates the same novel GABA binding activity which the Company believes will relieve anxiety while avoiding or reducing adverse side effects. This determination was made following the completion of later stage Phase I studies to establish the minimum blood levels at which NGD 91-1 is effective, the blood levels achieved by NGD 91-1 and the testing of an alternate formulation of NGD 91-1. While NGD 91-1 will remain subject to the collaboration, NGD 91-2 appears, based on animal studies, to be longer acting than NGD 91-1 and to have other pharmacokinetic properties which are superior to NGD 91-1. NGD 91-2 is currently in preclinical development in preparation for the planned commencement of Phase I studies. Under the 1992 Pfizer Agreement, Pfizer has the right to determine when to advance compounds in the clinical process, if at all. As with all drugs that enter clinical testing, no assurances can be given that NGD 91-2 or any other collaboration compound will successfully complete the clinical trials or advance through the regulatory approval process. In order to increase the likelihood that Neurogen's portfolio will produce a successful anxiolytic drug, Neurogen, in collaboration with Pfizer, has been developing additional alternative anxiolytic candidates that act through the GABA family of receptors and have properties similar to those of NGD 91-2 and NGD 91-1 but 8 which belong to different chemical series then either of these compounds. Neurogen has filed patent applications with respect to the composition of NGD 91-2 and NGD 91-1 and the other compounds in its anxiolytic program. See "-- Collaborative Research and Licensing Agreements." SCHIZOPHRENIA PROGRAM. Schizophrenia refers to a group of mental illnesses of unknown origin which have no known cure and are characterized by a variety of symptoms including hallucinations, delusions and social withdrawal. Schizophrenia is estimated to affect between one-half and one percent of the population worldwide. Although certain currently marketed antipsychotic drugs such as Haldol(R) and Clozaril(R), which act at dopamine receptors among others, have shown encouraging results in limiting mental deterioration, each may cause impairment of motor function, orthostatic hypotension (a decrease in blood pressure which may cause fainting) and numerous other side effects. In the case of Clozaril(R), the possibility of life-threatening changes in the white blood cell count (agranulocytosis) of patients requires blood monitoring of all patients receiving the drug, adding significantly to the cost of the therapy. Moreover, as many as 40 percent of all schizophrenics are unresponsive to standard antipsychotic medications and as many as 60 percent of treated patients subsequently relapse and require hospitalization. Industry analysts estimate the current annual market for antipsychotic drugs to be approximately $2.5 billion worldwide and $1.2 billion in the United States. Neurogen's antipsychotic program has concentrated on the discovery and development of drugs which block specific dopamine receptor subtypes. Research indicates that dopamine and its receptors play a critical role in schizophrenia. Neurogen scientists have investigated the pharmacology of dopamine receptors and their interaction with the network of neurons involved in emotional response and motor function. The Company believes that selectively blocking certain dopamine receptor subtypes could be efficacious in treating schizophrenia. The Company's primary and most advanced approach in its psychosis program is the development of compounds which selectively block the D4 receptor subtype, as described below. In addition, the Company is pursuing the development of broader acting compounds. All compounds in the Company's dopamine psychosis program are subject to the Collaboration and License Agreement dated as of June 28, 1995 between the Company and Schering-Plough (the "Schering-Plough Agreement") pursuant to which the Company and Schering-Plough aim to develop and commercialize drugs to treat a variety of dopamine-mediated disorders, including schizophrenia. See "--Collaborative Research and Licensing Agreements." D4 Selective Antipsychotics. The Company's focus on dopamine receptor subtypes and the design of specific binding agents for these subtypes is similar to its approach with respect to GABA receptor subtypes. In recent years, distinct dopamine receptor subtypes, known as D 1, D2, D3, D4 and D5, have been discovered which Neurogen believes may be involved in schizophrenia. Because elevated D4 receptors have been measured in the autopsied brains of schizophrenics, Neurogen believes that high levels of D4 receptors may intensify signals in the brain, thus causing many of the symptoms associated with schizophrenia. As a result, Neurogen believes that a specific D4 antagonist might be an effective antipsychotic agent and, because of its specificity, might have a reduced side effect profile compared to currently marketed drugs. Neurogen scientists have identified a series of small molecule, orally administered compounds, which preclinical research has indicated are potent and highly selective antagonists for the D4 receptor subtype. One of these compounds, NGD 94-4, has been the subject of a recent Phase I-A clinical study, performed by Schering-Plough. In this study, successive groups of subjects were administered single doses of escalating levels of NGD 94-4. The Company understands that Schering-Plough has completed the dosing of all groups, but that the data from the study is not yet complete. While preliminary data has been collected thus far from only certain of the groups, Neurogen and Schering- Plough have some questions regarding the pharmacokinetic properties suggested by such data which will require further examination upon the analysis of all data from the study. In March 1997, Neurogen received notice from Schering-Plough of its election to extend the research program under the Schering-Plough Agreement for an additional one-year period, through June 1998, pending the parties' adoption of a formal research plan relating to the extension period. Pursuant to the Schering-Plough Agreement, Schering-Plough has the right to determine when to advance collaboration compounds in the clinical process, if at all. No assurance can be given that any collaboration compound will successfully complete the clinical trials or advance through the regulatory approval process. In order to increase the likelihood that Neurogen's portfolio will produce a successful antipsychotic, Neurogen is developing alternative antipsychotic candidates, including its broader spectrum compounds noted below, in collaboration with Schering-Plough. While the Company's selective D4 compounds are being evaluated primarily as therapeutic agents, Neurogen is also pursuing their potential for diagnosing schizophrenic patients. By incorporating a radioisotope in such a selective compound, it may be able to identify and diagnose potential D4 receptor abnormalities in patients. See "--Collaborative Research and Licensing Agreements." 9 Broader Spectrum Antipsychotics. Schizophrenia may not be a single disease, but a syndrome or spectrum of diseases. As a result, the Company believes that a single receptor subtype specific antipsychotic drug may not provide adequate therapy for all patients. A complementary alternative to a D\\4\\ selective agent, would be a drug that possessed activity at a greater number of, but not all, receptor subtypes to provide broad therapy for a greater number of patients with fewer side effects than currently marketed drugs to treat schizophrenia. Neurogen has identified a series of compounds with a balance of dopamine receptor blocking activities (at D2, D3 and D4 receptors) and other related receptor blocking activities. In this regard, the Company, together with Schering-Plough, is investigating selected compounds with selectively broader receptor blocking properties. These include NGD 94-2, which selectively blocks the D4 receptor and the D2 receptor, and other combinations of dopamine antagonists. Neurogen believes that because of their activity at alternate receptor sites, these drugs, which are currently in preclinical development or earlier stage research, could potentially be used to treat a spectrum of disorders associated with schizophrenia. 10 EPILEPSY AND SEIZURE DISORDERS. Approximately two million people in the United States have epilepsy. Industry analysts estimate the current annual market for anticonvulsants (drugs that prevent or arrest convulsions) to be approximately $2.5 billion worldwide and over $1.4 billion in the United States. Convulsive disorders may have many origins and are characterized by abnormal neuronal activity in the brain. Instead of normal small bursts of electrical impulses, neurons in a person suffering a seizure fire a storm of strong, extremely rapid electrical signals, disturbing the normal activity of the brain. Seizures can be local, affecting only part of the brain, or generalized, affecting the entire brain and resulting in unconsciousness and subsequent amnesia. Drugs currently used to control seizures, such as phenobarbital, phenytoin (Dilantin(R)) and carbamazepine (Tegretol(R)), include drugs that are directed toward specific kinds of epilepsies and anticonvulsants that have a broad spectrum of activity. Epilepsy remains difficult to treat, however, because of limited understanding of the neuronal activity associated with the different forms of seizures and the toxic side effects caused by medication. In 1992, Neurogen entered into a licensing and cooperative research and development agreement ("CRADA") with the NIH which provided the Company exclusive access to a library of compounds for evaluation as potential anticonvulsants. In preclinical trials conducted by the Company, one of these compounds, ADCI, exhibited effective anticonvulsant activity in animal model systems used to predict efficacy and potential therapeutic value in treating epilepsy. The Company believes ADCI might be an effective anticonvulsant because it possesses two important modes of action: blocking the NMDA receptor and antagonism of voltage-dependent sodium channels, which is important in the treatment of seizures. Each of these defined biological activities has been associated with the activity of ADCI in different animal seizure models. In November 1996, Neurogen entered into an Agreement dated as of November 25, 1996, between the Company and American Home Products Corporation, acting through its Wyeth-Ayerst Laboratories division (the "American Home Products Agreement"), pursuant to which Neurogen licensed to American Home Products its worldwide development and commercial rights with respect to ADCI and related compounds. Under this agreement, American Home Products will conduct all future research and development activities under the program and has the right to determine when to commence clinical trials and which to advance compounds in the clinical process, it at all. --See "-Collaborative Research and Licensing Agreements." In contrast to many anticonvulsants currently on the market, ADCI shows a therapeutic effect in animal models at doses substantially below doses which cause side effects in preclinical animal models. However, ADCI is difficult to synthesize in large scale. American Home Products is currently following up on work initiated by Neurogen in an attempt to improve the route to synthesis before pursuing further development of ADCI. However, there can be no assurance that Neurogen will be successful in this regard or that ADCI will be tested in clinical trials. SLEEP DISORDERS. Recent studies indicate that as many as 20 million people in the United States experience chronic insomnia and an additional 20 to 30 million Americans experience intermittent sleep-disorders. Industry analysts estimate that the annual market for drugs to treat insomnia is approximately $1.6 billion worldwide and over $400 million in the United States. Neurogen is developing drugs to treat sleep disorders, primarily insomnia. While currently marketed drugs to treat sleep disorders, or hypnotics, are effective, they cause numerous side effects, including "hangovers," rebound insomnia, short-term memory loss and addiction. Humans possess an internal "biological clock" that controls the timing of different biological processes and affects the ability to sleep. This mechanism influences many different processes well beyond those associated with activity and rest. GABA receptor subtypes are involved in sleep regulation as well as anxiety. Neurogen's research suggests that some hypnotics may interact with different GABA receptor subtypes than those which regulate anxiety. Further, Neurogen believes that the side effects associated with many currently marketed medications arise from the fact that these drugs bind non-specifically to many different GABA receptor subtypes. Neurogen believes that drugs which are selective for certain sleep-inducing GABA receptor subtypes will have fewer side effects than the non-selective benzodiazepines currently on the market and could represent a substantial improvement in the treatment of sleep disorders. The Company has identified certain compounds in its portfolio which interact selectively with the GABA receptor subtypes it believes are involved in sleep regulation and tested numerous of these compounds in animals. Currently Neurogen and Pfizer are evaluating certain of these compounds as potential clinical candidates in further preclinical studies. Neurogen is pursuing its sleep disorder program in collaboration with Pfizer under the Collaborative Research Agreement dated as of July 1, 1994 between the Company and Pfizer (the "1994 Pfizer Agreement" and, together with the 1992 Pfizer Agreement and the 1995 Pfizer Agreement, the "Pfizer Agreements"). See "--Collaborative Research and Licensing Agreements." 11 COGNITION DISORDERS. Memory loss is one of the most devastating symptoms of neurodegenerative diseases such as Alzheimer's disease and Parkinson's disease. Research sponsored by the NIMH indicates that in any given year as many as five million people in the United States suffer from dementia, a condition characterized by the impairment of learning and memory recall. A 1990 study by the U.S. Office of Science and Technology Policy indicates that dementia afflicts approximately 10% of people over the age of 65. Industry analysts estimate the current annual market for drugs to treat cognitive disorders to be approximately $1.1 billion worldwide. The Company believes that GABA may affect and modulate the activity of other neurotransmitters which contribute to the storage and retrieval of memory. By understanding how GABA affects these other neurotransmitters, the Company believes that it may be able to develop a drug candidate that acts through GABA receptor subtypes to enhance brain function and cognition where brain function has been impaired through neurodegenerative processes caused by aging, chemical toxins, Alzheimer's disease or Parkinson's disease. Moreover, the Company believes that the benzodiazepines, which produce their desired anti-anxiety effect by enhancing the activity of certain GABA receptors, cause memory impairment and other side effects due to their non-selective binding to GABA receptor subtypes. Accordingly, the Company believes that inhibition of certain GABA receptor subtypes in the cortex and hippocampal regions of the brain may enhance the storage and retrieval of memory. Neurogen has discovered a number of compounds that inhibit activity at these GABA receptor subtypes and tested numerous of these compounds in animals. Currently, Neurogen and Pfizer are evaluating certain of these compounds as potential clinical candidates in further preclinical studies Neurogen is pursuing its cognition enhancement program in collaboration with Pfizer under the 1992 Pfizer Agreement. See "-- Collaborative Research and Licensing Agreements." Neurogen has also established a program to develop drugs which modulate the neuropeptide galanin for the treatment of cognitive deficits. Galanin has been demonstrated in various industry studies to modulate the neurotransmitter acetycholine, a neurotransmitter which is thought to be involved in Alzheimer's disease. Neurogen believes that a drug which blocks the activity of galanin could in turn increase acetycholine discovered a number of compounds that block a galanin receptor and is in the process of selecting the most attractive compounds for testing in animal models. Neurogen has, to date, retained all commercial rights to its galanin program. DEPRESSION AND STRESS DISORDERS. Depression is one of the most prevalent mental illnesses in the United States, affecting approximately 17 million people or 9% of the adult population annually according to the NIMH. Depression occurs in a variety of forms, ranging from a single episode of depressive symptoms to recurrent cycling of moods which can be severe in some patients, alternating between manic "highs" and depressed "lows." Research suggests that more than half of the people who have had one episode of major depression will have another at some point in their lives. While many patients function normally between episodes, it is believed that 20 to 35 percent of the victims suffer chronic depression that prevents them from maintaining a normal routine. Many depressed people sleep too much or too little, are lethargic or agitated and experience feelings of worthlessness and guilt or have recurring thoughts of death or suicide. Older generic antidepressants may cause sedation, mouth dryness or heart irregularities and can be lethal in overdose. Other classes of antidepressants exhibit toxicity when combined with certain foods. While recent pharmaceutical research has led to improved drugs, such as Prozac(R), for the treatment of depression, these medications have limitations in their use primarily because of their slow onset of therapeutic action (up to three weeks) and lack of efficacy in some patients. Industry analysts estimate the current annual market for antidepressants to be approximately $6.7 billion worldwide and $4.1 billion in the United States. Neurogen believes that exploring alternative mechanisms of action may lead to a new class of antidepressants that act quickly, safely and effectively either by themselves or in conjunction with existing medications. Stress is a condition commonly associated with depression. A number of neuropeptide receptors which appear to be involved in stress responses, including receptors for CRF and NPY, are altered in depressed patients. Through its AIDD program, Neurogen has discovered compounds which block a CRF receptor subtype it believes to be involved in stress responses and tested the most attractive of these compounds in animal models. The Company is currently in the process of evaluating certain of these compounds as potential clinical candidates in further preclinical studies. Neurogen has also discovered compounds, through its AIDD program, which block the NPY 2 receptor subtype, which the Company believes to be implicated in depression. These compounds are currently being evaluated for testing in animal models. COLLABORATIVE RESEARCH AND LICENSING AGREEMENTS As part of its business strategy, the Company seeks collaborative agreements with pharmaceutical companies as a means to achieve ratcheted growth in its own drug development, manufacturing and, possibly, sales and marketing capabilities. In February 1992, July 1994 and again in November 1995, Neurogen entered 12 into collaborations with Pfizer. In June 1995, Neurogen entered into a collaboration with Schering-Plough. Neurogen will strive through strategic alliances with major pharmaceutical companies to balance its exposure to research and development risks inherent in the industry and to retain an increasing share in the success of its future products. There can be no assurance that the Company will establish any additional collaborative arrangements or that such future relationships, if established, or its current relationships will result in marketed pharmaceutical products. PFIZER In the first quarter of 1992, Neurogen and Pfizer entered into the 1992 Pfizer Agreement pursuant to which Neurogen and Pfizer are collaborating in the discovery and development of anxiolytics and cognition enhancers which act through the GABA family of receptors. Pursuant to the 1992 Pfizer Agreement, Pfizer purchased 1.0 million shares of the Company's Common Stock for $13.8 million. In addition, the Company has received approximately $4.6 million per year since January 1, 1992 for research and development funding of the Company's anxiolytic and cognition enhancement programs. Neurogen could also receive milestone payments of up to $12.5 million if certain development and regulatory objectives are achieved regarding its anxiolytic and cognition enhancement products. In return, Pfizer received the exclusive worldwide license to manufacture, use and sell GABA-based anxiolytics and cognition enhancers developed in the collaboration. Pfizer is required to pay Neurogen royalties based upon net sales levels, if any, for such products. Any compound which acts through the GABA family of receptors and is not an anxiolytic or cognition enhancer falls outside the parameters of the 1992 Pfizer Agreement, but Pfizer has a right of first review for a period of six months from disclosure of such compound to Pfizer by Neurogen. In July 1994, Neurogen and Pfizer entered into the 1994 Pfizer Agreement. Under this second agreement, Neurogen and Pfizer are collaborating in the discovery and development of hypnotics which act through the GABA family of receptors to treat sleep disorders. Pursuant to the 1994 Pfizer Agreement, Pfizer purchased approximately 1.1 million shares of the Company's Common Stock for approximately $9.9 million, and the Company is entitled, subject to certain conditions, to receive $2.4 million per year for the three year period which commenced July 1, 1994, for research and development funding of the Company's sleep disorder program. Neurogen could also receive milestone payments of up to approximately $3.3 million if certain development and regulatory objectives are achieved regarding its sleep disorder compounds. As part of this second collaboration, Pfizer received the exclusive worldwide license to manufacture, use and sell GABA-based sleep disorder products developed in the collaboration. Pfizer is required to pay Neurogen royalties based on net sales levels, if any, for such products. In December 1996, Neurogen announced that it and Pfizer had agreed to extend the research programs under both the 1992 Pfizer Agreement and the 1994 Pfizer Agreement through December 1998. Pursuant to the agreement to extend these programs, Pfizer has agreed to pay Neurogen an additional aggregate of $10.6 million during 1997 and 1998 to fund Neurogen's research efforts. Under each of the first two Pfizer Agreements, in addition to making the equity investments and the research and milestone payments noted above, Pfizer is responsible for funding the cost of all clinical development and the manufacturing and marketing, if any, of drugs developed pursuant to the collaborations. As a result of these collaborations, Neurogen is dependent on Pfizer to seek regulatory approvals for, to conduct trials for and to determine the ultimate commercialization of compounds subject to the collaborations. In November 1995, Neurogen and Pfizer entered into the 1995 Pfizer Agreement. Pursuant to this third agreement, Neurogen and Pfizer are collaborating in the discovery and development of drugs for the treatment of NPY-mediated disorders, including obesity and eating disorders. Pursuant to the 1995 Pfizer Agreement, Pfizer purchased 750,000 shares of the Company's common stock for approximately $16.5 million and paid Neurogen a license fee of $3.5 million. The Company is entitled, subject to certain conditions, to receive approximately $2.4 million during the three-year period which commenced November 1, 1995, for research and development funding of the Company's eating disorder program and may receive additional research and development funding of up to $2.4 million per year for two additional one-year periods depending on whether and the extent to which Pfizer exercises its rights to extend the research program under the collaboration beyond November 1998. Neurogen could also receive milestone payments of up to approximately $28 million if certain development and regulatory objectives are achieved regarding compounds subject to the collaboration. As part of this third collaboration, Pfizer received the exclusive worldwide rights to products developed in the collaboration subject to certain rights retained by Neurogen as described below. While Pfizer is responsible for Phase II and later stage clinical trials under this collaboration, Neurogen will have primary responsibility for the preparation and filing of INDs and for the conduct the Phase I studies. Pursuant to the 1995 Pfizer Agreement, Neurogen will fund a minority share of early stage development costs and has retained 13 the right to manufacture any products resulting from the collaboration for markets in NAFTA countries and has retained a profit sharing option with respect to future sales in NAFTA countries. If Neurogen exercises this profit sharing option, it will fund a portion of the cost of late stage clinical trials and marketing and in return share in any profit generated by sales of products developed pursuant to the collaboration in NAFTA countries. If Neurogen chose not to exercise its profit-sharing option, Pfizer would pay Neurogen royalties on drugs marketed in NAFTA countries and would fund a majority of early stage and all late stage development and marketing expenses. In either case, Neurogen would be entitled to royalties on drugs marketed in non-NAFTA countries. SCHERING-PLOUGH In June 1995, Neurogen and Schering-Plough entered into the Schering-Plough Agreement to collaborate in the discovery and development of drugs for schizophrenia and other disorders which act through the dopamine family of receptors. Pursuant to the Schering-Plough Agreement, the Company received a license fee of $14.0 million for rights relating to Neurogen's dopamine program and $3.0 million for the right to test certain of Neurogen's combinatorial chemistry libraries in selected non-CNS assays. Schering-Plough also paid an additional $3.0 million in 1996 for the right to test additional libraries. Neurogen has or is entitled to receive approximately $3.6 million per year during the two-year period which commenced June, 1995, for research and development funding of the Company's schizophrenia program and may receive additional research and development funding of up to $3.6 million per year depending on whether and the extent to which Schering-Plough exercises its rights to extend the collaboration for additional one-year periods through June 2000. In March 1997, Neurogen received notice from Schering-Plough of its election to extend the research program under the Schering-Plough Agreement for an additional one-year period, through June 1998, pending the parties' adoption of a formal research plan relating to the extension period. Neurogen could also receive milestone payments of up to approximately $32.0 million if certain development and regulatory objectives regarding its products subject to the collaboration. In return, Schering-Plough received the exclusive worldwide license to market products subject to the collaboration and Neurogen retained the rights to receive royalties based on net sales levels, if any. In addition to the payments described above, Schering-Plough is responsible for funding the cost of all clinical development and marketing, if any, of drugs subject to the collaboration. Pursuant to the Schering-Plough Agreement, Neurogen has retained the right to participate on an advisory clinical development committee and an option to manufacture on a cost plus basis any products resulting from the collaboration for the United States market. As a result of this collaboration, Neurogen is dependent on Schering-Plough to seek regulatory approvals for, to conduct clinical trials for and to determine the ultimate commercialization of compounds subject to this collaboration. AMERICAN HOME PRODUCTS AND NIH In January 1992, Neurogen licensed a class of compounds including the anticonvulsant compound ADCI, from the NIH. In November 1996, Neurogen entered into the American Home Products Agreement pursuant to which Neurogen licensed to American Home Products its worldwide development and commercial rights with respect to ADCI and the related compounds licensed from NIH. Under this agreement, American Home Products will conduct and fund all future research and development and commercialization activities under the program and subject to certain requirements in its agreement with Neurogen and Neurogen's agreement with the NIH, will be entitled to make all determinations regarding any such efforts. Neurogen received a $750,000 license fee and an equity investment of an additional $750,000 for 37,442 shares of Neurogen common stock. Neurogen could also receive additional equity investments and milestone payments of up to approximately $11 million if certain development and regulatory objectives are achieved regarding compounds subject to the license agreement. In return, American Home Products received the exclusive worldwide license to develop and market products subject to the license and Neurogen retained the right to receive royalties based on net sales levels, if any. A portion of any such royalties would be payable to the NIH. PATENTS AND PROPRIETARY TECHNOLOGY The Company's success depends, in part, on its ability to obtain patents, maintain trade secrets and operate without infringing on the intellectual property rights of third parties. The Company files patent applications both in the United States and in foreign countries, as it deems appropriate, for protection of both its products and processes. To date, Neurogen has filed numerous patent applications in the United States and foreign countries, and intends to file additional domestic and foreign applications in the near future. Presently, the Company is the sole assignee of twenty-nine issued United States patents and several foreign patents. Twenty-five of the Company's issued United States patents and several pending patent applications concern the compounds in its anxiolytic program. Four of the Company's issued United States patents and several pending patent applications concern the compounds in its antipsychotic program.. The Company believes that it does not infringe any third-party patents and, except in the case of the NIH 14 with respect to ADCI, the Company has engaged in no technology transfer which would obligate it to pay royalties to any third party. There can be no assurance that patent applications relating to the Company's products or processes will result in patents being issued or, if issued, the claims allowed will be adequate to protect the Company's technology from competitors. Moreover, patent positions of pharmaceutical and biotechnology firms and patent protection for products such as those the Company is developing and proposes to develop are often highly uncertain and involve complex legal and factual questions. No assurance can be given that any patents issued or licensed to the Company will not be held unenforceable, invalidated or circumvented, or that the rights granted under such patents will provide competitive advantages to the Company. Because patent applications in the United States are maintained in secrecy until patents issue and because publication of technological developments in the scientific or patent literature often lags behind actual developments, the Company cannot be certain that it was the first to invent the subject matter covered by its patent applications or patents or that it was the first to file patent applications for such inventions. Moreover, the Company may have to participate in litigation or interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost to the Company, even if the eventual outcome is favorable to the Company. There can be no assurance that the Company's patents would be held valid and infringed by a court of competent jurisdiction. An adverse outcome with regard to a third-party claim could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from third parties or require the Company to cease using such technology, which could have a material adverse effect on the Company's business. The development of therapeutic products for CNS applications is intensely competitive. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in this field. Some of these applications or patents may be competitive with the Company's applications or conflict in certain respects with claims made under the Company's applications. Such conflict could result in a significant reduction of the coverage of the Company's patents, if issued. In addition, if patents are issued to other companies which contain competitive or conflicting claims and such claims are ultimately determined to be valid, the Company may be required to obtain licenses to these patents or to develop or obtain alternative technology. If any licenses are required, there can be no assurance that the Company will be able to obtain any such licenses on commercially favorable terms, if at all. The Company's breach of an existing license or failure to obtain a license to any technology that it may require to commercialize its products may have a material adverse impact on the Company. In connection with the Pfizer Agreements, the Schering-Plough Agreement and the American Home Products Agreement, Neurogen has granted Pfizer, Schering- Plough, and American Home Products as the case may be, the exclusive, worldwide license to manufacture (subject to Neurogen's option to manufacture products for the United States pursuant to the Schering-Plough Agreement and for NAFTA countries pursuant to 1995 Pfizer Agreement), use and sell compounds subject to those agreements. To the extent that Neurogen enters into future collaborations or license agreements with third parties, it may have to share, or it may have no rights to, intellectual property developed or patents obtained in connection with such arrangements. In addition to patent protection, the Company also relies on trade secrets and proprietary know-how which it seeks to protect, in part, by confidentiality agreements with collaborators, advisors, employees and consultants. There can be no assurance, however, that these agreements will not be breached, that the Company would have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known or independently discovered by competitors. The Company's business may be adversely affected by competitors who independently develop substantially equivalent technology. COMPETITION The biopharmaceutical industry is highly competitive. The Company's most significant competition comes from fully-integrated pharmaceutical companies, most of which have products and major research and development programs in the neuroscience field, certain of which are in late-stage clinical trials. In addition, there are many other entities, both public and private, in the United States and overseas, including fully-integrated chemical companies, specialized biotechnology firms, academic institutions, government agencies and other research organizations which are involved in the development of products similar to those of Neurogen. Furthermore, these companies and institutions compete with the Company in recruiting and retaining highly qualified scientific and management personnel. Many of the Company's existing or potential competitors possess substantially greater research and development, financial, technical, manufacturing, marketing, and human resources than Neurogen. There can be no assurance that the 15 Company's competitors will not succeed in developing technologies and products that are more effective than those developed by the Company or which would render the Company's technology and products less competitive or obsolete. MANUFACTURING Neurogen is currently relying, in part, on third-party manufacturers to produce its compounds for research purposes and for preclinical and clinical trials. The Company, which manufactures certain of its compounds to conduct preclinical studies, may expand its facilities to produce sufficient quantities of compounds for the clinical stage of development in certain circumstances. Neurogen has focused its research on developing compounds that are small molecules. The Company believes these compounds are more efficient to manufacture and do not require purification associated with certain protein compounds. Pfizer manufactures or will be responsible for manufacturing drugs for clinical trials which are subject to the 1992 Pfizer Agreement and the 1994 Pfizer Agreement and has the right to manufacture future products, if any, for commercialization. Pfizer will also be responsible for manufacturing drugs for Phase II and later stage clinical trials which are subject to the 1995 Pfizer Agreement and subject to Neurogen's option described below, has the right to manufacture future products, if any for commercialization. Schering-Plough will be responsible for manufacturing for clinical trials compounds which are subject to the Schering-Plough Agreement and, subject to Neurogen's option described below, has the right to manufacture future products, if any, for commercialization. Neurogen, however, has retained an option to manufacture future products, if any, developed pursuant to the Schering-Plough Agreement for sales in the United States and developed pursuant to the 1995 Pfizer Agreement for sales in NAFTA countries. See "--Collaborative Research and Licensing Agreements." With respect to compounds not currently subject to collaborations, the Company plans either to establish supply arrangements with third-party manufacturers for clinical trials and for commercial distribution or to develop its own manufacturing capabilities. There can be no assurance that the Company will be able to achieve third-party arrangements on terms acceptable to the Company or that such arrangements will be successful. While the Company may attempt to develop internal manufacturing capabilities for certain of its products, there can be no assurance that the Company will be able to establish such capabilities or to do so at an acceptable cost. SALES AND MARKETING The Company's strategy is to market products either directly or through co- promotion arrangements or other licensing arrangements with large pharmaceutical or biotechnology companies. Implementation will depend in large part on the market potential of any products the Company develops as well as on the Company's financial resources. The Company does not expect to establish a direct sales capability for at least the next several years. Pfizer and Schering-Plough each have the right to market worldwide future products, if any, resulting from their respective collaborations, except for Neurogen's option to co-market products under the 1995 Pfizer Agreement. GOVERNMENT REGULATION The production and marketing of the Company's products and its research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. In the United States, drugs are subject to rigorous federal regulation and to a lesser extent state regulation. The Federal Food, Drug and Cosmetic Act, as amended ("FFDCA"), and the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. Product development and approval within this regulatory framework will take a number of years and involve the expenditure of substantial resources. The steps required before a pharmaceutical agent may be marketed in the United States include (i) preclinical laboratory tests, in vivo preclinical studies and formulation studies, (ii) the submission to the FDA of an IND for human clinical testing which must become effective before human clinical trials can commence, (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug, (iv) the submission of a New Drug Application ("NDA") or Product License Application ("PLA") to the FDA and (v) FDA approval of the NDA or PLA prior to any commercial sale or shipment of the drug. In addition to obtaining FDA approval for each product, each domestic drug manufacturing establishment must be registered with, and approved by, the FDA. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must comply with the FDA's Good Manufacturing Practices ("GMP") for both drugs and devices. To supply products for use in the United States, foreign manufacturing establishments must comply with GMP and are 16 subject to periodic inspection by the FDA or by regulatory authorities in such countries under reciprocal agreements with the FDA. Preclinical testing includes laboratory evaluation of product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of the product. Preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices. The results of the preclinical testing are submitted to the FDA as part of an IND and are reviewed by the FDA prior to the commencement of human clinical trials. Unless the FDA objects to an IND, the IND will become effective 30 days following its receipt by the FDA. There can be no assurance that submission of an IND will result in commencement of clinical trials. Clinical trials involve the administration of the new drug to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials must be conducted in accordance with Good Clinical Practices under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical study must be conducted under the auspices of an independent Institutional Review Board ("IRB") at the institution where the study will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. Compounds must be formulated according to GMP. Clinical trials are typically conducted in three sequential phases, but the phases may overlap. In Phase I, the initial introduction of the drug into healthy human subjects, the drug is tested for safety (adverse side effects), absorption, dosage tolerance, metabolism, bio-distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited patient population (i) to determine the efficacy of the drug for specific, targeted indications, (ii) to determine dosage tolerance and optimal dosage and (iii) to identify possible adverse side effects and safety risks. When a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further evaluate clinical efficacy and to test for safety within an expanded patient population at geographically dispersed clinical study sites. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specified or targeted time period, if at all, with respect to any of the Company's products subject to such testing. Furthermore, the Company or the FDA may suspend clinical trials at any time if it is believed that the individuals participating in such trials are being exposed to unacceptable health risks. The results of the pharmaceutical development, preclinical studies and clinical studies are submitted to the FDA in the form of an NDA for approval of the marketing and commercial shipment of the drug. The testing and approval process is likely to require substantial time and effort. The approval process is affected by a number of factors including the severity of the disease, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Consequently, there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny an NDA if applicable regulatory criteria are not satisfied, require additional testing or information or require postmarketing testing and surveillance to monitor the safety of the Company's products if it does not believe the NDA contains adequate evidence of the safety and efficacy of the drug. Notwithstanding the submission of such data, the FDA may ultimately decide that an NDA does not satisfy its regulatory criteria for approval. Moreover, if regulatory approval of a drug is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Among the conditions for NDA approval is the requirement that any prospective manufacturer's quality control and manufacturing procedures conform to GMP. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance. Manufacturing establishments, both foreign and domestic, also are subject to inspections by or under the authority of the FDA and by other federal, state or local agencies. 17 Whether or not FDA approval has been obtained, approval of a product by regulatory authorities in foreign countries must be obtained prior to the commencement of commercial sales of the product in such countries. The requirements governing the conduct of clinical trials and product approvals vary widely from country to country, and the time required for approval may be longer or shorter than that required for FDA approval. Although there are some procedures for unified filings for certain European countries, in general, each country at this time has its own procedures and requirements. In addition to regulations enforced by the FDA, the Company also is subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. The Company's research and development involves the controlled use of hazardous materials, chemicals, and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of any accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. THIRD-PARTY REIMBURSEMENT The Company's ability to commercialize its products successfully will depend in part on reimbursement of the costs of such products and related treatments at acceptable levels from government authorities, private health insurers and other organizations, such as health maintenance organizations ("HMOs"). Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend towards managed health care in the United States and the concurrent growth of organizations, such as HMOs, which can control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for the Company's products. The cost containment measures that health care providers are instituting and the effect of any health care reform could adversely affect the Company's ability to sell its products if successfully developed and approved by the FDA and/or any other appropriate regulatory authority. There can be no assurance that reimbursement in the United States or foreign countries will be available for any products the Company may develop, or if available, will not be decreased in the future, or that reimbursement amounts will not reduce the demand for, or the price of, the Company's products, thereby adversely affecting the Company's business. The unavailability or inadequacy of third-party reimbursement for the Company's products would adversely affect the Company's business. Moreover, the Company is unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on the Company's business. SCIENTIFIC ADVISORY BOARD Neurogen's Scientific Advisory Board is composed of certain of its scientists and other leading scientists from Yale University (the "University") who have been actively involved in pioneering research in the field of neurobiology and the treatment of neurological disorders for a number of years. Scientific Advisory Board members meet as a group with management and key scientific employees of the Company approximately on a monthly basis. Scientific Advisory Board members have taken an active role in helping the Company identify scientific and product development opportunities and recruit and evaluate the Company's scientific staff. The Scientific Advisory Board presently consists of the following individuals: NAME POSITION - ---- -------- John F. Tallman, Ph.D. Chairman of the Scientific Advisory Board, Executive Vice President and Scientific Director of Neurogen Corporation George K. Aghajanian, M.D. Professor of Psychiatry and Pharmacology, Yale University 18 B. Stephenson Bunney, M.D. Professor of Psychiatry and Pharmacology, Chairman, Department of Psychiatry, Yale University Dennis S. Charney, M.D. Associate Professor of Psychiatry and Director, Clinical Neuroscience Research Unit, Yale University Michael Davis, Ph.D. Professor of Psychiatry and Psychology, Yale University Dorothy W. Gallager, Ph.D. Vice President--Pharmacology, Neurogen Corporation George R. Heninger, M.D. Professor of Psychiatry and Director of the Abraham Ribicoff Research Facilities of the Connecticut Mental Health Center, Yale University Alan J. Hutchison, Ph.D. Vice President--Drug Discovery, Neurogen Corporation Eric Nestler, M.D., Ph.D Associate Professor of Psychiatry and Pharmacology, Yale University D. Eugene Redmond, Jr., M.D. Professor of Psychiatry, Yale University Robert H. Roth, Ph.D. Professor of Psychiatry and Pharmacology, Yale University Each of the members has served on the Scientific Advisory Board pursuant to consulting agreements (the "SAB Agreements") since 1988, with the exception of Dr. Nestler, who has served on the Scientific Advisory Board since January 1993. The SAB Agreements contain confidentiality provisions and restrict the members of the Scientific Advisory Board from competing with the Company for the term of the agreement and for one year thereafter. The SAB Agreements expire in 1998. Each member of the Scientific Advisory Board who is not also an employee of the Company receives a fee of $15,000 per year for providing consulting services to Neurogen at least fifteen days per year and is eligible to participate in the Neurogen Corporation 1993 Omnibus Incentive Plan. All non-employee members of the Scientific Advisory Board are employed on a full-time basis by the University and, accordingly, devote only a small portion of their time to Neurogen. The University has regulations and policies which limit the ability of such personnel to act as part-time consultants or in other capacities for a commercial enterprise. A change in these regulations or policies could adversely affect the Company. Furthermore, it is possible that inventions or processes discovered by the outside members of the Scientific Advisory Board will not become the property of Neurogen, but will remain the property of such persons, the University or other entities to which the Scientific Advisory Board members have obligations. HUMAN RESOURCES As of December 31, 1996, the Company had 108 full-time employees, including 70 scientists and 18 administrative staff members. The Company's staff includes 35 persons with Ph.D. degrees, all of whom are actively involved in research. Neurogen believes that its success will be dependent largely upon its ability to continue to attract and retain scientists and technical staff qualified in pharmacology, neuroscience, medicinal chemistry and molecular biology. The failure to retain such personnel or to develop expertise in such fields could materially adversely affect prospects for the Company's success. None of the Company's employees are covered by collective bargaining agreements, and the Company considers relations with its employees to be good. In addition, the failure to retain certain of the Company's current scientific personnel, some of whom do not have employment contracts with the Company, could adversely affect the Company. Each of the Company's current scientific personnel has entered into confidentiality and non-competition agreements with the Company. 19 ITEM 2. PROPERTIES The Company conducts its operations in a facility located in Branford, Connecticut, which it purchased in March 1989. Since that time, Neurogen has completed two stages of construction which provide approximately 36,000 square feet of laboratory and administrative space. In August 1995, the Company entered into a ten-year lease agreement to lease 24,000 square feet of space, which is adjacent to the Company's existing research facility. Renovations of the new facility to convert it to laboratories and offices have been completed as of December 31, 1996. The Company has an option to purchase the facility and to extend the lease for an additional ten-year period. The Company expects that its expanded facility will accommodate the anticipated administrative and research needs of the Company for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Neurogen knows of no material litigation or proceeding pending or threatened to which the Company is, or may become, a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of fiscal year 1996, no matter was submitted to a vote of stockholders. 20 CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Except for historical matters, the matters discussed in this Form 10K are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 or any rules, regulations or releases of the Securities and Exchange Commission with respect thereto. Forward-looking statements in this Form 10K include, but are not limited to, statements in Item 1 under the caption "Business - Product Research and Development" with respect to the Company's various product development programs and statements in Item 7 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" with respect to the sufficiency of the Company's cash balance to fund planned operations. In addition, the Company may from time to time make forward-looking statements in the future. Neurogen wishes to caution readers, and others to whom forward-looking statements are addressed, that any such forward-looking statements are not guarantees of future performance and that actual results may differ materially from estimates in the forward looking statements. In addition to the important factors described elsewhere in this Form 10K and the Company's other filings with the Securities and Exchange Commission, the following important factors, among others, could affect Neurogen's actual future results and could cause such results to differ materially from estimates expressed in any forward-looking statements made by, or on behalf of, Neurogen: . Difficulties or delays in development, testing, regulatory approval, production and marketing of any of the Company's drug candidates, including without limitation any unanticipated pre-clinical or clinical delays, delays in regulatory approvals, the failure to attract or retain scientific and management personnel, any unexpected adverse side effects or inadequate therapeutic efficacy which could slow or prevent product development efforts at any stage of product development by delaying or preventing clinical trials, delaying or preventing regulatory approval for commercialization or adversely affecting acceptance by the market. . Vigorous competition within the Company's anticipated product markets, including without limitation competition from fully-integrated pharmaceutical companies with substantially greater capabilities, experience and resources than the Company. . Risk that competitors will succeed in developing technologies and products that are more effective than those of the Company or that are commercialized prior to similar technologies or products of the Company. . Neurogen's dependence on its corporate partners with respect to research and development funding, regulatory filings and manufacturing and marketing expertise with respect to its most advanced compounds. . Risk that Neurogen's interest will not coincide with those of its collaborators with respect to the timing of clinical development of compounds, the future productions of developed products and strategies with respect to marketing such products. . Risk that actual research and development costs may exceed budgeted amounts for a variety of reasons linked to the uncertainty of product development in the pharmaceutical industry. . Inability to obtain sufficient funds through future collaborative arrangements, equity or debt financings or other sources to continue the operation of the Company's business which may require the Company to reduce substantially or eliminate expenditures for product development or to relinquish rights to certain of its technologies or potential products. . Risk that the company's patents and confidentiality agreements of the Company with collaborators, employees, consultants or vendors will not adequately protect the Company's intellectual property or trade secrets. . The Company's dependence upon third parties for the manufacture of its potential products and the Company's inexperience in manufacturing if the Company establishes internal manufacturing capabilities, each of which could adversely affect the Company's future profit margins, if any, and its ability to develop and manufacture products on a timely and competitive basis. 21 . Neurogen's dependence on third parties to market potential products and Neurogen's lack of sales and marketing capabilities, each of which could adversely affect the success of any sales and marketing efforts for the Company's products. . Unavailability or inadequacy of medical insurance or other third-party reimbursement for the cost of purchases of the Company's products. 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of Neurogen is traded on The NASDAQ Stock Market under the symbol NRGN. As of March 1, 1997, there were approximately 420 holders of record of the Company's common stock. No dividends have been paid on the common stock to date, and the Company currently intends to retain any earnings for further development of the Company's business. The following table sets forth the high and low closing bid prices for the common stock as reported by NASDAQ.
High Low ------ ------ Fiscal 1996: ----------- First Quarter............................................ 35 1/4 25 1/4 Second Quarter........................................... 34 17 3/4 Third Quarter............................................ 26 1/2 16 3/4 Fourth Quarter........................................... 28 16 3/4 Fiscal 1995: ----------- First Quarter............................................ 9 5/8 6 5/8 Second Quarter........................................... 17 9 1/4 Third Quarter............................................ 22 1/4 13 1/2 Fourth Quarter........................................... 27 5/8 18 3/4
23 ITEM 6. - SELECTED FINANCIAL DATA
For the Year Ended December 31 (in thousands, except per share data) 1996 1995 1994 1993 1992 Total operating revenues $ 18,286 $ 26,929 $ 5,789 $ 4,604 $ 4,595 Total operating expenses $ 17,229 $ 15,585 $12,924 $ 9,036 $ 6,924 Net income (loss) $ 5,894 $ 13,353 $(6,651) $(3,816) $(1,593) Net Income (loss) per share-primary $ .38 $ 1.07 $ (.70) $ (.43) $ (.18) Total assets $113,869 $104,856 $25,889 $22,704 $27,426 Long-term debt $ 279 $ 460 $ 620 $ 792 $ 1,265 Stockholders' equity $106,245 $ 98,076 $24,080 $20,771 $24,587 Weighted average number of shares outstanding 15,449 12,479 9,528 8,962 8,752
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Since its inception in September 1987, Neurogen has been engaged in the discovery and development of drugs. The Company has not derived any revenue from product sales and, excluding the effect of one-time license fees received in 1996 from Schering-Plough and American Home Products and from Schering-Plough and Pfizer in 1995, expects to incur significant losses in most years prior to deriving any such product revenues. Revenues to date have come from three collaborative research agreements entered into with Pfizer, one collaboration with Schering-Plough, one license agreement with American Home Products and from interest income. RESULTS OF OPERATIONS Results of operations may vary from period to period depending on numerous factors, including the timing of income earned under existing or future strategic alliances, joint ventures or financings, if any, the progress of the Company's research and development projects, technological advances and determinations as to the commercial potential of proposed products. Neurogen expects research and development costs to increase significantly over the next several years as its drug development programs progress. In addition, general and administrative expenses necessary to support the expanded research and development activities are expected to increase for the foreseeable future. YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The Company's operating revenues decreased to $18.3 million for the year ended December 31, 1996 from $26.9 million for the same period in 1995. The decrease in operating revenues in 1996 compared to 1995 is mainly due to a decrease in license fees. The Company's 1996 results include the recognition of a previously unearned license fee of $3.0 million received from Schering-Plough in July 1995 for access to a portion of Neurogen's combinatorial chemistry libraries and $.8 million in license fees from American Home Products received in November 1996. In June and November 1995, the Company received, and recognized as revenue, $14 million and $3.5 million in one-time license fees in connection with entering into the Schering-Plough Agreement and the 1995 Pfizer Agreement, respectively. Due primarily to these license fees, the Company's operating revenues increased to $26.9 million for the year ended December 31, 1995 compared to $5.8 million in 1994. Research and development revenues increased $5.1 million, or 54 percent, to $14.5 million for the year ended December 31, 1996 due to the commencement of research funding under the Schering-Plough Agreement in the third quarter of 1995 and the 1995 Pfizer Agreement in the fourth quarter of 1995. In addition to the quarterly research funding payments received from Pfizer, research and development revenue for the year ended December 31, 1996 includes 24 reimbursements from Pfizer of certain development expenses as part of the cost sharing arrangement on the NPY obesity project. Research revenues increased by $3.6 million or 63 percent from 1994 to 1995. These increases are due to the commencement of the 1994 Pfizer Agreement in the third quarter of 1994, the Schering-Plough Agreement in the third quarter of 1995 and the 1995 Pfizer Agreement in the fourth quarter of 1995. Research and development costs increased 10 percent to $13.9 million for the year ended December 31, 1996 as compared to the same period in 1995. Research and development costs increased 25 percent to $12.6 million in 1995 compared to 1994. These increases are due primarily to an increase in research and development personnel to staff the company's growing portfolio of drug development programs and an expansion of Neurogen's drug discovery capabilities through its growing AIDD (Accelerated Intelligent Drug Design) program. Research and development costs represented 81 percent, 81 percent and 79 percent of total operating expenses for the years ended December 31, 1996, 1995 and 1994, respectively. General and administrative expenses increased 12 percent to $3.3 million in 1996 from $2.9 million in 1995 and 6 percent from $2.8 million in 1994. The increases in both years were due primarily to an increase in administrative activities and the addition of related facilities to support the Company's expanded research programs. Other income, consisting primarily of interest income and gains and losses from marketable securities, was $4.9 million in 1996, $2.3 million in 1995 and $0.5 million in 1994, respectively. The increase in both years was due primarily to a higher level of invested funds. The Company recognized net income of $5.9 million for the year ended December 31, 1996, net income of $13.4 million for the year ended December 31, 1995 and a net loss of $6.7 million in 1994. The decrease in net income in 1996 is due mainly to a decrease in license fees from Schering-Plough. The change in net income in 1995 is primarily due to revenues resulting from the above-noted one-time license fees of $14 million from Schering-Plough and $3.5 million from Pfizer and the $1.8 million increase in investment income. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996 and 1995, cash, cash equivalents and marketable securities were in the aggregate $95.1 million and $91.6 million, respectively. The increase in 1996 was due to an increase in receipts from corporate partner funding and an increase in investment income. The Company's aggregate level of cash, cash equivalents and marketable securities have fluctuated in the past and are expected to fluctuate in the future as a result of the factors described below. Neurogen's cash requirements to date have been met by the proceeds of its financing activities, amounts received pursuant to collaborative arrangements and interest earned on invested funds. The Company's financing activities include three private placement offerings of its common stock prior to its initial public offering, underwritten public offerings of the Company's common stock in 1989, 1991 and 1995, and the private sale of common stock to Pfizer in connection with entering into the Pfizer Agreements and to American Home Products in the American Home Products Agreement. Total funding received from these financing activities was approximately $105.6 million. The Company's expenditures have been primarily to fund research and development and general and administrative expenses and to construct and equip its research and development facilities. In the first quarter of 1992, the Company entered into the 1992 Pfizer Agreement pursuant to which Pfizer made a $13.8 million equity investment in the Company. Under this agreement, the Company received $4.6 million in each year from 1992 through 1996. Neurogen could also receive milestone payments of up to $12.5 million if certain development and regulatory objectives are achieved regarding its products subject to the collaboration. In return, Pfizer received the exclusive rights to manufacture and market collaboration anxiolytics and cognition enhancers that act through the family of receptors which interact with the neuro-transmitter gamma-aminobutyric acid, or GABA, and for which it will pay Neurogen royalties based upon net sales levels, if any, for such products. As of December 31, 1996, Pfizer had provided $23.0 million of research funding to the Company pursuant to the 1992 Pfizer Agreement, in addition to its $13.8 million equity investment in 1992. Neurogen and Pfizer entered into their second collaborative agreement, the 1994 Pfizer Agreement, in July 1994, pursuant to which Pfizer made an additional $9.9 million equity investment in the Company. Under this 25 agreement, the Company is scheduled to receive approximately $7.4 million during the three-year period which commenced July 1, 1994, to fund Neurogen's sleep disorder program. Neurogen could also receive milestone payments of up to $3.3 million if certain development and regulatory objectives are achieved regarding its products subject to the collaboration. As part of this second collaboration, Pfizer received the exclusive rights to manufacture and market GABA-based sleep disorder products for which it will pay Neurogen royalties depending upon net sales levels, if any. As of December 31, 1996, Pfizer had provided $6.2 million of research funding to the Company pursuant to the 1994 Pfizer Agreement, in addition to its $9.9 million equity investment in 1994. In 1996, Neurogen and Pfizer extended the research program under the 1992 Pfizer Agreement and 1994 Pfizer Agreement agreements and Neurogen expects to receive $5,280,000 in each of 1997 and 1998 for research and development funding of the Company's anxiolytic and cognitive enhancer projects to fund Neurogen's research in its anxiolytic (anxiety-reducing drugs), cognitive enhancer and sleep disorder programs. Under both the 1992 Pfizer Agreement and the 1994 Pfizer Agreement, in addition to making the equity investments and the research and milestone payments noted above, Pfizer is responsible for funding the cost of all clinical development and the manufacturing and marketing, if any, of drugs developed from the collaborations. Neurogen and Pfizer entered into their third collaborative agreement, the 1995 Pfizer Agreement, in November 1995, pursuant to which Pfizer made an additional $16.5 million equity investment in the Company bringing Pfizer's ownership of the Company's common stock up to 21% and paid a $3.5 million license fee. The Company is scheduled to receive approximately $7.2 million during the three-year period which commenced November 1, 1995, to fund Neurogen's neuropeptide Y (NPY) eating disorders program and may receive up to an additional $2.4 million per year for a fourth and fifth year should Pfizer exercise its option to extend the research program under the collaboration. Neurogen could also receive milestone payments of up to approximately $28 million if certain development and regulatory objectives are achieved regarding its products subject to the collaboration. As part of this third collaboration, Pfizer received the exclusive worldwide rights to manufacture and market NPY- based collaboration compounds, subject to certain rights retained by Neurogen. Pursuant to the 1995 Pfizer Agreement, Neurogen will fund a minority share of early stage development costs and has retained the right to manufacture any collaboration products in NAFTA countries and has retained a profit sharing option with respect to product sales in NAFTA countries. If Neurogen exercises the profit sharing option, it will fund a portion of the cost of late stage clinical trials and marketing costs and in return receive a specified percentage of any profit generated by sales of collaboration products in NAFTA countries. If Neurogen chooses not to exercise its profit-sharing option, Pfizer would pay Neurogen royalties on drugs marketed in NAFTA countries and would fund a majority of early stage and all late stage development and marketing expenses. In either case Neurogen would be entitled to royalties on drugs marketed in non- NAFTA countries. As of December 31, 1996, Pfizer had provided $3,000,000 in research funding (including $200,000 in unearned revenues) pursuant to the 1995 Pfizer Agreement. In June 1995, Neurogen and Schering-Plough entered into the Schering-Plough Agreement to collaborate in the discovery and development of drugs for the treatment of schizophrenia and other disorders which act through the dopamine family of receptors. Pursuant to the Schering-Plough Agreement, the Company received one-time license fees of $14 million for rights relating to Neurogen's dopamine program and $3 million in 1995 and 1996 for the right to test certain of Neurogen's combinatorial chemistry libraries in selected non-CNS assays. Neurogen has received or expects to receive an aggregate of approximately $7.2 million during the two-year period which commenced June 28, 1995, for research and development funding of the Company's dopamine program. The Company may receive additional research and development funding of up to $3.6 million per year for three additional one-year periods depending on whether and the extent to which Schering-Plough exercises its right to extend the research program under the collaboration. In March 1997, Neurogen received notice from Schering- Plough of its election to extend the research program under the Schering-Plough Agreement for an additional one-year period, through June 1998, pending the parties' adoption of a formal research plan relating to the extension period. Neurogen could also receive milestone payments of up to approximately $32 million if certain development and regulatory objectives are achieved regarding its products subject to the collaboration. In return, Schering-Plough received the exclusive worldwide license to market products subject to the collaboration and Neurogen retained the rights to receive royalties based on net sales levels, if any, and an option to manufacture products for the United States market. As of December 31, 1996, Schering-Plough had provided $6.3 million in research funding (including $900,000 in unearned revenue) pursuant to the Schering-Plough Agreement. In addition to the payments described above, Schering-Plough is responsible for funding the cost of all clinical development and marketing, if any, of drugs subject to the collaboration. In the forth quarter of 1996 Neurogen entered into an agreement with American Home Product Corporation, acting through its Wyeth-Ayerst Laboratories division. Under the terms of the agreement Neurogen received $750,000 in license 26 fees for ADCI, a small molecule pharmaceutical that Neurogen has been developing for the treatment of epilepsy and related disorders, and $750,000 for 37,442 shares of common stock. Neurogen may receive up to an additional $11.0 million in the form of license fees, equity investment and milestone payments on world- wide sales of ADCI. The Company plans to use its cash balance for its research and development activities, working capital and general corporate purposes. Neurogen anticipates that its current cash balance, as supplemented by research funding pursuant to the Pfizer Agreements and the Schering-Plough Agreement, will be sufficient to fund its current and planned operations through 2000. However, Neurogen's funding requirements may change and will depend upon numerous factors, including but not limited to, the progress of the Company's research and development programs, the timing and results of preclinical testing and clinical studies, the timing of regulatory approvals, technological advances, determinations as to the commercial potential of its proposed products, the status of competitive products and the ability of the Company to establish and maintain collaborative arrangements with others for the purpose of funding certain research and development programs, conducting clinical studies, obtaining regulatory approvals and, if such approvals are obtained, manufacturing and marketing products. The Company anticipates that it may augment its cash balance through financing transactions, including the issuance of debt or equity securities and further corporate alliances. No arrangements have been entered into for any future financing and no assurances can be given that adequate levels of additional funding can be obtained on favorable terms, if at all. As of December 31, 1996, the Company had approximately $ 11,490,000 of net operating loss carryforwards available for federal income tax purposes which expire from the years 2003 through 2009. The Company had approximately $ 9,405,000 of Connecticut state tax net operating loss carryforwards as of December 31, 1996 which expire in the years 1997 through 1999. Because of "change in ownership" provisions of the Tax Reform Act of 1986, the Company's utilization of its net operating loss carryforwards may be subject to an annual limitation in future periods. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
Page ---- Balance Sheets at December 31, 1996 and 1995..................... 29 Statements of Operations for the years ended December 31, 1996 1995 and 1994............................................... 30 Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994............................ 31 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994............................................... 32 Notes to Financial Statements.................................... 33 Independent Auditors' Reports.................................... 40
28
Neurogen Corporation BALANCE SHEETS (In thousands, except per share data) ------------------------------------------------------------- December 31 1996 1995 ------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents $ 62,823 $ 26,004 Marketable securities 32,314 65,613 Receivable from corporate partners 460 324 Other current assets 1,132 1,194 -------- ----------- Total current assets 96,729 93,135 Property, plant & equipment Land and land improvements 523 425 Building and building improvements 8,679 8,415 Leasehold improvements 4,005 - Equipment 5,903 4,072 Furniture 311 166 Construction in progress 440 294 -------- ----------- 19,861 13,372 Less accumulated depreciation and amortization 3,136 2,146 -------- ----------- Net property, plant and equipment 16,725 11,226 Other assets, net 415 495 -------- ----------- $113,869 $104,856 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued expenses $ 3,010 $ 1,997 Unearned revenue from corporate partners 4,100 4,100 Current portion of mortgage payable 181 160 -------- ----------- Total current liabilities 7,291 6,257 Mortgage payable, excluding current portion 279 460 Other compensation 54 63 -------- ----------- Total liabilities 7,624 6,780 Commitments and Contingencies Stockholders' Equity Preferred stock, par value $.025 per share. Authorized 2,000 shares; none issued - - Common stock, par value $.025 per share. Authorized 30,000 shares; issued and outstanding 14,252 shares in 1996 and 13,949 in 1995 356 349 Additional paid-in capital 108,491 106,040 Accumulated deficit (2,519) (8,413) Unrealized gain (loss) on marketable securities (83) 100 -------- ----------- Total stockholders' equity 106,245 98,076 -------- ----------- $113,869 $104,856 See accompanying notes to financial statements
29 Neurogen Corporation STATEMENTS OF OPERATIONS (In thousands, except per share data)
For the Year Ended December 31 1996 1995 1994 ------- ------- ------ Operating revenues: License fees $ 3,750 $17,500 - Research and development 14,536 9,429 $5,789 ------- ------- ------ Total operating revenues 18,286 26,929 5,789 Operating expenses: Research and development 13,934 12,646 10,150 General and administrative 3,295 2,939 2,774 ------- ------- ------ Total operating expenses 17,229 15,585 12,924 ------ ------ ------ Operating income (loss) 1,057 11,344 (7,135) Other income (expense): Investment income 4,988 2,353 573 Interest expense (51) (69) (89) ------- ------- ------ Total other income, net 4,937 2,284 484 ------- ------- ------ Income (loss) before provision for income taxes 5,994 13,628 (6,651) Provision for income taxes 100 275 - ------- ------- ------ Net income (loss) $ 5,894 $13,353 $(6,651) ------- ------- ------ Earnings (loss) per share: Primary $ .38 $ 1.07 $(0.70) ------- ------- ------ Fully diluted $ .38 $ 1.04 - ------- ------- ------ Shares used in calculation of earnings (loss) per share: Primary 15,449 12,479 9,528 ------- ------- ------ Fully diluted 15,449 12,868 - ------- ------- ------
See accompanying notes to financial statements 30 Neurogen Corporation STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
------------------------------------------------------------------------------------------------------------------ Common Stock Additional Unrealized gain For the Years Ended ------------- Paid-in Accumulated (loss) on marketable December 31, 1996, 1995 and 1994 Shares Amount Capital Deficit securities Total ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 8,962 $ 224 $ 35,662 $(15,115) $ - $ 20,771 Issuance of shares for cash to Pfizer, Inc 1,096 27 9,837 - - 9,864 Exercise of warrants 25 1 109 - - 110 Net Loss - - - (6,651) - (6,651) Unrealized loss on marketable securities - - - - (13) (13) ---------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 10,083 $ 252 $ 45,608 $(21,766) $ (13) $ 24,081 Issuance of shares for cash to Pfizer, Inc 750 19 16,481 - - 16,500 Issuance of shares for cash in public offering 2,875 72 42,783 - - 42,855 Exercise of stock options 241 6 1,110 - - 1,116 Net Income - - - 13,353 - 13,353 Tax benefit relating to stock option exercises - - 58 - - 58 Unrealized gain on marketable securities - - - - 113 113 ---------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 13,949 $ 349 $106,040 $ (8,413) $ 100 $ 98,076 Issuance of shares for cash to American Home Products 37 1 749 - - 750 Exercise of stock options 260 6 1,623 - - 1,629 Exercise of warrants 6 - 8 - - 8 Net Income - - - 5,894 - 5,894 Tax benefit relating to stock option exercises - - 71 - - 71 Unrealized loss on marketable securities - - - - (183) (183) ---------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 14,252 $ 356 $108,491 $ (2,519) $ (83) $106,245 ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements 31 Neurogen Corporation STATEMENTS OF CASH FLOWS (In thousands)
For the year ended December 31 1996 1995 1994 ------- ------- -------- Cash flows from operating activities: Net income (loss) $5,894 $13,353 $ (6,651) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization expense 1,020 780 889 Unrealized loss on marketable securities - - 76 (Gain) loss on sale of assets (15) 3 (26) Changes in operating assets and liabilities: Increase in accounts payable and accrued expenses 999 1,106 395 Increase in unearned revenue from corporate partners - 4,100 - (Increase) decrease in other current assets 62 (795) (199) Increase in receivable from corporate partners (136) (324) - (Increase) decrease in other assets, net 67 (325) (132) ------- ------- -------- Net cash provided by (used in) operating activities 7,891 17,898 (5,648) ------- ------- -------- Cash flows from investing activities: Purchase of plant and equipment (6,600) (2,172) (589) Purchases of marketable securities (42,584) (79,514) (14,958) Maturities and sales of marketable securities 75,784 20,054 14,750 Proceeds from sale of assets 109 - - ------- ------- -------- Net cash provided by (used in) investing activities 26,709 (61,632) (797) ------- ------- -------- Cash flows from financing activities: Proceeds from sales of common stock, net 750 59,355 9,864 Exercise of stock options 1,629 1,116 - Exercise of warrants - - 90 Principal payments under mortgage payable (160) (141) (125) Principal payments under capital lease obligations - (31) (349) ------- ------- -------- Net cash provided by financing activities 2,219 60,299 9,480 ------- ------- -------- Net increase in cash and cash equivalents 36,819 16,565 3,035 Cash and cash equivalents at beginning of year 26,004 9,439 6,404 ------- ------- -------- Cash and cash equivalents at end of year $62,823 $26,004 $ 9,439 ======= ======= ======== See accompanying notes to financial statements
32 NEUROGEN CORPORATION NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS - Neurogen Corporation ( "Neurogen" or the "Company") is an emerging neuropharmaceuticals Company engaged in the discovery and development of drugs. Neurogen's strategy is to discover and develop drugs which modulate communications between cells in such a way as to avoid or minimize the negative side effects typically associated with many currently prescribed medications. The Company has not derived any revenue from product sales to date. 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. ACCOUNTING STANDARDS - In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121 "Accounting for Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of" (FASB 121). This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and an impairment loss must be recognized. As required by the Statement, the Company adopted this statement as of January 1, 1996. The adoption of this statement in 1996 had no material effect on the Company's financial statements. CASH EQUIVALENTS AND MARKETABLE SECURITIES - The Company considers cash equivalents to be only those investments which are highly liquid, readily convertible to cash and which mature within three months from date of purchase. The carrying values of cash equivalents at December 31, 1996 and 1995 were approximately $62,716,000 and $25,710,000, respectively. The Company considers its investment portfolio to be available-for-sale securities as defined in Statement of Financial Accounting Standards ("SFAS") No. 115. Marketable securities at December 31, 1996 and 1995 consist of debt securities with maturities of three months to five years. The aggregate cost of marketable securities at December 31, 1996 and 1995 was approximately $32,397,000 and $65,513,000, respectively. Realized gains and losses have been determined by the specific identification method. The Company recognized gross realized gains of $15,000 and $96,000 in 1996 and 1995, respectively. Gross realized losses were $105,000 and $65,000 in 1996 and 1995, respectively. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the life of the lease. REVENUE RECOGNITION - Payments under corporate partner agreements are recorded as earned based on the performance requirements of the agreements, while related costs are expensed as incurred. STOCK-BASED COMPENSATION - The Company grants qualified stock options for a fixed number of shares to employees with an exercise price equal to the fair market value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees", and, accordingly, recognizes no compensation expense for qualified stock option grants. 33 INCOME TAXES - The liability method is used to account for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities as well as net operating loss carryforwards and are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets may be reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization. EARNINGS (LOSS) PER SHARE - Primary earnings (loss) per share are based on the weighted average number of shares outstanding during the year and the assumed exercise of dilutive stock options and warrants, if any, less the number of treasury shares assumed to be purchased from the proceeds using the average market price of the Company's common stock during the relevant period. Fully diluted earnings per share is calculated in the same manner, but utilizes the closing price at the end of a period rather than the average price. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of the Company's invested cash and marketable securities approximate fair value as estimated based on quoted market prices. The carrying value of long term debt approximates its fair value based upon currently available debt instruments having similar interest rates and maturities. The carrying amounts of the Company's other financial instruments approximate their fair value. RECLASSIFICATIONS - Certain reclassifications have been made to the 1995 financial statements in order to conform to the 1996 presentation. 2. CORPORATE PARTNER AGREEMENTS In 1992, the Company entered into a collaborative research agreement (the "1992 Pfizer Agreement") with Pfizer Inc. ("Pfizer"), pursuant to which Pfizer has provided $13,750,000 in equity financing. Pursuant to the 1992 Pfizer Agreement, the Company has received an aggregate of $23,000,000. Neurogen could also receive additional milestone payments totaling $12,500,000 If certain development and regulatory objectives are achieved regarding its products subject to the 92 Pfizer Agreement. In return, Pfizer received the exclusive rights to manufacture and market GABA-based anxiolytics and cognition enhancers developed in the collaboration for which it will pay Neurogen royalties based upon net sales levels, if any, for such products. In each of 1996, 1995 and 1994, Neurogen received approximately $4,600,000 in research funding, which approximates the research costs it incurred in such years under the 1992 Pfizer Agreement. The Company entered into its second collaborative agreement (the "1994 Pfizer Agreement") with Pfizer in June 1994 pursuant to which Pfizer made an additional equity investment in the Company of $9,864,000. Pursuant to the 1994 Pfizer Agreement, the Company has received or is scheduled to receive an aggregate of approximately $7,386,000 during the three-year period which commenced July 1, 1994, for research and development funding of the Company's sleep disorder project. Neurogen could also receive additional milestone payments totaling $3,250,000 if certain development and regulatory objectives are achieved regarding its products subject to the 94 Pfizer Agreement. As part of the 1994 Pfizer Agreement, Pfizer received the exclusive right to manufacture and market GABA-based sleep disorder products developed in the collaboration for which it will pay Neurogen royalties depending upon levels of any net sales. In 1996, 1995 and 1994, the Company received research funding of $2,379,000, $2,629,000 and $1,189,000 respectively, which approximates the research costs incurred in such years under the 1992 Pfizer Agreement. In 1996, Neurogen and Pfizer extended the 1992 and 1994 agreements. Neurogen expects to receive $5,280,000 in each of 1997 and 1998 for research and development funding of the Company's anxiolytic, cognitive enhancer and sleep programs. Under both the 1992 Pfizer Agreement and the 1994 Pfizer Agreement, in addition to making the equity investments and the research and milestone payments noted above, Pfizer is responsible for funding the cost of all clinical development and the manufacturing and marketing, if any, of drugs developed from the collaborations. Neurogen and Pfizer entered into their third collaborative agreement (the "1995 Pfizer Agreement") in November 1995, pursuant to which Pfizer paid $3,500,000 in one-time license fees and made an additional equity investment in the Company of $16,500,000, bringing Pfizer's ownership of the Company's common stock up to 21%. Under such agreement, the Company is scheduled to receive an aggregate of approximately $7,200,000 during the three-year period which commenced November 1, 1995, to fund Neurogen's 34 neuropeptide Y (NPY) eating disorders program and may receive up to $2,400,000 per year for two additional one-year periods, should Pfizer exercise its option to extend the research program under the collaboration. Neurogen could also receive milestone payments of up to approximately $28 million If certain development and regulatory objectives are achieved regarding its products subject to the 95 Pfizer Agreement. As part of this third collaboration, Pfizer received the exclusive worldwide rights to manufacture and market NPY-based collaboration compounds, subject to certain rights retained by Neurogen. Pursuant to the 1995 Pfizer Agreement, Neurogen will fund a minority share of early stage development costs and has retained the right to manufacture any collaboration products in NAFTA (North American Free Trade Agreement) countries and has retained a profit sharing option with respect to product sales in NAFTA countries. If Neurogen exercises the profit sharing option, it will fund a portion of the cost of late stage clinical trials and marketing costs and in return receive a share of any profit generated by sales of collaboration products in NAFTA countries. If Neurogen chooses not to exercise its profit sharing option, Pfizer would pay Neurogen royalties on drugs marketed in NAFTA countries and would fund a majority of early stage and all late stage development and marketing expenses. In either case Neurogen would be entitled to royalties on drugs marketed in non-NAFTA countries. As of December 31, 1996, Pfizer had provided $3,000,000 in research funding (including $200,000 in unearned revenues) pursuant to the 1995 Pfizer Agreement. In June 1995, Neurogen and Schering Corporation and Schering-Plough Ltd. (together, "Schering-Plough") entered into an Agreement (the "Schering-Plough Agreement") to collaborate in the discovery and development of drugs for the treatment of schizophrenia and other disorders which act through the dopamine family of receptors. Pursuant to the Schering-Plough Agreement, the Company received in 1995 one-time license fees of $14,000,000 in exchange for rights relating to Neurogen's dopamine program and $3,000,000 (which was included in unearned revenues at December 31, 1995) for the right to test certain of Neurogen's combinatorial chemistry libraries in selected non-CNS assays. Schering-Plough also paid an additional $3,000,000 in 1996 which was included in unearned revenues at December 31, 1996 for the right to test additional libraries. Neurogen expects to receive an aggregate of approximately $7,200,000 during the two-year period which commenced June 28, 1995, of which $6,300,000 had been received and $5,400,000 recognized as revenue as of December 31, 1996, for research and development funding of the Company's dopamine program. The Company may receive additional research and development funding of up to $3,600,000 per year for three additional one-year periods depending on whether, and the extent to which, Schering-Plough exercises its right to extend the research program under the collaboration. Neurogen could also receive milestone payments of up to approximately $32,000,000 if certain development and regulatory objectives are achieved regarding its products subject to the Schering-Plough Agreement. In return, Schering-Plough received the exclusive worldwide license to market products subject to the collaboration and Neurogen retained the rights to receive royalties based on net sales levels, if any, and an option to manufacture products for the United States market. In addition to the payments described above, Schering-Plough is responsible for funding the cost of all clinical development and marketing if any, of drugs subject to the collaboration. In November 1996, Neurogen entered into an agreement with American Home Products. Under the arrangement Neurogen may receive up to $12.5 million in the form of license fees, equity investments and milestone payments for licensing to American Home Products its world-wide commercial rights to a class of compounds including ADCI, a small molecule pharmaceutical that Neurogen has been developing for the treatment of epilepsy and related disorders. In the agreement, Neurogen retained the right to receive royalties on net sales, if any, a portion of which royalties would be paid to the National Institutes of Health, from whom Neurogen licensed the rights to ADCI. 3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES - Accounts payable and accrued expenses at December 31 are summarized as follows (in thousands):
1996 1995 ------ ------ Accounts payable $2,280 $1,281 Accrued compensation 730 716 ------ ------ $3,010 $1,997 ====== ======
4. LONG-TERM DEBT AND LEASE OBLIGATIONS 35 At December 31, 1996, the Company had a $460,000 mortgage payable on, and secured by, its Branford, Connecticut office and research facility, payable in monthly installments over ten years. The interest rate is adjusted quarterly to the prime rate plus 1%. At December 31, 1996, the prime rate was 8.25%. Aggregate annual principal payments applicable to the mortgage payable for the years subsequent to December 31, 1996 (in thousands) are: 1997 $181 1998 205 1999 74 ---- $460 ====
In the third quarter of 1995, the Company entered into a ten year operating lease agreement to lease 24,000 square feet of space in a building adjacent to the Company's existing research facility. The Company has a renewal option to extend the lease for an additional ten year period. The Company may also exercise an option to purchase the building after the sixth year of the lease. The improvements made to the leased facility for laboratory and office space were completed in the fourth quarter of 1996 and are to be amortized over the life of the lease, or ten years. Rent expense for 1996 and 1995 totaled $126,000 and $16,000 respectively. Future minimum rental lease payments subsequent to December 31, 1996 (in thousands) are: 1997 $ 126 1998 126 1999 126 2000 130 2001 151 Thereafter 580 ------ Total minimum lease payments $1,239 ======
5. STOCK OPTIONS AND WARRANTS The Neurogen Corporation Stock Option Plan (the "Plan") originally adopted in 1988 and amended in 1992, provided for the issuance of incentive and non- qualified stock options for up to 1,200,000 shares of common stock. In May 1994, the Company's shareholders approved its 1993 Omnibus Incentive Plan which makes a total of 3,000,000 shares available for grant and its 1993 Non- Employee Directors Stock Option Program which makes a total of 500,000 shares available for grant. The new plans allow for stock appreciation rights, restricted shares, and performance units. All options expire not later than ten years after the date of grant. The following table presents the combined activity of its stock option plans for the years ended December 31, as follows: 36
1996 1995 1994 ---------------------------- ------------------------ -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ---------- --------------- ------- -------------- ---------- -------------- Outstanding at January 1 2,477,649 $ 11.10 2 ,002,085 $ 6.30 1,485,725 $6.18 Granted 669,830 20.54 748,152 21.94 530,250 6.64 Exercised (260,118) 6.43 241,301 5.52 - - Canceled ( 12,817) 16.74 (31,287) 6.35 (13,890) 6.35 --------- ------- - -------- ------ --------- ----- Outstanding at December 31 2,874,544 $ 13.70 2 ,477,649 $11.10 2,002,085 6.30 ========= ======= = ======== ====== ========= ===== Options exercisable at December 31 1,121,196 $ 8.54 882,981 $ 6.30 700,428 $5.91 ========= ======= = ======== ====== ========= =====
The Company has adopted the disclosure provisions only of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). The Company will continue to account for its stock option plans in accordance with the provisions of APB 25, "Accounting for Stock Issued to Employees". The following table presents weighted average price and life information about significant option groups outstanding at December 31, 1996.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------- ------------------- WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE - --------------------------- ----------- -------------------- -------- ------------------- -------- Less than $6.50 148,065 4.7 $ 5.18 124,365 $ 5.00 $6.50-$10.00 1,446,608 7.0 6.57 867,193 6.54 $10.00-$20.00 583,730 9.9 18.80 5,251 15.13 $20.00-34.88 696,141 9.0 26.06 124,387 25.73 --------- --------- 2,874,544 1,121,196 ========= =========
As of December 31, 1996 the company had a total of 41,278 warrants outstanding issuable for shares of common stock at $ 2.55 per share. Such warrants were issued to a prior lessor in connection with a sale and lease back of certain of the Company's furniture and equipment and expire in the year 2001. In February 1995, the Board of Directors approved the conversion of 112,000 warrants granted to the Company's scientific advisory board at $6.50 per share to options under the 1993 Omnibus Incentive Plan. The new options have substantially the same terms as the warrants which they replaced and are included in the table above as options granted. Compensation cost has not been recognized for the stock option plans. Had compensation cost for the Corporation's stock option plans been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, the Corporation's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands):
1996 1995 ------- ------- Net earnings as reported $5,894 $13,353 Net earnings - pro forma $ 892 $13,132 Primary Earnings per share as reported $ .38 $ 1.07 Earnings per share - pro forma $ .06 $ 1.05
37 The estimated fair value at date of grant for options granted in 1995 and 1996 was $13.29 and $13.01, respectively, using the Black Scholes model with the following weighted average assumptions:
1996 1995 ----- ----- expected life 5 5 interest rate 6.4% 6.4% volatility 70% 70%
The effects on 1996 and 1995 pro forma net earnings and net earnings per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reporting the results of operations for future years as the period presented includes only one and two years, respectively, of option grants under the Company's plans. The Company has reserved 4,210,076 shares of common stock for the exercise of options and warrants. 6. INCOME TAXES The difference between the Company's "expected" tax provision (benefit), as computed by applying the U.S. federal corporate tax rate of 34% to income (loss) before provision for income taxes, and actual tax is reconciled below (in thousands) :
1996 1995 1994 ------- ------- ------- Expected tax provision (benefit) at 34% $ 2,038 $ 4,634 $(2,945) State tax provision (benefit) net of federal benefit 456 1,036 (505) Change in beginning of year balance of the allowance valuation for deferred tax assets allocated to income tax expense (2,252) (5,940) 3,450 R & D credit (150) (136) Adjustment for state tax rate - 677 - Nondeductible expense 8 4 - ------- ------ -------- $ 100 $ 275 - ------- ------ --------
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995, are presented below (in thousands) :
1996 1995 ------- ------- DEFERRED TAX ASSETS: Federal tax operating loss carryforwards $ 3,907 $ 4,163 State tax operating loss carryforwards 873 811 Research & development credit 803 640 Alternative minimum tax credit carryover 366 275 Other miscellaneous 225 190 ----- ------ Gross deferred asset 6,174 6,079 Valuation allowance (5,683) (5,652) ----- ------ Net deferred asset 491 427 DEFERRED TAX LIABILITY: Depreciation (491) (427) ----- ------ Net asset/liability $ - $ - ----- ------
38 A valuation allowance in the amount of $5,683,000 and $5,652,000 has been established at December 31, 1996 and 1995, respectively. The valuation allowance changed by $31,000 during 1996 due primarily to the increase in research and development tax credits and the alternative minimum tax credits offset by utilization of net operating loss carry forwards. This allowance has been established due to the uncertainty in the ability of the Company to benefit in the future from the federal and state operating loss carry forwards. Any subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 1996 would be allocated as follows (in thousands): Income tax provision $2,194 Additional paid-in-capital 3,489 ------ $5,683 ------ As of December 31, 1996, the Company had approximately $11,490,000 of net operating loss carryforwards available for federal income tax purposes which expire in the years 2003 through 2009. The Company also had approximately $9,405,000 of Connecticut state tax operating loss carryforwards as of December 31, 1996 which expire in the years 1997 through 1999. Because of "change in ownership" provisions of the Tax Reform Act of 1986, the Company's utilization of its net operating loss carryforwards may be subject to an annual limitation in future periods. 7. COMMITMENTS AND CONTINGENCIES The Company has granted Pfizer certain registration rights with respect to 2,846,000 shares of Common stock and limited preemptive rights with respect to future public offerings pursuant to stock purchase agreements entered into in connection with the Pfizer Agreements. The Company has granted certain registration rights to American Home Products with respect to 37,442 shares of common stock purchased in connection with entering into a licensing agreement in 1996. 8. BENEFIT PLANS The Company maintains a 401(k) Plan under which all of the Company's employees are eligible to participate. Each year the Company may, but is not required to, make a discretionary matching contribution to the Plan. On a quarterly basis the Company matches employee contributions at a rate of 33% of up to 6% of an employee's salary. Contributions to the 401(k) plan totaled approximately $92,000 in 1996, $49,000 in 1995 and $36,000 in 1994. The Company has made loans to certain officers subject to various compensation agreements. The loans will be forgiven and recognized as compensation expense ratably over service periods of five to seven years. The amount of loans outstanding at December 31, 1996 was $425,000. 9. SUPPLEMENTAL CASH FLOW INFORMATION The Company made interest payments of approximately $51,000 in 1996, $69,000 in 1995 and $90,000 in 1994. The Company made income tax payments of $37,000 in 1996 and $256,000 in 1995. 39 Report of Independent Auditors The Board of Directors and Stockholders Neurogen Corporation We have audited the accompanying balance sheet of Neurogen Corporation as of December 31, 1996 and the related statements of operations, stockholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides 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 Neurogen Corporation at December 31, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Ernst & Young LLP Boston, Massachusetts February 14, 1997 40 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors and Stockholders Neurogen Corporation We have audited the accompanying balance sheet of Neurogen Corporation as of December 31, 1995, and the related statements of operations, stockholders' equity and cash flows for each of the years in the two-year 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 Neurogen Corporation at December 31, 1995, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Hartford, Connecticut February 12, 1996 41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE As previously reported on the Company's Current Report on From 8-K dated April 25, 1996, the Company, upon the approval of the Audit Committee of its Board of Directors, elected not to retain KPMG Peat Marwick LLP as its principal independent accountants. On April 26, 1996, the audit Committee of the Board of Directors appointed Ernst & Young LLP to succeed KPMG Peat Marwick LLP as the principal independent accountants of the Company. There has not been any disagreements with the Company's accountants on any matter of accounting principles or practices, financial statement disclosure or audit scope or procedure in the last fiscal year. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information relating to directors and executive officers of the Company, reference is made to pages 2 through 5 and 8 through 12 of the Company's Proxy Statement delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 3, 1997, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION For information relating to executive compensation, reference is made to pages 8 through 12 of the Company's Proxy Statement delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 3, 1997, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information relating to the security ownership of certain beneficial owners and management, reference is made to pages 6 and 7 of the Company's Proxy Statement delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 3, 1997, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information relating to certain relationships and related transactions, reference is made to page 5 and pages 8 through 12 of the Company's Proxy Statement delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 3, 1997, which information is incorporated herein by reference. 42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements Reference is made to the Index to Financial Statements under Item 8 in Part II hereof, where these documents are listed. (2) Financial Statement Schedule Note: Schedules are omitted as not applicable, not required, or the information is included in the financial statements or notes thereto. (3) Executive Compensation Plans and Arrangements The following executive compensation plans or arrangements are required to be filed, and are filed, as exhibits to this Form 10-K: EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.1 - Neurogen Corporation Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company's Form 10-K for the fiscal year ended December 31, 1991). 10.2 - Form of Stock Option Agreement currently used in connection with the grant of options under Neurogen Corporation Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company's Form 10-K for the fiscal year ended December 31, 1992). 10.3 - Neurogen Corporation 1993 Omnibus Incentive Plan, as amended (incorporated by reference to Exhibit 10.3 to the Company's Form 10-K for the fiscal year ended December 31, 1993). 10.4 - Form of Stock Option Agreement currently used in connection with the grant of options under Neurogen Corporation 1993 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Form 10-K for the fiscal year ended December 31, 1993). 10.5 - Neurogen Corporation 1993 Non-Employee Directors Stock Option Program (incorporated by reference to Exhibit 10.5 to the Company's Form 10-K for the fiscal year ended December 31, 1993). 10.6 - Form of Stock Option Agreement currently used in connection with the grant of options under Neurogen Corporation 1993 Non- Employee Directors Stock Option Program (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K for the fiscal year ended December 31, 1993). 43 10.7 - Employment Contract between the Company and Harry H. Penner, Jr., dated as of October 12, 1993 (incorporated by reference to Exhibit 10.7 to the Company's Form 10-K for the fiscal year ended December 31, 1993). 10.8. - Employment Contract between the Company and John F. Tallman, dated as of December 1, 1993 (incorporated by reference to Exhibit 10.25 to the Company's Form 10-Q for the quarterly period ended September 30, 1994). 44 (4) Exhibits EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 - Restated Certificate of Incorporation, filed June 17, 1994. 3.2 - By-Laws, as amended (incorporated by reference to Exhibit 3.6 to the Company's Form 10-K for the fiscal year ended December 31, 1993). 10.1 - Neurogen Corporation Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company's Form 10-K for the fiscal year ended December 31, 1991). 10.2 - Form of Stock Option Agreement currently used in connection with the grant of options under Neurogen Corporation Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company's Form 10-K for the fiscal year ended December 31, 1992). 10.3 - Neurogen Corporation 1993 Omnibus Incentive Plan, as amended (incorporated by reference to Exhibit 10.3 to the Company's Form 10-K for the fiscal year ended December 31, 1993). 10.4 - Form of Stock Option Agreement currently used in connection with the grant of options under Neurogen Corporation 1993 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Form 10-K for the fiscal year ended December 31, 1993). 10.5 - Neurogen Corporation 1993 Non-Employee Directors Stock Option Program (incorporated by reference to Exhibit 10.5 to the Company's Form 10-K for the fiscal year ended December 31, 1993). 10.6 - Form of Stock Option Agreement currently used in connection with the grant of options under Neurogen Corporation 1993 Non- Employee Directors Stock Option Program (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K for the fiscal year ended December 31, 1993). 10.7 - Employment Contract between the Company and Harry H. Penner, Jr., dated as of October 12, 1993 (incorporated by reference to Exhibit 10.7 to the Company's Form 10-K for the fiscal year ended December 31, 1993). 10.8 - Employment Contract between the Company and John F. Tallman, dated as of December 1, 1993 (incorporated by reference to Exhibit 10.25 to the Company's Form 10-Q for the quarterly period ended September 30, 1994). 10.9 - Open-End Mortgage Deed and Security Agreement between the Company and Orion Machinery & Engineering Corp., dated March 16, 1989 (incorporated by reference to Exhibit 10.15 to Registration Statement No. 33-29709 on Form S-1). 10.10 - Form of Proprietary Information and Inventions Agreement (incorporated by reference to Exhibit 10.31 to Registration Statement No. 33-29709 on Form S-1). 10.11 - Warrant to Purchase 47,058 Shares of Common Stock to MMC/GATX Partnership No. I, dated February 20, 1991 (incorporated by reference to Exhibit 10.34 to the Company's Form 10-K for the fiscal year ended December 31, 1990). 45 10.12 - Collaborative Research Agreement and License and Royalty Agreement between the Company and Pfizer Inc, dated as of January 1, 1992 (confidential treatment requested) (incorporated by reference to Exhibit 10.35 to the Company's Form 10-K for the fiscal year ended December 31, 1991). 10.13 - License Agreement between the Company and the National Technical Information Service, dated as of January 1, 1992 (incorporated by reference to Exhibit 10.36 to the Company's Form 10-K for the fiscal year ended December 31, 1991). 10.14 - Cooperative Research and Development Agreement between the Company and the National Institutes of Health, dated as of January 21, 1993 (incorporated by reference to Exhibit 10.37 to the Company's Form 10-K for the fiscal year ended December 31, 1991). 10.15 - Letter Agreement between the Company and Barry M. Bloom, dated January 12, 1994 (incorporated by reference to Exhibit 10.25 to the Company's Form 10-K for the fiscal year ended December 31, 1993). 10.16 - Letter Agreement between the Company and Robert H. Roth, dated April 14, 1994 (incorporated by reference to Exhibit 10.26 to the Company's Form 10-K for the fiscal year ended December 31, 1994). 10.17 - Collaborative Research Agreement and License and Royalty Agreement between the Company and Pfizer Inc, dated as of July 1, 1994 (confidential treatment requested) (incorporated by reference of Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended June 30, 1994). 10.18 - Stock Purchase Agreement between the Company and Pfizer dated as of July 1, 1994 (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarterly period ended June 30, 1994). 10.19 - Registration Rights and Standstill Agreement among the Company and the Persons and Entities listed on Schedule I thereto, dated as of July 11, 1994 (incorporated by reference to Exhibit 10.29 to the Company's Form 10-Q for the quarterly period ended September 30, 1994). 10.20 - Collaboration and License Agreement and Screening Agreement between the Company and Schering-Plough Corporation (confidential treatment requested) (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K dated July 28, 1995). 10.21 - Lease Agreement between the Company and Commercial Building Associates dated as of August 30, 1995 (incorporated by reference to Exhibit 10.27 to the Company's Form 10-Q for the quarterly period ended September 30, 1995). 10.22 - Collaborative Research Agreement between the Company and Pfizer dated as of November 1, 1995 (confidential treatment requested) (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K dated November 1, 1995). 10.23 Development and Commercialization Agreement between the Company and Pfizer dated as of November 1, 1995 (confidential treatment requested) (incorporated by reference to Exhibit 10.2 of the Company's Form 8-K dated November 1, 1995). 10.24 - Stock Purchase Agreement between the Company and Pfizer dated as of November 1, 1995 (incorporated by reference to Exhibit 10.3 of the Company's Form 8-K dated November 1, 1995). 10.25 - Licensing Agreement dated as of November 25, 1996 between American Home Products Corporation, acting through it Wyeth- Ayerst Laboratories Division, and Neurogen Corporation (CONFIDENTIAL TREATMENT REQUESTED) (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K dated March 31, 1997). 10.26 - Stock Purchase Agreement dated as of November 25, 1996 between American Home Products Corporation, acting through its Wyeth- Ayerst Laboratories Division, and Neurogen Corporation (CONFIDENTIAL TREATMENT REQUESTED) (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K dated March 31, 1997). 46 11.1 - Computation of Net Income (Loss) per Common Share. 23.1 - Consent of Ernst & Young LLP, Independent Auditors. 23.2 - Consent of KPMG Peat Marwick LLP, Independent Auditors. 25.1 - Powers of Attorney of Frank C. Carlucci, Robert H. Roth, John Simon, John F. Tallman, Robert M. Gardiner, Robert N. Butler, Jeffrey J. Collinson, Richard D. Harrison, Mark Novitch and Barry M. Bloom. 99.1 - Proxy Statement for the Annual Meeting of Stockholders to be held on June 3, 1997 (to be filed with the Commission on or before April 29, 1997). (b) Reports on Form 8-K The Company did not file any reports on Form 8-K with the Securities and Exchange Commission during the fourth quarter of fiscal year 1996. 47 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. NEUROGEN CORPORATION By: /s/ HARRY H. PENNER, JR. ------------------------------- Harry H. Penner, Jr. President and Chief Executive Officer Date: March 31, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated: SIGNATURE TITLE DATE - --------- ----- ---- * Chairman of the Board March 31, 1997 - ---------------------------- and Director Frank C. Carlucci /s/ HARRY H. PENNER, JR. President, Chief Executive March 31, 1997 - ---------------------------- Officer and Director (Principal Harry H. Penner, Jr. Executive Officer) * Executive Vice President, March 31, 1997 - ---------------------------- Secretary and Director John F. Tallman, Ph.D. /s/ STEPHEN R. DAVIS Vice President-Finance, March 31, 1997 - ---------------------------- Chief Financial Stephen R. Davis Officer and Treasurer (Principal Financial and Accounting Officer) * Director March 31, 1997 - ---------------------------- Robert H. Roth, Ph.D. * Director March 31, 1997 - ---------------------------- Jeffrey J. Collinson * Director March 31, 1997 - ---------------------------- John Simon * Director March 31, 1997 - ---------------------------- Robert M. Gardiner * Director March 31, 1997 - ---------------------------- Robert N. Butler, M.D. Director March 31, 1997 - ---------------------------- Richard D. Harrison * Director March 31, 1997 - ---------------------------- Barry M. Bloom * Director March 31, 1997 - ---------------------------- Mark Novitch * By: /s/ HARRY H. PENNER, JR. ------------------------------- Harry H. Penner, Jr., Attorney-in-Fact 48 EX-11.1 2 COMP. OF NET EARNINGS PER COMMON SHARE EXHIBIT 11.1 NEUROGEN CORPORATION COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE (IN THOUSANDS, EXCEPT NET INCOME (LOSS) PER COMMON SHARE AMOUNTS)
For the Year Ended December 31, 1996 1995 1994 ----------------- ---------------- ------- Fully Fully Primary Diluted Primary Diluted Primary ------- ------- ------- ------- ------- Weighted average shares outstanding 14,144 14,144 11,267 11,267 9,528 Dilutive effect of: Warrants 42 42 39 43 -- (1) Stock Options 1,263 1,263 1,173 1,558 -- (1) ------ ------ ------- ------- ------- Common and Common Equivalent Shares 15,449 15,449 12,479 12,868 9,528 ====== ====== ======= ======= ======= 1. Net Income (Loss) $5,894 $5,894 $13,353 $13,353 $(6,651) ====== ====== ======= ======= ======= Net Income (Loss) per Common Share $ 0.38 $ 0.38 $ 1.07 $1.04 $ (.70) ====== ====== ======= ======= =======
__________________________ (1) The Common Stock Equivalents have not been included as their inclusion would be antidilutive. EX-23.1 3 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 33-43441, 33-43541 and 33-81266) pertaining to the Neurogen Stock Option Plan, the 1993 Omnibus Incentive Plan and the 1993 Non-Employee Directors Plan of Neurogen Corporation of our report dated February 14, 1997, with respect to the financial statements of Neurogen Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Boston, Massachusetts March 25, 1997 EX-23.2 4 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23.2 Independent Auditors' Consent ----------------------------- The Board of Directors Neurogen Corporation: We consent to the use of our report dated February 12, 1996, relating to the balance sheet of Neurogen Corporation as of December 31, 1995, and the related statements of operations, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 1995 which report appears in the December 31, 1996 annual report on Form 10-K of Neurogen Corporation. KPMG Peat Marwick LLP Hartford, Connecticut March 28, 1997 EX-25.1 5 POWERS OF ATTORNEY EXHIBIT 25.1 POWER OF ATTORNEY KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each his attorney-in-fact and agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to execute for him and on his behalf an Annual Report pursuant to Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K relating to the fiscal year ended December 31, 1996, of Neurogen Corporation (the "Company"), and any and all amendments to the foregoing Annual Report on Form 10-K, which amendments may make such changes in the Annual Report on Form 10-K as such attorney-in-fact deems appropriate, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 7th day of March, 1997. /s/ FRANK C. CARLUCCI ---------------------------- Frank C. Carlucci POWER OF ATTORNEY KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each his attorney-in-fact and agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to execute for him and on his behalf an Annual Report pursuant to Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K relating to the fiscal year ended December 31, 1996, of Neurogen Corporation (the "Company"), and any and all amendments to the foregoing Annual Report on Form 10-K, which amendments may make such changes in the Annual Report on Form 10-K as such attorney-in-fact deems appropriate, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 7th day of March, 1997. /s/ JOHN F. TALLMAN, PH.D. ---------------------------- John F. Tallman, Ph.D. POWER OF ATTORNEY KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each his attorney-in-fact and agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to execute for him and on his behalf an Annual Report pursuant to Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K relating to the fiscal year ended December 31, 1996, of Neurogen Corporation (the "Company"), and any and all amendments to the foregoing Annual Report on Form 10-K, which amendments may make such changes in the Annual Report on Form 10-K as such attorney-in-fact deems appropriate, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 7th day of March, 1997. /s/ ROBERT H. ROTH, PH.D. ---------------------------- Robert H. Roth, Ph.D. POWER OF ATTORNEY KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each his attorney-in-fact and agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to execute for him and on his behalf an Annual Report pursuant to Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K relating to the fiscal year ended December 31, 1996, of Neurogen Corporation (the "Company"), and any and all amendments to the foregoing Annual Report on Form 10-K, which amendments may make such changes in the Annual Report on Form 10-K as such attorney-in-fact deems appropriate, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 7th day of March, 1997. /s/ JEFFREY J. COLLINSON ---------------------------- Jeffrey J. Collinson POWER OF ATTORNEY KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each his attorney-in-fact and agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to execute for him and on his behalf an Annual Report pursuant to Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K relating to the fiscal year ended December 31, 1996, of Neurogen Corporation (the "Company"), and any and all amendments to the foregoing Annual Report on Form 10-K, which amendments may make such changes in the Annual Report on Form 10-K as such attorney-in-fact deems appropriate, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 7th day of March, 1997. /s/ JOHN SIMON ---------------------------- John Simon POWER OF ATTORNEY KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each his attorney-in-fact and agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to execute for him and on his behalf an Annual Report pursuant to Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K relating to the fiscal year ended December 31, 1996, of Neurogen Corporation (the "Company"), and any and all amendments to the foregoing Annual Report on Form 10-K, which amendments may make such changes in the Annual Report on Form 10-K as such attorney-in-fact deems appropriate, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 7th day of March, 1997. /s/ ROBERT M. GARDINER ---------------------------- Robert M. Gardiner POWER OF ATTORNEY KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each his attorney-in-fact and agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to execute for him and on his behalf an Annual Report pursuant to Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K relating to the fiscal year ended December 31, 1996, of Neurogen Corporation (the "Company"), and any and all amendments to the foregoing Annual Report on Form 10-K, which amendments may make such changes in the Annual Report on Form 10-K as such attorney-in-fact deems appropriate, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 7th day of March, 1997. /s/ ROBERT N. BUTLER, M.D. ---------------------------- Robert N. Butler, M.D. POWER OF ATTORNEY KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each his attorney-in-fact and agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to execute for him and on his behalf an Annual Report pursuant to Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K relating to the fiscal year ended December 31, 1996, of Neurogen Corporation (the "Company"), and any and all amendments to the foregoing Annual Report on Form 10-K, which amendments may make such changes in the Annual Report on Form 10-K as such attorney-in-fact deems appropriate, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 7th day of March, 1997. /s/ BARRY M. BLOOM ---------------------------- Barry M. Bloom POWER OF ATTORNEY IN WITNESS WHEREOF, the undersigned has executed this Poser of Attorney this 7th day of March, 1997. KNOW ALL YE PERSONS BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Harry H. Penner, Jr., and Stephen R. Davis, each his attorney-in-fact and agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to execute for him and on his behalf an Annual Report pursuant to Section 13 of the Securities and Exchange Act of 1934, as amended, on form 10-K relating to the fiscal year ended December 31, 1996, of Neurogen Corporation (the "Company"), and any and all amendments to the foregoing Annual Report on Form 10-K, which amendments may make such changes in the Annual Report on Form 10-K as such attorney-in-fact deems appropriate, and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 7th day of March, 1997. /s/ MARK NOVITCH ---------------------------- Mark Novitch EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 62,823 32,314 0 0 0 96,729 19,861 3,136 113,869 7,291 0 0 0 356 (83) 113,869 0 18,286 0 17,229 0 0 51 5,994 100 5,894 0 0 0 5,894 .38 .38
-----END PRIVACY-ENHANCED MESSAGE-----